奧多明尼昂貨運 (ODFL) 2014 Q1 法說會逐字稿

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Good morning, and welcome to the first quarter 2014 conference call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through May 9 by dialing 719-457-0820.

The replay passcode is 5760162.

The replay may also be accessed through May 9 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 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 first quarter conference call.

With me this morning is David Congdon, Old Dominion's President and CEO; and Wes Frye, our CFO.

After some brief remarks we will be glad to take your questions.

It is a pleasure to report that Old Dominion continued to excel in the first quarter of 2014, producing our best first quarter operating ratio, net income and income per share, as well as the highest quality revenue we have ever achieved in any quarter.

We produce these strong results despite the severe and widespread winter weather experienced for most of the quarter.

This performance highlights the dedication of the OD family throughout the company.

Our employees not only demonstrated their commitment to getting the job done but also the training and skills to operate in difficult conditions.

Our performance also shows the strength of our value proposition as we work through significantly productive -- productivity headwinds to deliver on our process on superior on-time, claims-free service.

With almost 14% growth in LTL times for the quarter, we believe our performance shows the market's growing recognition of our value proposition.

Simply put, Old Dominion is performing at a level better than I've ever seen with a more strongly differentiated competitive market position than ever before.

We also have the best financial position in our history and a highly experienced management team that has proven to be an outstanding steward of our shareholders capital.

Last year, we produced over an 18% return on average equity for our shareholders.

We believe we are well-positioned to expand our business for the foreseeable future driving increased earnings and shareholder value.

Thank you for joining us -- our call today, and now here is David Congdon.

Good morning, and welcome to all of you this morning.

We have had a great quarter to begin 2014.

While many variables affect any quarter, we think one of the simplest explanations of our strong first quarter performance is evidenced in our outstanding service metrics.

Despite severe -- extended severe weather across most of our network, we actually improved our cargo claim ratio to 0.26% of revenue; over 20% better than the first quarter last year.

This is the best cargo claim ratio we have ever known to be achieved in the LTL industry.

And our team produced it in the depths of one of the worst winters we've seen in years.

Despite the difficult weather conditions we still achieved a 99% on-time record for on-time service for the quarter.

We believe the consistency of our superior service performance despite horrible weather had a lot to do with our growth in comparable month LTL tons per day which started in the double digits for January and accelerated each month of the quarter.

The shift of the Easter weekend to the second quarter this year from the first quarter last year contributed to the 19.7% increase in LTL tons per day for March versus March of 2013.

We continue to benefit from a rational pricing environment in the first quarter.

In part because excess industry capacity remains limited.

Our LTL revenue per hundred weight, excluding fuel surcharge, increased a solid 2.2%, even with the downward pressure exerted on this metric by increased weight per shipment and a lower average length of haul.

In addition, like our experience with LTL tons per day, we are continuing to see strong performance in LTL revenue per hundred weight thus far in the second quarter.

As reflected in our tonnage growth and pricing, our increased density and yield for the first quarter drove the 70 basis point improvement in our operating ratio.

We were pleased with the strength of this performance given the impact of weather-related reduced productivity in our pick up and delivery and our dock operations.

Pressure on these metrics during the quarter was primarily related to our willingness to incur short-term operating inefficiencies during the poor weather in order to maintain our commitment to on time customer service.

In addition, we continue to experience inefficiencies associated with hiring and training new employees to address our higher volume and the continued impact of the more restrictive hours of service regulations.

As we look forward to the remainder of 2014 and beyond, we expect continued gains in market share will result in improved density.

Given the stable economy, we also expect further improvements in our yield.

Our yield discipline and philosophy have not changed.

We will continue to analyze the profitability of each shipment and customer for the services we provide.

We are confident that we will recover the productivity lost in the first quarter and produce further gains over time.

Our long-term investments in productivity-enhancing technology have historically resulted in improved operating margin.

And we have no shortage of investment opportunities ahead.

We continue to believe that by improving density, yield and productivity we can generate incremental operating margin of at least 15% to 20%.

The significant improvement in our first quarter density and yield, offset in part by productivity headwinds, our incremental margin was 17% for the first quarter.

Primary focus for Dominion moving forward will remain execution.

