奧多明尼昂貨運 (ODFL) 2013 Q3 法說會逐字稿

Good morning, and welcome to the third-quarter 2013 conference call for Old Dominion Freight Line.

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

The replay passcode is 1911778.

The replay may also be accessed through November 7th at the Company's website.

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

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

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

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

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 would 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 third-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 will be glad to take your questions.

Old Dominion produced another strong performance for the third quarter of 2013.

Despite a soft economic environment, the Company produced its highest-ever quarterly revenue and net income as we grew revenue and earnings per share by 12% and 18.6%, respectively.

We also continued to sustain our record service levels during the quarter.

With further improvement in density and yield, combined with consistent productivity results, we improved our operating ratio by 120 basis points to an 84.1%, compared to an 85.3% for the third quarter of last year.

Our 7.9% growth in tons per day strongly indicates that we continue to gain market share.

We believe a tonnage increase of this size in a quarter in which we increased revenue per hundredweight, excluding fuel surcharges, by 3.6% is evidence that the pricing environment remains favorable and that demand is robust for our value proposition of on-time claims-free service at a fair and equitable price.

Most of you know the history of the significant and continuous investment we have made over the past decade to build our infrastructure, purchase equipment, and deploy innovative technology that enables us to sustain industry-leading service standards.

However, it is the people throughout our Company who are our most valuable assets.

Our customers, shareholders, and communities have been rewarded because of the strength and dedication of the OD family, as well as by Old Dominion's commitment to give our employees the tools and training to excel at their tasks.

As a result, we believe Old Dominion is operating at a finely-tuned pitch -- one that we have sustained and improved over our many years of industry high performance.

We believe the Company is well positioned to continue to strengthen our prospects for long-term profitable growth and increasing our shareholder value.

We thank you for your interest in Old Dominion.

And now I will turn the meeting over to David Congdon for his comments on the Company's performance.

Thank you, Earl, and good morning.

I will start off by saying Earl is absolutely right by referencing the Company's finely-tuned operation.

In addition to delivering leading financial and service performance while investing significant capital, expanding and sustaining our network infrastructure and technology, we have also reduced our debt-to-total capital to its lowest level ever while producing Company record returns on assets, equity, and capital.

We were pleased to report a few years ago that our cargo claims ratio was creeping down toward the relatively unimaginable level of 0.5%.

This was not by sheer luck, but as the expected result of our deliberate strategies to provide superior service.

Because of our determination and continued focus in this area, I am pleased to report that we have just completed our 2nd consecutive quarter of a 0.31% cargo claim ratio.

We have consistently discussed and demonstrated our belief that, given a stable-to-improving economic environment and improved density, yield, and productivity, we could generate incremental margins of 15% to 20%.

Because of the infrastructure, the workforce, and information technology that we have built over the many years to provide our superior service value proposition, we have strengthened our ability to positively effect density, yield, and productivity.

For example, we believe we are consistently achieving increased market share and density because of our best-in-class service.

Second, due to the long-term consistency of our yield management process, we have built and are expanding an attractive base and mix of business that values the transportation solutions we provide and customers who are willing to pay a fair and equitable price for our proven service.

Lastly, we have also had a long-term record of increased productivity and much opportunity ahead because of our long-term history of investments in systems, technology, and processes.

While this business model requires a strong commitment and continuing investment to remain finely tuned, our long-term success is proof of our ability to sustain the strength of the model over time.

In addition, by raising the standard of performance in our industry, we differentiate Old Dominion's capabilities and create more consolidation pressure on industry participants who are not positioned to compete effectively.

To summarize my remarks this morning, there is no doubt our business model has proven successful at driving increased market share, industry-leading margins, and superior shareholder returns.

We are excited about the numerous opportunities ahead for continued improvement, long-term profitable growth, and further increases in shareholder value.

Thanks for being with us today.

And now I will turn it over to Wes to review our financial results for the quarter in greater detail.

Thank you, David.

And good morning.

Old Dominion's revenue were $616.5 million for the third quarter of 2013, an increase of 12%, and $550.5 million for the third quarter of 2012.

This revenue growth was driven by a 7.9% growth in tons per day, higher than the expected range of 7% to 7.5%.

