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Operator
Good day, ladies and gentlemen, and welcome to the Overnite Corp. Q2 2004 earnings conference call. My name is Rachel and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session toward the end of today's conference.
(OPERATOR INSTRUCTIONS).
I would now like to turn the presentation over to your host for today's call, Mr. Paul Hoelting, Vice President, Treasurer, and Financial Planning for Overnite Corp. Please proceed, sir.
Paul Hoelting - VP, Treasurer, Fin. Planning
Good morning and welcome to Overnite's second quarter 2004 earnings call. With us today are Leo Suggs, Chairman and President and CEO; and Pat Hanley, our Senior Vice President of Finance and Chief Financial Officer.
Our comments today contain forward-looking statements, including projections of future results and are made only as of today's date. These forward-looking statements are based on our current expectations and assumptions but are subject to risk and uncertainties. Please refer to the Safe Harbor provision at the end of our press release for a view of some of the factors that could cause our actual results to differ materially from our projections.
In addition, our comments today includes certain non GAAP financial measures. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP measures can be found on our earnings press release. If you don't have a press release a copy is available on our web site at OVNT.com.
Leo Suggs and Pat Hanley will provide our comments this morning, followed by a Q&A session.
With that I'll turn the call over to our Chairman, Leo Suggs.
Leo Suggs - Chairman, President and CEO
Good morning and let add my welcome. I'm pleased to report that our earnings were better than expected. We had a strong finish to the second quarter and we earned 60 cents per share versus 38 cents last year on a pro forma basis. This represents an increase of about 58 percent.
The tonnage growth was about 30 percent higher than last year. We attributed the majority of this growth to the economy as well as some share gains and industry consolidation. The tonnage growth enabled us to leverage our infrastructure and our fixed costs to improve our operating ratio by almost 2 points in the second quarter vs. last year on a pro forma basis.
I'm also very optimistic about the current pricing environment. Mix adjusted to LTL prices index also improved each month during the quarter and ended up being about 4 percent higher than last year. Pat will discuss price in more detail later on in the call. We also ended the quarter by continuing to improve our balance sheet. Our cash balance was over 36 million compared to only about 11 million at the end of the second -- at the end of 2003 despite the fact that we contributed 25 million to our pension fund. We paid down our long-term debt by about $3 million in the quarter.
In summary I have been in this business for over 40 years and I can count on one hand and maybe even one finger certainly since deregulation the number of times our industry has been able to grow in double digits and realized solid price increases in a given year. It's truly been an extraordinary year thus far. And I hope to see the same for the remainder of the year. Certainly, we need to see continued sustained economic growth.
I'd like to thank each one of you for joining us today and now I'll turn it over to Pat, Pat Hanley, our CFO. He will take you through the financial results. To you, Pat.
Pat Hanley - SVP, Finance and CFO
Thank you Leo. Good morning folks. I want to remind every one that my comments today comparing results to prior periods will be on a pro forma basis as if we were a standalone company in both periods. This makes the numbers more comparable. Detailed pro forma adjustments are available in our press release. With that said let’s discuss the financial results in more detail.
Our operating revenue for the quarter was 418.5 million, an increase of 46 5 or 12 1/2 percent from the 372 million in the second quarter of 2003. And as Leo mentioned, tonnage was up 13.4 percent. Our operating income was 29.2 million versus 19.2 million last year which was an increase of 52.1 percent.
Our operating ratio was 93.0 versus 94.8 last year, an improvement of 1.8 points. Our net income was 16.8 million in the second quarter versus 10.6 million last year, which was an increase of 58.5 percent. This equates to earnings per share on a fully diluted basis of 60 cents for the second quarter of '04 versus 38 cents last year.
Now let's look at the expense side. Our expense growth was 10.4 percent substantially below our revenue growth of 2 to 12.5 and our tonnage growth of 13 4.
There are three line items that are probably worth noting. Supplies and expense were up 6.9 or 22.6 percent. Fuel expense accounted for 5.1 million of this increase and if you exclude fuel, supplies and expenses were only up 1.8 million or 5.9 percent. Rents and purchase trends were up 19.6 which given our flexibility, we really should think of rents and purchase trends as being part of salary wages, and benefits. And if you combine the two, salary wages and benefits and purchase trends, you'll see that the combined increase was 10 percent -- still significantly less than our revenue and tonnage growth.
The only other item of note is in our other expenses which were up 22.6 percent. The increase is really attributable to some good news and favorable adjustments we've made to bad debt expenses last year when we brought down our day sales outstanding significantly. Excluding the adjustments we made last year other expenses would've been less up -- less than 9 percent.
