奧多明尼昂貨運 (ODFL) 2011 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2011 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through May 6 by dialing (719) 457-0820.

The confirmation number for the replay is 7176960.

The replay may also be accessed through May 27 at the Company's web site.

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 form in Old Dominion's filings with the Securities and Exchange Commission, and in this morning's news release.

And consequently, actual results 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, other otherwise.

As a final note before we begin, we welcome your questions today but ask in fairness to all that you limit yourself to just a couple of questions at a time before returning to the queue.

Thank you for your cooperation.

At this time, for opening remarks, I'd like to turn the conference 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, Old Dominion's President and CEO, and Wes Frye, the Company's CFO.

After some brief remarks, we'll be glad to take your questions.

First quarter results represent our third consecutive quarter of 20% plus growth in tonnage and an improving pricing environment.

We produced 33% growth in revenue for the quarter, which is a new record for our nearly 20 years as a public Company.

Primarily due to our operating leverage, the strong revenue growth drove an increase in earnings per share of 171.4% for the quarter.

Consistent with the past few quarters, our focus for the first quarter was to deliver superior on-time, claims-free service to our customers during a period of high tonnage growth.

We continue to achieve industry-leading performance levels while also expanding our work force to meet this strong growth.

However, despite the strength of our first quarter financial results, we believe we have the capacity to improve various aspects of our operations in our continuing effort to improve efficiency and productivity and thereby our operating ratio.

Looking forward, we intend to keep providing the value proposition and implementing the business model that has enabled us to out-perform our industry throughout the economic cycle.

We have ample head room for organic growth, both within our existing service center network and through expanding our geographic footprint.

Old Dominion is differentiated in the market by our technology, the comprehensiveness of our high-quality service and coverage, along with our strong financial performance.

We continue to evaluate potential acquisition opportunities that would be appropriately accretive to our results and help us achieve our strategic objectives.

With low debt, substantial cash, and strong cash flow, we are strongly positioned to act on appropriate opportunities that will support long-term growth and increased shareholder value.

Thank you again for being with us today, and now here's David Congdon to discuss our first quarter operations in more detail.

Thanks, Earl, and good morning.

We got off to a great start for 2011 with our first quarter results.

I am proud that the Old Dominion family has the operating skill and capacity to handle this type of growth while also producing high-quality service levels and strong margins.

Our performance for the quarter is a credit to the strength of the OD team.

Most of you with us today have followed Old Dominion for at least the last few years, if not longer.

Even in the worst of the recession, we remained committed to a value proposition focused on delivering superior service at a fair and equitable price.

Our financial record through the recession validated this commitment and our results for the first quarter demonstrate the strength of our value proposition in an expanding market as well.

Despite the improvement in our OR for the quarter, the strong growth in shipments and tonnage created increased handling costs as we expanded our workforce to handle the increased shipment volume.

In addition, the very harsh winter weather in January and February increased short-term pressure on certain aspects of operations, with pickup and delivery stops per hour down 2%, and platform pounds per hour down 5%.

We produced improvements in other measures of productivity with an approximate half percentage point improvement each in P&D shipments per hour and our line haul load average.

We are confident we can improve future performance in all our productivity metrics.

We are also very pleased with the first quarter increase in our on-time delivery to 98.8% from 98.5% for the fourth quarter of 2010 and with our industry-leading cargo claim ratio of 0.47% of revenue.

During 2011, we plan to continue to invest in increasing our service center capacity through expansions or relocations.

These expansions will increase our door count throughout the system by just over 7%.

In addition, we will continue our investment in information technology to improve productivity and provide our customers with more integrated and transparent experience with our Company.

We believe these investments will continue to be competitive differentiators for Old Dominion.

During 2011, we will remain focused on enhancing our products and services within the OD Domestic LTL network.

Our biggest growth opportunity in 2011 and beyond continues to be gaining market share and increasing density within our existing service center network.

Despite Old Dominion's historic growth, our overall share of the LTL market is still less than 5%.

With our inherent structural advantages versus both national and regional LTL companies with our superior service standards and integrated comprehensive capabilities, we believe we are strongly positioned in our existing markets.

We will also continue to build our value-added products.

While aggregate revenues from OD Expedited, OD Global and OD supply chain solutions were only 7% of Company revenue for 2010, these services are also growing rapidly.

They also expand the comprehensiveness of our single-source services, and leverage both our service center network and our relationships with more than 70,000 customers.

We are confident that this market positioning, combined with our proven team and strong financial resources will support further profitable growth during 2011 and beyond.

Thank you and we'll now ask Wes to review our financials in greater detail.

Thank you, and good morning.

Old Dominion's revenue was $422.7 million for the first quarter of 2011, an increase of 33% from $317.8 million for the first quarter of 2010.

This revenue growth was primarily the result of a 20.3% increase in tons and an 11.1% increase in revenue per hundred weight, or 6.4% excluding the effect of fuel surcharges.

Our tonnage growth of 20.3% reflects a record 20.9% increase in shipments, combined with a 0.6% decline in weight per shipment.

Sequentially throughout the quarter, tonnage growth per day was 14.9% for January, 20.3% for February, and 20% for March, year-over-year.

