奧多明尼昂貨運 (ODFL) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Second 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 August 6th by dialing 719-457-0820.

The confirmation number for the replay is 8865108.

The replay may also be accessed through August 28th at the Company's website.

This Conference Call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding Old Dominion's expected financial and operating performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements.

You're hereby cautioned that these statements may be affected by the important factors among others set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release.

And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to 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 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 Second 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.

As most of you know from this morning's news release, Old Dominion produced a very strong performance for the second quarter of 2011 -- our best in the history of the Company according to a number of key metrics.

Our net revenue of $480.3 million, earnings per diluted share of $0.69, and our operating ratio of 86.5 were the best in our 77-year history.

We believe our performance for the second quarter provides further validation of the strengths of our differentiated business model.

The structural advantages we have built as an integrated nonunion company handling regional, interregional and national freight are significant.

In addition, we also often stand apart from the industry in our decisions regarding the basics of building and operating our business in areas such as capital structure, technology, geographic coverage and expansion, price and service quality; as well as the steadily increasing comprehensiveness of our services.

Through the execution of our business model and our unique market position, Old Dominion has produced an unmatched record of consistently superior performance throughout the economic cycle.

The second quarter is seasonally our strongest quarter, generally with the greatest inherent operating leverage.

The timing of this quarter in relation to the economic recovery and the actions of our large LTL competitors produced a strong pricing environment.

Even though our pricing for the second quarter reflected in part both a decline in weight per shipment and an increase in length of haul, the growth in revenue per hundredweight excluding fuel surcharge was substantial.

As predicted, we were well positioned to benefit from stronger economic conditions when many of our peers would need to meaningfully increase pricing in order to return to a profitable and appropriate return on invested capital.

Furthermore, due to our superior service performance during the recession, we were better able to recover pricing that was reduced previously to preserve specific customer relationships.

I'll close my comments by saying that we are very pleased with our performance and confident of our ability to produce further long-term growth in earnings and shareholder value.

We are also very proud of the people who produce these results and our ongoing position of industry leadership.

Thank you again for being with us today.

Now, here's David Congdon to discuss our first quarter operations in more detail.

Thank you, Earl, and good morning.

I'll begin this morning by adding my thanks to the OD family for their dedication and performance.

Our challenge during the second quarter was handling a substantial increase in tonnage and shipments while maintaining, and even improving, our industry-leading service.

Once again, our employees responded with flexibility and creativity to get the job done.

I'll start by saying that no performance is perfect.

And so it is open to improvement both in the short term and the long term.

I can point to inefficiencies in our operations for the second quarter that could've represented immediate incremental margin if successfully addressed.

For example, our substantial tonnage and shipment growth created some increased handling cost and slight reductions in our productivity metrics as we expanded and trained our workforce to move our increased volume.

In our analysis of this productivity, we found that more customers have returned to smaller but more frequent shipments, requiring more handling; versus the larger aggregated shipments we experienced in the downturn.

However, we are willing to accept those small productivity declines in order to maintain and improve our service metrics, which continued to be very strong for the second quarter and the best in the industry.

We sustained our cargo claim ratio at 0.47 of net revenue, and also increased our on-time service performance to 98.7% from 98.2% for the second quarter last year.

Stepping back from the specifics of the quarter -- there are such a variety of ways to produce long-term improvement in our operating margins that I'm confident that such improvements will provide ongoing opportunity to improve the Company's earnings growth for the foreseeable future.

The biggest opportunity will continue to be expanding our market share and increasing freight density in our existing network of service centers.

Our average revenue per service center remains several million dollars below some industry peers.

And the added costs required to increase our service center average will be more than offset by the operating margin on that incremental revenue.

Even during the second quarter, our weight and shipments per door per day were below our peak levels.

In a high-fixed cost business, growth drives operating leverage.

Unlike 10 or 15 years ago, our network today provides such depth of coverage that whether we grow within the network or through expansion of our LTL services beyond the current network, we are generating additional volume that leverages our infrastructure investment.

Our investment in value-added services, both in the US and abroad, also serves to drive operating leverage within our existing infrastructure.

With our market share in the mid single digits, even after years of outperforming the industry in tonnage growth, we continue to have ample room for significant market share expansion.

Our continuing investment in technology presents further opportunities for enhanced productivity.