Our net capital expenditures for the quarter were 9.1 million compared to 16.1 million last year. For the first six months of this year, our net capital expenditures have aggregated 14.8 million versus 27 million last year.
This is purely a timing issue. We previously indicated we intended to spend as much as 85 million in 2004 depending upon what type of tonnage growth we experienced during the year. Since our tonnage growth in the second quarter was even higher than the first quarter's tonnage growth, the 85 million we previously forecasted as the high end is what we're currently forecasting for 2004.
As Leo mentioned earlier, our balance sheet is in very good shape. Our cash balance at the end of the year was 36.8 million versus 11 1 at the -- at year-end. During the first six months of the year, we paid down 7.2 million of our debt and we contributed 25 million to our pension plan.
As previously stated, we intend to contribute a total of 30 million to our pension plans this year. Thus, we only have 5 million left for the remainder of 2004.
Now I'd like to talk a little bit about freight mix and yield. As mentioned earlier, our revenue was up 12.5 percent while our tonnage was up 13.4 percent. Our LTL revenue per hundredweight, excluding fuel surcharge, was 1467 for the burst quarter of 2004 versus 1493 last year. The LTL rate factor was 15.45 versus 15.42 last year.
On the surface it appears our rates were down 1.7 percent. However, as we discussed during our first quarter conference call, the rate factor is not an accurate measurement for yield, if the freight mix is changed year-over-year and ours certainly has. Our overnight weight for LTL shipment was up 78 pounds or 8.9 percent. By the way that's 2.2 percentage points higher than it was in the first quarter when it was up about 6.9.
In addition the average class of our freight at Overnite was up -- at Overnite Transportation was up about 1 1/2 points from 77 1.2 to 79.
Finally we saw our average length on the whole decreased 1.8 percent. All three of these factors negatively impact the revenue per hundredweight factor.
As we previously stated the mix change to the economy, the loss of small high-class shipments from one of our largest customers, and a conservative effort on our part to target more industrial freight is what's driving this change.
If you adjust for the increases in our average weight for shipment, lower class and shorter length of haul, our mix adjusted LTL pricing mix was up about 4 percent and it strengthened all throughout the quarter.
Now let's take a look at third quarter and full year earnings guidance. We are projecting on a fully diluted basis to have our earnings for the third quarter to be between 75 and 80 cents per share. And our earnings per share projections for the full year is now between $2.15 and $2.25. Our assumptions are contingent upon sustained economic growth, and the continued favorable pricing environment that we are seeing today.
That concludes our comments and with that we will open it up to questions.
Operator
(OPERATOR INSTRUCTIONS) Ken Hechter of Merrill Lynch.
Ken Hechter - Analyst
Nice to see on the (indiscernible) increased targets, on your volume closing can you talk a bit about how it flowed through the quarter? Are you seeing accelerating growth through the quarter? Can you give us a month by month look and also some technical questions for Pat. Can you give us the number of employees and number of gallons used and average price per gallon?
Pat Hanley - SVP, Finance and CFO
Ken, the tonnage just because of the way the weeks fell was up and down but we actually saw fairly strong volumes all throughout the quarter. In terms of your second question, was the gallons -- .
Paul Hoelting - VP, Treasurer, Fin. Planning
16 million versus 15.
Pat Hanley - SVP, Finance and CFO
Did you hear that 16 million versus 15 in terms of absolute gallons used?
Ken Hechter - Analyst
Yes.
Pat Hanley - SVP, Finance and CFO
And what was the last portion of (MULTIPLE SPEAKERS)
Ken Hechter Number of employees?
Pat Hanley - SVP, Finance and CFO
Employees is up about 600 people.
Ken Hechter - Analyst
And then just, Leo, you talked a couple months ago about capacity being at 90 percent or greater than that. Can you kind of walk us through how that's looking? You talked about CapEx being at the high end. Is that getting to be a struggle for you as you get this level of volume growth or what do you need to do? Is it just additional tractors and trailers or at some point do you have to add more brick and mortar?
Leo Suggs - Chairman, President and CEO
Ken we do have some construction plans that are in progress right now. They won't come on board until the end of the year. What you end up doing in a situation like this as far as bricks and mortar you can articulate your freight movement plan to some degree to prevent capacity issues. I think we're still in good shape on capacity. I would say that, given our opportunities to utilize substitute service when necessary and given the new rolling stock we're bringing on board, I think we're still around -- I think we could still take on 10 percent more business without really affecting, negatively affecting our service.
