奧多明尼昂貨運 (ODFL) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Third Quarter 2018 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through November 3, by dialing (719) 457-0820.

The replay passcode is 3409151.

The replay may also be accessed through November 24 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.

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

The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

(Operator Instructions) At this time, for opening remarks, I would like to turn the conference over to the company's Executive Chairman, Mr. David Congdon.

Please go ahead, sir.

Good morning, and welcome to our third quarter conference call.

With me on the call today are Greg Gantt, our President and CEO; and Adam Satterfield, our CFO.

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

I'm pleased to report the strong financial results for Old Dominion's third quarter.

It was another record-breaking quarter for us in terms of revenue and profitability.

Financial results for the quarter reflect our ongoing ability to win market share, which has been supported by the strategic plan we implemented many years ago.

While there are many elements to this plan, it is centered on people, our employees and our customers.

Our OD family of employees worked tirelessly to build relationships with our customers, and those relationships are strengthened by our ability to provide on-time and claim-free service at a fair price.

This value proposition is clearly differentiated in our industry as is our continuous investment in assets so that we have the ability to grow.

Our past results have demonstrated an ability to grow throughout the economic cycle, and we are confident we can continue delivering long-term profitable growth.

Economic indicators continue to be positive, and coupled with a capacity-constrained industry, support a favorable pricing environment as well as continued strength with our volumes.

While we have persistently faced questions from investors throughout this year about when the domestic economy may begin to slow, it simply hasn't happened yet.

2018 may turn out to be one of the best operating years in our company's history, and we are excited about the opportunity for continued growth in 2019.

Before I turn things over to Greg, I would like to take a moment to pay our respects to Mr. Scott Brittain from Corporate Communications, who passed away unexpectedly last week.

Scott had worked with us since we went public in 1991, providing guidance on our -- on Investor Relations and kicking off our earnings calls.

He has helped us communicate our story and was a tremendous part of our team.

We will miss Scott dearly, and offer our deepest sympathy to the Brittain family and his colleagues at Corporate Communications.

Now here is Greg, to provide more details on the third quarter.

Thanks, David, and good morning.

Old Dominion produced another solid quarter of profitable growth, and our 78.4% operating ratio is a testament to our team's execution of our business strategies.

The ability of our team to also maintain best-in-class service standards with 99% on-time and a claims ratio of 0.2%, while growing like we have this year has been remarkable.

I firmly believe that our best-in-class service continues to drive our market share growth, and I was pleased to see the increase in revenue that exceeded 20% for the third quarter in a row.

Assuming normal sequential trends, I expect that our shipment growth will slow in the fourth quarter due to the acceleration in volumes that began in late September of last year.

In addition, we made strategic operational changes late in the second quarter of this year that negatively impacted some shipments and weight per shipment.

Many of these shipments were eliminated from our network were transactional in nature, and generally more appropriate for the truckload industry, and these would have likely moved away from us anyway when capacity loosens in the truckload sector.

We made this call to protect the service standards that are so critical to our customers, while also preserving capacity to meet increased customer demand for LTL shipments.

While these changes may have short-term implications on volume trends, we continue to believe that we are better positioned than anyone in our industry to win LTL market share over the long term by following the strategic plan that David referenced earlier.

The 5-year and 10-year compound average growth rates for our revenue has been 11.5% and 9.6%, respectively.

And revenue growth thus far into October has exceeded these numbers due to the ongoing strength of our yield.

We would expect our yield to trend favorably in the fourth quarter given the environment and the decrease in weight per shipment that generally results in an increase to revenue per hundredweight.

The increases in density in yield during in the third quarter contributed to the year-over-year improvement in our operating ratio.

In addition, this was the first time since 2011 that our third quarter operating ratio was better than the second quarter of the same year.

We believe we can drive the operating ratio even lower, even in a slower-growth environment by continuing to focus on ways to improve operating efficiencies, while carefully managing our discretionary spending.

With opportunities to continue to win market share and improve our margins, combined with the commitment to invest in the capacity necessary to continue to grow our business, we believe Old Dominion is in a unique position in the LTL industry.

Our outlook for the economy and industry dynamics continue to be favorable, which gives us confidence in our ability to produce further gains in long-term earnings and shareholder value.

Thanks for joining us this morning.

And now, Adam will discuss our third quarter financial results in greater detail.

Thank you, Greg, and good morning.

Old Dominion's revenue grew 21.2% to $1.1 billion, and our operating ratio improved to 78.4%, which is a record for the company, and we believe, the industry.

The combination of these factors allowed us to increase our income before tax by 39.3%.

Earnings per diluted share also benefited from a lower effective tax rate and increased 71% to $2.12.

Our revenue growth for the third quarter included increases in both LTL volumes and yield, both of which were again supported by the strength of the domestic economy and tight capacity within the transportation industry.

LTL revenue per hundredweight increased 12.5% and increased 9.0% when excluding fuel surcharges.

