奧多明尼昂貨運 (ODFL) 2016 Q2 法說會逐字稿

Good morning, and welcome to the second-quarter 2016 conference call for Old Dominion Freight Line.

Today's call is being recorded, and will be available for replay beginning today, and through August 5, by dialing (719) 457-0820. The replay passcode is 4636822. The replay may also be accessed through August 28 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 yourselves to 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. Thank you for joining us today for our second-quarter conference call.

Joining me this morning are David Congdon, Old Dominion's Vice Chairman and CEO; and Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions.

During the second quarter, we remained focused on executing our strategic plan, and customers continued to respond to our value proposition of providing on-time, claims-free service at a fair price. Based on our on-time delivery of 99%, and our cargo claims ratio of 0.28% for the quarter, we continue to believe our service is the best in the industry.

The economic environment remains soft, however, and our year-over-year results reflect this softness. We expect that our second-quarter financial results will continue to out-pace our industry peer group, and believe our LTL tonnage represents a gain in market share, despite being down slightly from the second quarter last year.

We note that the second quarter started out slower than expected in April, but we began to see more of a normal sequential trend with our May and June results. In addition, the comparable quarter decline in the fuel surcharge moderated for the second quarter, a trend that we expect will continue in the second half of 2016, based on current diesel fuel prices. We also expect that the decline in non-LTL revenues will lessen in the second half of 2016, based on our timing for eliminating certain services in 2015.

Before I turn things over to David, I would like to take a moment to pay our respects to Mr. Harwood Cochran, the founder of Old Dominion Transportation Company, who passed away earlier this week. Harwood Cochran was, I think, the very best LTL trucker of his generation. He certainly made significant contributions to our industry, and the Congdon family and the Cochran family have been very good friends for many years. I'd like to offer our deepest sympathy to the Cochran family during this difficult time.

Now, here is David Congdon to give you more details on the quarter.

Thanks, Earl, and good morning. From a financial perspective, the second quarter was similar to the first quarter in many respects. Adam will review the specific numbers, but the basic story is that the combination of our tonnage, yield, and productivity for the second quarter was not sufficient to drive operating leverage versus the second quarter of last year. Instead, the small decline in revenue had a deleveraging effect on our income statement, and increased operating costs resulted in an 80-basis-point increase in our operating ratio for the quarter.

We have consistently said that the key factors to long-term margin improvement are increased density, productivity, and yield. But a positive macro environment is necessary to support our revenue and yield growth. While our density has not increased like we would have liked this year, I am pleased with the improvement in our direct costs.

We improved our platform productivity with a 3.7% increase in platform shipments per hour. Our P&D productivity metrics were flat. Our line haul latent load average decreased 2%, as we continue to run schedules to meet service; but this is an area of opportunity for us. Our yield remained steady during the second quarter, with revenue per hundred weight excluding fuel surcharges up 2.7%. As Earl said, however, the economic environment remains challenging, although recently reported data from ISM and industrial production has been positive.

Despite the economy, we will continue to focus on the disciplined execution of our strategic plan. Our value proposition is built on providing superior service at a fair price, and we do not intend to waiver from this core strategy. In addition, we will continue to focus on further controlling our costs.

With that said, however, we will continue to make strategic investments that position us for long-term success. We invested nearly $300 million in capital expenditures during the first half of 2016, which we expect will again differentiate us in an industry that is spending far less on relative basis. Our balance sheet remains strong, with a debt-to-total capitalization of only 11%.

To summarize, let me repeat what I have said many times before. Our plan, regardless of whether we face ongoing macro weakness or a strong environment, is absolutely clear and has not changed. We will continue to provide our customers with superior, on-time, claim-free service, at a fair price. We will maintain our disciplined pricing philosophy, and we will continue to make significant investments in capacity, technology, and training and education for our OD family of employees.

These factors all contribute to a value proposition that allows us to keep the promises we make to our customers, and that they make to their customers every day. We're confident that the execution of this strategy will enable Old Dominion to continue to win market share, driving our long-term prospects for further profitable growth and increased shareholder value.

Thanks for joining us today. Now Adam will review our financial results for the second quarter in greater detail. Adam?

Thank you, David, and good morning.

Old Dominion's revenue was $755.4 million for the second quarter of 2016, a 0.9% decrease from last year. Our operating ratio was 82.3%, which was an 80-basis-point increase over the second quarter of 2015. Earnings per diluted share were $0.98, which was a 2% decrease from the $1 per share earned in the second quarter of last year.