Thus far tor April, we are seeing our tonnage increase at a rate of approximately 14% to 15% per day against tougher comparisons versus the second quarter of 2010.

Revenue for a hundred weight excluding fuel surcharge for the first quarter was up 6.4%.

The 0.6% decrease in weight per shipment for the quarter and the 0.7% increase in length of haul had a positive impact on the revenue per hundred weight.

Thus far for April, we are seeing revenue per hundred weight excluding fuel surcharge increase at a rate of approximately 7% year-over-year.

The 380 basis point improvement in our offering ratio for the first quarter is primarily attributable to a combination of the strong growth in tonnage combined with an improved pricing environment.

Salary, wages and benefits as a percentage of revenue declined 450 basis points, even with a 2% pay increase in September of 2010 while operating supplies and expense increased 300 basis points, largely due to the increased fuel cost.

Purchased transportation increased 50 basis points, resulting from our greater use of this resource to meet the surging tonnage for the quarter, and most other expense categories improved as a percent of revenue.

Capital expenditures for the first quarter totaled approximately $58 million.

We currently expect total CapEx for 2011 to be in a range of $265 million to $300 million, including $120 million to $140 million for real estate, $130 million to $140 million for the purchase of equipment, and $15 million to $20 million for investments in technology.

Consistent with past performance, we expect to fund much of this expenditure through cash flow, and the remainder through our cash balance and available borrowing capacity.

We had $175 million of availability in a revolving credit facility at the end of the first quarter, and $88.1 million in cash and cash equivalents.

During the first quarter we completed a $95 million private placement of senior notes and raised net proceeds of $48.4 million from our at-the-market stock offering program.

Total debt, total capitalization improved 80 basis points during the quarter to 28.1% at the quarter's end, from 28.9% at the end of the fourth quarter.

Over the past year this ratio has improved 590 basis points from 34% at the end of the first quarter of 2010.

With full implementation of our CapEx plan for this year, which is again, subject to availability and timing of real estate, we would expect our total debt to capitalization to be in a range of 28% to 30% at year end.

Our effective tax rate was 39.2% for the quarter, and we estimate our effective tax rate also for the remainder of the year to be 39.2% as well.

This concludes our prepared remarks this morning, and Operator, we'll be happy to open the floor for any questions at this time.

Thank you.

(Operator Instructions) Our first question comes from Chris Weatherby with Citi.

Great, thanks.

Good morning, guys.

Good morning.

You gave a very helpful breakdown of tons per day sequentially through the quarter.

Could you just give us a sense of how the yield tracked?

It seemed like it was reasonably consistent, but I just wanted to get a sense of how that worked throughout the quarter?

Do you want it with or excluding fuel surcharges?

Excluding fuel surcharges would be the best way.

Okay.

Let me get the number.

Okay.

I'll get there.

I'm getting to the right year Chris, hold on.

Sure no problem.

It was 6.2% in January, 5.3% in February, and up to 6.5% in March.

And then it's up to about 7% in April is what you had mentioned?

Correct.

When you think about the progression there, your acceleration into March and then to April as you saw some of the operating conditions improve a little bit, you started to get a bit of a tightening in the market?

Is that a fair way to look at it?

Just trying to get a sense of how you think about the improvement we've seen in the last couple months.

Yes, I think since the inflection point in the third quarter, we've just seen progressively, improving pricing environment.

Okay, that's helpful.

And nothing that you're seeing now on the horizon that would imply any different as you go forward here from a yield perspective into the second quarter?

Not that we're seeing.

Okay.

That's helpful.

When you think about the significant growth you had from a tonnage perspective, when you look at capacity, obviously, you raised some additional capital in the quarter.

When you think about geographically, the service center network, where are you spending most of your time thinking about potentially adding some capacity?

Chris this is David Congdon.

Our capacity, from an equipment standpoint, it looks like we're carrying and plan to carry through the rest of this year approximately 10% to 12% excess capacity and equipment.

Service centers, we have right now about 5% to 10% of our service centers that are either at capacity -- we've just got one or two there -- or nearing capacity that we are addressing through our CapEx plans for this year, and about 60% of our service centers have anywhere from 20 to 60% capacity.

So we're in real good shape from a capacity standpoint to both grow the network organically this year and continue handling this increase of market share, and also equipped to handle any industry consolidation events if that should occur.

Okay.

Then just curious from a geographical perspective, any concentration of those tight capacity service centers in the network?

No, no particular concentration.

We've got a few up in the midwest where our growth rate has been the most significant for the last really going on two years, where we have some capacity issues, but we're addressing those as we speak.

Okay, that's great.

Finally on the leveraging salaries, wages, and benefits, obviously great job doing that.

As you move forward here, particularly into the second quarter and then beyond for 2011, is there any sense that leverage may die down a little bit, or you feel good about your ability to continue to see improvements in a percent of sales as you move forward through the rest of the year on a year-over-year basis?

No, we still see that we'll continue to see some improvements and some leverage in those costs, Chris.

Okay.

So nothing materially you need to do as far as ramping up in the very near term.

