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Operator
Welcome to the review for the third quarter 2004 Overnite Corporation earnings conference call. This conference is being recorded on Tuesday, October 26, 2004.
Please clearly state your name and company name followed by the pound sign. During the playback of the call you may press one to rewind 30 seconds, seven to rewind one minute, three to fast forward 30 seconds, and nine to fast forward one minute. You may also press two to pause and eight to resume.
Good day, ladies and gentlemen, and welcome to the third quarter 2004 Overnite Corporation earnings conference call. My name is Alicia and I will be your operator. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and an operator will assist you. As a reminder, this conference is being recorded for replay purposes.
I would now like to introduce your host for today's call, Mr. Mike Mahan, Director of Financial Planning, Mr. Leo Suggs, Chairman, CEO and President, and Mr. Pat Hanley, Senior Vice President and Chief Financial Officer. Mr. Mahan, you may proceed, sir.
Mike Mahan - Director- Strategic Planning
Thank you. Good morning and welcome to Overnite's third quarter 2004 earnings call.
With us today are Leo Suggs, Chairman, CEO and President, Pat Hanley, our senior vice president 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 current expectations and assumptions that are subject to risks 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 include certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release. If you don't have a press release, a copy is available on our Web site at www.ovnt.com.
Leo Suggs and Pat Hanley will provide our comments this morning followed by a Q&A session. With that, I will turn the call over to our Chairman, Leo Suggs.
Leo Suggs - Chairman, President, CEO
Good morning. Let me add my welcome.
Well, we had another strong quarter. Our earnings per diluted share ended up being 80 cents versus 55 cents last year on a pro forma basis. This represented growth of more than 45 percent. I was pleased by our ability to improve the operating margins by almost two points. We finished the quarter with an operating ratio of 91.3 versus 93.1 last year. The margin improvement, coupled with our revenue growth of nearly 12 percent enabled us to increase profits by almost 50 percent. We attribute the margin improvement to the operating leverage realized from tonnage growth, higher prices and lower cargo plane and DIPD expense.
Economic conditions remained favorable. Our tonnage growth was nearly nine percent for the quarter. While this wasn't as high as the double-digit growth we experienced during the first two quarters, it was still much higher than historical averages. Tonnage fell off a little than the first half of the year due to some softness in the retail sector as well as by some pricing actions we took during the quarter to remove some of the lower yielding freight from our network and free up capacity for our higher margin business.
As we mentioned before, our third - over a third of our business consists of retail freight. And strong consumer spending is a key catalyst we rely on for growth. The pricing environment remains good. Our mix adjusted pricing, excluding fuel surcharges, was up over five percent during the quarter. Pat will talk a little more about the rate factor and how freight mix changes impacted that later during the call.
Our balance sheet remains strong. We paid down our long-term debt by about $6 million during the quarter and have reduced our debt by roughly $13 million year to date. We ended the quarter with a cash balance of $53 million compared to $37 million at the end of the second quarter.
During our second quarter call we estimated that free cash flow would be around $50 million for the year. It now appears it'll be closer to $60 million. We're currently evaluating alternatives to investing the excess cash. Naturally, we'll be looking for whatever generates the highest return for our shareholders. At this point in time we haven't made any decisions. We may pull ahead a portion of our 2005 pension funding. And as I indicated on our last conference call, we're looking at the small acquisition market for opportunities.
Finally, I'd like to add that I'm not only pleased by our margin improvement of nearly two points and earnings growth of 46.7 percent, but I'm also pleased with the progress we've made this year in reducing our claims and insurance expense. Our results last year didn't meet our expectations, and I challenged all of our employees to reduce accident and cargo claims. And I'm pleased with the results thus far and fully expect continuous improvement in this area.
By the way, you heard earlier from Mike Mahan. He'll be assuming the position, subject to approval of the board of directors, of vice president, treasurer and planning later in November when Paul Hoelting, who you all know, will become our vice president and controller upon the departure of Mike Liebschwager. Mike is leaving us to pursue business interests with his wife. And we will miss him, but we wish him well.