Our company is positioned for growth with a proven business model, a value proposition driving increased demand, and the personnel and financial resources to maximize the opportunities before us.

By continuing our long-term record of superior execution, we also expect to extend our long-term record of value creation.

Thanks for being with us today, and now I'll ask Wes to reveal our financial results for the first quarter and greater detail.

Thank you, David, and good morning.

Old Dominion's revenues grew 15.2% to a company record $620.3 million for the first quarter of 2014 from $538.4 million for the first quarter last year.

A third consecutive quarter of double-digit revenue growth was driven by a 13.9% increase in LTL tons for the quarter, above our expectation of 11% to 11.5%.

This increase reflected an 11.9% increase in LTL shipments and a 1.8% increase in weight per shipment.

LTL revenue per 100 weight increased 1.6% for the first quarter while LTL revenue per hundred weight excluding fuel surcharge increased to 2.2%.

Which was consistent with our expectation of 2% to 2.5%.

This 2.2% increase in the revenue per hundred weight includes the negative impact of a 1.8% increase in weight per shipment, as well as a 0.6% decline in length of haul.

For the first quarter of 2014, LTL tons per day increased sequentially by for 4.1% from January -- from December, 5% for February, and 8.5% for March.

In addition, LTL tons per day for January 2014 increased 10.1% compared with January of 2013, with increases of 11.7% and 19.7% for February and March respectively.

We estimate April LTL tonnage to be approximately 14.5% up versus the same period last year.

In the second quarter of 2014, we expect LTL tons per day to increase in a range of 14% to 14.5% compared to the second quarter of 2013.

We expect revenue per hundred weight, excluding fuel surcharge, to be in a range of 2% to 2.5% for the second quarter, reflecting continued mixed changes toward higher weighted contractual business and a decrease in length of haul due to increased volume in our next-day and two-day regional lanes.

Old Dominion's operating ratio improved 70 basis points for the first quarter to an 87.1 from an 87.8 for the first quarter of 2013.

Our direct labor improved as a percentage of revenue driven primarily by increased operating leverage although increases in group health expense and weather-related productivity declines offset much of those improvements.

We also benefited from an efficient fuel and fleet management that contributed to a 70 basis point reduction in operating supplies and expense during the quarter.

Capital expenditures were $79.8 million for the first quarter of 2014, which included approximately $18 million of our $47 million 2014 budget for technology and other assets.

As we discussed last quarter, these expenditures reflect the launch of a 3 to 5 year process to expand and enhance our technology platform to prepare for our anticipated growth trajectory over the next 10 to 20 years.

In addition, today we announced that we were increasing our planned capital expenditures by $25 million for 2014 for additional tractors and trailers as a result of our strong volume for the first quarter and our expectation for the remainder of the year.

Therefore, we now estimate CapEx for 2014 will total approximately $367 million.

Including planned expenditures of $132 million for real estate, $188 million for tractors, trailers and other equipment, and $47 million for technology and other assets.

We expect the sale of assets due in 2014 to be approximately $9 million for a total net CapEx of approximately $358 million.

And 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 to 12.4% at the end of the first quarter of 2014 from 13.4% at the end of 2013.

Our effective tax rate for the first quarter of 2014 was 40.6%, compared with 36.1% for the first quarter of 2013 and our expected effective tax rate of 39% for the remainder of 2014.

The increase in our effective tax rate for the first quarter of 2014 was due primarily to the expiration of favorable tax credits in 2013 and other discrete tax adjustments.

And this concludes our prepared remarks this morning, and operator we will be happy to open the floor for additional questions at this time.

(Operator Instructions) Our first question will come from Bill Greene for Morgan Stanley.

Wes, maybe you can talk a little bit about how you're thinking about where this tonnage growth is coming from in terms of market share.

I've got to believe that when you outgrow the market by that amount it's perhaps destabilizing to some of the competitors out there.

Do you worry at all this sort of growth leads to maybe a less rational pricing environment where they say, Gosh, we have to win some of this back.

This is unbelievable how much these guys are growing.

Well, as David mentioned in his comments, during the quarter we saw fairly stable pricing, and that's what we've seen for quite a while now.

Where it came from, it's difficult to say.

Obviously, much of it came from market share.