As far as power equipment is concerned, for the whole corporation, when you include 175 lease units that we're using in our truckload division we're going to bring home close to 700 new tractors this year.
Pat Hanley - SVP, Finance and CFO
Ken I might add that we're bringing that equipment on right now. So we added 100 units in June, we added another 130 in July and another 140 in August. So we're gearing up for what as you know September and October are the strongest periods generally in our industry. So we're gearing up to have the equipment on hand for that surge of business.
Ken Hechter - Analyst
I'm sorry something Leo said it just popped into my head if I can toss another question to Leo? Now that you've got the court might throw out the hours of service rules is there any risk to some of that significant truckload business that is coming your way disappearing?
Leo Suggs - Chairman, President and CEO
Nobody knows what's going to happen to the hours of service. I personally don't think it will ever revert back to the old rules. I think that, certainly, what we end up with is likely to even be more restrictive than what was put in as the solution. So I would be very surprised if we ended up with a hours of service that as an example did away with running the continuous 14 hours. I think what we end up with could be more restrictive than what we have under the new plan. I don't think it will be negative though.
Operator
James Valentine of Morgan Stanley.
Chad Bruso - Analyst
Chad Bruso, actually. Quick question on the length of haul. I believe in the past you've mentioned a lot of the market share gains were coming in the longer length of haul lanes and I think Leo said that again this morning. But yet the length of haul declined 2 percent year-over-year. I was wondering if you could just help us reconcile those two?
Leo Suggs - Chairman, President and CEO
Yes, actually, it was the interregional, the 500 to 1200 miles, that grew the least that probably diluted the overall because in our regional business, at Overnite, we saw about a 9 percent on the LTL side and on the long haul a 9.7 percent in that interregional only 7.1 percent. Here again just in the LTL agreement so we still saw the greatest growth in -- for the quarter in the long haul segment but the regional business was up a bit. Also pulled down the -- almost as much pulled down the overall length of haul.
Chad Bruso - Analyst
What do you think is driving that trend in the interregional business?
Leo Suggs - Chairman, President and CEO
I really think it was just the fact that we are continuing to see strong growth in the long haul and it was a very good quarter. Of course, our numbers weren't exactly quantified but certainly consolidation took place in the Northeast, probably gave us a little shot in the arm.
Chad Bruso - Analyst
Just one last one on tonnage. What type tonnage increases are you expecting in the 215 to 225 guidance for the rest of this year?
Pat Hanley - SVP, Finance and CFO
We're still looking and I am going to go back to revenue for a second. We are still looking for load double-digit revenues. My assumption on tonnage is we'll still see somewhere between the 8 1/2 to 9 percent in terms of tonnage and just a little color on that regional, interregional long haul. You asked about the interregional I would tell you the surprise to us was really how will the regional did versus the interregional. We expected to have 579 when we started off the year and we're doing exactly sort of what we expected to do in the interregional. It's the regional that has done so much better.
Operator
Scott Flower (ph) Smith Barney Citigroup.
Scott Flower - Analyst
Wonder if I could get some color on a couple of things. In the longer haul lanes -- and you gave us some data on how well that is growing -- are you finding that your offering is getting receptivity from customers of some of the nationals and what's going on from a consolidation perspective there. What's driving that in your view? Is it that you've been successful in (indiscernible) how you positioned your offer relative to the others in the marketplace?
Leo Suggs - Chairman, President and CEO
I don't think it's -- certainly it's difficult to tell exactly who the share's coming from when you look at it. As an example Yellow's growth is pretty obvious -- there's been some concern. It's pretty obvious they're not losing share at this point. I would say the probably most of the longer haul growth that we have enjoyed rather than find there's any specific company has been more tied to existing Overnite customers who were giving us either their regional business or possibly their interregional business, and now that we have our network complete they're also allowing us to participate in longer haul business.
Scott Flower - Analyst
Okay and then also wondering, one of the focuses that you all have drilled down on is looking at the local accounts and trying to build that out and targeting the field sales forces. Then you give us some kind of an update on how that is going and what your progress is in that regard?
Leo Suggs - Chairman, President and CEO
We're making good progress. We are seeing faster growth from the local accounts. I'm not in the office today. Pat do you have the numbers, specifically, that indicate the local growth versus the national growth?