LTL tons per day increased 8.1% as compared to the third quarter of 2017, with a 9.7% increase in LTL shipments per day, that was partially offset by the 1.4% decrease in LTL weight per shipment, which was primarily caused by the changes in the mix of our freight and factors just described by Greg.

On a sequential basis, third quarter LTL shipments per day increased 1.4% as compared to the second quarter of 2018, which was below the 10-year average sequential increase of 2.7%.

As expected, LTL tons per day were also below our long-term sequential average.

Given the strength in our yields, however, revenue per day increased 4.0% as compared to the second quarter of this year, which compares favorably to the 10-year average sequential increase of 3.6%.

This was the sixth straight quarter that our sequential revenue trend has outperformed the long-term average.

We expect that our revenue in tonnage growth rates will moderate in the fourth quarter given the material acceleration in revenue, and particularly, the weight per shipment that began in September of 2017.

Thus far into October, our LTL tons per day on a year-over-year basis has increased approximately 2%, but our revenue per day has increased approximately 15%.

Our third quarter operating ratio improved 280 basis points as network density and quality revenue growth allowed us to improve both our direct operating costs and overhead expenses as a percent of revenue.

As stated in our release this morning, we believe the current size of our workforce is appropriate and do not anticipate any major changes in headcount during the fourth quarter.

Going back to the second quarter of last year, we had hired at an accelerated pace to keep up with our growth.

Some of our productivity metrics have taken a hit as a result, but we believe we can regain some of those lost ground now that our daily shipment counts are trending more in line with normal seasonality.

Old Dominion's cash flow from operations totaled $250.7 million and $675.4 million for the third quarter and first 9 months of 2018, respectively.

Capital expenditures were $177.6 million for the third quarter and $469.9 million for the first 9 months of the year.

We continue to expect total capital expenditures of approximately $555 million for the year, subject to the timing on certain real estate projects.

We returned $39.8 million of capital to our shareholders during the third quarter, including $29.2 million of share repurchases.

Total amount of shares repurchased and dividends paid for the year-to-date period was $108.6 million.

Our effective tax rate for the third quarter of 2018 was 24.3% as compared to 37.8% in the third quarter of 2017, due primarily to the Tax Cuts and Jobs Act as well as certain discrete adjustments made during the quarter.

We currently anticipate our effective tax rate to be 25.9% for the fourth quarter.

One final note before we open the floor for questions.

We will no longer count Christmas Eve as a workday in our fourth quarter.

This is a new holiday that we'll begin providing to our employees this year.

So while there may be an impact on certain per day metrics in trends, we don't expect there to be a significant impact on our revenue.

The fourth quarter of this year will now have 62 workdays.

Workdays for 2019 will be 63 in the first quarter, 64 in the second and third quarters, and 62 in the fourth.

This concludes our prepared remarks this morning.

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

(Operator Instructions) And we will take our first question from Allison Landry with Crédit Suisse.

I wanted to just quickly ask about the length of haul, it's been -- seen maybe couple of quarters of sequential increase, which I would think maybe with e-commerce trends and whatnot that, that might be getting shorter.

So just wanted to understand maybe what's driving that?

Allison, it is hard to say, it stayed relatively consistent, it has moved up a few miles, but I think that our percent of freight that's typically in the -- our next day and second day lanes has stayed relatively consistent.

It just may be that -- may be we're picking up a little bit more market share in some of our longer haul lanes that may be skewing it slightly north a little bit.

But certainly, to your point, I think we continue to see and believe longer-term that there will be more opportunity and shorter length of haul lanes, these next day and second day lanes that we have very good service.

And our business model was unique though that through one company we provide regional, interregional and national service.

And so there are times where our national longer haul lanes may be growing a little more, and we can be growing in those longer interregional lanes as well.

But certainly, longer-term, we would envision just in general on the transportation space weight per shipments to be declining, which will be good for the LTL industry and length of haul shortening as well.

Okay.

That's really helpful.

And so it sounds like it's sort of not something to read too much into.

And in terms of the weight per shipment, I apologize if I missed this earlier, but obviously, you guys have talked about sort of changing your strategy a little bit in the last couple of quarters.

But do you expect the weight per shipment on a sequential basis in Q4 to be similar to Q3?

Or does it normally see a sequential uptick?

Normally, it increases a little bit slightly.

And I don't anticipate really a lot of major changes from here out.

Last year was when we were seeing a significant acceleration.

It was September of last year, if you recall, our weight per shipment had been 1,550 to 1,560 pounds or so in the first 8 months of the year and in September, went up to 1,620 pounds, and it accelerated there all the way to 1,660 in December.

And so when we made some of these operational changes that Greg discussed, we saw an immediate step down in our weight per shipment.

In June, we were at 1,622 pounds.

In July, we were at 1,562 pounds.

So as we go through the fourth quarter, I think that you'll see a bigger decrease in weight per shipment.

And that's what we were talking about.

Our shipment trends continue to be good.

We feel like and we've got strong daily shipment volumes coming in, but that delta and the weight per shipment that will get even wider in the fourth quarter could if current weight per shipment trends hold, will have more of an impact on our tonnage that we report.