We can't really say that it came from macro, although we were okay with the macro during the quarter from what we could see in our discussions with customers.

But I don't think it will result in any accelerated pricing from the sector overall.

I don't think any of us can afford that, especially as we continue to reinvest.

And I say "we" -- and I'm talking about the sector -- reinvest in our network.

In our rolling stock.

Is there -- Sorry.

Go ahead.

I'll add to that, Bill, that as we look at our growth across the country, every one of our operating regions had very -- have had a very nice growth.

It's been pretty similar to the past that the northern half of the country has been -- Midwest and Northeast has been a little bit stronger say than in the South, but what it's looking like so far is really uniform across the entire network.

I'd like to add -- this is Earl Congdon -- also, it's not prices getting this growth for us.

It's customer service and that low plains ratio.

Is it too simplistic of me to think that if you used that strong service level in the market to get a bit higher price, little bit lower tonnage growth, that that's not a better outcome?

Is that too simplistic the way I phrased that?

I think we're getting that outcome, aren't we?

I don't mean to take anything away from the results.

They were obviously very solid.

It's more just like we look at the fact that the yields have come down.

The tonnage growth is so significant, you're going to have to UpCapEx them.

And that's Okay.

There's nothing wrong with that outcome except that, is there a mix change here that you can push towards a little bit higher price and therefore even more on the margin and therefore returns.

Maybe that's not the way to do it.

I can't speak to the rest of the sector but some of that growth was based upon a comparison.

And by that I mean, in January our tonnage was up about 10.1.

In February the tonnage increased 11.7, and we had this very large growth in March of 19.7.

But I think some of that wasn't necessarily market share or macro.

It was just because March last year had that Easter holiday at the end of the year and that would explain some of that.

So that's not necessarily increased volume but just a comparison to what it was last year.

And some of the March growth could also be some swap over of business that did not move in January and February due to weather contributed to that.

Fair enough.

It was a great quarter so thanks for the time.

Our next question comes from Scott Group from Wolfe research.

Hey thanks.

Good morning, guys.

When you have a quarter like this you don't have to talk much about weather, but do you think that maybe -- what is your sense on what the impact of weather may have been on the tonnage and on the cost.

Is difficult to address the tonnage when you had almost 14%.

And so I'll relate -- relate it to the cost.

I can't really make a discussion on the revenue level but from a cost standpoint, I think, Scott, the relevant thing here is not only what it cost us this quarter but even though we had horrible weather this quarter we did have some weather last year.

And also some of our increased cost was due to volume increases.

It gets a little tricky trying to separate all those costs between the relative increase in weather headwinds and also the increased volume.

But my best estimate on what those incremental costs -- keep in mind I said "incremental", not the cost of this quarter -- is about $4.5 to $5 million in increased operating costs due to linehaul, motels, snow removals and those type of related costs.

That is the cost that I estimate over what it was last year, about $4.5 to $5 million.

Okay.

That is helpful.

And then one follow-up on the tonnage.

Do you think -- do you feel like you had any material amount of spillover from truckload, just given capacity issues they saw on truckload?

And when you think about this level of tonnage growth -- is the $25 million increase in CapEx enough or do we need to start thinking about more material increases just to handle this amount of growth?

Just talking about the volume and the spot quotes, we saw a little bit of an increase.

But keep in mind, we don't -- we manage that increase.

We do not want a lot of truckload business on the truck line because we're LTL carrier.

And that is what the cost of our network should include.

That cost.

So that wasn't that much.

But we maybe saw a little bit.

As far as the lever equipment, we haven't given any guidance on tonnage for the rest of the year other than what we're seeing.

And we gave some estimated tonnage growth, obviously, for the second quarter.

So we are actually based our initial CapEx for equipment on one number, but obviously that number is higher.

And we think at this point, the additional equipment that we put into play and ordered will be sufficient to handle that estimated increased volume for the year.

Okay.

Thanks guys.

(Operator Instructions) Our next question is from Chris Wetherbee from Citigroup.

Good morning, guys.

Just kind of curious, when you think about the overall business -- taking a step back for a second -- and you look at the tonnage growth, which has been very, very strong -- and the outlook for the second quarter, also very strong -- it seems like there's a bit of an inflection going on in the business in the last several quarters.