Our recent investment in onboard computers has already helped us establish an improving trend in miles per gallon for the last five consecutive months, which is a trend we seek to sustain through ongoing driver training and management.

This technology also generates electronic logs that will provide compliance with pending regulatory requirements.

We also expect our investment in electronic mapping systems to improve our dispatch operations.

And we have already made profitable use, and will continue to make use, of new tools and technology to plan our labor requirements on a real-time basis.

These are just a few current opportunities that we're pursuing.

Within our normal planning horizons, there is no shortage of other attractive technology advances we are evaluating.

In addition to increased productivity, we expect these investments to improve customer service, thereby raising the bar in terms of the investment the industry needs to remain competitive.

We do not discount the difficulty of sustaining and improving on the performance we've produced in the second quarter of 2011.

But we believe the strength and consistency of our results are indicative of the opportunities Old Dominion has to achieve further top-line growth, expanded margins and increased earnings.

We're encouraged that we were able to produce these results in an economic recovery of uncertain strength.

We fully intend to continue our investments to be positioned with the capacity and other resources to take advantage of a strengthening recovery and other strategic opportunities.

Thank you.

And now, I'll ask Wes to review our financial results in greater detail.

Thank you, David.

And good morning.

After a 33% increase for the first quarter of 2011, Old Dominion's revenue for the second quarter grew 30.4%, to $480.3 million.

This revenue growth was primarily the result of a 14% comparable quarter increase in tons and a 14.2% in revenue per hundredweight.

Our tonnage growth of 14% reflected a 16.8% increase in shipments and a 2.3% decline in weight per shipment.

While freight mix is the largest factor causing the decline in weight per shipment, as David mentioned, we were also experiencing a trend among many customers to disaggregate their freight into smaller, more frequent shipments that better suit their supply chain needs into less timely and less costly aggregated shipments we experienced during the recession.

Sequentially, throughout the second quarter, tonnage growth per day was 15.6% in April, 13.7% for May and 12.7% for June year-over-year, with each month progressively facing tougher comparisons.

Thus far for July, we're seeing tonnage increase approaching 8% per day against a much tougher comparison for the third quarter versus the third quarter of 2010.

As a reminder, tonnage growth in July of 2010 was up 21.3%.

Revenue per hundredweight excluding fuel surcharge was up 8.1% for the second quarter.

We believe the 2.3% decrease in weight per shipment for the quarter and the 1.5% increase in length of haul had a materially positive impact on the revenue per hundredweight.

Thus far for July, we are again seeing revenue per hundredweight excluding fuel surcharge increase in the 7.5% to 8% range year-over-year.

Old Dominion's operating ratio for the second quarter was an 86.5 -- a 260-basis point improvement over the second quarter last year.

Salary and wages and benefits as a percent of revenue declined 350 basis points, and operating supplies and expense increased 270 basis points, largely due to increased fuel expense.

With the exception of a 10-basis point increase in purchase transportation, all other expense categories improved as a percent of revenue.

Capital expenditures for the second quarter totaled approximately $84 million, and $142 million for the first half of 2011.

We have slightly reduced total expected CapEx for 2011 by $5 million, to a range of $260 million to $295 million.

We have reduced expected real estate expenditures by $20 million, to a range of $100 million to $120 million due to availability and construction timeline issues.

We have increased the planned expenditures, however, for equipment by $15 million, to a range of $145 million to $155 million due to accelerations of 2012 planned expenditures into the fourth quarter of 2011.

Our plans for investment and technology remains in the range of $15 million to $20 million for 2011.

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

We have $174.2 million of availability in our revolving credit facility at the end of the second quarter, and $28.7 million in cash and cash equivalents.

Total debt to total capitalization improved 270 basis points sequentially, to 25.4% at the quarter's end from 28.1% at the end of the first quarter.

With full implementation of our CapEx plans for 2011, which remained subject to availability and timing of real estate, we would expect our total debt to capitalization to be in the range of 26% to 28% at year end.

Our effective tax rate was 35.3% for the quarter due to favorable tax adjustments related to prior years recorded in the current quarter that represented a $0.03-per-share benefit.

We estimate our effective tax rate for the remainder of 2011 to be 38.8%.

This concludes our prepared remarks this morning.

Operator, we'll be happy to open the floor to any questions at this time.

(Operator instructions) Tom Wadewitz, JPMorgan.

Good morning, and congratulations on the great results.

Wanted to see if you could give a comment on how you think the market supply demand -- do you think the LTL market is tight?