With an extra work day in the third quarter compared to the third quarter of last year, total tons increased 9.6%.

Shipments for the quarter rose 8.7% and weight per shipment increased 0.8%.

Revenue per hundredweight increased 3.3% in the quarter, despite the increased weight per shipment and a slight decline in length of haul.

Revenue per hundredweight, excluding fuel surcharge, increased 3.6% compared to the third quarter of last year, just ahead of the expected range of 3% to 3.5%.

Sequentially, through the third quarter, tonnage per day decreased 2.4% for July versus June, and increased 1.4% for August and 3.5% for September.

This trend was better than expected and slightly higher than the 10-year average sequential month change, which was a decrease of 2.2% for July, an increase of 0.6% for August, and an increase of 3.3% for September.

Year-over-year tonnage per day during the quarter was 6.2%, 8.6%, and 8.6% for July, August, and September, respectively.

We expect year-over-year tonnage per day for October to be up approximately 9% and be in a range of 9% to 10% for the fourth quarter overall.

We also expect revenue per hundredweight, excluding fuel surcharge, to increase approximately 2.3% for October and be in a range of 1.5% to 2.5% for the fourth quarter.

While this range is less than our year-to-date increase of 3.1%, the guidance is more reflective of continued mix changes toward contractual business with a 13% higher weight per shipment when compared to the weight per shipment of our overall LPL business, a higher growth in our container drainage volume, and also a reduced length of haul.

Revenue per hundredweight, which reflects a continuously changing mix of business, does not measure, however, our profitability.

Therefore, year-over-year changes in revenue per hundredweight do not necessarily reflect a change in pricing levels.

We still maintain our positive yield outlook based upon our disciplined and consistent pricing strategy and believe that same outlook applies to the LPL sector overall.

Our operating ratio improved to 84.1% for the third quarter of 2013, a 120-basis-point improvement compared to an 85.3% for the third quarter last year.

We continue to realize savings from better purchasing and fuel efficiencies, which were primarily accountable for the 150-basis-point decline in operating supplies and expense as a percent of revenue.

Salaries and wages, however, increased 10 basis points, reflecting a 60-basis-point increase in group health cost resulting from increased medical claims experience.

The increase in depreciation and amortization as percent of revenue for the quarter, which was due to -- mainly to expansion and replacement purchases of tractors, trailers, and service centers, was offset by reduced equipment repairs and maintenance costs and also service center leases.

Capital expenditures for the third quarter were $72.1 million and $219.8 million for the first 9 months of 2013.

We expect CapEx net of sales proceeds for the full year to approximately -- be approximately $305 million including planned expenditures of $130 million for real estate, $150 million for equipment, and $25 million for technology and other assets.

We expect to fund these expenditures primarily through operating cash flow as well as our available borrowing capacity, if necessary.

Total debt-to-total capitalization improved 14.8%, compared to 22.3% at the end of third quarter last year.

We expect the ratio to be in a range of 14% to 15% at the end of this year.

Our effective tax rate for the third quarter of 2013 was 36.9%, compared to 34.9% for the third quarter of 2012.

We expect our effective tax rate for the fourth quarter of 2013 to be approximately 38.6%.

This concludes our prepared remarks this morning.

Operator, we will be happy to open the floor for questions at this time.

Are you there?

Yes.

Hello?

Yes, go ahead.

Hello?

Yes, you are there.

We are opening the floor to questions at this time.

[Operator Instructions] And we will take our first question from William Green of Morgan Stanley.

Hi there, good morning.

You know, Wes, I am curious about, some of the -- you went through a lot of sequential changes and changes in tonnage.

That was very helpful but I'm curious on the OR, it actually got a little bit worse than in the second quarter, despite the extra working day.

And I actually would have thought that it typically is flat and so the extra working day might have helped a little bit.

Can you just talk a little bit about if there are changes going on this mix that are going to affect the sequential change when we think forward from here, given what you told us in October?

No.

I will reconcile briefly the second to the third quarter and it has really nothing to do with mix.

If you recall, Bill, in the second quarter we reported a gain on the sale of real estate of 40 basis points, which did not occur in the third quarter.

Also, as I mentioned in my comments, our group health, which was very high in the third quarter, was 40 basis -- also 40 basis points higher in the third quarter than it was in the second quarter.