I don't know if you can speak to that necessarily, but is there anything that you're doing differently outside of the very, very stellar cargo claims and continued good service, which I think has been your hallmark for many years, that ultimately is sparking that change.

It doesn't seem like the underlying economy is picking up that much.

Just curious what's going on from a market dynamic perspective that may change that.

Chris, David here.

Honestly we believe our service performance is what is leading market share, as Earl pointed out a minute ago.

And I think it's going to be interesting to see what really comes out with all the rest of the carriers' reports because we haven't heard that much about volume increases and so forth.

But it will be interesting to see how the industry sector fares for the quarter to see if maybe there's been any inflection in the economy.

Perhaps it hasn't surfaced yet.

So we'll just have to wait and see how that looks.

But again service performance, we believe, is driving our tonnage.

Okay.

That's helpful.

I guess we'll see how that plays out with the rest of the carriers.

When you think about the network and how it stands right now, given that very robust growth you had the last couple of quarters -- I know, obviously, adding to the CapEx -- I think you said tractors and trailers was the main focus.

When you think about the network geographically, any pinch points we need to worry about?

I know you've opened a couple of terminals in the last quarter or so.

I just want to get a rough sense if there's any rails that might need some incremental real estate capital or otherwise.

No.

Chris, we are in a really good shape across the entire network.

No pinch points.

Thanks to all the CapEx that we've invested of the last year or two to solve some of the pinch points we had in 2012 and 2013.

Okay.

That's helpful.

Thanks.

Our next question will come from Todd Fowler with KeyBanc Capital Markets.

Great.

Thanks good morning.

David, I was curious if you could talk about your philosophy on a general rate increase this year.

Our philosophy on that is to generally look at our costs and look at our various cost of doing business increases and to pass on what we believe is a fair and equitable increase in our rates.

Also, if you look at our GRIs that we put in over the last several years, we've been fairly consistent in the 4% to 4.5% range, maybe.

I think 4.9% is about the highest that we've announced in the last two or three years.

And this appears to be what we need to do and what we need to pass on.

So I think that historically, you've done your wage increase sometime in the third quarter.

Does that mean that the general rate increase might be more closely aligned with when you're going to -- or when you have historically done your wage increases?

No.

Our wage increases typically have been September.

We don't have any intentions at this point of changing that timing.

But with the general rate increase more closely -- if you did a general rate increase, would the expectation be that that would be more closely aligned with the wage increases?

Are you talking about the percentage of wage increase?

Timing.

We've already announced our GRI.

Are you are aware of that, Todd?

I'm sorry.

I was thinking about the impact of the GRI with the wage increases into the second quarter.

And so the wage increases are going to be -- you haven't said anything on the wage increase side, is what I was thinking about.

We normally increase on the first Friday in September is when our wage increases go into effect.

Okay.

And my follow-up on that, I guess, is can you talk about the labor availability -- talking about growing -- the tonnage growth that you're seeing right now -- increasing the rolling stock.

We've heard a lot about the labor market right now, particularly on the drivers' side.

And I guess this is what it was trying to get at ultimately -- your ability to attract and bring in labor right now given the growth that you're seeing.

We are not having any problem attracting good qualified people to our company.

And no pressure on wages then as a result of that?

No.

We pay a very competitive wages and benefits package.

And we don't see any pressure to do anything out of the ordinary as it relates to compensation.

To attract employees.

Okay.

Sorry for making that more confusing than that needed to be.

Thanks for the time.

Our next question will come from David Ross from Stifel.

Good morning gentlemen.

Good morning.

Can you talk about your sales force growth year-over-year.

Do you have a lot more feet on the street now driving this tonnage growth or is it mostly coming from the existing guys that are out there selling the business?

It's mostly coming from the existing guys.

We've had some increase in the sales force but nothing dramatic at all.

It is just winning business from existing accounts and continuing to win new accounts that are coming on board with the Company.

And general growth and improvements in density across the board

If you had to look at the overall tonnage growth numbers and divide that up between tonnage that came from existing accounts -- whether it be them doing were more business or you getting a bigger share of the business versus new accounts -- how would that first quarter tonnage growth breakdown?

We don't have a breakdown on that.

Okay.

Do you think it's more than half from existing or do you think mostly from new?