And how would you look at pricing going forward?

Do you think pricing is kind of stable where it is, or do you think there's potential that it accelerates a bit further?

It's kind of difficult to separate our tonnage growth and shipment growth between what's economic and what's market share, although many of our metrics -- which we see in terms of weight per shipment, then number of shipments -- still remain fairly stable, in our view.

As far as pricing, as I already indicated, in July -- we're seeing, at least for July, pricing to still be stable.

And there's no reason to think that that would be otherwise going forward, since there's been at least four announcement of GRIs to be effective August 1st.

So do you think the favorable pricing is driven more by the big players showing some discipline?

Or do you think there's actually a tightness in available capacity?

I would think there'd still be some available capacity by at least a number of players in the market.

I'd say it's more just the stance that the major players have taken on their pricing, where they've had to raise their prices to get their companies back into a profitable mode, where they had taken prices down so low.

It's not quite as much of a supply-and-demand and capacity driving the prices up; it's what I said before.

Okay.

And then, Wes, when we think about potential cost pressures -- obviously, you've done a great job with the margin expansion and leveraging your fixed costs.

But sometimes success will cause you to have pressures that increase, either as you add capacity or -- if your incentive comp goes up, or, I suppose, could be wage increases that are more material this fall than you might've had last year.

How would you think about comp and benefits or other items that might move up, and specific items that might drive that?

As far as benefits, we're still seeing, obviously, inflation in the health-related, which affects both our group health and also our workman's compensation.

As far as wage and increases -- we haven't made that decision, if and how much, at this point.

Is there anything on incentive comp that's meaningful, in terms of step-up?

Or that's kind of already in the numbers?

The incentive compensation is already in the numbers.

Yes.

So you don't really expect a ramp, a material ramp, in comp and benefits when you look at second half versus your run rate in second quarter?

When you say a ramp --

We normally -- and we'll be giving a wage increase in September.

But we're not at liberty to discuss that at this moment.

Okay.

It would probably be normal seasonality.

I appreciate the time.

Chris Wetherbee, Citigroup.

Maybe on the back of Tom's question on pricing, if you could talk a little bit about how you think the progression has come out of the recovery here -- maybe how much more we might have left here?

Assuming that we have economic growth in the back half of the year, just given where some of your competitors are relative to you on margins, do you feel like we're 50% of the way through the pricing recovery?

Or is there less or more kind of run rate to go, going forward?

Our competition is operating in the high 90s still.

And with the price of new equipment, we're all familiar with how much new tractors and trailers are costing now.

I think that there is at least 50% left.

That's helpful.

And then, when you think about the costs coming back onto the network -- obviously, aside from normal kind of seasonality, volume growth is a little bit slower, just on very difficult comps, as you go into the back half of the year.

How do you think about incremental margins on that new tonnage that's coming in?

Sequentially, would you expect it to be roughly flat with the second quarter?

Looking back historically, I think typically they're a little bit pressured in third and fourth quarter compared to the second, which I think lines up with your comments earlier about 2Q being the biggest sequential benefit as you move through the year.

Yes, Chris.

Obviously, we haven't -- and at this point still don't intend on giving guidance on either the incremental margins or margins in general.

We've historically looked at a 10% to 15% margin incrementally, where we would grow it in existing territory.

And certainly we've been exceeding that in the last few quarters.

And if pricing still holds up, there's not any reason to think that maybe our margins would be better than that range.

But we're not willing to give any more specifics on that at this point.

Fair enough.

And maybe one final question, just on the sense of the outlook you're getting from your customers as you look into the back half of the year, just more from a macro perspective -- you've obviously noted the weight per shipment coming down, as it looks like people are doing a little bit more time-sensitive or efficient moves of goods as opposed to more of a wholesale type of approach to their supply chain.

How do you think about the back half of the year?

Do you see continued ramp-up here?

Or are you constructive, I guess, on the pace of activity?

We're not exactly sure what the economy will provide for us going for the second half.

So it's hard to make any -- or have any visibility about weight per shipment in volumes and frequency.

Again, much of ours has been as a result of market share.

But our weight per shipment has been declining somewhat year-over-year.

But virtually all of that is mix, prompted mostly by the fact that our spot quotes are down substantially, and that's down substantially intentionally.

When we look at more finitely into our contractual customers, and even into our 559 customers, it's been relatively stable, especially on the contractual side -- our weight per shipment has been relatively flat.