I'd like to thank each of you for joining us today. I'll now turn it over to Pat to take you through the financial results and provide fourth quarter guidance.
Patrick Hanley - CFO, SVP, Director
(audio Gap) 8.9 percent. Our operating income was $37.4 million versus $26.7 million last year, which was an increase of 40.1 percent. Our operating ratio was 91.3 percent for the third quarter versus 93.1 last year. Our net income was $22.4 million versus $15.3 million last year, which was an increase of 46.4 percent. This equates to an EPS on a fully diluted basis of 80 cents for the third quarter versus 55 cents last year.
Now let's turn to the expense side.
Our expense growth of 9.5 percent was substantially below our revenue growth of 11.7. There are three line items worth noting, first supplies and expenses, which were up $10.2 million or nearly 33 percent. Fuel expense accounted for $8.6 million of this increase. And if you exclude the fuel and supplies, expenses were up only $1.6 million or 5.2 percent. Next, claims and insurance expenses were actually down $8.1 million or 45 percent versus last year. Safety and exception-free freight handling, cargo freight handling have always been chief focus areas in our company. And as Leo mentioned earlier, we recognize this as being a big opportunity for 2004. Last year we had a few serious accidents that negatively impacted our results despite the fact that we had an improvement in our accident frequency.
We invested in more training and awareness programs to reduce these expenses in 2004. And thus far we've seen some positive results. Naturally, our goal is to always continuously improve in this arena.
The only other line item of note is in other expenses, which were up 21.1 percent. The story here is basically the same as we discussed last quarter. We had some really good news last year as a result of the various rating and billing accuracy initiatives that we began two to three years ago. As our processes and accuracy improved, we were able to minimize the accrual for bad debt last year. This year we're continuing to make improvements in the age of our receivables, but not to the same magnitude and, therefore, we're not having the same beneficial results.
One other item worth noting was a favorable state tax ruling that resulted in a reduction in our tax liability by $700,000 that we booked during the quarter. That's why the tax rate for the quarter was 37.8 percent instead of our normal 40 percent.
Our net capital expenditures for the quarter was $32.1 million compared to $16 million last year. For the first nine months of this year our net capital expenditures totaled $46.7 million versus $42.7 million last year. As we discussed before, we plan to spend $85 million on capital expenditures for the full year.
As Leo mentioned earlier, our balance sheet is in very good shape. Our cash balance at the end of the quarter was $53.3 million versus $11.1 million for the year ended 2003. During the first nine months of this year we paid down our debt by $13.4 million, contributed $30 million to our pension plan and paid dividends of $3.4 million to our shareholders. We expect free cash flow to be around $60 million for the year.
There's a chance, as Leo mentioned earlier, that we'll pull ahead $15 million in pension funding at the end of this year if our cash flow ends up being stronger than expected, much like we did last year. We expect to continue funding about $45 million a year into our pension plan for the foreseeable future.
As we've done during prior calls, I'd like to talk a little bit about our freight mix and our yield. As I mentioned earlier, our daily revenue was up 11.7 percent while our daily tonnage was up 8.9 percent. Our LTO revenue per hundred weight, excluding fuel surcharge, was 15.02 for the third quarter versus 15.11 last year. The LTO rate factor with fuel was 15.98 versus 15.56 last year.
On the surface it appears our rate excluding fuel were down .6 percent. However, as we discussed during our second quarter conference call, the rate factor is not an accurate measurement for yield if freight mix changes year over year, which again is the case for Overnite. Our average weight per shipment was up 68 pounds or 7.6 percent. Our length of haul was down 2.2 percent from 787 to 769. And our average classification of our freight declined from 79.8 to 79.2, reflecting the denser freight we're handling.
All three of these changes would negatively impact the rates charged to customers. After adjusting for these mix changes, our rates were actually up about five percent for the quarter. And this is a continuation of the good news we had in the first and second. If you recall, we said mix adjusted prices were up two percent in the first quarter, four percent in the second. And this five percent in the third says that strong pricing environment we've been talking about is continuing, and it's continuing into the fourth quarter.