Pat Hanley - SVP, Finance and CFO
Yes. Scott, if you look at -- our game plan remember was to grow sort of 1/2 point to 1 point faster in local versus marketing national. I should say since we increased the share of local by 1/2 point to 1 point and I have to tell you that we're over a point is what we are is what we're doing right now. So that program is doing very well and we've added some more sales books to focus on that local growth and it's definitely working.
Scott Flower - Analyst
And then just two last questions that tied together. Wondered if I could get some sense as to, are all regions as you look across your network in the country performing about the same or certain regions stronger from a tonnage standpoint and obviously related to tonnage growth I take it that the GRI you put in and your promise on pricing is that that has been readily accepted by the customer base.
Leo Suggs - Chairman, President and CEO
Your first question with regard to the regional breakdown, on outbound business, our strongest two regions of the country continue to be the West and the Central. Just to give you some perspective of my total standpoint of the LTL, second quarter '04 versus '03. We are looking at over 16 1/2 percent growth in the West. So that's still the strongest one and followed by a 12 1/2 in the Central so those are the 2 strongest areas of the country.
And what was a second part that question? (MULTIPLE SPEAKERS)
The rate increases?
Scott Flower - Analyst
That the GRI has been readily accepted given the way the capacity environment is in the LTL business.
Leo Suggs - Chairman, President and CEO
Yes. It has.
Operator
Greg Burns of J.P. Morgan.
Greg Burns - Analyst
Very strong quarter. Obviously. Wanted to, Leo, just clarify the comments on to regions because I would thought Northeast would be your strongest. Given Red Star and it sounds like it wasn't. How much business -- is it possible to quantify what business you took there and, then, I guess as correlated with that assuming Freightways moves back in with their Holland subsidiary could you see some of that business go back?
Leo Suggs - Chairman, President and CEO
We really didn't take on a lot of Red Star business in the Northeast. We have a philosophy that says that you project (ph) capacity for your existing customers. So, certainly, we had some existing customers that may have not used us in the Northeast but you're right. Red Star business was not a windfall for Overnite in the Northeast. Pat, I think you may have some specific numbers. I thought I had them here but I don't see them.
Pat Hanley - SVP, Finance and CFO
What I was going to tell you, Greg, is Leo quoted you the Central and the West and they've been our strongest growing areas all year long. We did get stronger in the Northeast in the second quarter and we measure both outbound and inbound revenue and where we saw our greatest gains into the Northeast was in inbound as opposed to outbound revenue and that is up about 2, 2 1/2, to 3 percent versus where we were running prior to the advent of Red Star going out of business.
Greg Burns - Analyst
That's really helpful. Leo, on price. It sounds like pricing accelerated in the quarter and I guess, historically, we've seen the industry go out with a list price and then that list has been steadily discounted throughout the year. Do you see the same sort of thing happening. I guess I am trying to understand is are contracts that come up in July getting higher prices than contracts that came up in, say, April or is pricing going up for you guys because essentially you are repricing a book at higher prices? In other words is the day-to-day price going up? Or is it just a function of as your book rolls over?
Leo Suggs - Chairman, President and CEO
It's more or less as your book rolls over. Because while I think there's a pretty strong bright pricing environment out there today, you price every account individually, based on its contribution. And certainly to the extent that you have any customers who are not paying their way when their contracts come up but you try to adjust that and the stronger the economy in the business levels, the more risk you can take. But the ones that really vary are the ones at kind of the bottom end of the totem pole. When business is strong you'll take risks with customers who don't have significant contribution to profit.
Greg Burns - Analyst
One follow-up question, Pat. Any idea or preliminary CapEx for '05?
Pat Hanley - SVP, Finance and CFO
No, we really haven't focused in on that yet, although I will share with you one thing we will be considering as we look forward is, 2007 isn't that far away. And this is the issue on the new emissions requirements. So as we go through our planning for next year, the following year we are going to look to see what if anything we want to do in anticipation of those changes.
Leo Suggs - Chairman, President and CEO
I would add one thing to the answer and that is that while we have indicated before that we have our national footprint complete and we are not out looking for a lot of major acquisitions along the scale of the Motor Cargo, we did recently add an officer level position within our Company, a vice president of corporate development. And certainly he's going to be looking at the alternatives from a standpoint of capital expenditures, paying down debt, possible acquisitions of some level or new business opportunities.
Pat Hanley - SVP, Finance and CFO
Yes Leo. Glad that you brought that up. I guess the other thing we should tell everyone on the line we said all along, we thought our free cash flow this year was going to be around 40 million. We are now suggesting that as we look at it is, it's going to be 50 million and that's after increasing our capital expenditures this year to 85 million. So point being, while we certainly want to reduce our debt somewhat there are better alternatives for our shareholders and we want to make sure we're looking at those.