Revenue for the second quarter continued to be impacted by a decline in fuel surcharges, as well as a $9.7 decrease in non-LTL revenue. Our LTL revenue benefited from an increase in yield that was partially offset by a decrease in LTL tons. LTL revenue per hundred-weight increase 0.8% for the quarter, and increased 2.7% when excluding fuel surcharges.

While we noted an increase in price competition during our first quarter call, we did not see as many of those issues in the second quarter, and we continue to characterize the pricing environment as relatively stable. We expect that our contractual renewals will continue to increase at rates between 3% to 4%, although reported yields may differ from this range. As David mentioned, we do not intend to make any changes to our pricing philosophy.

LTL tons decreased 0.3% as compared to the second quarter of 2015, which included a 1% decrease in weight per shipment, partially offset by a 0.6% increase in LTL shipments. For July, on a year-over-year basis, our month-to-date LTL tons per day decreased 1.5% as compared to July of 2015.

On a sequential basis, LTL tons per day for the second quarter increased 5.3% as compared to the first quarter of 2016. While this was lower than our ten-year average sequential trend, which is an 8.5% increase, we are encouraged by the sequential increases in tons per day from May and June that were pretty much in line with averages for years when Good Friday was in the first quarter. In addition, the sequential trend for July is in line with our ten-year average, which is a 2.4% decrease in LTL tons per day as compared to June.

Our operating ratio for the second quarter of 2016 increased 80 basis points as compared to the same quarter of last year. The declining revenue generally had a de-leveraging impact on all of our expense items; however, the 90-basis-point increase in depreciation and amortization cost was also a result of the long-term investments we have made in real estate, equipment, and information technology.

While overhead costs were generally higher as a percent of revenue, our direct operating costs, such as salaries, wages, benefits, operating supplies, and expenses, and purchased transportation, improved slightly as a percent of revenue on an aggregate basis. The year-over-year increase in salaries, wages, and benefits for the second quarter was primarily due to a 2.2% increase in the average number of full-time employees, and general wage inflation.

Our fringe benefit costs were 31.9% of salaries and wages, as compared to 31.5% in the second quarter of 2015. Fringe benefit costs in the second quarter benefited from a reduction and expense for retirement plans, and were lower as a percent of salaries and wages than the fourth quarter of 2015 and the first quarter of 2016. We don't expect for this trend to continue, however, and believe that benefit costs will trend higher again in the second half of the year.

Old Dominion's cash flow from operations totaled $123.8 million for the second quarter and $292.2 million for the first half of 2016. Capital expenditures were $175.2 million for the quarter, and $295.5 million for the first six months of 2016, which is approximately 75% of our $405 million estimate for the year.

We re-purchased $40 million of common stock during the second quarter, and $84.7 million in the first half of 2016, which left us with $245.6 million available for purchase under our new $250 million repurchase program. We completed the previously authorized $200 million repurchase program in June, which was approximately five months prior to its scheduled expiration.

Our effective tax rate for the second quarter and first half of 2016 was 38.4%, compared to 38.6% for the second quarter and first half of 2015.

This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time. We are in different locations today, so please forgive us if we talk over each other a bit.

(Operator Instructions)

Chris Wetherbee, Citigroup.

Hi, thanks. Good morning.

Thanks for the July month-to-date tonnage number. I was wondering if you could give us the June number, and then maybe a comment on how the revenue per hundredweight ex-fuel might be looking July month to date?

Sure, the tons per day for June on a year-over-year basis were down 0.3%, and our shipments in June were basically flat, again on a year-over-year basis. Then the revenue per hundredweight, excluding the fuel, it did trend below 3%.

When you look sequentially, though, the absolute number for the revenue per hundredweight ex-fuel is $16.6 in the second quarter, and our weight per shipment was $15.59. If you look at the first quarter, our weight per shipment was 15.45, and revenue per hundred-weigh ex-fuel was $16.54. Sequentially, our weight be shipment has increased, yet are revenue per hundredweight has actually increased slightly, as well.

Some of what is going on with the comparison is last year, the weight per shipment was decreasing. Now on a sequential basis, now we've got it increasing. There's some different factors going different ways that's going to impact that overall comparison. That continued into the back half of last year. We're seeing weight per shipment continuing to hold pretty steady, in terms of moving up right now.

We still feel good about the pricing environment. We're still getting contractual renewals at a same rate that we were earlier in the year, and feel pretty good about the environment.

In terms of -- sticking on pricing for a second -- in terms of that pricing dynamic that you mentioned that you saw a little less of the pricing competition, I'm guessing that probably is holding over here until at least the beginnings of the third quarter, but can you speak to what has changed? Do you think it's individual carrier decisions that they're making a little bit more rationality, or is their weight per shipment getting a little stronger? What's your read on how things are trending from that perspective?