So when you combine those two it is actually 80 basis points, and if it weren't for those two occurrences, or notwithstanding those two occurrences, the third quarter is very comparable, or maybe even a little bit better.

Now, you know whether or not we have real estate gains is just a matter of when we sell real estate.

As you might imagine, since we are expanding and adding real estate, larger real estate, we routinely have excess service centers that are for sale, usually in the range of 10 to 20.

It is kind of common and ongoing that we would record gains.

We just had one sizable gain in the second quarter.

Whether that is repeated or not would just depend upon the real estate sales.

And on the group health, you know there is ebbs and flows on how those expenses hit the income statement.

Whether that increase is a trend or whether it is one of those ebbs and flows is difficult to define.

But still, those two items alone accounted for the difference in the ORs between the second and third quarter.

Okay.

On the fourth quarter, is it -- based on what you know today, is the group health going to be an issue?

Does that trend continue?

Well, it is unclear at this point whether that third quarter was an ebb up or in the fourth quarter it will ebb down.

We can't really sustain that at this point.

Whether we -- that is a just trend in medical costs, and Obamacare and all those other things that are affecting our medical cost, we will just have to wait and see.

But it is what it is, and I can't give you any clarification of how that is going to effect the fourth quarter of this point.

Okay.

Just one last question just from a cost perspective.

Do you feel like our service had much of a impact on the cost?

Was it a material headwind for you, or were you able to adjust and it really didn't matter.

It was not -- this is David -- not at all a material headwind; the initial impact we had was really over the first two weekends.

We missed some dispatches, but then we re-engineered our schedules and we have operationally overcome that.

The main effect that we have seen out of hours of service was that a loss in driver income from June until July.

A lot of our drivers were able to get an extra -- maybe an extra trip on a Saturday, then they could do a restart and go back to work on Monday afternoon; I'm talking about road drivers.

And this change in hours of service has basically reverted everyone back to the use of the 70 hours and eight day clock.

We hope that the drivers won't be impacted in the long run, that they will figure out how to work within the system to maximize their number of miles and hours and so forth within the confines of the law.

That's great.

Thank you for the time.

We go next to Chris Wetherbee of Citi.

Great, thanks, good morning guys.

Maybe just a follow-up on the question regarding mix.

When you think about the revenue per hundredweight, it sounds like pricing, underlying pricing is better than the guide that you are giving us for the fourth quarter.

When you think about some of the business that is coming on in the underlying mix there.

Do you see that play out anywhere other than revenues?

I.e., is there any sort of margin impact?

I know, Wes, you implied that that wasn't really a big differentiator between second quarter and third quarter, but you had some of these mix impacts over the course the year.

I'm just trying to get a rough sense of where else we see that flow-through in the model outside of just weakening the -- or softening the revenue per hundredweight growth a bit.

Chris, this is David again.

Ill try -- let me put it this way.

The current business mix that we have in the Company is obviously producing very strong results regardless of what the year-over-year differences are in revenue per hundredweight.

As we look sequentially towards the fourth quarter and beyond, we anticipate continued strong performance, and we are frankly not that concerned over the mathematical difference in the year-over-year statistic.

That is just merely a resulting number of how you manage your business mix, how you manage every customer.

We manage every customer to an operating ratio.

You have got 15 different things that affect revenue per hundredweight.

So, it is not something we are really concerned about because those overall mix of different services and customers and so forth that we have right now is producing a rather strong end result in our operating ratio.

So -- and we also have not, and I want to be real -- we have not made any strategic shift in our yield management philosophy, nor have we seen any negative turn in the pricing environment.

Okay.

That's helpful.

That was going to be a follow-up.

So that sounds like that it is continuing, the numbers you put up suggest that there is no underlying softness in the pricing environment within LTL.

That's correct.

Maybe just a quick follow-up, just as you think switching gears to three PL's, and you think about the expansions into the LTL business.

Talk a little bit about how you guys think about the three PL piece of your business.

Maybe give us an update on where it stands currently as a percent of your total, and then how you think about the pricing dynamic there?

It doesn't seem like that is having any negative impacts on the pace of pricing.

But just kind of curious how you manage that as that continues to grow as a piece of the pie.