But the number of shipments have been very strong.

So we really expect that, for the most part, to continue.

We haven't seen anything at this point otherwise.

Okay.

Thanks for the time, I appreciate it.

Todd Fowler, KeyBanc Capital Markets.

I'm curious to get your comments on how your revenue per hundredweight is trending, with fuel up 14%.

I understand that there's some mix issues going on in the quarter.

We haven't seen all of your competitors report, but to me, that feels like a very strong number.

And I would say that you were more disciplined with price in the past couple of years.

I'm curious to get your thoughts as to why you're able to show such strength with revenue per hundredweight, where it seems like some of your competitors maybe haven't shown numbers that have been as strong.

I don't know what the detailed metrics on the competitors are, Todd.

But as we mentioned in our comments, we have seen a reduction in weight per shipment -- more frequent shipments, but a reduction in weight per shipment; and also a mix which has caused that revenue per hundredweight to come down, and increased length of haul.

Both of those have a positive reflection.

And I'm not sure what the competitors are seeing.

If their metrics are opposite, that could explain some of the differential.

It's not all pricing; it's just the demographics of how the freight is coming to us.

Todd, I'd also say that our revenue quality improvement processes have been in place for a dozen or more years.

And we have just consistently applied certain elements of this process.

And I think it's just paying off now, and it's a long-term thing that's causing our strength in revenue per hundredweight.

And the level of service, on-time deliveries, and that 0.47 claims ratio is helping a lot.

That's helpful.

And actually, David, that was exactly where I was going to go [with my] next part -- how much do you attribute, or how much do you think is related to some of the technology that you have, and being able to maybe more accurately capture dimension and weight and those sorts of things; and getting just the proper billing from your customers?

It really boils down to a value proposition.

Value is everything to do with your service products.

And the proposition side of it for us is to arrive at a fair and equitable price with our customers that is clearly supported by a strong value on the other side of the equation.

And that's just the real key to the whole thing.

Okay.

And then, just for my follow-up -- obviously there was some concern during the quarter about YRC going through their financial restructuring.

Does it feel like that there was any temporary shift in freight -- maybe some customers that diverted freight in the interim, and maybe some of that freight's going to move back?

Do you think that that had any impact on your results here during the quarter?

Not meaningful.

I think the transition of freight from YRC to us and other carriers has been an ongoing process for the last couple of years.

We did not see any major shift or change in that dynamic.

Okay.

Thanks for the time, and congratulations.

David Ross, Stifel Nicolaus.

Can you talk a little bit about the Old Dominion tariff, and how many customers are on your rate base versus a foreign tariff?

Our tariff, which we call a 559, is about 30% of our revenue.

And has that changed materially in the past year or so?

It's been trending downward over the last few years.

Okay.

And --

And I suspect it has been for the industry overall.

Yes.

And then, on your LTL business -- you talked about the growth in some other services and other segments.

Can you quantify how much LTL business might've been driven to your network from those other services?

If you had 14% tonnage growth, was 1% of that coming from other businesses you're doing driving LTL volume into the network?

David, we have not done -- obviously don't have a real good measurement of that to give you a solid answer.

Our other businesses are so tiny right now that I would say there's very little coming from the other businesses at this point.

But there's a lot of potential there.

But those other businesses have higher -- they're small segments, but they have high growth rates.

And they stand on their own pretty well.

They do tend to feed the network a little bit, but -- Earl's probably right -- not in a substantial way.

The percentage of mix for the value-added is up about 20 basis points.

It still averages at roughly 8% of our revenue.

And so, theoretically, instead of 8%, it's 8.2%.

So the growth is strong.

And it's meaningful from a [profitive] standpoint, but still not from an overall standpoint.

Yes, the most significant contributor to helping the network would be North America LTL's services, between the US and Canada, Mexico, Hawaii, Alaska and the Caribbean.

And we've got a good growth rate in that area.

Those would be the ones that would help, although I wouldn't say they're substantial.

It wasn't half of our growth, or anything substantial like that.

Makes sense.

And then, Wes, just on the income statement expense line items -- the building and office equipment rents declined year-over-year, but they were also year-over-year last quarter.

Is there anything unusual going on in that line, or was there anything unusual last year --

Yes, Dave, the biggest part of that is -- as we own more and more of our [turnals] as opposed to leasing them, obviously you'll see an increase in depreciation -- the dollars, not necessarily as a percent of revenue.