We said in the first-quarter call that really it was selective. Some of the actions we have seen that nothing was broad-based. I think carriers go through their own assessments for business they need, and different lanes, and so forth. We felt like some of the pricing actions on a few customers in a few places didn't necessarily make sense to us.

But overall, we had characterized the environment as stable then, and we continue to characterize it as stable today. I think there's always spotty issues, regardless of the environment. I think that's just what we were seeing in the first quarter.

Okay, that's helpful.

One quick follow-up question. I think you mentioned in the prepared remarks that head count was up 2.2% in the second quarter. How should we think about the year-over-year progressions in 3Q? If tonnage is down, does that number flatten out, turn lower? How can you manage that on a quarter-to-quarter basis?

Go ahead, David.

I'd say absolute head count should remain relatively flat, aside from attrition that we may have. But we're looking -- if we have some attrition in our head count, just for normal reasons, we'll look real strongly at whether we need to replace positions or not. I would think absolute head count ought to remain relatively flat now. We are properly staffed to do the amount of work that we're doing now. A lot of it will depend upon how the economy shakes out coming out of July and into the third quarter peak season.

Okay, that's helpful. Thank you for the time. I appreciate it.

Matt Brooklier, Longbow Research.

Thanks, good morning.

I had a follow-up to the head count question. Is there a number in terms of tonnage in your mind that would require you to add additional heads? Let's say that tonnage starts to pick up, we start to see re-acceleration in the second half of this year. Is there a certain level of tonnage growth that you would need to reach before you start adding heads again to the model?

It is hard to say that, Matt. It really all depends on -- those decisions are made on a service center by service center basis. Historically, coming into July has been a pretty decent month for us, layers, several years. But August it builds, and September builds to a larger amount. We're usually hiring some people for a peak season in September about now.

We don't necessarily gauge it that oh, all of a sudden we're up 5%, so we're going to add X number of people. It's something we have to gauge based on the workload that's hitting our service centers, and how many hours per week people are working, to determine if we need to put some more people on the payroll.

Okay, but to reiterate, with the current trajectory of tonnage right now, you feel comfortable with holding head count flat going into the second half of this year?

I wouldn't say for the whole second half. Maybe I misspoke a few minutes ago to say head count was going to be flat. I believe from an overhead standpoint and a management and salaries and fixed salary standpoint, our head count should be relatively flat. From a dock workers and drivers standpoint, I would anticipate that we will grow head count a little bit going into the fall.

We're going to watch it, because this economy just remains soft. We don't want to go overboard with too much head count; but we've got to stay ahead of it, too. It takes a good couple of months to train somebody to our methods of moving freight in our network. We've got to -- it's just a very careful balance.

Okay, that helps.

Then in terms of the month-to-date tonnage, it's down a little bit more than it was in June. I'm trying to get a sense for -- it wasn't a huge change. Obviously things can shift from month to month. Was there anything going on with the calendar that potentially impacted your tonnage, and drove tonnage down a little bit more than where it was in June?

No, the comparison for July is probably a little tougher last year on a sequential basis. We were down 1.2%, and I mentioned the ten-year average is down 2.4%, July compared to June. I think we still feel good about our sequential trends being in line. This is basically three months in a row.

We talked about April in last quarter's call. May and June, and the way July is trending, we're encouraged by that, as well as some of the positive economic data that's come out recently. It's not necessarily strong, but at least it has been positive. We feel good about the fact that we've got three months now that's back on trend, and we'd like to see that continue.

Okay, appreciate the time.

Ari Rosa, BofA Merrill Lynch.

Hi, good morning.

First, I wanted to start follow-up on pricing. Last year and for the past several years there's been a pretty big step-up in sequential pricing between first half and second half. Just wanted to get your sense of it that's likely to repeat?

Some of that though, again, if you look in the last year, we had an unusual phenomenon going on with weight per shipment, as that was trending down. I'd say trends were 14, our weight per shipment ticked up. Last year, it ticked down. I'm looking at it more on a sequential basis for right now, and seeing good stability in our revenue per hundredweight. Our revenue per shipment continues to trend in line with where we would expect. You're not seeing any sequential deterioration in that.

Talking to our pricing department, they're continuing to see the same types of contractual renewals that we have been seeing. We feel like again, as we've characterized it, the overall pricing environment continues to be stable.

Adam, when you say you're seeing it consistent on a sequential basis, does that mean on an absolute basis seeing it flat? Or is that -- even if you can talk about July, maybe, what the trend is looking like?