Now let's take a look at the fourth quarter guidance. We're projecting on a fully diluted basis to have our earnings for the fourth quarter to be 53 to 58 cents per share. And our full year earnings per share projection is now $2.20 to $2.25. We haven't completed our 2005 budget. Therefore, I can't give you any guidance at this time for next year.
That concludes my comments. And with that, I'll open it up to any questions you may have.
Operator
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been asked or you wish to withdraw your question, please press star two. Again, it is star one to ask your question.
The first question is from Ken Hoexter with Merrill Lynch. Please go ahead.
Ken Hoexter - Analyst
: Great. Good morning, Pat and Leo.
Can you - Pat, can you talk a bit about the freight mix going forward, what we should expect as we move? I guess now we've got kind of some year over year comparisons with the shift from the truckload volumes. Can you talk about what you expect going forward?
Patrick Hanley - CFO, SVP, Director
Well, let me talk a little bit about the third quarter for a second, Ken.
Two things we did. And Leo mentioned them early on. One, we went after in the quarter as we got through the second quarter we decided we'd get more aggressive on some low yielding accounts. And we did that. And that had an impact on our primarily retail accounts. The second thing is the retail sector, as I'm sure you're all aware, in August - I won't say it hit a dry spell, but it certainly slackened off from where it had been running through the second quarter. I think towards the end of September and as we're looking into October that has begun to pick up again. So, we're seeing retail coming back, and that's good news for us.
The reason I bring that up is I perceive that our retail mix, which is about a third of our business, will continue that will and will be probably more prevalent in the third - in the fourth quarter than it was in the second. With that, I think the mix of business and the specifically the higher weight per shipment will persist. So, I would suggest that - we talked about five percent as our price increase in the third quarter. And everything we're seeing as we look forward says we're going to continue to get further price improvements as we go forward. And it'll be impacted by that mix shift to some degree, but it's really the fact of how strong the environment is.
The other thing I want to bring up that fits into the pricing question, Ken, is we're looking for, as we mentioned previously, about 60 percent of our pricing in terms of our contract business occurs between November and February. We think that's a very big positive as we look into the next few months in setting up our pricing for next year.
Ken Hoexter - Analyst
Great. And do you feel comfortable giving a month by month kind of flow on how things are looking and how they're looking so far in October?
Patrick Hanley - CFO, SVP, Director
I would tell you in terms of tonnage. If you look at our tonnage for October and our tonnage in September I'll tell you that we were running around eight percent in September. And right now I'd tell you we're probably in the six plus percent in October.
Now, the reason I want to make note of that is if you looked at the third quarter last year it was up about 3.5% percent versus third quarter '02. And with the fourth quarter last year it was up 7%. So it was double the growth we had in the third quarter. So I'm very pleased with the tonnage environment we're seeing in October given how strong last year's fourth quarter was.
Ken Hoexter - Analyst
Great. And I think Jeff has one question.
Jeff
Hi. I was just wondering if you could touch on the claims. I know it was at 2.8 percent of revenue this quarter. How should we be looking at that going forward? I know you're still expecting year over year improvements.
Patrick Hanley - CFO, SVP, Director
Claims - we had two things. Last year - the two things are cargo claims and also our experience on accidents and injuries. And I think - I know that we've had continually good experience in terms of our accident frequency rate. And we've actually had record low frequencies. But last year we had very, I'm going to say, seven plus severe accidents that impacted our cost. This year we haven't had that. Last year we had to shore up our reserves for those accidents. This year we haven't had to. I regard that as something that as something - right now - and they are accidents, but I have to say so far through October we've had continually good experience in the accident area. And I think on the cargo claims we're continuing to make progress. We're looking to continue to bring that number down. We think that's a particular opportunity for us to make sure we provide damage-free deliveries to our customers and maintain those customers and keep them. So, I would suggest it's going to continue.
Jeff
OK. Thank you.
Ken Hoexter - Analyst
Thanks. Bye.
Operator
The next question is from Gregory Burns with J.P. Morgan. Please go ahead.
Gregory Burns - Analyst
Thanks. Hi, Pat, Leo. Just wanted to follow-up on some comments Leo made about capacity.