Three PL's currently make up somewhere in the neighborhood of 25% of our revenues.

We just have a method of working with three PL's whereby we look at each individual account that they bring to the table, and we cost them and price them on their own, on each account's merits.

That is basically what we do.

Okay so no negative impact that you're seeing on the pricing environment or the pricing within Old Dominion as a result of the three PL increases.

No, not at all.

All right.

That's very helpful.

Thanks for the time guys, I appreciate it.

We go next to Thomas [Chan] with Goldman Sachs.

Think you.

Can you just give us a little bit more color in terms of how we should be thinking about wages, and wage inflation, as we look out to 2014.

Yes Tom.

We did give a 3% wage increase in September.

And also we actually -- we have often said the success of the Company is we like to recognize the employees and try to provide additional compensation to them, and in addition to the 3% we also enhanced the vacation that our employees get.

So, there was a little bit of a headwind in the third quarter of us accounting for the additional vacation time that we provided to employees.

It was not material, but it was one of those other things.

So we enhanced our vacation benefit and also gave a 3% wage increase effective in September.

Thank you.

Just in general with regard to the access to labor and the driver shortage that we continue to hear about.

Can you give us an update in terms of what you're seeing with regard to your ability to grow and whether this is becoming increasingly a challenge for you?

Thomas, fortunately the LTL business does not experience the driver turnover that full truckload carriers do, because our drivers are more on a scheduled basis, and the local drivers are basically working Monday through Friday, daytime, with some Saturday work, as well.

But everyone knows what their job expectations are every week and they get a lot of home time.

So consequently, our turnover rate is 10% or less.

If you take out normal retirements and people becoming unable to do the job anymore for disability purposes and things like that, the other turnover, about half of that 10% is real turnover, people leaving you for one reason or another or for disciplinary reasons, and the other half of the 10% is just normal turnover.

So therefore, we are not having a lot of trouble bringing drivers on.

I think our success is breeding success in the area of hiring and attracting attractive personnel across the entire, across all job categories and classes.

Thank you very much.

We go next to Jason Seidl of Cowen and Company.

Hey David, Wes, Earl.

How are you guys this morning?

Glad to be with you.

Hanging in there.

A couple quick questions for you guys.

Wes, did you guys see any impact in the quarter from some competitors shutting down some of their Western operations, or are you seeing anything in October from that, or even for the potential labor actions that ABF has?

I can't say; I assume on the first part of your question, you are referring to Vitran.

Yes.

No.

I would assume that Vitran's market share on the West Coast was pretty small anyway.

But I can't say we have seen any effect to speak of, and as far as ABF's labor, we don't really have the visibility of whether we are seeing any of that either.

So, I can't really answer the question one way or the other.

Okay.

My next question is a little bit longer term.

Obviously your balance sheet is just in fantastic shape, the best it has ever been, at least since I have been covering you.

Looking out, I am just curious, what is the plan as you reach your maximum buildout and you start reducing your capital expenditures going forward, what is your plan to distribute your free cash flow?

We will see that when that cash flow builds, we will look at the alternatives, one of those alternatives being to return some cash to the stockholders.

But we are still a growth Company.

We still are investing pretty heavy dollars back into the Company for growth and have been good stewards of that as a return on vested capital to our shareholders, both in terms of return on the invested capital and return on share prices.

So we will look at all those things but we still think that we have some growth potential, and we will look at that and see what kind of capital would be necessary to do that.

But then, we will look at the shareholders, as well.

We will have to put that all in a bucket and see what makes sense and what is best for the Company's growth and what is best for the shareholders.

And Wes in the past you guys have mentioned that bucket's included potentially some non-LTL business, but stuff that might have a sort of tie into you guys.

Is that still out there for you to sort of expand a little bit?

It is.

And those -- what we call the adjacent businesses that we're in, we're doing organically now, isn't not as if -- that we are not into those businesses.

Whether we accelerate the growth in those businesses through an acquisition is certainly something we continue to consider and evaluate.

Okay.

Then guys that is all I have.

I will turn it over to somebody else.

Thank you so much for the time is always.

Thank you Jason.

We go next to Todd Fowler KeyBanc Capital Markets.

Great.

Thanks.

Good morning.