It's very similar. Yes, on an absolute basis, revenue per hundredweight ex-fuel ticked up a little bit as compared to the absolute number that was in the first quarter, despite the fact that weight per shipment moved up, which would in theory put negative pressure on that revenue per hundredweight number.

Okay, got it. That makes sense. Then the release mentioned some changes in freight mix weighing on yields. Could you go into that a little bit more, and what it is that changes in what you're shipping?

Mix changes every day, depending on what we're picking up and what customers are coming in, or what customers are going out. We've talked about we've had, in the first quarter call, a little bit of customer churn. But we're replacing the customers that we lost. Some of them may be coming back to us, and we're bringing in new business. That's supporting the sequential trends we started seeing since May. All of that goes into play.

We often talk about the fact that revenue per hundredweight is a yield metric, and not core pricing. There are times when revenue per hundredweight will be lower, like it was in second quarter, than what we are seeing that our contractual renewals are holding. There are times when it's been higher. You can't always reconcile those two numbers. But we still feel good about the pricing environment and our own ability to get necessary price increases to support our continued investments here at the Company.

Adam, I meant more is the freight mix a reflection of anything that is going on with the economy and the underlying LTL industry?

No, the revenue per hundredweight is what it is, and our mix is what it is. The main thing is that we manage to the operating ratio of each and every account. We've got target ORs, and we're finding that we can manage to that, and that the environment is stable.

This revenue per hundredweight, what it does sequentially, or what it does year over year, is purely an end result of a yield management process. Again, different customers give us different lanes and different consistencies of freight and different pounds per cubic foot. That's a moving target all the time. You just can't focus on that and call that a good or bad pricing environment, based on year-over-year or sequential trends in revenue per hundredweight.

Okay, great. Thank you.

Todd Fowler, KeyBanc Capital Markets.

Great, good morning. David, the past several quarters we've been talking about the impact of the smaller shipments on your productivity and some of the costs associated with that. It looks like the weight per shipment stabilized here sequentially. Do you think the network has adjusted to the smaller shipments, and that the costs are more in line with where the shipment sizes are, or is there still some opportunity to get some efficiencies with where the shipments -- with where the shipment size is trending?

We both --

I didn't mean to make you sigh that deeply.

Yes, we both saw on the productivity day in and day out, and actually hourly. We're always working on improving efficiency. I think the points I was trying to make on the last calls is that if you're dealing with a shipment that weighs 1,500 pounds and moving it across the dock, and now your weight per shipment is say 1,300 pounds, and it's still three skids of freight, but they're a little bit shorter or little less weight on the pallets, it takes the same amount of time to move it across the dock. The lower weight per shipment was impacting some of those freight-handling metrics negatively. Now that things are leveled out, it's less of an impact.

Okay. When you think about if weight per shipment stays here sequentially going forward, is there still some opportunity on the productivity side, or do you think you have adjusted, and are handling the freight the way you need to based on where the weight per shipment is?

You can look at any -- with 226 service centers, there's always some service centers whose productivity is not where it ought to be. We're working to find out why and working toward improving productivity. But then, other centers might be peaked out in their productivity, because you just can't move a forklift any faster across the dock, or load trailers any faster.

Again, it's something that we're continually looking at productivity. If we see weakness in productivity in any particular terminal, or on any particular shift within a service center, or any particular individuals that work on a shift, we're continually addressing productivity and striving for improvement.

Okay, that helps. Maybe for a follow-up, Adam, I know that depreciation's been a bit of a head wind here in the first part of the year, because of some of the investments that you've been making. How does that play out? Are you caught up now on the fleet side, or is depreciation still going to be a bit of a headwind until revenue growth kicks back in at some point in the future? How do we think about the investments you're making in the first part of the year relative to the changes in revenue?

Yes, we definitely need the revenue to catch back up. We -- for one thing, we've about purchased all of our revenue equipment in the first half of the year, which was on a little bit of an accelerated basis from prior periods.

Okay.

That's usually what contributes most of the depreciation for the year. There will still be some continued up-tick, as it wasn't fully complete. But then you've got the ongoing investments in IT and the real estate, which doesn't have as much of an impact in the short term on your depreciation line. We probably bought more equipment this year than perhaps what we needed, based on where our growth is. We continue to look at that. As we start making preparations for next year, we'll relay what the size of the fleet is, what our replacement needs are, and what our growth may be. We certainly would like for the top line to catch up with where we are.

Okay, but it sounds like if nothing else, you'll pulled some of that forward, and you can grow into it at some point in the future.

That's right.

Okay, thanks a lot for the time this morning, and congratulations on a nice quarter.