I will just say -- a gut feel -- just probably at least half and half.

Last question, on the equipment side.

The additional tractors and trailers you are bringing on.

Are those predominantly Freightliner and Wabash?

Yes.

Thank you.

Our next question will come from Brad Delco with Stephens Investment Bank.

Thanks for taking my question.

Wes, I wanted to ask you, I guess, first on the margin, I guess, you identified $4.5 to $5 million of cost in the first quarter.

Is there anything else in terms of maybe Easter or anything else that would cause sequential margins to not follow normal historical trends, or should we just assume given the amount of tonnage growth versus your yield guidance that 15% to 20% incrementals is what we should be thinking about in the near term?

Or is there anything that would adjust that are 2Q?

I don't know what -- our definition of normal that we said for years is incremental margins of 15% to 20%.

We produced higher than that, but that's with the other -- with certain characteristics being different.

In 2010 and 2011 when we were producing 30% plus margins, we had a lot of excess capacity.

And not only in network but also in people and in labor and pricing, quite frankly, was on the rebound and we were getting 4% and 5% increases in yield.

So that wasn't normal, but we think this environment is more normal and that is why we keep saying that our incremental margins should be in the 15% to 20% range.

Now having said that, as we said many times, if those ingredients of that incremental margin -- which would include a macro that's behaving, a price discipline in the sector and with our own ability to leverage the density -- that is no reason we shouldn't be maybe, potentially at the top of that range.

Keeping in mind that the 17% that we produced in the first quarter did have some headwinds on productivity, declines due to weather and other costs that I kind of gave you a range of.

So we're still in that 15% to 20% range.

Keeping in mind, that 20% incremental margin represents an 80 OR.

That's not bad.

No.

By no means is it bad.

I guess, sort of longer-term, I mean, you guys aren't skimping at all on CapEx.

You are still declining your debt to Cap.

At some point, you're going to have a high dollar problem where you could be debt free and still investing a tremendous amount of CapEx relative to your peers.

What are other thoughts have you guys had in terms of the use of that capital, considering you're already growing at likely industry-best growth rates and at industry-best margins?

A Gulfstream wouldn't be bad but -- [ Laughter ]. We've had many discussions with excess cash.

And obviously we are considering, and have considered, in evaluating returning some of the cash to shareholders, whether that's in the form of stock repurchases or dividends.

We still are looking at those alternatives.

But we are under evaluation of those alternatives going forward.

The primary thing we are going to invest in is investing in the Company.

And if that continues to generate 18% or so return on equity as we did last year, we think that's a pretty good return to our shareholders as well.

Number one is to continue to look at opportunities to grow our business profitably before we consider using that excess cash for those other purposes Wes mentioned.

Well said.

Great.

Maybe one quick question for you, Wes.

Tax rate outlook going forward.

I don't know if you provided that, but what should we be modeling.

I did.

39% is what I mentioned for the remainder of the year.

Sorry for having you repeat that, but I appreciate the time guys.

Thanks, and congrats on a great quarter.

Our next question comes from Allison Landry with Credit Suisse.

Good morning.

I wanted to ask about the use of third-party brokers and get your thoughts on whether you think this is contributed to the consistent increases in weight per shipment that we've seen for the last several quarters.

And following on that from a strategic perspective could you talk about what you might be doing differently with respect to the way that you use brokers relative to some of your peers.

I think you mentioned in the past that you use the brokers to fill some of your backhaul moves?

So I was wondering if I was thinking about that correctly.

No.

I'm not sure that you are, Allison.

When you say third-party brokers, you're talking about 3PL and about 25% of our LTL business does come from 3PLs.

If you're looking -- discussing purchase transportation, that's another sector and we use purchase transportation and that's another matter.

So I'm not sure which one you are referring to.

About 25% of our revenue is through 3PLs but it has nothing really to do with the weight per shipment.

Or backhauls.

I guess I was just thinking that there was a tendency for freight that comes from the brokers to just generally be a higher weight per shipment.

So I didn't know if that was a trend you were seeing.

Not really.

The 3PL -- any given 3PL might have 5 or 6 or 10 or 20 or 30 different customers that they bring to us.

And the changes in weight per shipment could be the natural evolution of customers you happen to bring on the truck line.