Operator
(OPERATOR INSTRUCTIONS) Mark Rosa of Thompson Davis.
Mark Rosa - Analyst
What was the mix between Motor Cargo and LTL revenues in the quarter?
Pat Hanley - SVP, Finance and CFO
The mix between Motor Cargo in terms of absolute revenue? Is that what you're asking?
Mark Rosa - Analyst
Yes.
Pat Hanley - SVP, Finance and CFO
Their revenue is about -- hold on. 46 million -- of the 2004 quarter Motor Cargo represented 46 million.
Mark Rosa - Analyst
Fourth quarter would drop off if you backed it out from your guidance. Are there any assumptions other than seasonality in these estimates? Is there anything unusual last year in the increase of salary in wages?
Leo Suggs - Chairman, President and CEO
I think if you look at the fourth quarter of last year we had a pretty strong fourth quarter. So I think when you look at -- we're certainly expecting normal seasonality this year compared to previous years but we're also lapping (ph) a year that was pretty strong last year.
Mark Rosa - Analyst
And is there anything unsustainable about the 93 percent operating ratio that you had in the quarter?
Leo Suggs - Chairman, President and CEO
Anything unsustainable?
Mark Rosa - Analyst
Yes.
Leo Suggs - Chairman, President and CEO
I think that certainly we have made steady progress in continuing to improve our operating ratio. I think the thing that has been the key for Overnite as well as the industry in total has been the fact that we have had strong revenue growth and with strong revenue growth, you have a lot of cost opportunities and extraordinary opportunities to improve your operating ratio. Certainly to the extent that we can continue with a strong economy. We think that we can continue to maintain a very good operating ratio and continue to make improvements. But I think the business levels in the economy are probably the greatest single factor that will influence that.
Mark Rosa - Analyst
And have you seen this growth continue so far in July?
Leo Suggs - Chairman, President and CEO
So far, yes.
Operator
Edward Wolfe, Bear Stearns.
Edward Wolfe - Analyst
Leo just a follow-up there in July, have you seen any slowdown in retail or any other consumer ends? We've seen some data that's shown that.
Leo Suggs - Chairman, President and CEO
Well we -- typically so much of the business comes on at the end of the month here lately that I think that will really be the key to the month is what do you do in the last week of the month which is the week we're in right now. So from an overall standpoint, I'd say it still looks pretty good, wouldn't you, Pat?
Pat Hanley - SVP, Finance and CFO
Yes I would and Ed as we look at this week, this week is doing exactly what we would have expected it to do.
Edward Wolfe - Analyst
Are there any verticals that are doing better in its manufacturing, doing better than retail? Or is everything kind of feeling the same?
Pat Hanley - SVP, Finance and CFO
Right now I would have to say they're all feeling the same -- it's a little early for us to tell you as Leo was indicating to do the analysis to tell you that the pieces we really need to finish the week.
Leo Suggs - Chairman, President and CEO
And we do both of that analyses after the close of the month.
Edward Wolfe - Analyst
We look back over the quarter and you look at the different lanes as the long hauls and regionals are reporting it seems like yields are firmer for the long haul market but, again, all the regionals seem to be seeing a big uptick in weight because of some of the hours of service stuff in the economy getting better. Does pricing feel better to you in the longer markets? Is the consolidation there really starting to impact those markets or is it equally firm in the regional next day markets?
Leo Suggs - Chairman, President and CEO
I would say that you probably have always had more competition from the regional and next day markets because you've got so many niche carriers and I just think that it's a matter of supply and demand. And the more you stretch it out the less competition you got. That's what I would equate it to.
Edward Wolfe - Analyst
And is that changing directionally if you looked out six months from now would you think from where we are right now one market would be firmer in pricing than another?
Leo Suggs - Chairman, President and CEO
You never know. Here again it's on an account by account basis but I expect the next day and regional markets to continue to be the competitive from a rate standpoint of any markets.
Edward Wolfe - Analyst
Have you seen evidence in the marketplace of either customers leaving the Yellow Roadway or Yellow Roadway improving their -- particularly to pricing strategy?
Leo Suggs - Chairman, President and CEO
No.
Edward Wolfe - Analyst
Neither either way?