Thanks, Todd.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning, everyone. A couple of follow-ups here, and a bigger-picture question. The follow-ups would be, I'm sorry if I missed this, but did you give us the revenue per hundredweight ex-fuel in July, and how that's trending year on year?

I didn't give that number yet. Right now we're trending -- it's trending up about 2%. That's the comment we had made before that -- but on an absolute basis, it's right in line with where we have been. But we'll continue to see that number potentially differ from that 3% to 4% target range we have on true underlying pricing, as compared to yield.

That's because the funky math that you said -- is because the direction of movement?

There's always a difference between price versus yield, but yes, the weight per shipment trends definitely impact that.

Okay, and the weight per shipment trend, is that up sequentially, or year on year so far in 3Q?

Right now our weight per shipment continues to trend -- we've been saying since the back half of last year, around 1,550 pounds. That's basically where it continues. It was 1,559 in the second quarter, and that was up a little bit from the first quarter at 1,545. Somewhere around 1,550, plus or minus 10 pounds, is where we've been trending this year. Last year, particularly in the first half of the year, it was declining sequentially.

Got it. The bigger-picture question on e-commerce. I just wanted to clarify a few things. Can you remind me what percentage of your revenues roughly do you guys believe comes from e-commerce? Maybe what percentage of that is from Amazon versus the other retailers?

Also, what are you seeing in terms of e-commerce trends right now? There's a lot of talk about the omni-channel shift in the next year or two. Especially, do you see that as a long-term opportunity for you?

Right now, about -- we've got I would say little e-commerce, true e-commerce freight. We don't have any last-mile. We do some residential deliveries, but about 15% of our revenue overall is retail. We would focus more on freight that's going into distribution centers then we would going into some residential area.

I think the long-term trends, and we've talked about this before, is that as e-commerce -- as that environment changes, I think it can ultimately drive more freight into the LTL industry. I think having the amount of capacity that we do, and the continued investments in capacity, that we would be benefactors of that.

Got it. I think it's understandable that guys don't have much B2C last-mile e-commerce, but do you have a sense of the -- when you consider the B2B, intra-DC moves, again what percentage of that, the stuff you're moving, comes from e-commerce.

We don't have a break-down on that, Ravi.

Okay, thanks for the help.

David Ross, Stifel.

Yes, good morning, gentlemen.

Good morning.

Adam, if you could give us an update on the IT roll-out, the new platform I think you were migrating towards, maybe about halfway through now. Is that on plan, any issues?

We continue to work on that. It's a big project.

I wouldn't say that we're halfway through, but that's not going to be a big-bang theory deal where we flip the switch and turn things live. It's coming on in multiple pieces. I think we're making progress at a pace that we had established. There are certain applications that are being switched and turned on live from an old green-screen AS400 applications to the New World of Java and user interface screens that we've got.

Things seem to be progressing, but that's a long-term deal as we convert all of our systems, most of which are home-grown into this new programming and format. But we're taking the time to do it in a way to enhance the processing capabilities and overall efficiency that we hope will drive long-term productivity for us, and give us a further differentiated advantage in the market place.

But no negative surprises so far, and everything seems to be tracking on plan?

I'd say it's tracking on plan. It's a big project. Some things are going to go better than expected, some things not as good as expected. We just continue to work through it every day. It's a big coordinated effort from a lot of people involved, and we'll continue to work at it.

This is one of those things though, that comes at a short-term cost. We knew going into it if revenue softened that we've got to stay committed to it, because again, we think it gives us a long-term strategic advantage, and we're continuing to do that. It's higher overhead in the short run, but long term we think it's going to be beneficial for us.

I got the June tonnage was down 0.3% in July, down 1.5%. Did you provide April and May year over year tonnage comps?

April was plus 0.1%. May was down 1.0%.

Thank you very much.

Rob Salmon, Deutsche Bank.

Hi, good morning. Adam, in your prepared remarks I thought you called out a fringe benefit in the second quarter. Can you remind us what the magnitude is at, and what you guys are expecting with regard to fringe benefit inflation in the back half of the year?

Yes, the benefit costs are what they are. There's a lot of different things that go into it. The past couple of quarters, I've talked about it initially in the fourth quarter of last year, that our cost had ticked up as a percent of salaries and wages -- out of line with what the previous quarters had been. It had ticked up to 33% to 34%, as a percent of salaries and wages. In the fourth quarter of 2015 and first quarter 2016 it was 31.9%. An element of that is retirement plan benefit costs that are linked to share price. As that share price declined, we got a little bit of a benefit. There's a lot of moving parts and pieces.