You indicated the two factors, if I heard correctly, was, one, some softness in retail and then, two, attempt to re-price maybe some lower yielding accounts. And I think you indicated that capacity constraints were an issue. I guess, if I heard correctly, where do you guys think you are in terms of capacity? Was capacity a constraint to growth in the quarter? And then how might that feed into your CaPEx plans next year?
Leo Suggs - Chairman, President, CEO
I think that the third quarter being typically kind of the peak of the year I think we were probably 90 to 95 percent of capacity. And I think that certainly from an ongoing basis, as we've said all along, we're going to continue to look at low yielding freight from a standpoint of trying to upgrade our mix, because certainly if you get pure revenue growth it adds an incremental impact on your earnings, but once you invest in capital, that incremental part goes away to the extent that you can improve your yield, that's a more permanent improvement.
So, we're going to continue to look at all of our business. We certainly want to grow but we want to maintain good yields in the process. As far as capacity is concerned, I think the one area of the country that we probably had the greatest pinch, as you might expect, was in the Northeast.
We do have a new hub terminal under construction at Newburg (ph) that will come on line hopefully close the end of the first quarter of next year that should really expand our capacity going forward. So yeah, for the third quarter, there was a few locations where we experienced a bit of a pinch but our plans are such that going forward, we hope that we can stay ahead of the growth curve as far as capacity is concerned.
Gregory Burns - Analyst
And Leo, most of the year, you guys I think were growing faster in the longer haul lanes. Was that still the case in the third quarter?
Leo Suggs - Chairman, President, CEO
No actually, in the third quarter, our greatest growth was in the regional business. Here again, with the Northeast and the Central part of the country being the greatest percentage, we're really encouraged by that because we think long-term, those will be the fastest growing markets. That was followed very closely by the long haul business and then the slowest growing business which was still I think around 7% was the inter regional business.
Gregory Burns - Analyst
Great, and then Pat, I know you haven't set your budgets yet but any preliminary idea of how CapEx may shape out for next year vis a vis this year?
Patrick Hanley - CFO, SVP, Director
I look at the CapEx, we've got $85 million in this year, I would tell you that our normal replacement capital should be 65 to 75, but as we look at next year, we're going to be looking for opportunities. We've got one, Leo talked about Newburg, we'll probably pay about half that Newburg cost in 2005.
We've got a couple other pin points we'll look at. But more importantly, they also are going to take a hard look at what we want to do for the suite in terms of tractors and what we're trying to figure out here is 2007, the new emission laws go in and that was a struggle for the engine manufacturers to meet those requirements in 2002, so we want to make sure we avoid that issue in 2007. So we may do some pull ahead. So are things we're looking at.
Gregory Burns - Analyst
OK, so you may want to try to just beat the rush a little bit?
Patrick Hanley - CFO, SVP, Director
Yes.
Gregory Burns - Analyst
OK, thanks a lot guys.
Operator
The next question is from John Barnes with Credit Suisse First Boston. Please go ahead.
John Barnes - Analyst
Yeah, good morning guys.
Leo Suggs - Chairman, President, CEO
Hey John.
John Barnes - Analyst
Leo, can you talk a little bit about, the guidance that you gave for the fourth quarter seems to be a little conservative and I recognize you are up against tougher comps, Pat talked to 7% increase in tonnage in the fourth quarter. Are you expecting in the fourth quarter, as you look at December, are you expecting kind of a reversion to normal seasonal trends where you begin to see some fall off in freight activity in the back half of December? Is just that return to the mean kind of the reason for maybe a little bit more normalized guidance for the fourth quarter?
Leo Suggs - Chairman, President, CEO
Yeah, I think when you look at the year over year improvement, John, that we're projecting for the fourth quarter, we are still projecting substantial percentage of improvement. I think almost 50% improvement in earnings over the fourth quarter of last year. So I don't think we're really all that conservative. But yes, we think this fourth quarter will be similar to what we've seen in the past. We do expect business to begin tapering off in late November and then the last half of December being pretty slow as it normally is.