Leo Suggs - Chairman, President and CEO
Neither either way. As I commented earlier and in previous discussions, I think most of the what I would consider share gains for us is gaining business from existing customers who did not use Overnite in the long haul markets before. It's just really tough to tell. Most customers use multiple carriers and to identify that, hey we've taken this business from carrier ABC, it's hard today. About the only time you can do that is if you submit a bid on a large chunk of national accounts business that you didn't handle before and it was dominated by someone else. We really haven't seen those type customers come on board for us because here again, I think in our national account bidding, our focus has been on maintaining current customers and growing with the local accounts.
Edward Wolfe - Analyst
And when you discussed, you mentioned before acquisitions and hiring somebody and you are getting to the point where your net income is equally in your CapEx just about so you're going to throw off a lot of cash going forward in any environment, I would guess. What kinds of acquisitions are you thinking? Are you strictly thinking about talking LTL or would you look at truckloads or some kind of logistics or ancillary acquisitions?
Leo Suggs - Chairman, President and CEO
It's too early to say. Here again that's why we hired this fellow. We would certainly like to provide as much of a bundling portfolio to our customers as possible. So we are looking at this individual, we will be looking at any and all of the above. But we really don't have anything planned at the present time that says we really want to zero in on this. We're just really beginning in this process to try to determine where are the opportunities to increase our value to the customers.
Edward Wolfe - Analyst
Maybe you can buy a railroad one day. When you look at fuel which we keep thinking is going to go down but doesn't seem to ever go down, does there come a point where you can't pass it through as well as an industry as you've done it? Are you getting any pushback now with diesel going up every day?
Leo Suggs - Chairman, President and CEO
Well -- it's a tough bill for everybody to swallow. And I really can't say. If it went to $4 a gallon I guess it would be maybe a more difficult issue than it is today, but I think this is one of those items that has been isolated in our industry for years and years and years. And I think customers recognize that this is the way we price our services. So I think customers have been fairly receptive. They didn't like it but they understand it because this is the way we've done it for many years. I really don't know if there is a tolerance limit.
Edward Wolfe - Analyst
You haven't hit it yet, it sounds like.
Leo Suggs - Chairman, President and CEO
No I don't think so.
Operator
Scott Flower of Smith Barney Citigroup.
Scott Flower - Analyst
Just one follow-up and this is really a big picture question and I don't know that it has a specific answer but I know Leo that you had mentioned in your opening comments and obviously you've seen this industry for a lot of years and a lot of cycles that it's perhaps the best environment you've seen. I was wondering what and I am not saying you're seeing it now but what do you look for where that might change? Obviously, your pricing is so good do you start to see more of the niche carrier getting capacity and again I am not saying it's happening today but you've seen this long enough that people are making tremendous free cash and sizable gains in pricing. At some juncture do people start adding capacity? Where does that come from? Or has the industry changed enough through consolidation and some of the weaker carriers falling off that it truly in your view will be different as you look through the cycle? I am just wondering what do you look for for how the pricing environment may or may not change or is it going to be status quo for a good while here?
Leo Suggs - Chairman, President and CEO
Scott I really don't -- I guess I'm a little different maybe from some folks but I don't see that the pricing environment is that much of a windfall today. I think the windfall is the growth in the economy. Certainly, if the national economic growth slows down, I think that you're going to see a situation where cyclicals such as LTL trucking industry slow down in their private gains. But as far as pricing is concerned, I think you have -- as I said I think you have some customers who are very marginal. And they are the ones that really get impacted in a supply and demand issue. But if you've got a customer who is giving you that is profitable to handle gosh, you're not going to risk that business by giving them an extraordinary rate increase.
So I think the success of the industry is more geared to the economy and to getting the poorest 10 percent of the customers up into the acceptable level during this period of time.
So that's kind of my picture of the situation. Does that answer your question?
Scott Flower - Analyst
Yes and then just 1 cycle up. You are being disciplined and how you're running the Company in this environment but do you look for different finds where, again, your focus is on the volume side and the economy, where people start to add too much capacity. In other words, start to believe that, gee, we're going to have this kind of tonnage growth and they start to extrapolate and get too heady and is there any way you look at that when you look at the sector. Because obviously if capacity gets out of kilter with the rate of change in volume, that's where, obviously, the industry may have more difficulties.
Leo Suggs - Chairman, President and CEO
I guess that can happen. I think there are some issues out there. One issue, of course, being the availability of drivers and, certainly, some of the niche folks that might think about expanding their territory usually are some of the ones that have the lower wage rates or lesser benefits so their drivers could possibly be an issue in this regard. I read things that indicate that the truckload segment of the industry is not adding a lot of capacity because of the driver situation.