The only question is, we usually look and we haven't made any decisions, if and what and how much would be a wage increase, but that would happen in September.

Okay so September's the next time to think about that?

Correct.

Great.

Thanks very much for your time, guys.

I appreciate it.

Not a problem.

Out next question comes from Tom Wadewitz with JPMorgan.

Yes, good morning, and congratulations on the great results.

Very impressive.

Let's see, I wanted to ask you about operating ratio.

I think the 91% is the best I can see in your first quarter, at least as far as my model goes back.

I had the sense -- I think this may have been from the fourth quarter call -- that you were going to be pretty focused on tonnage growth, and that you might do that at the expense of some productivity.

I guess we've seen that a little bit.

It may be the pace of margin improvement might slow a bit, as you were really focused on share gain.

But yet the margin continues to improve a lot.

So how would you think about potential for where your OR can get to?

Do you keep putting up record ORs and just keeps OR moving down, or do you think it hits a level where it kind of stabilizes in the next couple of quarters?

Well, we certainly don't have the goal of moving our OR up.

Our peak OR was in 2006, where we operated at 89.8%, so you know that we're capable of getting there.

We don't give any guidance on our OR, but just looking at the history and where it has been, and look at even last year, keep in mind two quarters we operated at 89.1% and 89% in the second and third quarters, respectively.

So our intent obviously will be to continue to improve our margins.

Also, Tom, with a continued favorable pricing environment -- that, coupled with the benefits of density across the network -- we should be able to continue moving the OR down.

Do you think, and if pricing environment continues to be pretty good and economy's pretty good, do you think you can move towards mid-80s type of OR?

If you look at maybe 2012 into 2013 is that feasible?

Because that'd be pretty far above historical peaks, I think.

Tom, we're not going to comment on that.

Okay.

Fair enough.

One other one and I'll pass it along.

You mentioned, you're pretty explicit about the interest in acquisitions and strategic opportunities.

Can you frame that a little bit in terms of what type of acquisition you might have in mind?

Is this LTL, or this is some other type of service that you add on?

It's Earl.

First of all, we're trying to keep our powder dry on acquisitions while we wait to see if there's some major industry consolidation because it might not be the smartest thing in the world to be in the middle of a substantial acquisition and then have a huge industry consolidation event.

So we're keeping our power dry and we're going to wait that out, unless something mighty, mighty attractive come along.

We'll just wait and see what happens.

Once that is known, then we are going to be seriously looking for an acquisition.

And it may or may not -- it probably would not be in the LTL field, but it could be.

It would probably not be a full front load carrier.

It would more likely be something in the dedicated area, and we are also organically starting a warehousing operation.

So we would be looking for something to enhance the warehousing and the dedicated.

Okay.

Great, thanks for the time.

And our next question comes from David Ross with Stifel Nicklaus.

Good morning, gentlemen.

Good morning.

Continuing to kill it down there in North Carolina.

Great first quarter.

Question on, just real quick on the other income line.

There was a big gain in the quarter.

Wes, can you comment on exactly what that was attributable to?

Yes.

Unfortunately that was the proceeds of a life insurance product that was supporting our non-qualified plan, due to the death of John Yowel.

Yes.

Sorry to hear about that.

As for the growth that you saw in the quarter, could you comment on how much of that growth came from new customers versus existing customers?

David, we don't have a breakdown on that, but my gut tells me that it's probably more on the majority side, 60% or 70% from existing customers, and probably 30% from new customers coming on board.

Then, as you continue growing going forward, sounds like you have plenty of capital there to expand facilities and to add equipment, I would think that the labor would be the biggest constraint to growth.

Have you have any issues to date of driver/dockworker availability in different regions?

Well, when our growth really started ramping up last fall, we were having some difficulty finding drivers, but we've counteracted that by putting some more emphasis on our internal driving school and we're producing -- we've produced a couple hundred drivers already since the fall for that.

And we're having a lot of drivers knock on our doors, coming from truckload carriers.

Our job driving a truck in LTL is probably an easier job and pays more, which you can't beat that if you're a truck driver.

A lot of questions just on the labor management that you guys did very well.

Looks like you got about 3% more tonnage in the network sequentially from the fourth quarter, but labor costs were only up just over 1%.

Could you talk about what the sequential change from fourth quarter to first quarter was in terms of head count?

And then also what the year-over-year head count change was?

I'll have to get back to you.

I don't have those numbers right in front of me.

I can tell you that the head count at the Company is right now, as of Monday, we had 11,593 full-time employees.

That puts us -- we're still 61 down from our peak of September of 2008.

I don't know if that means anything to you, but at one point, we were down 2,000 from the peak of 2008, so we've come back up close to our peak employment, but our shipments and tonnage are above peaks.

So we are definitely more efficient as a result of going through the recession and so forth.

I really attribute the cost control to the dedication of our entire team, all of those guys out there on the front line that are working our freight, and driving our trucks, are doing a fabulous job with their day-to-day productivity.

From a management standpoint, we've got the technology and the tools to plan our labor, and to manage it and look at it on a real-time basis.

So we've got to commend the team out there for the great job they did.