We also -- hopefully the economy has turned a little bit.

It will be interesting to see what the rest of the carriers of report and usually with an improving economy you start to get slightly larger weight per shipment.

At least that's been the historical trend over the years.

So maybe the economy's inflecting a little bit.

But only thing we do, as far as strategic use of brokers, we just consider -- we don't call them brokers per se.

We call them third-party logistics companies.

They've been infiltrating the LTL marketplace for many, many years.

And we work with those 3PLs on each individual customer they bring to us, and we treat those customers the same way as if we were dealing direct with the customer without a 3PL.

In terms of analyzing the freight and analyzing the profitability of that freight given the service -- services that the customer needs.

Got it.

And so I guess it sort of fair to think about the increased use of the 3PLs as having an impact on purchase transportation costs and maybe we'll those moving --.

That has nothing to do with purchase transportation costs.

Okay.

That's helpful.

And my second question I thought it was interesting that you guys took action sort of in -- really a hit on your productivity to make sure that shipments made it to customers on time.

I was just curious, you know, did you -- did customers understand that you guys did this and what was their reaction and is that something that could potentially bolster your general ability to take market share and get solid price.

Well, I think they noticed, and I think that our tonnage growth is reflective of them noticing.

What the future holds for that continuing is yet to be seen.

Okay.

Fair enough.

Thank you so much for the time.

Our next question comes from Ben Hartford with Baird.

A good -- good morning, guys.

So I guess along that line of questioning about utilization of third-party logistics providers, it doesn't sound like, Wes, that the number change of the amount of revenue you generated from those third-party logistics providers in the first quarter was any different than what you talked about in the past.

Is 25% -- and it's probably too granular for me to ask how that trended through the quarter because I'm interested in that March number in particular and some of these anecdotes about truckload loads being broken up and put into LTL networks.

To get a sense for whether that two place in March that helped the March number, and the fact that you guys do have healthy relationships with these third-party logistics providers help facilitate some of that?

Can you provide any perspective to that?

As David mentioned, third-party logistics is -- the only difference in third-party logistics and directly with customers is we deal with the third-party logistics.

We still go underneath those logistics companies and look at the customers and provide those customers with high levels of service, and so I don't really see a relationship there with growth in March due to third-party or anyone else.

It's just overall volumes coming on board.

And the Easter holiday.

And Easter holiday was fairly substantial.

Remember, not only did Easter fall into the first quarter of last year, it fell into the last day of the quarter.

So some of that -- whatever we didn't pick up and move on that last day of March of 2013 probably flowed over into April -- making the swing of the comparisons a little bit funky, so to speak.

But we had heard instances of the tightness in truckload capacity forcing some truckload loads being broken up and put into LTL networks.

And just the trajectory of the volume growth for the quarters would suggest that you might have seen some of that.

Do you have any insight in terms of whether that was happening -- whether you guys were taking advantage of some of that in March and into April?

As I mentioned, we saw our volume loads -- and when I say volume, for us that's in the 8,000 to 10,000 pound shipments -- did increase some but it wasn't -- it wasn't like it was twice the normal growth or twice what the LTL -- it was just in line, basically, with what the LTL growth was.

Okay.

That's helpful.

Thank you.

Our next question comes from Thomas Kim with Goldman Sachs.

Thanks.

I wanted to ask with regard to the cost structure.

We've seen several of your cost constituents rising with revenue -- and salaries was one of them.

I was wondering if you could talk more about your headcount requirements as you grow the business, and then, also, what's the best way for us to be thinking about labor productivity given the ongoing productivity in the business.

Our headcount has definitely increased from last -- it really began last fall.

We're fairly stable with the headcount from -- remained fairly stable with the headcount from November all the way through February, but we started increasing headcount again in March based on the tonnage that we were seeing.

The productivity, pounds per hour and bills per hour and things like that we watch, took a little bit -- were hit a little bit due to the winter weather and due to the training of all these new people that we brought on board.

But as we -- I'd say right now from the headcount standpoint, we are probably pretty stable going through April, May and June and all of those new employees will become more and more productive as they get more used to this work that they do.