John Barnes - Analyst
OK, were you able to quantify the impact of the hurricanes for the quarter? Was it a couple of cents or did you even go to that map?
Leo Suggs - Chairman, President, CEO
That's probably as good a guess as anything John. It may even be a little less than $0.02. It's really difficult to quantify. But it had a little bit of an impact, but we didn't think that at this point in time it was worth of comment.
John Barnes - Analyst
OK, if you're looking at, as you go through re-pricing your book of business and trying to look at some of that under performing freight out there, two questions along those lines, one, are you hearing it from everybody and the entire industry is talking about doing the same thing.
Have you seen a noticeable change in the shipper response, the constant under-performing on the shipper side from a freight standpoint? Are they beginning to acknowledge that rate increases are a necessary thing and gradually beginning to see rates across the industry, across all types of freight beginning to come up.
And then secondly, specifically to overnight, if you were kind of grading your book of business, where do you think you are in terms of A, B, C kind of level of freight in terms of your entire book of business of where you think you can go?
Leo Suggs - Chairman, President, CEO
Well, John, I would say that the pricing environment has been good at all levels. Certainly the lower yielding business I think has been the target of a lot of carriers. So if those guys are not recognizing that something is changing then I think that, I don't know who is hauling their freight.
So I would expect that they are probably feeling the pressures of capacity within the industry. As far as our mix is concerned, I think the one area that we're the most happy about, some of you may recall that we wanted to put more focus on the local accounts and have them grow faster than our national accounts. Our national accounts are important as a base of business, but the local accounts have a better yield and we really wanted to focus on that.
And our goal was to improve the mix of local revenues as a percent of revenue by about 50 basis points every year. This year we've exceeded that target. Currently about 54% of our revenue is local versus about 52.5% last year. So we've made some good progress in that area and we're going to continue to focus there.
John Barnes - Analyst
OK, and then lastly Leo, as you have gone through earnings season and we've heard a number of carriers in the LTL space begin to talk about spending some money next year, CapEx budgets look to be going up modestly and in some instances a little bit sharper than that.
Are you concerned at all sitting where you are that all of a sudden there's going to be an influx of capacity that could harm the pricing environment or do you think this is needed by the industry to kind of catch up on three or four years of relative under investment in the business?
Leo Suggs - Chairman, President, CEO
Well John, it's all going to depend on what the economy does. Certainly we are fairly optimistic that the economy should be better in the next three or four years than it was in the two or three years prior to 2004. So given that scenario, I don't see any evidence that there's going to be a great deal of surplus capacity out there.
I think driver constraints are still an issue, particularly in the truckload segment of the business. And that tends to cascade down and impact the entire industry. So at this point in time, I do not believe that we will see surplus capacity in 2005.
Patrick Hanley - CFO, SVP, Director
And I add by the way that we are not having any problems in our driver hiring. And Leo's mentioned many times previously, we have a program where we're training our dock people so they can get their commercial drivers license. And that has served us well and we continue to focus on it as a means of finding new drivers. So by and large we don't have any concerns for ourselves about hiring drivers.
John Barnes - Analyst
OK, guys, thanks for your time.
Leo Suggs - Chairman, President, CEO
Thank you.
Operator
The next question is from Chad Brusso (ph) with Morgan Stanley, please go ahead.
Chad Brusso - Analyst
Great, thanks guys. I wanted to come back to pricing just for a minute and make sure I had some of these numbers right. I believe you said we're seeing 5%, all in, apples to apples year over year pricing, but only 40% of the business is rolling over here. So my guess is, just working through the math, you're seeing something like 8 to 10% price increases just on that 40% of the book that is rolling over here.
So am I in the same zip code there and we go to re-price the other 60% of the business that rolls over November through February here are we going to go for the same level of increases?
Leo Suggs - Chairman, President, CEO
No, you're not calculating it right. When you compare this year to last year it's 5% from an overall standpoint. During the aggressive or the normal contract renewal period near the end of the year and the start of next year, we will be lapping increases that took place during that same period as last year. So the 5% is 5% and there's no compounding that gets it currently higher than that.