David, I am curious to get your thoughts on what is driving the change in mix in the heavier-weighted shipments.

I used to think of that as more of a function of the economy, but from what we are hearing that does not seem to be the case.

I'm curious any sort of insider thoughts you would have to what is resulting in the acceleration in your year-over-year time decreases and the change in mix.

It is hard to say Todd, our approach to aiming business, you are always calling on new accounts and you are trying to increase business with existing accounts.

You are responding to bids, both for new accounts and existing accounts, and as we have done this, it is just -- the end result is what it is.

It is not a particular focus on trying to get heavier-weighted freight versus lighter-weighted freight, or any particular direct focus on anything but our normal business growth processes.

The end result is just what it is.

Okay.

So it is nothing strategic within the Company, and you also would not attribute it to anything external like hours of service in the truckload market, spillover freight from that or something along those lines.

It sounds a lot like revenue per hundredweight, where it is the end result of a lot of different things?

Yes, that is exactly what it is.

Okay.

For my follow-up, Wes, I'm curious what your thoughts are with the Christmas holiday this year being on a Wednesday.

I think last year there was a bit of a hiccup with the margins in the operating ratio in the fourth quarter because of the timing of the holidays.

How are you thinking about the timing of Christmas this year?

What should you do from a workday perspective and a cost perspective?

You recall Christmas last year had a couple of influences, as did the fourth quarter overall.

We were influenced fairly significantly in October and November through Hurricane Sandy.

And then, I think, the fiscal cliff, in addition to how the month ended in December of last year, the fiscal cliff uncertainty caused some economic downturn that we saw in the last two or three weeks in December.

I am not sure what to expect this year, but my guidance in tonnage of 92% was reflecting that we should have a fairly easy -- easier comparison this year going into the holiday season.

Whether it is stronger or not remains to be seen but at least the comparison is easier because of the downturn we saw in December of last year.

Typically, for example, from November to December we see our tonnage decline about 8% to 9%.

Last year it declined 12.5%, well above what would be normal.

Our expectations at this point is -- that not to happen this year, but that remains to be seen.

Okay.

So in your tonnage guidance you have incorporated the comparison issues last year from the variety of things, as well as thinking about the potential timing, not the potential, but the actual timing of the holiday season this year.

That is correct, Todd.

Thanks a lot for the time guys.

We go next to David Roth with Stifel Nicolaus.

Good morning gentlemen.

Good morning.

Are there any regions in the US or segments, customer industry verticals, that you see as stronger or weaker than others right now?

It is hard to say on the customer industry verticals.

We don't have good visibility into that.

But in looking at the regions across the country, it looks like the Midwest, Central States, Ohio Valley and North, the northern half of the country is a little bit above average, and at average or below is our southern and Midsouth regions and the west, which is primarily California, and the Pacific Northwest is off a little bit below average.

But we've continued to see good growth across all regions of the country.

It is just the Northern half seems a little stronger than the Southern half.

And then just a comment about October to date.

It sounds like the fourth quarter started off strong just like the third quarter ended.

That is a little bit different than what we have heard from a lot of other people.

Is that really what you are seeing, that the strength is still there?

Yes.

I don't know if I would characterize it necessarily as strength, I would characterize it as a little bit of an easier comparison, and although Sandy hit the 29th of October of 2012, those last three days were fairly material in terms of our overall October last year.

So we're going against that this year with an easier comparison, not anticipating another event such as we had last year.

That is part of it, but I would not characterize it really as strong.

I would think that, any -- just like we saw in the third quarter -- any additional uptick we are seeing is not from macro, but still from market share.

So October, if you had to rate it versus September would be a little bit better, about the same, little bit worse?

Sequentially, October is down about normal of what you would expect for September into October to be.

Excellent.

Thank you very much.

We go next to Thom Albrecht with BBT.

Hi.

Good morning everyone.

I wanted to just clarify a couple of things.

First of all, everybody gets caught up in these yields and that.

I am just wondering if you just talk about price increases on renewals of business, which is more of an apples to apples, as opposed to new business and mix changes.

What are you realizing on price increases?

Contract businesses is around 3%, is what we are seeing this year.

Okay.

Then Wes, you gave a number, I don't know if I heard it correctly, there was a little static on the line.