So consequently, you'd see an offsetting decrease in rents, specifically service center rents.

So if it's fluctuated between kind of $3.4 million and $4.2 million a quarter, that's probably going to level off at around where it is now, the $3.5 million; or maybe even go lower if you switch to more owned facilities?

Yes.

Excellent.

Justin Yagerman, Deutsche Bank.

David, you threw out a metric that I don't think we've heard you talk too much to before.

You said that weight and shipment per door per day were still off of peak levels.

Was curious if you could give us some quantification of where you are relative to peak -- what's peak, how you think about that -- and when we would expect to get to peak, and if you could exceed peak -- if you can answer all those different questions on it.

First of all, I'll say I don't have the actual statistic in front of me on weight per door per day.

But it struck me, when I was looking at our statistics that are produced by Wes's group, that we were below the peak that I'd seen about three years ago.

And to me, it represents a nice opportunity to continue leveraging the network.

A lot of our service centers -- if you look at their weight per door per day and compare them to the service centers who have the highest weight per door per day, you find some of our smaller centers and medium centers are 50% of the highest that we have in the system.

So you would think they have 50% capacity for growth.

And it's -- the overall -- if you take the overall average service center, compared to the top 10 service centers in weight per door per day -- if you say that those are -- and some of those are near capacity -- we probably have an overall average service center door utilization in the 55% or 60% range, overall average.

So that would say we've got loads of leverage available in the network.

But you still have those 10 up at the top that we're having to address with our capital expenditures now to expand capacity for the future.

That's really helpful in thinking about that.

A broader question on where Old Dominion is, and how you guys position yourselves in the market -- we used to hear from FedEx and from Conway that they were a premium product at a premium price.

I think that a lot of that's changed this cycle in terms of how they're viewed and how their results are viewed by customers and by the likes of the market.

You guys used to get picked on for potentially being -- undercutting -- from pricing standpoint, I would say, outperforming, if you just looked at where your margins are.

How do you think about, when you're going into markets, where Old Dominion is?

Are you a premium product at a value price?

Are you a premium product, do you think now, at a premium price?

When you stack yourself up against the competition, where do you guys fall out?

We believe we're a premium product at a fair and equitable price with the customer, and at a better value for the service product that the customer receives.

We're not trying to gouge our customers; we're trying to establish the most fair and equitable price that we can, but give the customers the superior value.

That's kind of what I thought, I was just curious.

And the last question -- Wes, you talked about -- and I think, David, you also mentioned in your prepared remarks -- that there was some workforce flex [op] that obviously had to take place with the tonnage you guys took in the market this quarter.

And then maybe, that was where -- if you could poke holes at anything in the quarter, that was where some inefficiencies cropped up.

As you look at the back half -- Wes, you said July you've got 8% tonnage levels in terms of an increase -- how real-time are you guys flexing workforce right now?

How much flexibility do you have?

How much have you taken on?

And is most of that part time, in thinking about how it comes on and off?

If you could give us color on that, that'd be definitely helpful.

Yes.

If you just go back to our peak employment, which is the third quarter of '08 -- we have about 2% more full-time people than we did then.

If you look at our shipment in tonnage per day, compared to that same peak, we're now 10% more shipments and 12% more weight.

So we are actually more efficient.

Now, some of the productivity numbers year-over-year are slightly down, simply because of the volumes and the fact that our mix has changed to be more handling required.

But still, the bottom line is our margins incrementally are still much better because of that leverage that we still are seeing from our peak employment, going back pre-recessionary period.

Justin, we're just -- through our management and through technology and systems, we're very -- we flex our workforce up and down with the volumes on a daily basis.

Got it.

Thank you so much for your time, and nice job on the quarter, guys.

Jon Langenfeld, Baird.

On the service side -- did you get any sense that your competitors, given how stretched they are on the profitability side -- that the service element has hurt them?

And you see customers come to you because you haven't had to cut costs, and you haven't had to be as mindful of that side of the equation, given where pricing has been at?

Jon, we really can't comment much on the service levels of our competition.

We stay focused on our service levels.

And I know they maybe have had some issues.

But it's hard to -- I'd rather not even try to comment on that.

Well, let me rephrase it, then -- how often does the conversation of service come up in the new customers that you're bringing onboard as being a key attribute for why they're choosing you over someone else?