Patrick Hanley - CFO, SVP, Director
The only thing that I might add is the 5% is what we achieved in the third quarter when we compared that to Ford in the second and two in the first. You've got a general rate increase that applies, let's say 35% of our business that went into effect, that was like 5.9% was our published rate increase that went into effect.
About almost a month earlier than it did last year, that was beneficial to us. And then the other piece you may have been missing is Leo pointed out that issue of local versus national. That shift of a 1.5 from 52.5 to 54 does impact our price because it impacts the mix of business that is local versus marketing national. Both of those will help you.
Chad Brusso - Analyst
OK, that seems to make a little more sense, that helps quite a bit. Now turning to the tonnage guidance here, I'm just going through my notes and I wrote down in the last quarterly conference call that you had full year guidance, or the second half of '04 guidance of 8.5 to 9%. And we came in at 9% this quarter, we're seeing 6% in October.
Once again, that's very strong by historical standards and we're looking for really good EPS growth in the fourth quarter here but I'm wondering if we didn't see a slow down versus what we might have been expecting.
Patrick Hanley - CFO, SVP, Director
Go ahead Leo.
Leo Suggs - Chairman, President, CEO
I think we already commented on the fact that we did see certainly in August and the first half of September a slow down in the retail segment of the business which represents a little over a third of our total business in our company. So I think that it's still too early to say what the Christmas season is going to bring and so forth so far as the fourth quarter is concerned. But it is a fact, kind of in the middle of the third quarter, we did see a little bit of a slowdown in the retail segment.
Chad Brusso - Analyst
OK, great, thanks guys.
Operator
The next question is from Tom Alva (ph) with BB&T, please go ahead.
Tom Alva - Analyst
Hey, good morning guys. Pat, on the insurance and claims discussion, can you just give us a little bit more specific approximately where that is as a percentage of revenues and where it was maybe a year ago? I know that has been one of the kind of quiet opportunities.
Patrick Hanley - CFO, SVP, Director
Yeah, I think if I remember correctly, the numbers for the quarter were at 2.8%.
Tom Alva - Analyst
Yeah.
Patrick Hanley - CFO, SVP, Director
And that would have compared to about a 5 in last year. So that's how much the improvement was. I would tell you that our, and somebody asked earlier, I would tell you we'd be looking for our running rate, I don't know if it's going to remain that low but I would think the running rate would certainly be in the 3's, not in the 5's as we go forward. Does that answer your question Tom?
Tom Alva - Analyst
Yeah, it gives me enough to kind of finagle the numbers a little bit there. Let me see if I, I guess I want to go back to Chad's question too on tonnage. As you scrub your budget for '05 in that, I'm trying to remember from my notes this past year if you sort of advertised the longer term tonnage growth rate that you are comfortable with.
Obviously we've had an exceptional year this year but is it kind of a 5 to 7% number in a more normalized environment. What are your thoughts on longer-term LTL tonnage growth?
Patrick Hanley - CFO, SVP, Director
As I said, we haven't finished the budget but here's some guidelines I guess. We're going to look at what the GDP and the industrial production index look like. Right now, I think that number is somewhere between 4 to 4.5%. And I'll look to see what that might look like for next year, get a handle on that.
And we would still expect to grow somewhere in the neighborhood of 2 to maybe even 3 points above that in terms of market share. So those are the types of things we would be looking at. Does that answer your question?
Tom Alva - Analyst
Yeah, that certainly gives me a sense of what I need to be thinking about as well. And then lastly, Leo, you mentioned potential usage, the free cash flow. Besides pension you alluded to possibly a small acquisition or two. Just wondering how many companies are out there and I guess really what you would gain by that, because you do have a true national footprint. You filled an obvious void a few years ago out west. And just what might be happening with seller's prices at this point in the cycle?
Leo Suggs - Chairman, President, CEO
Well, that's a good question, Tom. And certainly we're not looking for any large overlapping acquisitions because we all know the history and experience of companies that have tried to integrate large overlapping acquisitions. However, we have some segments of our business - our value added services segments and so forth - that if we could somehow enhance those or add some new value added services that come in premium rates, that's the type of thing we're looking at.