Something about 13% increase, I don't know if that was a reference to weight and (multiple speakers).

Yes.

I was talking about some of the mix changes and talking about our guidance, and the fact that we are growing contractual business, and that business the weight per shipment and the contractual business is about 13% higher than what it is for our overall LTL business.

Which would result, as you would think, and as you would know, in a lower revenue per hundredweight.

Yes.

Yes.

Lastly, sometimes, especially, during periods where the economy is either changing or there is regulatory issues, you have shared some data on the growth in heavier shipments above either 5,000 pounds or 10,000 pounds.

Do you have any of that data available?

On the spot quotes, and I think David mentioned that that would be flowing over through any supply demand issues on truckload.

We are not really seeing that.

But we manage that.

We are not a truckload carrier.

So if we get truckload we want to make sure it is profitable.

If we get a deluge of that coming into us we will start increasing rates.

We manage that volume.

We would prefer to haul our normal LTL, which is what our network is based on.

We are not seeing any real influx in that, those spot quotes, those heavier shipments in the 8,000 to the 10,000 pounds.

Okay.

Then I just thought of one other question.

On the depreciation it came in about $1 million higher than I was looking for.

Do you have a -- either a 2014 estimate or even a thought on the fourth quarter?

Are we going to see another sequential jump?

It is a little early, we are not going to give those numbers yet We haven't even completed our CapEx budget for next year, so I couldn't possibly do that anyway.

But --

How about Q4?

I will put it this way, most of our equipment CapEx requirements this year has been delivered.

So, the effect on depreciation should start to even out in the fourth quarter.

Okay.

That's helpful.

Thank you very much guys.

Thank you.

Art Hatfield at Raymond James.

Good morning guys, this is actually Derick Raby on for Art.

Would it be fair to assume that about half of what you're doing on the equipment side this year is dedicated for growth purposes?

And then just looking forward on the service center side, what you guys see in terms of growth potential there?

As far as equipment, no I would not say half of our equipment this year is growth.

Most of it is replacement.

As far as the service center side, we have often stated that we are around 221, 222 now.

We expect as we continue to penetrate markets deeper we may get up to 250 or even long-term, even 270.

It just depends what the market presents itself at.

We still have some expansion in terms of our service in the network.

What is the normal replacement CapEx then?

Normal on equipment fluctuates between $120 million and $130 million a year.

Okay.

Great color.

Then you mentioned in the press release that you are starting -- or that you are continuing to gain market share.

Are you seeing that more in the next-day or in the two-to-four day lanes?

And then I think in the past you have provided some commentary on the geographic regions, your share in those regions.

Any color there would be great.

Yes

Yes, a general trend across the country is towards - is growth in regional distribution.

So as the general growth in LTL and growing markets are in the next day and two day markets.

So, but as far as our business mix is concerned, it is all over the board as we address the needs of our customers.

One customer, we might be -- they might have a hurting spot for long haul, and so we are able to solve that problem for them.

And another customer might be in two or three day lanes and we solve their issue there.

There is no specific focus on any length of haul for us.

All freight is good.

It is a matter of how you price it.

Okay.

Great.

All my other questions have been asked and answered.

Thank you.

We go next to Anthony Gallo of Wells Fargo.

Good morning, congratulations.

Wes, you mentioned that the contractual business is heavier weight per shipment.

What percent of your overall business is contractual?

It is about 45%.

Actually it is approaching 50%.

I have always thought of heavier weight shipments as potentially being more profitable to the extent that handling requirements might be less.

Are there other factors that I need to consider, or am I off base with that thought?

I think generally since 99.95% of our shipments across the dock is through a forklift, and a forklift doesn't care of whether it is 1,000 pounds or 1,300 pounds.

It takes pretty much the same.

So from the P&D standpoint, yes, there is maybe a little bit of a positive effect, but as far as the line haul, it takes similar -- the same space in the trailer, there is no real advantage in that.

It really points more on density than it does just pure weight on itself.

So --

If you have a carton of bolts, there is a definite -- and those bolts weigh 1,000 pounds, it is definitely better than 1,000 pounds of pillows, is what I'm saying.

Depends on how that weight is distributed and what commodity it is in.

Okay.

That makes sense.

Then just a housekeeping item.