Sequentially, we added from the fourth quarter, we added just over 2% to our employee ranks, full-time people, from the fourth quarter of last year to the first quarter of this year.

Against a tonnage growth of, sequentially--

About 3%.

About 3%.

Okay.

Thanks a lot.

Our next question comes from Ed Wolfe with Wolfe Trahan Research.

Hey, good morning, guys.

Good morning, Ed.

So you said the proceeds were $48 million from the at-the-market equity offering.

Do you plan to complete the $100 million, and if so, any sense of timing?

Ed, at this point, we think we are well capitalized and within our target range of a debt to cap as I mentioned even year at 28% to 30%.

The only thing that would change that would be the possibility, as Earl mentioned, of an acquisition, or even a block of real estate coming on the market.

Otherwise, we think about our capitalization as pretty much on target.

Okay.

So the share count of 57.4 million is kind of where we're going to end up?

At this point, again, unless one or two of those events would occur, that would indicate another use of proceeds for a long-term type investment.

Okay.

You noted the one-time gain on the insurance policy, and I'm sorry about that as well.

It looks like you had extra expense in the miscellaneous expense line item, $3 million up from $1.5 a year ago.

What was going on there?

It wasn't anything negative this year.

It was the comparison of a positive that happened last year within our bad debt reserves that was a positive adjustment last year.

So that's the reason for that increase was a very favorable last year results compared to this year.

I'm looking back 15 years and I don't see it anywhere close to $3 million.

Is it just you're a bigger Company so there's more things?

We've definitely a bigger Company.

We've got more people on the Board, the Board is more expensive.

We've got higher auditing and consulting costs.

All of those issues.

Okay.

So nothing's shoved in there to hold that earnings.

That's kind of a normal number, is what you're telling me?

Staying pretty much level in terms of percent of revenue, but those expenses unfortunately grow as we go.

Sure.

Is there any way to quantify -- you guys are very good at quantifying things -- what the weather impact and/or the fuel impact, and whether fuel was a negative or a positive in the quarter?

Yes.

I think on a revenue basis it's very difficult to quantify it because we know we obviously lost revenue in January and February.

What we don't know is how much of that came back in March, and our March was very strong.

Without question on a cost standpoint, we did have some costs directly associated and while it's a little bit difficult to estimate what those costs are, we think it amounted after tax to about $1.7 million, about $0.03 a share, was the costs that we incurred in January and February.

Somehow I knew you had that calculated, Wes.

Then the impact from fuel year-over-year, can you tell whether that -- give a sense of that?

Our objective on pricing with customers has always been to try to strike a fair and equitable deal.

We really honestly focus on the operating ratio of the accounts, and over time fuel and base rates and discounts have all gotten a bit muddled.

So it's really kind of hard to tell whether it was a positive or a negative because of the way it's shifted around between base rates and discounts and fuel.

Can you talk a little bit about what you're seeing on new bids in terms of pricing, as you go to the market price for existing customers and new customers?

Last fall when several of the carriers changed their tune on pricing, it basically lifted a pretty major anchor on our industry.

So as we have addressed new accounts, we've had less price pressure, and we've been able to get higher yields on our accounts, and lower operating ratios on our initial pricing with new accounts.

The same, I think, has occurred in our routine contract renewal area, where we were able to get a little better operating ratio than we did before.

We also went back to approximately, probably three dozen major accounts who we were doing business with before the recession, and we had to reduce prices significantly during the recession to retain volume across the network, and we were able to go back to those accounts and put the prices back where they belonged.

So it's kind of a combination of those things and the GRI that have enabled us to have good yield improvement.

But the bottom line of getting good yield improvement is the value side of the value proposition.

Our superior service and our low claim ratio and our accurate billing processes are the underpinning of this value proposition that are enabling us to gain in the area of pricing and drive the 20% tonnage growth that we saw for the quarter.

So that productivity and that value you're adding, what's that getting you currently in the marketplace, 3%, 4%?

I think that's a reasonable number, it's hard to determine exactly what it is.

We don't have an algorithm to separate that from other variables, but that's probably a fairly reasonable, anecdotally, from the feedback that we're getting.

I appreciate all the time, I'll get back in line.

Thank you.

And our next question comes from Chris Ceraso with Credit Suisse.

Thank you, good morning.

Good morning, Chris.

One of the big brokerage companies recently talked about strong growth in LTL, as shippers seem to be getting more comfortable with outsourcing that function.

Obviously it's not hurting your margins right now, but is it something that you think is a trend?

Are you seeing more broker freight?

Is it something we should be watching?

If you want a broker freight or 3PL freight, I guess if you're calling that the same, there's been an ongoing growth in third-party logistics companies for years that manage LTL, and they have become approximately a fourth of our revenues with 3PLs.

Yes, there's been some shifts and maybe that's grown a little bit in the last year or two, but I don't see any major shifts, either up or down, taking place in the next year to two in that area.

Okay, and then second question.

Wes, I think you commented on both the decline in your weight per shipment, as well as the increase in the length of haul, that helped to bolster your yields.

Can you just talk about where you see those things headed?

Is this the start of a trend?