We will take our next question from Chris Wetherbee with Citi.

I wanted to touch a little bit on tonnage trends, and maybe sort of think about what may be you're seeing from your customers in terms of sort of the pace of activity?

Certainly, the comps are getting tougher and that seems to be speaking to at least in some of the decline, deceleration in growth, I should say, but are you seeing maybe something a little bit more than that?

Is it related to price actions?

Are you actually seeing some sort of softness in certain end markets that you're seeing customer-wise?

We hadn't seen any softness really.

And again, part decision that -- or the reason why we made the of the decision to eliminate some of these heavier-weighted transact or shipments that were more transactional in nature from the network is just the continued strength that we're seeing and the demand from inbound customer calls to continue to move their LTL shipments.

Certainly, we have the ability to move heavy-weighted LTL shipments and we still are.

There are some shipments in the network that are up to 10,000 pounds, and that's fine if we're moving them at the right price.

But we felt like the demand, the ongoing demand continue to be strong and we wanted to make sure that we were protecting service and protecting capacity for that strength in those more average weighted LTL shipments, if you will, that we were seeing.

So we haven't seen anything at this point, be it the macroeconomic numbers that we look at or customer feedback that would suggest any kind of slowdown.

Okay, that's helpful.

And when you think out a little bit beyond 2018 into 2019, you gave us, I think, an update for in October in terms of revenue per day, obviously, it implies a pretty big yield number.

How do you think or what do you expect the relationship between tonnage and yield to be as you go out into '19?

Should it be very over-weighted yield side?

Do you think that's sustainable as you guys are doing some of the work on the network to sort of restrict tonnage in certain places and focus on probably what's more profitable for you?

Well, from a yield standpoint, right now, certainly, the decrease in the weight per shipment is kind of boosting that number.

We put our general rate increase in effect in June, and that was at 4.9%.

And we don't give any longer or contractual renewals.

But typically, we were targeting contractual renewals somewhere in that same ballpark.

And sometimes they're higher or lower, but the optics and the -- if this current weight per shipment trend holds, then certainly, it may look like the revenue per hundredweight is -- would continue to trend at a very positive level.

And we'll just see on the volume side how the shipments continue to trend.

Okay.

And then just the last one quick for me.

Just sort of thinking conceptually about the OR comments at the beginning of the conference call, you've given us historically some benchmarks about incremental margins.

Obviously, you've been outperforming, I think, those over the course of the last couple of quarters.

Any news or thoughts of what the right number should be as we look over time what the OR can be at the company?

Yes, I don't know that we're ready to give long term what we think the operating ratio, at least not here on the call today.

But I think long term, we've said it many times that the incremental margin range is sort of in that 20% to 25%.

And I guess is, if we get closer to a 75% operating ratio, we may have to update that.

But I think we've gone through the math in terms of relationship with direct costs versus our overhead costs and that's why we can generate incremental margins in the 30% to 35% range in certain quarters.

I don't know that we're at the point where that's the new long-term range for us, but certainly, we've seen it 2 quarters in a row now with really strong incrementals and I think we got a good opportunity again in the fourth quarter to have some strong margins.

And into next year.

We will take our next question from Brad Delco with Stephens.

Adam, you touched on, I guess, expecting flat employee count in the fourth quarter.

It's something that stood out to me on a year-over-year basis.

FTEs were up 16.2%.

I think, you said previously, you expect that the trend in line with shipments that were up, what, 9.7%.

So do you feel like you're overstaffed right now?

Or can you provide some comments on where productivity is versus where you expect it to be?

Because it seems like you have some excess capacity maybe in the network.

Brad, if anything, maybe back earlier in the year we were a little behind with our numbers of employees.

We got a little bit behind at our peak times, but I think since then we certainly we've hired an adequate number.

We may be slightly overstaffed at this point in time, but it's very, very slight.

Certainly, with continued volumes as they are, we will make those adjustments as they are needed.

But I think we are definitely staffed at this point.

And if need be, we'll make adjustments as we see fit.

Brad, this is Adam.

I'll just add to that a little bit, but part of the decision-making and making the hires this year is we continue to say we expect a strong year into 2019, so we wanted to make sure that the workforce is not only appropriate for current trends, but also what we may see going into next year.

And we also took a little bit out of purchased transportation that we had last year.

That decrease just slightly, but still that's additional line haul runs that we're running that we may have had to outsource a little bit of last year when our volumes were accelerating.

Brad, if anything also.

Some of our folks were probably overworked, if you will.

Getting those hours adjusted to more normal type of numbers on a weekly basis, really makes sense for everybody.

So you can't kill the workforce, if you know what I mean.

I got that.

It makes sense.

And then maybe a quick follow-up, Adam, this is more nitpicky.

But did you give September tonnage?

And I don't have June tonnage either in my model, if you have that one?

And then could you tell us what shipments were up in October thus far?

On the -- for September results, the tons per day on a year-over-year basis were up 4.6%.