I would just expect that we continue to see higher group health benefit costs. Our worker's comp -- not worker's comp, but the paid time off benefits have continued to be higher, as well. We're not necessarily giving a hard fast number, but I would expect it to be higher than that 31.9% that we saw this most recent quarter.

Okay, that's helpful from a contextual standpoint. If I -- what do you think is the right optimal capital structure for Old Dominion from a debt-to-cap or a debt-to-EBITDA perspective? If I think about the first half of this year, despite really front-loading the CapEx for the full year, you're still at just 11%. Basically, what I'm trying to get at is how should I think about the use of that free cash flow in the back half of the year, given the lower CapEx needs?

Yes, we continue to look at that. Obviously we want to optimize our balance sheet. We finished our $200 million re-purchase program early, and launched into an up-sized $250 million deal. I think the last few quarters, the last 12 months we've purchased close to $150 million. Our capital allocation strategy is one, to invest in LTL. We think that's where the best returns have been. We've said that we'll continue to look secondly at M&A opportunities. We haven't had one since 2008. The ones we've looked at haven't made sense for us. Then we'll look at returning capital to shareholders.

In absence of the right M&A opportunity, we've increased that pace of re-purchasing. We continue to look at ways that we can make strategic investments in the Company, as well, and we want to maintain some dry powder. Our debt-to-cap did move up to 11% at the end of this quarter from where it had been in lower single digits.

Right, makes a lot of sense. Nice execution in the tough quarter.

Thank you.

Scott Group, Wolfe Research.

Hi, thanks. Good morning.

Good morning, Scott.

Adam, if we assume that normal sequential volume trend continues in August and September, do you have a sense, what does that imply for third-quarter tonnage? I think it's a little bit better than the down 1.5% in July, but just want to make sure we're thinking about that right.

On a ten-year average basis, third quarter's weight per day is generally up 2%. If things continue to move in August and September, according to the normal sequential trend, that's the number you would get.

You're talking sequentially up 2%, so down slightly, but not down as much as 1.5% year over year?

The year over year is -- again, last year looking at it, I think we were little bit stronger sequentially than -- just slightly than the long-term average. We'll just have to wait and see. We're not ready to give a range on what we think our total tons for the quarter would be.

Again, looking at it -- now we're trying to look more at getting back on to a consistent sequential type of change with our volumes, knowing that we've mentioned it before, we've cycled out some business, and we'll continue to look at that. That may impact, as were growing in the last year, some of the year-over-year trends.

Okay, that makes sense.

Can you remind us when and how big the annual wage increase was this year, and how that compares versus a year ago?

We haven't talked about -- typically it happens the 1st of September. Last year we gave about a 3.5% wage increase. We haven't announced that to our employees at this point. Based on current trends, we would expect that there would be a wage increase this year. We're just not ready to talk about the amount.

Okay, fair enough.

Last question. You talked a little bit on the prepared comments about the de-leveraging impact of down revenue and slower tonnage. What is the level of either tonnage or revenue growth, where you can start to see margin improvement again on a year-over-year basis? Given the easier fuel comp, do you think we get back to margin improvement in the third quarter, or is that tougher, given the tonnage environment?

No, I'm not really ready to give any guidance on where our OR is going to be for the third quarter at this point. We'll still continue to have some head winds on the top-line basis as we go into the back half of the year. We knew the first half of the year was going to be more challenging than the back. The third quarter, we'll continue -- the fuel should moderate if prices stay where they are on that comparison.

But a non-LTL, really it was -- it was more so the fourth quarter that those services were fully out of our number. We still had close to -- just call it $19 million of non-LTL revenue in the third quarter of last year. While we gave that number in the first quarter, it was about $13 million, and that's about what it was in the second quarter, as well. If that continues the trend, we'd still have that head wind there.

But there's not a good rule of thumb in terms of how much tonnage or total revenue growth you need for to see margin improvement?

It's going to vary every year based on the investments that we're making -- what the contribution to expense for depreciation is going to be, what our CapEx size is, and so forth. Obviously we need more growth -- our growth to start with at this point.

Okay, thank you.

Brad Delco, Stephens.

Good morning, David. Good morning, Adam. How are you doing?

Good morning.

David, I don't know if maybe this is best for you, but in the earlier comments I think it was mentioned that you believe your tonnage in the quarter suggests you're still taking market share. The bigger-picture question is, why do you think there's such a disconnect between maybe the ISM data and/or industrial production relative to what we're seeing amongst LTL carriers?

That's a good question. I honestly don't have an answer why there is a disconnect with the ISM data. Now ISM has improved a little bit, but we haven't seen it come through yet in terms of LTL tonnage. The why is -- I'm not an economist, so I have no earthly idea.