So we should see some improvements in labor productivity in the second quarter versus the first because of the new employees getting more educated as to what they need to do, and secondly, with the spring coming and lack of cold weather and snow and ice and all the things that we had in the first quarter.

Okay.

And can you give us a guidance as to what your year-end headcount number should be at the end of the year?

What would that growth look like?

Tom, we don't give guidance on growth so that would be an element of that guidance.

So we're not prepared to give that number.

Okay.

And if I could ask one last question.

If we look at cost X labor, can you break down the fixed versus variable component for -- the one area I'm more interested in is the operating supplies and expenses.

So if we were to look at that cost constituent, can you give us a breakdown of fixed versus variable.

Our excluding labor?

So operating supplies and expense -- just that category I was wondering what the fixed versus variable component was.

By definition, most of the operating supplies and expense line are variable cost.

Great.

Thank you.

But you also, to some extent, you have to run a certain pedal runs out into areas regardless of how much freight you've got on the truck, so some portion of that variable cost -- depends on the timeframe.

On an hourly basis all costs are fixed.

On a yearly basis all costs are variable.

It depends on the timeframe.

I'm starting to understand with regard to the potential operating leverage.

Obviously it's complicate by the fact that you are growing, and I'm trying to parse out the growth that's attributable to the ongoing reinvestment versus the organic growth.

I appreciate that there are a lot of moving parts there.

Our next question comes from Rob Salmon, Deutsche Bank.

Hey, good morning.

Thanks for taking my question, guys.

On the fourth quarter, you guys had called out the hours of service as being a headwind to the linehaul network.

Could you give us an update in terms of how you guys have adjusted the network, because if I'm looking at the salary wages and benefits line item, it didn't increase sequentially from the fourth quarter to the first quarter is a much as it traditionally does which could imply that you guys have right-sized the network now to where needs to be.

Rob, I'd say we're definitely -- we had to make adjustments to that - it was primarily the 34 hour restart which caused us in the third quarter of last year to add some extra road drivers to pick up the slack from the work that the existing road drivers and existing city drivers could not do on weekends.

So that slack was picked up in the third quarter so cost levels in which you see in our linehaul cost component, say, in the fourth quarter and what we had in the first quarter is pretty stable with what it ought to be going forward.

David, that color is really helpful.

Just a quick follow-up in terms of the network capacity -- you're adding a few extra tractors year given the strong growth, did you guys experience in the month of March, April and Q1.

Can you give us a sense of how much spare capacity there is on the linehaul fleet right now?

On linehaul, we don't really track capacity.

We try to maintain a certain percent of capacity.

That fluctuates by week, by month, by quarter, depending on seasonality.

I would say anywhere from 5% to 10% on our fleet.

That's the best number we have.

You don't operate your equipment with a lot of capacity, but you don't operator equipment with no capacity either.

Normally increased purchase transportation, also, if you get an unexpected surge.

That's correct.

It sounds pretty stable to historical numbers.

Appreciate the time guys.

Our equipment is stable, but with our tonnage increases year-to-date, we thought that we probably should increase our number of equipment, which we have, so that's our expectation.

Our next call will come from [Indiscernible] Capital Markets.

Good morning, guys.

Great quarter.

Want to ask the question everybody's been dancing around a little bit, but in a different way.

Can you give your percentage growth in shipments over 5000 pounds and also every 10,000 pounds?

We don't necessarily even track that.

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

Okay.

Also the tonnage guidance 14% to 14.5%.

That is LTL only, correct?

Correct.

All right.

That's going to do it for me, thanks.

At this time we have one question remaining in the queue.

(Operator Instructions).

Next question from Todd Fowler from KeyBanc Capital Markets.

Thanks for giving me another chance after the first go round.

Just to follow-up on that last question, Wes, do you have a restated LTL tonnage number for the second quarter of 2013?

Todd, when we issue our first quarter -- our 10-Q for the first quarter, we will provide a table for each of the remaining quarters of 2013 and give you those tonnage numbers.

Okay.

But so the 14% to 14.5% that you gave today -- that's not going to be comparable to what you had for the second quarter of 2013 -- the number that we have in our models.

It will not.

The relationship should be fairly consistent with total tonnage and LTL tonnage, but we'll get to those numbers when we file the 10-Q of what those restated numbers for 2013 are.