And then shipment count in September was up 8.8%.

And could you give shipments for October?

Yes, right now it's -- 1 second, right now the October trend is approximately 6%.

Again, you can see that bigger gap, if you will, in terms of the weight per shipment and the impact that it's having.

And I know when I think of ODFL, I think of the model we don't make excuses, we make money.

But if Michael -- did the Hurricane Michael have any effect on October trends?

Noticeable?

Hardly.

There was some impact, but hardly.

And we're not going to make an excuse with it, but definitely there was some impact.

And we take it and we move on, but hardly.

We will take our next question from Matt Reustle with Goldman Sachs.

Just in terms of the business shift towards that lower weight per shipment.

Can you talk about the impact that you'd expect to see through the cycle?

I mean, do you consider that stickier business in any way and just short-term impact and longer-term impact as you see that shift?

I think we've already seen the short-term impact.

And some of this, like we said, we felt like was more transactional freight that if capacity loosened up, would have moved on terms that weren't ours.

And so it may have been business that we were handling and coming to us either directly from customers or through 3PL customers as well as 3PLs continue to try to find capacity for the shippers traffic that they're managing.

So I think that we were able to control the outflow of it, if you will.

And so we've already seen -- and are seeing some impact on our volume trends as a result.

But we felt like it was more appropriate to go ahead and make some of these decisions or sales versus waiting on when capacity might change or might not change in the truckload sector.

Understood.

And just to follow up on that.

How much of that push towards that business is market share versus the customers in that space continuing to grow?

Our market share, just in general, continues to grow.

I think that when you look over any long period of time, we continue to be one of the biggest beneficiaries, if not the largest, in terms of when the LTL market is growing.

And that just gets back to our long-term model.

We continue to give very good service at a fair price, and we've got the capacity to grow.

So those 3 elements have all got to work together.

And I think they work better for us than perhaps anyone else in the space.

And as we've said, we believe in what our business can continue to do and can continue to grow.

And so we're going to continue to reinvest in our service center network to give ourselves the ability to grow and we don't see any signs of that slowing down.

And certainly, the long-term opportunity will continue to be there for us.

I guess, ask it different way.

Are you seeing any differentiation in terms of growth of that lower weight per shipment business versus growth in the higher weight shipment business?

No, I don't see this to be too blown out of proportion, these are not a large percentage of share for us, but they're just -- can be very heavy-weighted shipments.

So it certainly and if you got one 10,000 pound shipment versus our average that between 1,550 and 1,600 pounds, it can have an impact on the overall company weight per shipment.

But is not necessarily meaningful to our ability to grow.

Matt, this is Greg.

When were at peak back near the end of the second quarter, when we raised the rates, what was happening, customers couldn't get their truckloads moved and they were taking 30,000 and 40,000-pound shipments.

Splitting them up and shipping them over 2, 3, 4-day period.

And that's what was ending up on our trucks.

And so instead of our ability to move of our LTL, we just, in some cases, we were restricted and limited because we had these truckloads on.

So those are the kind of shipments we cut out.

They never were a large percentage of what we were doing, but they were so heavy, they did have an impact on our weight per shipment.

So those are the types of shipments that we eliminated when we raised the rates and did what we did.

So like Adam said, never were a real big part of what we were doing.

Understood.

Yes, we're going to have to look at the medium weight per shipment rather than the average, I guess.

We will take our next question from David Ross with Stifel.

So a question -- yes questions mainly going to start with pricing.

I'm just hoping you could help me understand the more than 5% sequential growth in yield.

The -- I understand the weight per shipment having a positive impact on yield, but it was only down about 1%, length of haul is relatively flat.

So I guess, I'm just not understanding the big jump in yields, maybe there is a freight commodity class adjustment or something that we're missing.

Well, for the quarter, we did get a, if you're comparing the third quarter to the second of this year, we got our GRI in effect in June, so we had a full quarter's impact of it this year versus last year's third quarter to second quarter, it was effective in September.

So that certainly helped.

But throughout the year, we've been trying to address underperforming accounts.

And we've been trying to address yield in multiple ways.

In some cases, it may be fuel tables.

It could be a multitude of different ways that we try to address underperforming accounts and improving yields.

I think that the environment has obviously been very favorable for all of the carriers.

And so that's given us the support to be able to properly address maybe some of the underperformers that needed to have some help, if you will.

Because our long-term philosophy is to focus on individual account profitability, and that's what our pricing department does everyday.

I'll add to that, David.

Earlier in the year, not only were we growing with our existing accounts and gaining more density and so forth, we brought on a lot of new accounts.

And oftentimes, when you bring on new accounts, you bring them on under a pricing program and certain assumptions of profitability, and these new accounts, some of them were not as good as we thought they were from an OR standpoint, so we -- with our -- with the type of systems we had and the way we can track costs and profitability, we began addressing those large accounts.

As our volumes continue to grow, we felt like we had to address those and keep servicing our accounts.

So that's helped the yield a little bit later in the year, addressing an early year new accounts.

That make sense.