It comes up quite often that we're being more and more perceived as the best service product in the industry.

And customers are coming to us because they need a better service product than what they're getting from their current carriers.

Any more so today than, say, two or three years ago?

Probably more so.

I think our market share is expanding a little more rapidly here in the last year than it had in years prior to the recession.

We held our market share very steady during the recession.

But since we've been coming out of it, and since a lot of competitors have been drastically increasing prices, the customers are looking at their alternatives.

And they're coming to us because our service in the industry is the best, and at the best value in terms of price.

Certainly makes sense.

And then, just on the smaller shipment size comment that you made -- how much of that, do you think, can be attributed to the economy versus the supply chain side, in terms of how they're managing their supply chain?

Typically, in weaker economies, we've historically seen that weight per shipment go down.

But you tended to put that more towards the way they're managing their supply chains.

We don't really necessarily see that weight per shipment, first of all, being down -- as I said, most of that is mix.

But even when you look within the contractual and the 559 businesses relatively flat, we don't really necessarily see that as a negative, because the frequency of shipments is so much higher.

So they're shipping -- purportedly because of their demand, they can't afford to delay shipments and make the shipments heavier, like they were doing during the recessionary period; they're having to ship more frequently.

So if it wasn't combined with the fact that the number of shipments are so much higher, possibly we would be concerned.

But the fact that they're flat, but we're having many more shipments, is fine with us.

So the shipment count -- obviously, we see that number -- it's up.

But even if you took another layer down and looked at on a shipment, on a per-customer basis, that number has gone up as well, is what you're saying.

Yes.

We are seeing a lot of growth in multiple shipments -- shippers, as well as the quantity of shipments those type of shippers are giving us.

And that's part of where our operating leverage is coming from now, too.

Makes sense.

Anthony Gallo, Wells Fargo.

Could you speak to where you think the network is in terms of available capacity, and if there's any particular regions of the country where you think you're tighter than others?

And then I have a follow-up question.

Anthony, you must not have been on the call.

I said that earlier -- that our service center network capacity is probably in the 40% range, 35% or 40% range.

But there are some of our service centers that have maybe 5% capacity or are at capacity that we are addressing with expansion plans, and that's where this capital expenditure is going for real estate.

So --

No, I'm sorry, I didn't hear.

So across the network, though, is there a blended number?

And then, I think in the past, you've talked about capacity on the rolling stock as well.

That's what I was trying to get to.

Rolling stock is fairly tight right now.

We have some more tractors and trailers coming in later this year that will give us capacity through the fall.

But can't give you a real firm number on equipment --

I'll suggest our capacity is 5% to 10% on equipment.

On equipment.

You never want it to get down to 0%, but then you don't want it to get up to 15% to 20%.

So I think we're managing that quite well.

And we're okay with the capacity that we have on the equipment side.

On the real estate side -- probably 20% to 25% overall.

But as David said, some could be 50%, 60% percent capacity, where we've just expanded them.

And some, specifically in the Midwest, we're just out of capacity.

And that's why our CapEx is there.

I appreciate that those are estimates; that's very helpful.

As a follow-up -- when you think about some of the productivity metrics that you've given in the past, Wes -- and I think David said that you weren't quite where you've been at peaks, or where you thought you could be -- is that because of where you are from a capacity standpoint?

Or do you think you just need a little bit more on the execution and focus right now?

(Inaudible) like on the platform, we're down.

But we've added a lot of new dock workers and had a lot of training for those people.

So likely, you would expect your tonnage to be down, not only because of the inexperience but just because of the training time that we spend to make sure they're properly trained.

And don't get my question wrong -- remarkable operating ratio, fantastic performance.

Matt Brooklier, Piper Jaffray.

Just one quick housekeeping question -- how should we think about the tax rate in the second half of the year?

I'd already indicated we expect that to be 38.8%.

38.8%?

Right.

Thank you, that's all I got.

Tom Albrecht; BB&T Capital Markets.

Congratulations on a great quarter.

Two questions -- David, it sounds like from your description of the onboard computers that -- and maybe this is the nature of LTL -- that you're able to get productivity almost from the get-go, since you have some of the same issues with logbooks and pushing hours of service limitations.

Would that be an accurate read -- that they're providing productivity maybe quicker than a truckload carrier would experience?

I commented about the fuel mileage improvement that we're starting to see.