It was a number of quarters in a row there where the weight was rising, which was weighing on your yields.

Then also, how -- what do you think is the runway in terms of length of haul?

Maybe just spend some time on those two topics?

On the weight per shipment, most of that decline that we you saw was in mix.

When you look underneath that, specifically at the LTL for contractual and tariff business, they were actually up.

But we have seen a reduction obviously in our spot quotes, which are heavier shipments, in the 8,000 to 9,000 pounds due to the fact that we've increased the rates fairly significantly in that segment.

So I would say that we expect just the LTL with the contractual and that to still be up slightly, but still we'll probably realize either pretty much a flat to maybe slightly down weight per shipment reflective of the continued mix that we see on that point.

The other one was length of haul.

On the length of haul, it depends on where we are getting the market share.

The fact that our length of haul is slightly still increasing indicates that perhaps we're getting some of the longer haul freight, and so we anticipate that to continue to happen.

But also, we are continuing to putting the focus on the regional business.

So I would combine those two to say that our length of haul should stay fairly flat for the remainder of the year, as well.

Okay, thank you.

And our next question comes from Anthony Gallo with Wells Fargo.

Good morning, gentlemen.

Good morning.

If I recall correct, in the fourth quarter it seemed that there were some costs that you absorbed or cost headwinds, if you will, that were taking on obviously in the hopes of bringing forth additional growth -- looking like quite a timely move given the first quarter results.

But my question is, is that how we should think about your cost structure?

Do you see these periodic stair steps and cost increases that are going to come ahead of expected capacity growth?

Is that kind of the way to think about the cost structure?

Or is there other cost inflation that we're not seeing yet?

The only thing I think that you may be referring to in the fourth quarter, we accelerated 200 tractors into the fourth quarter.

That certainly caused a headwind in terms of our depreciation expense, both a little bit in the fourth quarter and certainly in the first quarter.

So the other cost headwind, Anthony, was that our sequential tonnage started really ramping up in the third quarter and into the fourth quarter, and we were adding employees at a greater rate than normal.

And we were absorbing training costs and lower productivity levels of the new employees until they got up to speed with how we'd like to handle freight and so forth.

So those were kind of headwinds, but the only other time you might see something unusual like that, I would say, is if there were any kind of major industry consolidation event, where we might have a stair-step of sudden costs from having to add a lot of people at one time.

A lot of things started happening when we reached that pricing inflection point last fall, and customers started deciding to look at their other alternatives in the marketplace, and we were blessed and fortunate enough to have the customers -- a lot of customers come our way.

Okay, very helpful.

A quick question, on your fuel surcharge programs, is there anything you've done different recently, or is this just that during the downturn you maintained those programs -- you maintained your discipline around fuel surcharges as well, or is there something new taking place there?

We've done nothing new.

I think the only time we did something fairly significant was back in the first quarter of 2008, when we had that huge spike in fuel during the first and second quarters of 2008.

We addressed a lot of the caps that we had on fuel charges back then, and we've tried to be very disciplined from that point forward, with how we addressed fuel surcharges and caps to where we don't have too many really -- we don't have any really low caps at all, because we just don't think it's the right thing to do.

So we haven't done anything new lately.

Maybe it's just the result of what we did back in 2008 that's helped us.

Sounds like the right move.

Thank you, guys.

And our next question comes from Thom Albrecht with BB&T.

Hey, guys.

Another nice job here.

I wanted to just clarify a couple things and then ask a little bigger question.

Wes, on the tax rate, when you were giving that, there was kind of a crackle in the phone.

Did you say 39.2%?

I did.

Okay.

All right.

Then when you talk about dedicated as a potential opportunity, are you really talking about the possibility that you might make a small truckload acquisition?

You mean someone that is concentrating on dedicated?

Yes, I mean, because you sort of identified warehousing and dedicated as potential acquisition targets, and I wanted to follow up on what you meant by the dedicated.

Yes, that's a possibility.

Dedicated, primarily meaning dedicated fleets, dedicated drivers, compensation for all miles traveled type of a truckload operation.

You mean real dedicated, not fake dedicated (laughter).

And then, as you grow, it's so easy, we've seen it happen with others where their service deteriorates.

Are you placing extra emphasis on training these days?

How are you maintaining these high service standards while adding employees?

Tom, we have put a lot of emphasis on training new employees for many, many years.

We have a standard for bringing someone on board, putting them out on the dock with trainers for a period of a few weeks before we really cut them loose.

The same thing with bringing drivers on board, of getting them trained and educated to the way we want to do business, and the way we want to handle freight and so forth.

So we had to invest some in that last fall as we brought on this -- call it a slug of new people -- and we're just not going to back off on our trading efforts.

So that, and I just think we have a very loyal team of people across our network, and the folks that have been with us a while that are helping bring the new people on board take a lot of pride in their work, and they try to instill that pride in this new trainee that they work with, hand in hand.

Okay.

Well that's helpful to hear.

Thanks guys.

Keep up the good work.

And our next question comes from Justin Yagerman with Deutsche Bank.

I wanted to dig in a little bit here -- some longer-term thoughts.