Would you subscribe to the idea that we generally see LTL tonnage lag by about three months? July would've been the fifth month of when we saw the inflection to positive territory with ISM.

I subscribe that there is a lag with the ISM data, and perhaps three months sounds good to me. We have seen some improvement in our sequential trends in the last couple of months. Adam, would you speak to that? Because I don't see -- it does feel better, the daily tonnage, the daily shipments that we're seeing feel better every day when we're looking at how much business we did each day. Adam, touch on what are sequential trends are doing recently.

As we went through the second quarter, our weight per day was up 0.6% in April versus March. The ten-year average was up 0.3%. But remember, this is -- and it's the last quarter we're going to have to talk about it, but with the Good Friday in the first quarter, these are thrown off. We would've expected that number to have been up more. Weight per day in May was up 2.1%, versus a 4.7% average. It was up 2.4% in June, versus the 2.3% average.

Shipments were more in line. We talked about that when we put our mid-quarter update. Shipments per day in May was up 2%. When you look at years when Good Friday was in the first quarter, the average is 1.4% for us. We felt good about the way May's revenue built from start to finish.

We saw a similar trend in June. July pretty much has been very similar, as well. Things feel a little bit better. Perhaps what we are seeing, though, is once ISM turned back and stayed above 50 pretty much consistently and marched forward, that may be supportive of these trends.

Got you. Thanks for the color.

David Campbell, Thompson Davis & Company.

Yes, thanks for taking my question.

This issue of non-LTL revenue, which you were down about $6 million year to year in the second quarter. It's from business services that you terminated near the end of last year. What were those services, and why did you terminate them?

It was two things, David.

One was where we pulled back our ocean container dredge operations off of the West Coast. We discontinued those, as well as Chicago. The second non-LTL change had to do with our global freight forwarding, where we were booking the entire revenue of the ocean containers, and the purchased transportation against that.

We have partnered with Mallory Alexander to manage our ocean forwarding now. We don't have that top-line revenue. We're getting a -- we work basically off of a commission-type basis on the net revenue. Those are the two primary areas.

Adam, did I miss anything?

No, that's it. I'll add, though, that the decrease in the second quarter was not $9.7 million, not the $6 million that was mentioned.

$9.7 million?

Correct.

Those are likely to continue in the third quarter, and then be less in the fourth?

Right.

Okay. Some of it is in an accounting thing, where you're just picking up commissions instead of grossing the revenues. It's not really a reduced -- it doesn't sound like you've really reduced services, you're just partnering with somebody else?

That's correct.

Okay, thank you for the help. Have a good third quarter. Thanks for the good second quarter.

Thank you

Taylor Brown, Raymond James.

Hi, good morning, guys.

Adam, quick housekeeping item. Can you give the service quarter count at quarter end, and actually in Q1, if you have it?

That was $225 million at the end of first quarter -- I think it's $226 million (multiple speakers).

Okay, all right. Okay, perfect. David, can we talk a little bit about the real estate CapEx. You guys mentioned in the release that you're looking to spend $170 million earmarked for facilities. I think that's the highest budget we've seen. I'm just curious if you could talk about how tight land and facility availability is, with industrial occupancy nearing all-time highs. Are you guys seeing the cost per door, whether you acquire it or build it, rise significantly?

Acquiring land and building the freight service center has been a problem -- a difficult endeavor for the last 30 years that I can remember. I believe it always will be. Unfortunately, everyone enjoys the clothes on their back and the food that they eat. They just don't want to see a truck in the neighborhood bringing the product to them.

Our cost per door on construction has definitely risen. The various environmental concerns, neighborhood concerns, landscaping, stormwater run-off, all those kind of things have caused the cost per door to rise.

As far as acquisition of use facilities, one of the issues we face today is most of the facilities that are out there on the market are just not big enough for us. If we're lucky enough to find one that has some additional land that we can renovate and add doors, we've found that to be the case from time to time.

Real estate is always a challenge. Historically, we talk about a real estate budget; but historically, we don't usually spend what we said we're going to spend in a given year, because of the time delays in acquiring land and getting through the permitting processes and so forth.

Okay, yes, that's great. Can you give any sense how much door capacity you are looking to add this year?

Do you have that, Adam?

No, and we don't necessarily break that down, Tyler. I would say that the investments we're making are generally more in expanding existing locations. The fact that we've only added one facility this year, it's primarily been expanding existing locations in that dollar amount. We may add a couple of more facilities this year.

Okay, perfect. Thanks.