What was the other expense in the quarter below the operating income line that was pretty big this quarter?

$389 million.

Miscellaneous.

$389 million, I'm sorry $389,000.

Oh.

That is how we account for some of the nonqualified plans that we have in the Company.

Those nonqualified plans are based upon movements in stock price.

So, it is just the normal fluctuations as the stock prices, as each of those investments fluctuate and change.

We had a gain last year and it was a negative this year.

It is hard to predict -- well, you guys can probably tell me what the Dow is going to do next week, so you can give us that number.

(laughter)

With absolute certainty.

(laughter) Thank you.

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

Yes, thanks and good morning everybody, I just wanted to ask if you could tell me how many employees there were at the end of the third quarter and at the end of the second quarter?

Well you threw a loop, because I've got at the end of the third quarter.

It was 13,991.

-- those are full-time employees.

Yes.

Right.

You don't have the second quarter right now?

Yes, I will get it to you.

Do you have another question while I'm looking?

Here it is.

David at the end of the second quarter was 13,303.

13,303.

And you think that level of employment going to be about the same for about the next six months or is it not -- you can't really predict.

I mean, you -- do employment based upon volume levels.

We are basically into and through the peak season, so we would not anticipate any additional employees coming on until probably when business picks back up March.

Yes.

That is typical progression.

Yes.

Right.

And there would be some attrition between now and March, where the levels would maybe taper back down some through the holidays and then come back for March.

Right, right.

Well, it is certainly nice to be adding employees, I am sure that the employment situation there is good.

Do you have any estimate of how much the holiday accrual, increased vacations will cost in the third quarter?

In the third quarter it was around $800,000 to $900,000.

Not a lot from a earnings per share, but still a good size number.

Almost $1 million.

That is a one-time adjustment, right?

No.

No, part of that is an adjustment to catch up, but also we would expect our vacation expense, since we are giving a higher benefit, will to some extent, we will have to accrue that every quarter.

Not the $800,000 or $900,000, but the expense in general will be a little -- slightly higher.

Okay.

All right.

All of my questions have been answered.

Thank you very much I appreciate the help.

Okay Dave.

Justin Yagerman of Deutsche Bank.

Hey, good morning guys.

Good morning.

When in September was the pay adjustment, was it just on the first?

And so, if I am thinking about that $1 million on the holiday accrual, is that going to be $3 million a quarter going forward?

Is that the way to think about that?

No, not really.

That $1 million, once you give it -- a benefit --you have to address all those employees who have already passed those anniversary dates and do a catch-up.

As I mentioned, not necessarily the catch-up will be re-occurring, but obviously we are giving a higher benefit.

So there will be some small incremental costs to our fringes going forward.

Okay.

In terms of -- was it September 1 for the wage increase?

It was.

Yes.

Or -- Not exactly.

First Friday.

Whatever that first Friday was.

So roughly one month of the quarter was--

Yes.

That is correct.

Wes, on the balance sheet, you know, you have been asked about cash, I know I've asked you about this in the past as you think about going forward.

Asked a different way I guess, you've got the lowest debt to cap you guys have ever had, it is going to go basically sideways to the end of the year, and arguably it could go lower next year if you guys don't do anything, depending on what you CapEx budget looks like.

Where are you guys - what do you think about an optimal capital structure from a debt to cap standpoint for the company?

Would you consider using the balance sheet to support the stock if you ever felt like you weren't getting the right valuation for your Company?

We look at our capital structure and we don't necessarily think that we need to be debt-free before we consider returning any cash to the stockholders.

What that number is, we prefer not to say, but we are willing to have some leverage there even though we may be producing cash flow.

If that answers your question.

Yes, I'm just thinking it wasn't that long ago you guys were comfortable at 30 plus debt to cap and now you are well below that.

Right.

We are comfortable now.

(laughter)

We are a lot more comfortable now.

(laughter)

I hear that.

I know on the weight per shipment side, I know a lot has been asked on it.

But is there a specific industry that you're getting this higher weight per shipment freight from or is really more -- is it the influence of your drayage business, if it is not the truckload or spot quote businesses that somebody else had asked earlier.

I'm just trying to zero in what is driving that.