I remember bank in the 2005, 2006 period where you guys were experiencing some nice growth.

The thought was getting at $2 billion of revenue in over 200 service centers.

Next year in my model, you're over $2 billion in revenue, and I was curious what your thoughts are from here, in terms of what you see is the service center build-out.

What you guys are thinking, you used to talk about revenue per service center from a density standpoint -- what your goal is there, and then kind of getting at, how long we're going to be at these elevated CapEx levels to generate that kind of growth that you're really looking at?

Justin, I believe on the last call, we established a new target revenue of achieving $3 billion in revenue at a run rate by the first of 2016.

So in our five-year time horizon being at $3 billion, we still see approximately 30 to 40 more service centers in our network to fill out a couple of our -- a handful of our states where we need some more coverage, and also to spin off some of our service centers in some major markets.

So whatever the math is of $3 billion over 260 service centers, you can do the math on the service center density compared to where we are today.

Where does that take us?

About $11.5 million.

About $11.5 million, and today we're at just about $7 million, almost $8 million.

So with that density, that should drive some more leverage and efficiencies across the network.

I think another interesting observation might be that in the recession in 2009, we were cash positive, cash flow positive, and is that not right, Wes?

We haven't been cash flow positive in a while, because we've been heavily invested.

We got close.

I thought we were in 2009.

Oh, I'm sorry, in 2009, we were.

I'm sorry.

But our profits dropped in half.

So we're not sure that we would like to stop the growth in order to reduce the CapEx.

But $300 million, a lot of that was catch-up, both in real estate and in equipment.

We do expect that certainly the CapEx as a percent of our revenue and revenue growth to come down, and pending any major acquisition of real estate or companies, we do see ourselves as cash flow positive in the next few years.

But again, that would depend on opportunities out there in the real estate and an acquisition basis, but we do expect that CapEx to come down maybe slightly, even in pure dollars, but certainly as a percent of our revenue.

Yes.

No, that makes a lot of sense, and if you can get that density going the way that you're looking out towards, obviously there will be a lot of margin expansion alongside of that, so that'll be positive.

Those generate free cash flow.

Our goal certainly is to continue to improve return on invested capital.

I think we've been very good stewards of our capital in the past, and we anticipate doing that in the future as well.

Absolutely.

Between the ATM and your comments on the call, you guys have a decent amount of dry powder and it sounds like you think there's a capacity event that's imminent.

I mean, it's been a couple years now, we haven't seen anything.

What gives you that conviction level, and at what point do you say, you know what, this probably isn't going to happen, so we go forward with acquisitions and continue to make tuck-ins like we did in the past?

No, we keep looking at that, and we do have some extra equipment costs so that we won't get caught having to disappoint a lot of customers.

But we are not really praying that the event will happen, because we are very happy with the way things are going.

We've got a really great growth rate, and it's going to be hard for the industry to absorb $4 billion of revenue, and there's going to be some service disruptions, and we just assume that nothing happen, but we think it would be irresponsible to not keep something parked against the fence so that we can take care of our customers, and some new ones if the event should occur.

It's very kind of you to be so considerate.

(laughter)

We can afford to be.

I wanted to also ask, just looking at the overall market, a couple of your competitors have been pretty active with churning their freight base right now, talking about yield optimization.

It looks like you guys have been the beneficiaries of that, as you had capacity and you're already operating at better margins.

You could take advantage of it.

You've seen a lot of the freight coming your way from anybody in particular?

Conway and FedEx are the two that I'd be thinking about.

On the FedEx front, I'd be curious to hear if you guys or your sales force have any comments around what they've been hearing about the restructuring and the new product offerings that are out there from those guys?

We're not going to comment on any of the competition.

We feel we are gaining in general from -- it's obvious we're gaining from competitors.

Our market share is increasing.

So where it's coming from -- a little here, and a little there.

That's all we'll say.

Fair enough.

All right, well keep up the good work.

Thanks, guys.

Our next question comes from Jon Langenfeld with Robert W.

Baird.

Good morning.

Can you help me out on the fuel side.

If I think about the expenses -- just want to gut-check a few things.

If I think about your fuel expense, it basically shows up in three lines -- op supplies, the tax line, and purchased transportation, is that right?

In some respect or another?

Well, actually, it shows up on what you get -- it just shows up on the operating supplies and expense line.

Are the taxes in there?

Or are they --

No, the fuel taxes are in the operating tax and license line, correct.

And then on the purchased transportation indirectly, there's fuel expense in there?

There's elements of fuel that we're paying indirectly through line haul, or in some cases rail, yes.

Okay, great.

In that, the true fuel expense that you pay, excluding the taxes, is that order of magnitude $53 million, $54 million in the quarter?

Would that be about right?

We're not giving that number at this point.

Okay.

When you think about the surcharge, as that has progressed through the quarter, when things are accelerating, I know you've got weekly resets on most of what you're doing.

Does the lag help or hurt as the velocity of the increases or decreases move against you?

It wouldn't be material, since we adjust it weekly.

Obviously, if there's an increase, and a sudden increase, and a material increase in one week, it would help for that one week, but there is only a week lag.