I think this is an ongoing process that takes -- is not an immediate improvement, because it takes some education and some coaching, and some measuring and monitoring and further coaching over time, to improve the driving habits to where the drivers are getting optimal performance.

So it's not an overnight kind of -- or immediate savings that we've gained from that.

That's fair.

That's kind of what I would've thought, but I wanted to clarify that from your comments.

Also, what's the size of your sales force today, let's say, versus a year ago, and maybe even versus peak?

Wes, I know you gave some figures on where your shipment and poundage levels are versus the prior peak.

But I'm also kind of interested in the sales force today versus a year or so, and versus peak.

Yes, we --

Tom, we'd rather not comment on the size of our sales force.

I think that's a competitive thing.

Would it be fair to say, though, that you continue to look at that as just a real opportunity versus -- I think some others, maybe, are not adding nearly as aggressively?

It's important to have adequate coverage on the street.

And we've kind of -- I don't know, we've maintained our own is what I'll say.

I'd just rather not get into the numbers on how many people -- how many sales force we have.

No, I understand.

And do you feel like --

[Think] it's very expensive.

What about -- I know 3PLs have been something that -- whether they're kind of brokers or 3PLs that you've been comfortable with -- what percentage of your revenue today is coming in from those types of companies, and how might that have changed over the last few years?

It's probably in the neighborhood of 25% now, Tom.

And that's been an ongoing segment of our customer base that has grown over the years.

It probably notches up one or two percentage points a year, or maybe 1% a year, in terms of the mix of our customers.

Okay.

That's all I have, thank you.

Jason Seidl, Dahlman Rose.

Couple quick questions -- one, I guess, I'll piggyback off Tom's question on the 3PL exposure.

Since it's been inching up, is there a limit where you want to keep it at, in terms of 3PLs having a percentage of your business?

Or do you think this could climb beyond 25%?

We look at 3PLs like any customer.

And it could keep growing.

But when we work with our 3PLs, we try to establish good partnership arrangements with them.

We look at every customer on an individual basis as it relates to the operating ratio and the profitability of each customer that that deal brings to us.

So we don't have a ceiling on how high it'll get.

We just take it as it goes and try to maintain a profitable, mutually beneficial relationship with our 3PLs.

Great.

And the next question is going to be more around the general rate increase.

Last year, you took two of them.

And you sort of announced [the call in] a week or two weeks ahead of time.

The market seems to have announced this round of GRIs a little bit earlier than last year.

Could we assume that you will announce yours a little bit earlier than you did last year, considering you're towards the back half of it, in sort of middle November?

Jason, we have decided we will take one.

But we have not settled on the date or the amount as of yet.

That's fair enough, guys.

Nice quarter, I appreciate the time.

Scott Group, Wolfe Trahan.

At a higher level, where do we go from here on the margin side?

Is it reasonable to think about material margin improvement from here?

Or is there something structural about the business of the network that makes it tougher to get better from here?

I guess, I'm just thinking as we look out the next couple of years, should we be thinking about top-line growth in maintaining margins?

Or do you think we can still get a combination of growth and margin improvement going forward?

Scott, we knew somebody was going to ask us that question.

But I'm going to have to let Wes Frye answer that.

I think we've talked before, Scott.

We're not giving margin or operating ratio guidance.

I think David said in his comments that we -- and Earl -- that we think that we still have some potential for top-line growth as well as margin growth.

But we're not giving any more specifics other than that.

Our goal continues to be to improve margins and look for ways to continuously improve our company.

And hopefully, that will result in improved margins going forward.

And you think that 86.5 in second quarter on the OR -- that's a real kind of ongoing number that we should think about trying to improve from, from that level?

We also knew you'd try to ask it a different way.

You've got -- how are our competitors going to perform in the future?

What's the economy going to be?

There's so many unknowns that could have something to do with our margins.

Obviously, we've already --

Pricing environment, yes.

I think, Scott, the most important aspect of our company and feature here is that -- is the consistency of the margins that we have delivered.

And we intend to stay on track and deliver consistent margins going forward.

How low can it get?

We're not sure.

But our goal is to take it lower, and we hope we can.

That's helpful.

The commentary on July -- tonnage up 8% -- I understand the tougher comp.

Are you seeing anything slow on a -- beyond just normal seasonal patterns?

UPS was talking about (inaudible) [rates] falling [in July].