And Adam, what percentage of the business roughly is impacted by the GRI?

About 25%-or-so.

And then last question just, I guess, for David and Greg, how would you compare the economic environment or really the LTL freight environment versus past cycles?

Whether you're talking about '05, '06, 2014, back into the '90s, does this remind you of any time period more so than others?

Overall, this year has probably been one of the strongest freight environments that we've seen ever.

It really started cranking up in '17, and going into '18, it's just been one of the strongest environments.

As right now, we've got a solid book of business that's generally priced well.

And our year-over-year comparisons might start looking smaller in terms of the growth is concerned, but we're still blessed with a solid book of customers that appreciate our service levels and our claim-free service and we've struck a fair price for performing the services that we're asked to perform.

And so we're just -- we're optimistic about next year, the year-over-year, because of the tough comparisons.

The growth may not look as good, but we think our opportunities for continued growth and for improving margins are still there and we're looking forward to a strong 2019.

Very strong base, very strong top line revenue base to start the year with.

Regardless of what the comparisons look like, the base is excellent.

We will take our next question from Amit Mehrotra with Deutsche Bank.

One quick one, just with respect to the comment on the release about the headcount growth, the lack of headcount growth going forward.

How much more tonnage and shipments, I guess, given the difference in the declining weight per shipment, maybe shipments is a better way to look at it, but how much more shipments can you bring out of the network without adding incremental headcount?

It's hard to say.

I do think we have some capacity right now, for sure, in our workforce as it stands, but we definitely can stand some growth without adding.

So that's a good thing.

I think as our workforce becomes more productive, that's an even better thing for us and that's really where we're putting some focus at this point in time to try to improve the productivity and whatnot.

So some cases you can do more with less.

And I think that's where we're heading.

So feel good about our workforce.

We definitely have some capacity.

And then Adam, you've talked about kind of 20% to 25% incremental margins.

Obviously, you've been running more than that and every quarter we ask you when it's going down, and you don't really -- you don't have -- seem to have a lot of visibility on that going forward or not willing to share that at least.

But, I guess, with pricing seemingly quite strong, you have a little bit of maybe weight per shipment headwind and tonnage in positive territory, but obviously, often very, very tough comps.

I mean, just underlying you have a better book of business from a profitability standpoint, it seems like you've been calling some lower profit contracts.

And so -- as we look out prospectively, just given the capacity on the structural cost side, why shouldn't incremental margin stay at these levels at 30%, 35%, just given all those moving parts?

Just like we've said and we've got visibility into it, but yes, we don't always share.

I think when we talk about the 20% to 25% range, keep in mind in the first quarter, that's where we were.

And I think that we don't manage the business to incremental margins.

And there may be periods where we're adding costs into the system.

And those can be different versus what the top line revenue trend may be.

We've still got some capital expenditures on the real estate side that we need to add to the network in time.

And typically, in particular of this year and one of the reasons why the incremental margin strength has been very positive is, we've added thus far 6 service centers to the network.

Typically, there is a lot of inefficiency that comes as you add these service centers and we're doing it for to support our long-term growth.

But when you look in prior periods, 2014 is a good example, we had a weaker incremental margin that year in a high-growth period versus '15 was a stronger incremental margin as calculated when our revenue growth was slowing.

So we're going to continue to make decisions that are right for the long term and to support what our long-term revenue growth can be, and sometimes those may be out of sync in the sense of what the top line is doing.

Yes.

One quick one for me, if it's okay, just nitpicky again.

I'm not sure if you provided the sequential change in tonnage and shipments through the course of the quarter.

I'm just trying to understand kind of the slowdown in September.

Was that more of a reflection of the strength in prior months in the quarter and really how that compares to the historical on a sequential basis?

Yes, I'll give the monthly weight per shipment.

I'll start with that.

So in July, and again, that was when we had that biggest change that sequential decrease in the weight per shipment.

But July versus June was a decrease of 5.4%.

The 10-year average is a 2.1% decrease.

In August, it was a 0.2% decrease versus a normal or the 10-year average being a 0.4% increase.

And then September was a 2.4% increase versus the 10-year average is an increase of 3.2%.

So that was on the tonnage side.

On the shipments, July was a decrease of 1.8% versus June, the 10-year average is a 0.8% decrease.

Then August was a 0.6% increase versus the 10-year average 0.9% increase, and September was a 1.8% increase versus a 2.6% average increase.

Got it.

And the first was weight, right, not -- it was tonnage, not weight per shipment, right?

Just to make sure.

Yes.

Yes, tonnage.

We will take our next question from Ari Rosa with Bank of America Merrill Lynch.

So first question, I wanted to ask about the sequential change in the operating ratio.

As we look from third quarter to fourth quarter, it's been about 200 to 300 basis points over the past few years.

Is there any reason to think that we should see variance from that kind of sequential change in the OR this fourth quarter?

Well, I don't want to give specific guidance there.

But you're right, it's normally the 10-year average sequential is a 200 basis point increase and over the last 5 years, the average has been 240 basis points.