Okay, Nothing beyond that, not anything material in terms of monthly or every other week?

No, but we have a lot of other costs, tires and parts, and a lot of things that are related to fuel that aren't part of this fuel surcharge that we do have to absorb.

And they are going up like they're skyrocketing.

Yes.

For example in tires, in the fourth quarter of last year, we got notice that our tire cost was going to go up 12%.

Then January, we got another notice that it was going to go up another 12%.

Much of that's due to the cost of fuel.

So those costs we can't pass along.

We have to absorb those.

Sure.

Okay.

Last question, just on the depreciation line.

Assuming you execute against your CapEx plan toward the mid-point of that range, how does that trend depreciation expense?

Depreciation will obviously increase as we continue to add the CapEx.

But, you know, and toward dollars.

We're looking at depreciation this year to be up over last year by roughly 12%.

But as a percent of revenue, we still see that based upon our growth that we have caused it to still be at the level of the first quarter, maybe even lower.

When you say that, you mean -- so the 5% of revenue?

Yes, 5% of the first quarter.

Got it.

Great.

Thank you.

Okay.

And our next question comes from David Campbell with Thompson Davis & Company.

Hi, good morning.

Just wanted to ask you a little bit more specifically about the growth of your other services.

You mentioned, I guess, warehousing containers and expedited as your fastest growing areas, and now accounting for roughly 7% of your revenues.

Of those three services -- I guess that's what you meant -- what would be the fastest growth?

We haven't given numbers on those to percent growth just suffice it to say that they're going very nicely.

Can you say whether they're growing faster than the overall tonnage growth of 20%?

Probably all lumped together, the growth rate of the value-added -- the growth rate is higher than the growth rate for the Company.

Right.

That's one of the reasons you're focused on possible acquisitions in the warehousing arena?

You've got a smaller denominator and we've had a long-term focus on growing in those areas.

We've always expected that the value-added services will have a higher growth rate than the core LTL, because our core LTL, we've got basic 48-state coverage right now, and as we're maturing, that growth rate will taper down in that area, and others will probably -- should have a higher growth rate.

Is this 7% of overall revenues up from last year by, what was it last year, 5%?

Yes, roughly, yes.

Okay.

Thanks a lot for your help.

All right.

And our next question comes from Matt Brooklier with Piper Jaffray.

The $58 million of CapEx spent in the quarter, can you give a little bit of color in terms of what you guys bought?

Most of that was the equipment that was slated for the first quarter of delivery.

So that was 70% of it.

The rest would be the CapEx for IT and real estate.

Okay.

And I think you threw the number out earlier, but terminal count at the end of the quarter -- 260's the right number?

213.

213.

All right, 213.

What are your thoughts in terms of current terminal footprint, if you will, this year?

Is there a need, if you want to get more dense in certain areas, to add to the terminal count, or is the, I guess the deployment of capital organically, is more focused on expanding the current terminals?

Maybe just walk us through that?

We have a handful, maybe, of new terminals that we might add this year.

Some of it depends on whether we can find an appropriate facility.

And I think we have one or two new ones we're building.

Canton.

Yes, Canton, Ohio, for example, is a new one.

So the majority of the CapEx in terminals has to do with expanding existing facilities.

Okay.

But it sounds like right now you have two new terminals on deck in terms of building and adding to the networks, so 213, potentially 215, plus any opportunistic terminal ads?

That's right.

Okay, that's all I've got.

Thanks.

Our next question comes from John Barnes with RBC Capital Markets.

Hi, good morning, guys.

Could you talk a little bit about the new hires that you are making, the new employees that you're bringing on?

Is there enough of a difference in the wage scale between a new hire and your existing employees that, as you realize this additional growth, have to match it up with additional head count, that your absolute dollar, the growth and absolute dollars of salary should slow a little bit just given the lower wage scale for the new employees?

Yes, the starting rates are several dollars an hour lower than our top rates, but most of our service centers are either on a two-year or a three-year program to raise from start rate to top rate.

So, that's in general how the pay scales work.

But your question is whether that's going to bring our wage rate on average overall average down.

Probably not by a measurable amount.

That's where you should continue to realize some benefit on some leverage to the salary line, correct?

Between bringing on a less expensive new hire coupled with the productivity you've talked about?

Yes, I don't know where it ends up, but with a new hire, you do typically as they're getting trained, get lower productivity.

Okay, very good.

Then, recognizing that you did a phenomenal job on pricing, I'm just curious, because one of your competitors talked about things in the marketplace, or in their book of business, like substandard fuel surcharges or something, and recognizing you've already addressed, that you kind of attacked that the last time fuel spiked, was there anything in your book of business that at any point kind of weighed on pricing even with the really good result you had?

Is there anything could you have gotten a little bit better at?

I hate to ask for too much here, but --

You know, not that I can think of, Ben.

Is this Ben still?

John.

Okay.

I'm sorry.

Yes, I'm not sure I understood your question.

You did a great job on price, and I'm not knocking that.

I'm just saying is there anything -- you talked about you'd gone back to 36 customers where you had to significantly lower prices during the downturn and you're having success there.

Is there anything else in your book of business?