Directionally, if we looked at the restatement for the first quarter, would the magnitude be somewhat similar in the second quarter for kind of a zip code or a ballpark?

Yes.

And the last one I had, Wes, do you have any comments on expectations for depreciation expense given the increase in CapEx, either how we should think about it on a dollar basis or percent basis now in 2014 versus 2013?

I would say as a percent of revenue, once the year's done, that the percentage revenue from depreciation will be fairly flat between 2013 and 2014.

Okay.

That gives me something to work off of.

Thanks again for letting me jump back in.

Our next question will be from Matt Brooklier from Longbow Research.

Thanks, good morning.

So I have a higher level question.

As 3PLs become a larger percentage of the overall market, what are your thoughts on 3PLs impact on overall market pricing?

Is it a positive for pricing?

Is it a negative for pricing overall?

Or is it -- does it not have an impact on market pricing?

Matt, I believe that a lot of that has to do with how the carriers deal with the third-party logistics firms.

As we've stated today we think it is very important to look at each and every customer that a third-party logistics firm brings to your company and to determine your pricing based upon the merits of those individual shippers.

Because, oftentimes, the 3PLs are looking for some kind of a blanket discount that they can apply to every Tom, Dick and Harry that they want to apply it to.

And I think that is what has gotten so many of the players in the LTL space in trouble.

So that's not something that we have done.

So our thoughts on how to deal with it, and we would hope others would listen to these comments.

Okay.

And the 3PLs contribute, I think, 25% of you total volume at this point in time.

Does that number stay about the same over the longer term?

Does that number grow?

Are you guys thinking about shrinking your relationship with 3PLs and the total amount of volume they contribute in any given quarter?

We view 3PLs as an extension of our sales force, and we have very good relationships with our 3PL partners.

We are not trying to necessarily grow that segment of the business, nor shrink that segment.

If we have a good relationship with our 3PL customers, which we do with most, our goal is to grow with each and every one of them.

Okay.

Fair enough.

Thanks for the time.

Thank you, Matt.

Our next question is from Jason Seidl from Cowen and Company.

Hey guys.

I promise no 3PL questions from me, here.

Wes, you mentioned capacity in terms of your equipment -- you think about 5% or 10%, but your growth rates are very, very impressive compared to the rest of the industry.

How long can you grow at double-digit rates until you have to add physical capacity?

Are we talking another year or two years?

On the terminal side.

Jason, when you look at terminal capacity -- and our most basic way we look at it is pounds per door, per day -- you will find some service centers that have 50% to 60% capacity -- some of the small ones.

You'd find some that are up there at the 80% to 90% of maximum capacity.

And therein lies our continued investment in real estate because you're always having some of the service centers that are up at the upper end of the capacity limits.

And based upon our future projected growth in those service centers, we're just -- we will have incremental investments in real estate for the foreseeable future as we continue to strive for double-digit market share and LTL space.

We've been investing in the same way for the last decade and you've seen the results that we've been able to achieve in our operating ratio despite those investments in those service centers.

It will be some incremental -- some ratio of sales maybe --

As David mentioned, even though we may have service centers that are at 80% or 90% capacity, that doesn't mean there we already aren't looking at expanding those facilities.

As a matter of fact, we have five or six facilities right now going on that's either moving to a larger facility or expanding an existing facility.

That is just something we inherently do.

Obviously, when you expand a facility, you don't expanded to take care of your volume for the next one or two years.

You expanded to take care of your volume for a longer term.

I think it would be fair to say that we're in better shape as far as capacity around real estate is concerned that we've been in years.

We are in better shape for taking on additional business than we have been in the past.

Because of the money that we've spent on these real estate --

We've invested almost $1 billion in real estate over the last 8, 9, 10 years.

So we continuously do that and will.

Gentlemen that's great color.

I appreciate it.

It's been a long call.

That's all of I've got.

Thanks.

It appears there are no further questions at this time.

Mr. Earl Congdon, I'd like to turn the conference back to you for any additional or closing remarks.

Well, guys, as always, we thank you for your participation today.

We appreciate your questions and, most of all, your support for Old Dominion.

So give us a call if you have any further questions and thank you and good day.

This concludes today's conference.

Thank you for your participation.

[ Event Concluded ]