Ben Hartford, Baird.

Hi, good morning. Adam, interested in any perspective you might have on bids in the back half of the year. Are you hearing any talk from customers regarding potentially pulling forward bids that might hit in the fourth quarter or early next year into the third quarter?

No, we haven't heard anything like that. Bids for us is not any kind of seasonal thing. They come in on a fairly regular basis throughout the year. It's just something that constant communication that you have with our customer base, and between our (inaudible - cut off) department and our sales department, as well.

Sure, and then a follow-up on the last question. The long-term service center count, are you still targeting 250 ti 260?

Obviously, that's going to vary as we grow and get bigger. We may find that we need spin-off locations. But right now, I think that we've got another 35 to 40 facilities when we think long term where we may grow to. There's probably going to be some ebb and flow there as we continue to make our way and achieve our long-term growth objectives. Right now, I will add too, that probably the capacity in the system that we have is somewhere in the ball park of 25%, plus or minus.

Okay, that's helpful. Thank you.

Jason Seidl, Cowen and Company.

Thanks, good morning, guys.

A quick one here. In the past, when truckload capacity has tightened its impact at the LTLs, in terms of different freight shifting around the move, if truckload continues to tighten, should we see a similar impact that we've seen in the past with you? What do you think it might do for your pricing in that 3% to 4% range? Could that boost it any?

Jason, our pricing philosophy is that we target the increases we need on a fairly consistent basis to be in line with what our cost inflation is. I think there have been periods where maybe the industry is going up more, based on capacity, or they may be cutting rates from an environment that capacity has flipped, and they're needing to get that volume. I think our customers like our consistent approach, and we've had good success with that.

Okay, that's fair enough.

One follow-up. You touched on it briefly about looking at some ancillary opportunities to tack on with acquisitions. What are the ones you think would fit most? Is it still something in maybe the warehousing mode, or is there anything else that we should be thinking about that would make sense for OD?

It varies. We obviously continue to look, Jason, and try to figure out what we think would make sense long term for us. We're doing a couple of different things here, as it is. LTL is really the growth engine of the Company. First and foremost, we've only got 8% to 9% market share. We're going to continue to focus on this long runway of growth that we have within LTL.

If there are other services that are complementary, those other non-LTL services that we have today are the drayage, which we've changed our business model, and we're trying to focus and be able to capture coming growth, and maybe changes in capacity within that market place. We've got a truckload brokerage operation, and we can continue to enhance that offering.

Really, we're going to focus on things that are complementary to our LTL business. Maybe a service that when we're making sales calls on a decision-maker at our existing customers that we can leverage those relationships.

All right. Gentleman, I appreciate the time.

Okay.

Ari Rosa, Bank of America.

Hello. Just wanted to sneak one last one in. On some of the pricing initiatives that you took at the end of last year, specifically thinking about the changes in the way -- having a change in the fuel surcharge option, and then also looking at some of the surcharges going into and out of California. Just wanted to get a bit of a comment on how those are being received by customers -- if you've gotten push-back, if they've generally responded well? Just thoughts, generally?

Yes, some of those things and changes that were made is just it's always looking at what our costs are doing. The industry changed fuel surcharge rates early in 2015. We had just gone through a GRI, and felt like it wasn't the right thing to do to sit across our customer and say that fuel is going down, but we need a rate increase. We worked through that.

The fuel surcharge has just become a variable component to pricing. Like David mentioned earlier in the call is that we've got target ORs for our customers, and we're managing base rates, and any type of [bastasorial] charge, based on what the cost of handling that customer's business is. That's been a consistent approach we've had. We try to put in place fair pricing programs that's beneficial for both parties involved, and continue to support the growth of our Company.

Anything on adoption rates of the alternate pricing structure?

Are you speaking of that new tariff that we put in?

Yes, for the alternative fuel surcharge arrangement.

Right. That's been pretty small in terms of acceptance. We went through that process of identifying it and working through it, because there were some customers that wanted to switch and not have that fluctuation and variance with their fuel, and have to update their systems every week as the DOE price is changing.

It's been responded to by some customers that really were asking for it. We didn't really anticipate that that would become widespread and the most adopted tariff option that we have. We've got multiple tariff options, but our 559, the most traditional one, continues to be what most of that business moves on.

That's terrific. Thanks for taking the follow-up.

With that, that does conclude today's question-and-answer session. I'd like to turn the conference back to Earl Congdon for any additional or closing comments.

Well, as always, thank you all for your participation today. We appreciate your questions and your support of Old Dominion. Please feel free to give us a call if you have any further questions. Thank you and good day.

Again, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.