Is there another slug of those type of customers that you have to attack yet?

Again, I recognize how good pricing was.

Is there anything that could have made it even better?

The thing about our philosophy is three words - fair, consistent, and equitable -- has been our philosophy.

We carried that philosophy through the downturn, and now through the upturn.

So we're just basically applying our basic philosophies to yield management, but we don't see another big slug of certain customers that we need to do major things with.

We may have some when their contracts come up for renewals that need more price improvement than others, but it's just part of our normal process, is the way I'd say.

All right, very good.

Recognizing that volumes have gotten better, you're capturing market share.

In talking to a couple of other LTLs, they've indicated the volumes are good enough now that you've got a lot of carriers are trying to figure out, or kind of get the right freight for their particular network.

Are you seeing -- is that a strategy here where you now know what fits really well in your network, and there's a more concerted effort to go get that, and that business carries with it higher yields or whatever?

Or is your volume growth and your market share capture much more broad based than that?

I'd say there's no such thing as bad freight in the LTL industry.

There may be bad pricing.

The key thing that you have to do is know your costs and have a good costing model, have good discipline about what you do, and do what you need to do to achieve a fair and equitable price for the value that you produce for the customer.

And that's what we do.

So talking about mix, you know there is certain freight that is hard to handle or maybe has a lot of potential for high claims.

And you try to steer clear of that, but if you're going to handle it, you have to charge an appropriate price that offsets a high claim ratio.

So we handle some stuff that has less than desirable claim ratios, but we try to charge an appropriate price so we can handle paying for the claims.

Very good.

Nice quarter.

Thanks for your time.

Thank you.

And our next question comes from Todd Fowlers with KeyBanc Capital Markets.

Hi guys, it's actually Ryan Cieslak in for Todd.

How are you?

Good.

How are you doing, Ryan?

Most of my questions have been answered and I know it's been a long call, so I just had one really quick one here.

I know you guys are making obviously investments in technology again here this year.

You talked about staying focused on productivity.

Could you just maybe elaborate, provide some additional color on what those technology investments are, and the potential impact to your productivity going forward here?

As far as just general productivity management and labor, labor cost control in a lot of the systems that we utilize are systems that we've been building for the last half a dozen to a dozen years.

So we've just got great day-to-day tools for that.

Some of the new technology that we're deploying, or the most significant would be the PeopleNet blue computers in the trucks, where we'll have GPS and some improved tracking capabilities, and some improved information to give to our customers; and also the ability to zero in on the driving habits of our drivers and miles per gallon they are achieving so that we can properly coach our drivers into understanding what they can do to help us improve productivity, fuel efficiency and our sustainability efforts for the Company.

Okay, great.

Appreciate the help, guys.

All right, thanks.

And our next question comes from Jason Seidl with Dahlman Rose.

Earl, David, Wes, how are you guys this morning?

Good.

I'll keep it quick because it's been a long call.

Wes, you mentioned the life insurance recovery.

That was in miscellaneous?

It was.

It was below the operating line.

What was the total?

There was a positive, $1.4 million, if you look at the expense.

Most of that, practically all of that, was due to that.

Okay, thank you.

When we look out, guys, as both the truckload and the LTL market become tighter, it feels like the truckload will probably tighten up first, and it has been for a while.

What type of freight can actually move over to you guys?

Should we look at maybe longer-haul freight on sort of like the multi-stop truckload?

Or is that typically shorter-haul freight?

I'm trying to figure out what the impact on your length of haul might be going forward?

I'm not sure we've ever had enough information to be able to determine that.

Obviously we wouldn't be interested in true truckload type business.

Our whole configurations of trailers just wouldn't accommodate that.

So the customers that are producing truckload -- if they can't get the capacity on the truckload carrier will have to break those shipments down and send them separately on an LTL.

We would probably see in our spot market and truckload in the 6,000- to 10,000-pound type shipments is where it would come out, that we can't handle, but we would be cautious in handling that from a pricing standpoint because it does utilize a trailer, and the revenue per trailer would be lower than it would be on a just purely LTL.

And whether that's a shorter haul or longer haul, that's what I don't know.

Yes.

Whether those multi-stop truckloads come to us in shorter-haul segments or longer-haul segments.

But if our capacity is tight as well in the LTL industry, the prices we need to charge for those larger shipments is probably higher than the shippers might want to pay.

That's actually happened in our spot quote market, where the average shipment is 8,000 to 10,000 pounds in that, and we have had substantial increases in that.

We're still getting it, but it's down year-over-year, but the revenue's actually up because of the price increases.

Guys that was very good color.

I appreciate the time and very good quarter.

Thank you.

Thank you.

Thank you.

And our last question comes from Jack Waldo with Stephens, Inc.

All of my questions have been answered.

Good to talk to you guys.

Well, thank you, Jack.

We've been wondering when you were coming on.

That was the easiest question of all.

Have a good one.

Thank you very much.

So that was the last question.

Okay.

Thanks, everyone, for participating today, and for all of your questions and support of Old Dominion.

Please feel free to call today if you have any further questions.

Have a good day.

This does conclude today's conference.

Thank you for your participation.