And this year, I think that we've obviously got a little bit of slowdown in the revenue growth like we've talked about, but we'll continue to monitor the labor to revenue trends.

I think we've got some opportunity on the productivity side, as Greg just mentioned.

And so we will be evaluating cost closely as we progress through the fourth quarter here.

I think the strength -- we had a lot of stars in alignment for the third quarter.

And when you go up and down the income statement looking at some of those cost trends and so forth, there were a lot of things that went right for us.

So you just never know what from one quarter to the next there are certain things that aren't necessarily always in our control from an expense standpoint.

Sure, that makes sense.

So next question I wanted to ask about the pricing guide.

Historically, you guys have talked about targeting kind of 3% to 4% growth in pricing ex fuel.

Obviously, given kind of the timing of the GRIs, expected that third quarter was pretty strong, but it sounds like it's still trending pretty strong into October.

I'm wondering to what extent you think that's sustainable or do you think it kind of migrates back to that 3% to 4% range?

Well, that's -- long term, that's what our revenue per hundredweight has trended in that 3% to 4% range, and that's on an ex fuel basis.

So it's not necessarily what underlying pricing has done.

I think that we look at it more on a revenue per shipment basis and then compare it against our cost per shipment and there needs to be a positive delta there to support the continued reinvestment in real estate and technology and other things that our customers demand of us.

So when you look, say, going back to 2010, our revenue per shipment is probably up closer to 5%, whereas our cost per shipment trends up closer to about 4%, which is primarily the wage inflation that we've had and so forth.

So yes, the revenue per shipment in the third quarter is trending a little stronger than that.

And I think performing better than cost, and that just gets back to the strength in the yields and our ability to go out and get the yield increases that we needed this year.

And it's been supported by the favorable environment like we've talked about, but certainly, the optics of those metrics like we mentioned earlier with changes in weight per shipment, there is no linear formula that can tie through changes in weight per shipment necessarily to the revenue per hundredweight.

But certainly, as revenue or weight per shipment rather decreases, that generally has a positive effect on those yield metrics.

Sure, that make sense.

And then just last question for me.

David mentioned at the start of the call that OD has demonstrated this ability to grow through a cycle.

You've obviously added a fair amount of capacity in the current up-cycle.

And I'm just wondering, to what extent we should be concerned, maybe that if there is a slowdown that OD could be left with some idle capacity.

Is that a concern?

How do you guys think about managing that risk?

Right now, we don't have that concern.

And frankly, it gets back to believing in how we can grow the company over the longer run.

As you know, we like to own our real estate, and we think that's a competitive advantage that we have.

With the growth that we've had over the last couple of years, the amount of excess capacity that we have in the system is probably not as great as it has been in the past we're probably closer to the 15% capacity range, if you will, from a door pressure standpoint.

And so we're going to continue to look to add service centers.

We've added 6 thus far.

We've probably got 1 or 2 more openings that in the fourth quarter.

And then looking out into next year, I would expect us to open a fair number of service centers as well.

If there is any kind of short-term lull then we've got to think about longer-term, not just managing to what short-term expectations and depreciation on the service centers doesn't really hit us too bad either.

And so those are things we believe in what our long-term capabilities are and we need to continue to invest, and certainly our return on invested capital has been very strong and supportive of our ability to want -- to continue to invest in ourselves.

Our next question is from Todd Fowler with KeyBanc Capital Markets.

Adam, on the salaries, wages and benefit line this quarter, you're coming in just below 51% of revenue.

Was there anything unusual either positive or negative from, like, a health care standpoint or anything we should think about?

Or can you continue to see some leverage on that as the employee productivity ramps and as you slow the headcount growth going forward?

Nothing unusual there.

On the benefit side, we typically give the -- our fringe cost as a percent of salaries and wages.

And that was 35% this quarter.

If you recall in the second quarter, it had trended down.

It was just around 33%.

And I think we commented that we expected it to trend north a little bit in the back half of the year, and it did.

So that was something that was kind of expected.

But I think that we continue with the strength of the revenue growth, we're getting tremendous leverage on our salaries cost, our clerical cost.

We're still seeing benefit on our productive labor cost as a percent of revenue as well.

And despite the 16% growth in headcount and maybe a little bit of lost productivity, I think that the support of the yield improvement and just the volume of revenue growth that we've had, certainly, allowed us to leverage most of our costs, everything primarily except for the operating supplies and expenses that were impacted by fuel.

Okay.

And then historically, if I go back in the model, maybe 5 or 6 years ago, that line item on a full year basis had been around 50% of revenue and it's drifted high over the past couple of years.

Structurally, as you think about the business, does that go back to roughly being 50% of revenue?

Or are there things that have changed within the composition of the workforce or benefits that makes that higher on kind of a run rate basis going forward?

Going back when it was back in sort of '12, '13 and '14, when it was below 50%, we were still outsourcing some of our line-haul runs particularly, from the Midwest to the Pacific Northwest, and to the Northeast.