We have had some good growth in our drayage, and obviously at an average weight per shipment of 25,000 pounds that has an influence.

As I already mentioned, we are having good growth from contractual -- getting additional market share and also additional penetration from some large shippers, which typically has a higher weight per shipment.

Those are the two main things on the mix and on the revenue -- which have influenced the revenue per hundredweight.

The manufacturing-oriented shippers are a heavier concentration than retail, for example.

That is correct.

But that is a very general statement.

Manufacturers.

That's helpful.

The last question, because I know it is getting to be a long call already.

You said I think you have 221 facilities and your goal is to get to 250 or 270.

Do you have any thoughts on timeline for that?

I know it depends on the real estate market, and maybe some color on how tough or easy the real estate market has been these days.

It is just hard to say, we have maintained a list of cities that we have in mind for the future.

If a real estate opportunity presents itself in one of those cities and it is the only game in town, we will decide to open up.

So it really hinges more on real estate availability opening up than anything else.

We don't have -- to be honest with you -- we don't have any new cities that we are targeting right now that we are trying to buy land and build.

Most of everything that, well -- I will take that back.

There are less than a handful where we are thinking about that.

It is just more so looking for a place for to come on the market.

Got it.

Thanks for the time guys, I appreciate it.

We will take our next question from Scott Group of Wolfe Research.

Thanks, good morning guys.

Good morning, Scott.

Wes, just one quick modeling question.

Tax rate was a bit light in the third quarter, what should we use going forward?

Well we gave -- in my comments I gave 38.6%.

I just want to make a comment on our tax rate real quickly, is that Wall Street tends to dismiss any tax rate that comes in lower than what your guidance is.

As if it didn't really happen.

I just want to make sure that all of you understand, you manage your taxes just like you manage your labor and any other form of expense.

So don't be so quick to dismiss it and say that is not what your results are for the quarter.

It is in fact what the results are for the quarter.

Just as what you spend in labor and equipment and other -- fuel, etc.

is part of the quarter.

We do have a system of looking at all of our taxes, both -- we are in all 50 states plus the federal, and manage it as aggressively as we can and of course, being within the law.

It would be useful if they just don't quickly dismiss the fact that we did have some incentives in the third quarter and were able to reduce our tax liability by that.

So, going forward I gave the guidance of 38.6%.

Now, we could very well look at the other incentive credits and others and get that lower.

It just depends on when we actually filed for those and get those to be effective.

But that is the number we are giving at this point, Scott.

Okay.

So yes, I was a couple of minutes late getting on the call, so I must have missed that.

And I certainly hear what you're saying on the tax rate side, and for sure it is good for cash flow if you are of a lower tax rate.

So the tonnage guidance of 9% to 10%.

If I take the midpoint, 9.5%, it actually implies sequential tonnage that is actually worse than what we normally see in 4th quarter.

Is that --

Actually, when I look at sequential tonnage overall, it is fairly in line with the10-year average sequential.

Okay.

Okay.

So that I guess answers my question.

Last thing, on purchased transportation, that has been going up for the past couple of years.

Is that all just associated with the other revenue, or is there anything change in terms of the LTL side and how you are dealing with PT.

If you go back enough years, and even if you go back in our historic financial statements, you may not realize that in the second quarter we made a discussion that we actually changed the way we accounted for some of our purchased transportation that was netted out in the revenue line.

So we changed that accounting method so that we recorded the purchased transportation as part of the revenue and therefore had to record the actual purchased transportation cost down in that purchased transportation line.

So if you compare that to some of the historic numbers, it looks like it is higher.

But it isn't, it is actually still at a fairly consistent level, and just so you all know, most of our purchased transportation is due to our drayage operation, which uses lease operators.

We use very little purchased transportation in our LTL sector, just in some back haul - back haul lanes in certain parts of the country.

On rail, and maybe some truckloads to where we have an imbalance and even that is only around 0.2% or less.

All right.

Thanks for the color there.

All right.

This does conclude today's question and answer session, I would like to turn the conference back to Mr. Earl Congdon for additional and closing remarks.

Thanks again for your participation today.

We appreciate your questions and your support for Old Dominion.

You are free to give us a call if you have any further questions.

Good day.

This does conclude today's presentation.

Thank you all for joining and have a nice day.