Seasonally, from June into July, it's fairly normal what we're seeing, on a seasonal note.

[Nothing] --

That's helpful.

-- unusual there, both in terms of shipments and weight per day.

Okay.

And last one, real quick -- why wouldn't you match the 6.9 GRI that everyone else is doing?

Is there -- do you think it's tougher to get a GRI given how well you're operating?

Or should we not read into that, and you think maybe 6.9's the right number?

We're not going to comment on that right now.

Okay.

Chris Ceraso, Credit Suisse.

This is Allison Landry in for Chris.

You've mentioned that part of your growth strategy would be via geographical expansion.

So I was wondering if you could talk a little bit about what you're seeing out there in the acquisition market, and what types of opportunities you'd be the most interested in pursuing.

Well, we're kind of cooling it right now on acquisitions.

We're still -- first of all, the economy has been decent, and the pricing environment's good.

Our market share is still only in the mid single digits.

So there's a lot of room for us to expand without having to acquire additional LTL carriers.

So we're not -- that's not to say that we might pick up one or two relatively small ones.

We're trying to avoid a bet-the-company strategy.

Because we've seen so many people fail at it, so we probably won't go for something that would be really large.

But we'll always have our -- we're open to opportunities that might come along.

But our primary growth strategy is going to be to grow where we already are because of the incremental nature of additional business where we currently operate.

We think we can make more money by doing that.

And we do have some -- as you know, we cover the entire United States now, but we do have some areas that we run on [pedal] runs.

I'll give you an example -- Akron-Canton -- we have a -- we've been serving that out of Cleveland.

And we're building a new facility there because the population is huge in that area, and we think that we can increase market share there by being there.

So that's the type of geographic growth that we're having.

We already serve on a pedal run.

But once we put a facility there, we hope to gain market share.

So that is our growth strategy.

So it sounds like the focus is more on building density, at this point.

And then, in terms of the CapEx -- do you expect the spending to persist at these levels for the next couple years?

Or do you think you can moderate the spending levels without compromising your top-line growth?

I think that the spending levels might stay fairly consistent, depending on what the opportunities, especially in real estate; and also depending on what our growth outlook is.

However, we do expect the CapEx to reduce as a percent of revenue.

Okay.

Then, just my last question -- I was just wondering if you saw any regional differences in demand during the second quarter.

Percentagewise, all of them grew [healthily].

Obviously, some of the more mature areas may have not, percentagewise, grown as much.

But we saw very nice growth in all areas.

Thank you very much.

Jack Waldo, Stephens, Inc.

Wes, I was wondering what your operating ratio was going to be in the third quarter.

I'll tell you that offline.

I couldn't resist.

My only question -- you guys used to have this really nice slide in your deck that showed market share based on geographies.

And I know you had some commentary on your overall market share in the press release.

I was just kind of wondering -- how does your market share in the West compare to your market share in the East right now?

We're pretty consistent across the country.

The Southeast was a little over 7%, 7.5%.

But most of the other regions of the country range from a low of 5.5% to a high of 6%, 6.5%.

So we've shown a pretty -- north of 5% out in the Pacific Northwest and [upper] Central states.

And we've got good, consistent share everywhere.

Those market shares are as a result of a database.

So they're not the total 100% LTL market, but representative.

Got you.

And how do you guys think about -- five years out, or whatever -- what you think your overall market share could be?

We have publicly stated that our intention is to grow our revenue to $3 billion by 2015.

So we don't -- that's what we are looking to be our numerator; we're not sure what the denominator.

But if it stays around the $35 billion -- $30 billion to $35 billion, it's approaching 10%.

And that $3 billion by 2015 is absent the demise of a large competitor.

If they --

It's not [including] --

It does not -- if they -- if a large competitor were to exit the industry, we would anticipate more than $3 billion by 2015.

So you can do your own guess on what our market share is from there.

Got you.

Thank you guys very much, and congrats on the quarter.

Thank you.

Thank you.

There being no further questions in queue, I'd like to turn the Conference over to Mr.

Earl Congdon for any closing or additional remarks.

Well, needless to say, we're delighted with our second quarter and do our best to continue in the manner in which we have been operating.

But as always, we'd like to thank you all for your participation.

And we certainly appreciate your support, your questions for us -- we've had some great questions.

And feel free to give us a call if you have any further questions.

Good day.

Ladies and gentlemen, thank you for your participation.

This will conclude today's Conference Call.