And our purchase transportation was more in the 4.5% of revenue line.

So now that we're kind of in, just call it a 2.5% range, we've taken 200 basis points of PT and moved that up into salaries, wages and benefits as well as there were some of that PT cost that goes into depreciation and operating supplies and expenses as well.

So if you do a back of the envelope calculation, outsourcing may look like it's cheaper, but we believe that controlling the assets and controlling the service has been favorable for us, albeit, it may be a little bit more expensive.

Okay, that helps.

And just the last one that I had.

Greg you had made a comment that strategically coming into the third quarter, your thought that some of the heavier-weighted spot freight was going to go back to the truckload market at some point if capacity loosened.

I don't know if you have visibility.

I mean, can -- are you able to see, obviously, you've made some pricing decisions that's impacted your metrics.

But are you -- can you tell that has the truckload market loosened or some of that freight would be going back to the market had you not made those pricing decisions?

Just trying to get a sense of tightness or looseness in the truckload market in general and kind of the relationship between the spillover with truckload and LTL.

Todd, it does appear that it has loosened some.

The demand for our services on those shipments is not what it was.

Not back in peak periods by any means.

So it does appear to have loosened some.

Our next question is from Scott Group with Wolfe research.

It's Rob on for Scott.

When we're looking out to the fourth quarter, obviously, third quarter incremental margins were very strong.

It feels like there could be even additional upside given that we've got slowing headcount growth relative -- and a bigger spread or a similar spread between yield improvement versus kind of shipment growth.

How should we be thinking about kind of the incremental margins near term, in light of that deceleration in headcount growth and potentially uptick in productivity?

Rob, I don't know that -- we're, obviously, not going to comment and give any specifics, but I think, I generally or earlier, I was trying to generally say that certainly, we can continue to have some strong incremental margins.

And certainly, that is potential in the fourth quarter as well.

Because we wouldn't expect anything materially to change from a yield standpoint.

I think that we'll continue to see the strength there.

And revenue growth is continuing, as we said.

In October, it's at 15% and you know a lot -- I know it get sort of caught up in what the tonnage growth is versus just what the absolute level of revenue growth is.

But at 15% revenue growth, we're trending kind of above what our long-term average.

We've been able to grow the top line at about 12% to 13% when you look over various periods of time, whether that's going back to 2010 or even going all the way back to 1997 when we started putting this plan in place.

And that's been supported or it's been comprised rather of kind of 7% to 8% growth on the shipments.

And the balance in the yield kind of 4% to 5% there to make up that difference.

So I think, that we've got revenue growth that's continuing at a strong double-digit pace and probably more of that made up in yield right now even though we've still got strong shipment growth, just slightly below maybe what some of those long-term averages are.

So it certainly sets up to have what we believe could be a strong fourth quarter, and a really strong finish to the year.

That make sense and that actually segues nicely into my question.

Adam, in the last couple of calls you've been talking quite a bit in terms of the fuel component of pricing.

With regard to your fuel surcharges, are you now where you want to be, kind of across your customer base as we leave third quarter '18, or is there still more opportunities to kind of make some adjustments there?

Yes, we -- I think fuel has remained -- it's increased, but it's remained relatively consistent this year, which is a good thing.

I mean, it's increased a little bit sequentially.

It probably started the year at about $3 a gallon on average in the third quarter, it was about $3.25.

We had some customers that we've addressed the overall yield.

And the point I was making earlier, there's multiple elements of -- to yield improvement that may have had a lower contractual fuel table.

And so we've made some adjustments in certain places versus trading all fuel versus a base rate increase.

So I think, it all kind of goes into the ball of wax that has been our yield improvement over the year.

Got it.

And -- but from a all-in basis, do you feel like that's where it should be?

Or is there more opportunities net-net to kind of strengthen and drive it to similar levels of what we've been seeing recently?

Yes, I think that where we are now, I don't know that there's many contracts left to -- that need to be addressed.

And just depending on where fuel prices stay, if we stay in a fairly consistent band from where we are and maybe where we've even been, if you recall, I think it was '16 when the prices declined, and we waited to go back to our customers and address those when it was on the lower part of the scale.

But certainly, we try to look then at all elements of the scale and whether it's fuel prices being on the lower end or even north of where they are now to make sure that we're paid appropriately for the cost.

Because when fuel cost goes up, it's not just the cost of diesel fuel that we face, there's lot of indirect impact in our total cost structure we get it through in many petroleum-based products that we use.

And so we see cost inflation and other elements just outside of the raw cost of diesel fuel.

We will take our next question from Matt Brooklier with Buckingham Research.

Adam, do you have a service center account for the end of third quarter?

We're at 234.

And this year is going to be a growth year in terms of investment as we're looking out to '19, do you have a sense for directionally where total CapEx could end up?

We haven't finalized that at this point.

We're starting now to -- this is typically time of the year where we start doing our planning out for 2019.

But to my point earlier, I think that we would anticipate having another healthy year of real estate CapEx for sure.

Our next question is from Ravi Shanker with Morgan Stanley.