So could it happen? Yes I guess it could. Do I expect a big insurgency of expansion? No, not really. I expect to see some more consolidation. You may have some people adding onto their authority by buying others but I really don't think what we're seeing today as far as the strong economy and the improved earnings I don't expect that to trigger an expansion that would result in substantial overcapacity this time next year.
Operator
David Campbell of Thompson (technical difficulty) Company.
David Campbell - Analyst
David Campbell from Thomson News. You said that the employees went up 600 people -- was that compared to what? Was that a year ago, the fourth quarter?
Pat Hanley - SVP, Finance and CFO
That was our full-time equivalent this quarter versus last year's quarter.
Leo Suggs - Chairman, President and CEO
You got the numbers, too, don't you Pat?
Pat Hanley - SVP, Finance and CFO
Yes.
David Campbell - Analyst
What are the numbers?
Leo Suggs - Chairman, President and CEO
14 860 versus 14 287.
David Campbell - Analyst
14 860 versus 14 287.
Leo Suggs - Chairman, President and CEO
Right.
David Campbell - Analyst
And second question is, last year's fourth quarter had a big increase in salaries and wages versus the third and versus a year -- 2002. Is that what makes the fourth quarter -- I mean will that be happening again this year -- is that what makes the fourth quarter so much less than the third?
Pat Hanley - SVP, Finance and CFO
You talking in terms of earnings?
David Campbell - Analyst
I am just talking about the -- yeah, well, I am talking about earnings at the bottom line but I'm talking about the cause of that. Is it the salaries and wages lines going up so much?
Paul Hoelting - VP, Treasurer, Fin. Planning
It's really traditional pieces what we look at in the fourth quarter is the fall off in the business and it's a question of how quickly it falls off. December normally is -- through Thanksgiving and into December it starts falling off. And that's your issue. And you don't know exactly how that occurs so generally in our industry we probably have a slightly higher salary and wages hitting us as we try to gear down the volumes coming down. I think that's an industry phenomenon so those are probably the things that you normally see and, again, if you look at the third quarter, the third quarter is always the peak in our industry. So if you look at the revenue and the tonnage per day September followed by October, the strongest months throughout the year. And they fall off in September and dramatically in December.
David Campbell - Analyst
But third to fourth quarters you wouldn't expect like a 6 percent increase or 7 percent increase in labor costs, would you, from the third to the fourth quarter? (MULTIPLE SPEAKERS)
Pat Hanley - SVP, Finance and CFO
No, you should not.
Leo Suggs - Chairman, President and CEO
Now there is some of that that's a little misleading because some of the labor costs during the peak periods of time shows up as an example as purchase transportation where we have, in order to extend our capacity, we use purchase transportation. You use less of that, certainly, towards the end of the fourth quarter. The other thing that you have that shows up in the fourth quarter is wages affected, during that quarter you got three holidays. And the holidays are expensed in the month in which they occur. So that exacerbates it a little bit. That in itself three holidays and that period of time represents about almost 5 percent of your wage cost.
Operator
John Barnes, Credit Suisse First Boston.
John Barnes - Analyst
Leo, every company that we've listened to, earnings so far this quarter has seen saying pretty significant volume gains and they've all talked about market share gains and I am just curious. I know the economy is benefiting everybody and you're seeing that. But where is the market share gain coming from? And I know where it's coming from for you I mean existing customers -- that makes a lot of sense to me and it's showing up in your numbers but if everybody is talking about market share gains can you really pick out a discernible market share shift in the industry? Or as this more everybody is benefiting from an improvement in the economy?
Leo Suggs - Chairman, President and CEO
I think everybody, John, certainly is benefiting from an improvement in the economy. And it's a thing that's really hard to put your finger on. I think it's made up of a number of little pieces, I think certainly the change in hours of service has created some market share gains that the freight that used to go on truckload stop outs. I think the -- I think the continued expansion of things like Expedite and Guaranteed and these sorts of things has probably taken a little share from the airfreight industry. So I think it's the little bits and pieces but you are absolutely right. Within the core LTL segments, everybody can't have share gains.
John Barnes - Analyst
So it seems like it's more picking up freight from other sectors versus actual big market share shift among the players in LTL?
Leo Suggs - Chairman, President and CEO
Yes with the exception of CF that occurred a long time ago and Red Star that was a fairly small player that recently closed its stores, I don't know of any prominent companies or any prominent company that have have reported share losses. I think in the case of Overnite, we can, in fact identify that we have some share gains particularly in the long haul segment because this was a place that we didn't have a nationwide footprint up until that was really put in place and completed up until -- in the last 18 months is what we're really got everything in place. So we can quantify specific market gains in the long haul market.