Just couple of follow-ups here.

Just on the OR front, I was little surprised to hear the commentary earlier in the call that even if we get a slowdown next year, you expected the OR to kind of remain, if not in the 70s or kind of at current level-ish.

Given that typically in slowdowns we see customers become more price focused versus service.

What gives you that confidence that you can kind of retain OR's current levels.

Is it on the cost side?

Is it on the service side?

Where do you think that sustainability lies?

Ravi, I think, we do have some opportunities on the cost side to make some improvements for sure.

We've been in a dead run this year for most of the year.

So I think, you can equate a lot of what we do.

And if you think about where we've been, you could see that there are some opportunities there.

So we certainly hope so.

But the economics that we work in, the economy and whatnot certainly drive our pricing and drive a lot of what we do.

So we're just going to have to wait and see.

But we do think we have some opportunities within our network to make some improvements.

And if the economy holds, then we certainly think we can improve even at a slower growth rate.

Okay, understood.

And just to clarify something you said earlier, did you say that you have about 15% spare capacity right now?

I believe that number historically has been about 25%.

Yes, that's about where we are right now.

And there is no exact science to calculating it.

It's sort of between 15% to 20%, but probably on the lower end of that range.

And you're right, we historically, we kind of try to target about 25% excess capacity within the service and the network.

Okay, got it.

And just lastly, there's been this prevailing narrative about LTLs in general kind of benefiting from e-commerce.

Can you just give us an update on that?

What growth are you seeing on the e-commerce side?

What percent of your tonnage comes from e-commerce?

And probably more importantly, are you seeing any kind of mix shift in your tonnage base, which I think has historically been more industrial-focused towards consumer?

Ravi, it's hard to say what's necessarily coming from e-commerce.

I think we need to talk more generically in terms of our retail.

And every retailer needs to have some type of e-commerce presence.

And -- but we do believe that we'll continue to see trends of smaller shipment sizes for retailers and that should push freight into the LTL environment.

Certainly, it's not something that's happening overnight, but it's happening.

In addition, many retailers have got these on-time, in full programs, which not only is good for LTL, but it's good for high service LTL carriers.

And we've been able to grow our market share there.

As a result in this most recent quarter, our retail-oriented customers are growing between 25% and 30% and that's probably a little bit faster than our industrial-oriented customers, if you will, that are growing sort of in an 18% to 20% range.

And historically, we had been about 60% industrial and about 25% retail.

And industrial's staying about the same, but retail is probably picking up a couple of points, if you will and is moving a little bit higher.

But I think, industrial-related freight certainly continues to drive not only our business, but it's typically highly correlated with LTL business in general.

Our next question is from Ben Hartford with Baird.

Adam, any change on kind of the 30 service center accounts plus or minus longer-term that you've been talking about?

No, I think it's -- we've probably lately been seeing more in the 40-ish-type range.

And that's one of those things that will probably consistently change.

The reality is, we think we know what we want our service center base to be as we continue to grow the company.

But sometimes we find out that maybe having more service centers, particularly in a metro area makes more sense from an efficiency standpoint.

But I think we're in pretty good shape now as -- we've got -- we're in the process of developing a plan for next year.

And I'd like to see a little bit more investment there.

It'd be nice if we could find existing service centers, but it seems like we've got to find more at this point land and then building out, which takes a little bit longer.

And that's why over the last few years, our service center count growth has slowed a little bit.

But we're in good shape.

I think we've got a good plan and we'll be reinforcing that long-term real estate plan here shortly as we start going through our annual strategic planning session in the fourth quarter.

Your cash balance particularly at quarter-end has risen in recent quarters.

As you think about the balance sheet as you -- in the context of OR having doubled the cycle with line of sight to continued improvement, presumably, do you think about the cash management and leverage ratios a little more differently?

In other words, you've got more sustainable underlying free cash flow base with the margin profile higher.

And as you start to have a line of sight to some of the land or real estate needs, do you look at cash management a little bit more progressively?

And is there opportunity at minimum to take some of the cash levels down that you've seen rise over the past year or so?

Yes, our cash balance really rose when we took the year off of buying shares on that repurchase program.

And it's -- we've had probably little increase this year, but we'd like to target being able to spend our operating cash flow into capital expenditures and then returning capital to shareholders.

And so with our share price at lower levels now typically the way our repurchase program works, we're buying more shares.

And so maybe we'll use a little bit of extra cash in that regard.

But we'll continue to look at and go down the capital allocation priority scale.

And the first is certainly reinvesting in ourselves.

And many of these service centers that we're looking at, particularly in areas like California and so forth, are going to be more expensive for the land component than we've faced in the past.

So that will certainly be one use and when we go down the spectrum and end with returning capital to shareholders, and we'll continue to evaluate ways that maybe we can increase that as well.

And there are no additional phone questions at this time.

I would like to turn the conference back to David Congdon for any additional or closing remarks.

Thank you all for your participation and questions today.

Feel free to call us if you have anything further.

Thank you very much, and have a great day.