But your question is an excellent question. And I would say from an industry perspective that, certainly, that the economy is playing a much bigger part than share gain.
Pat Hanley - SVP, Finance and CFO
I would like to just add on that in terms of looking at the regional interregional long haul, we gave you the growth in each. We are seeing stronger growth in regional and on here, I will follow it up by, traditionally, when we look at our local customers versus what we call our marketing national customers, we used to see that our local customers had much stronger length of haul with anywhere from 70 to 100 miles longer. But what we're seeing now is that differential is shrinking, which sort of indicate to you that we are on -- our local customers selling them both our long haul products and our regional products.
John Barnes - Analyst
Leo, is the majority of the share gain is coming at the expense of other sectors. First of all in your view how long can that continue? And then more importantly if that begins to dissipate are you fearful at all that the remaining LTL players, that there's somebody out there that does something stupid on pricing. You are enjoying -- the industry as a whole is enjoying very very good pricing and I mean is there anybody out there that worries you about maybe changing their philosophy and deciding to buy market share?
Leo Suggs - Chairman, President and CEO
That's always a concern. Over the years when that has happened, John, it's -- it has been when companies start getting desperate for cash flow and these sorts of things and in good times I don't think you see so much of that. This is not something that I really worry too much about because there's not a lot I can do about it. But I think, here again, I think we're in a very good time right now and business is strong and that's driving a very strong result in the industry. Certainly to the extent that the economy slows down. I think that that would be the type situation that might trigger people to do dumb things. Whether or not that will happen I haven't thought a lot about it to be honest with you.
John Barnes - Analyst
Lastly the other thing we've heard from a lot of players is interest in taking advantage of pristine balance sheets and a lot of free cash flow and putting it back to work in growing the business. Acquisitions comes up a lot as a potential use of the cash. From where you sit today, would you rather be out running a couple of hundred million dollar LTL and selling it to somebody? Do you worry that as Overnite tries to deploy their cash and if you come across something that you're going to end up in a bidding war for something because there's so many people clamoring for acquisition opportunities?
Leo Suggs - Chairman, President and CEO
No. I don't think so. I think that, No. 1, we don't need to make acquisitions to grow our business. You know we can and certainly add facilities and we can add -- as an example in some of the metropolitan areas last year, we added a terminal in the L.A. Basin, as an example. And spun off some of the L.A. business and that created some growth, just because of the fact that in some of these big markets if you have a strong economy you can increase your capacity and take advantage of more business. So we have opportunities without acquisitions.
So certainly to the extent that we could come up with something that may be added to our portfolio or something along these lines, that's why we hired this guy to look to see where are the opportunities and what should we be considering. But it's in our case it's a nice situation to have the luxury to look at these sorts of situations. But we are not desperate to go out and make acquisitions where we're getting into a bidding war. I can tell you that anything we would consider would have to be accretive pretty darned quick.
John Barnes - Analyst
Pat can you remind us lastly just -- I'm sorry, one more thing. Are there any further pension contributions planned for this year? And then as you look out at '05 can you give us an idea what your contribution should be in '05?
Leo Suggs - Chairman, President and CEO
Pat, take that one.
Pat Hanley - SVP, Finance and CFO
Yes we contributed 25 million and we said we would contribute 30 million this year so we have 5 million left. We said, historically, what we would look at is around 45 million as the pension contribution on an annual basis. If you recall last year we contributed 60 million so we pulled ahead, sort of 15 million out of this year. That's why we're doing we did 60 last year to 30 this year. Ongoing, we think that 45 number will keep us in good shape in terms of supporting the pension plan and making it very sound.
The only other caveat I would throw out is the possibility as we look at interest rates going forward that interest rates going up will actually be a help to us because as you know, that reduces the present value of the liability and it looks like interest rates are going up.
Operator
Ladies and gentlemen, at this time, there are no further questions. I would like to turn it back to Mr. Suggs and the management team for any closing remarks.
Leo Suggs - Chairman, President and CEO
Okay, well, thank you and thanks to all of you for joining us this morning. And we look forward to, hopefully, another good quarter in the third quarter and talking to you again in about three months. So, you have any closing comments, Pat?
Pat Hanley - SVP, Finance and CFO
No I think you hit it right on the head. We want to hopefully be back in three months to continue this uplifting story.
Leo Suggs - Chairman, President and CEO
Okay, thanks, folks.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a great day.