Tom Alva - Analyst
OK. That makes more sense. OK. Keep up the good work, guys. Thank you.
Leo Suggs - Chairman, President, CEO
Thank you.
Patrick Hanley - CFO, SVP, Director
Thanks, Tom.
Operator
The next question is from Edward Wolfe with Bear Stearns. Please go ahead.
Edward Wolfe - Analyst
Hi, Leo and Pat. Just maybe another way of asking a question that's been asked a little bit, generally what we're seeing from LTL companies is people making the number but either being conservative or giving guidance that's either in line or a little below consensus. I guess what I'm trying to ask you is how much of that do you think bodes for your company and the group? It's just that we on our side probably got a little bit excited and ahead of ourselves and kind of created too much expectation. And how much of it is that maybe that we'll slow down a little bit both in terms of demand and maybe pricing from where you saw it four or five months ago?
Leo Suggs - Chairman, President, CEO
Ed, that's a good question. I think it's probably a little of both.
Edward Wolfe - Analyst
I think that's probably fair from where I sit too. When you say that maybe some of it then slowed down from where you were four or five months ago, would you say that more of that is on a tonnage side or is it on the pricing side from the weight? Obviously pricing is good, but maybe it would've been even better if things kept going the way they were going.
Leo Suggs - Chairman, President, CEO
Well, there's a couple things. We talked already, Ed, about the retail segment. There's also a factor that I hadn't thought about until recently I heard an economist comment on the fact that in 2003 in July and August the federal government was sending out income tax checks to people and that spiked the retail during that period of time. So, I think there may be a little bit of a spike in there. And I think with energy costs where they are today, let's face it, I think everyone would say that there is a bit of uncertainty for the future.
Edward Wolfe - Analyst
As we sit here, though, at the end of October have you seen that retail customer of yours back to where they were prior to that August/September slowdown?
Leo Suggs - Chairman, President, CEO
We think it's coming back. It's too early to say. I think that the real Christmas shipping that we will see is usually really heavy toward the end of October and on up into November. So, I think if you go back to last year in October/November it's pretty obvious that merchants were reordering Christmas merchandise as compared to the two previous years, that they were obsessed with getting rid of their stock and they didn't reorder. So, it's too early to really make a judgment on that, in my opinion.
Edward Wolfe - Analyst
At manufacturing any sense that that's slowing at all?
Leo Suggs - Chairman, President, CEO
No. I think the manufacturing segment appears to be, from what we can see, continuing to grow.
Patrick Hanley - CFO, SVP, Director
The only other thing, Ed - you mentioned pricing. I guess I wouldn't suggest to you that pricing is weakening at the present time. I don't think that's what our experience is. Indeed, we talked about the fact that we went after lower margin accounts. I think that's something that the industry is also looking at from your folk's comments on this call itself.
Edward Wolfe - Analyst
Pat, I wasn't alluding to weakening. I was saying kind of the acceleration of pricing has maybe come in a little bit slower than we thought it was going to at that point. It felt like capacity was getting tighter, quicker maybe than it did.
And then if we look at revenue per rate, you guys talked about changes in mix in what the fallen weight. We've heard that from a lot of companies. Some companies have been a little bit better, like yourselves, at quantifying what the impact is. Others said they couldn't do it. Just can you walk us through directionally the process and how you get to five percent from minus 0.6 percent? What do you have to do directionally to get the apples to apples pricing was up five percent?
Leo Suggs - Chairman, President, CEO
Yes. We have a model that does that. And it takes into consideration the weight per shipment. And if you look in general, the industry's weight per shipment is up. I think Overnite's weight per shipment is probably up more than any of our public peers. We also look at the length of haul, which is - we mentioned earlier - due to some real good growth in our zero to 500-mile length of haul. Our average length of haul came down about two percent. And then finally the classification of the freight with the heavier dense freight, the manufacturing type freight, carrying a lower classification. All of those things have an impact. And I don't know exactly - I don't think it's the type of situation where you can say that X percentage of that impact is this and that. I don't know what's in the algorithms of the model.
Edward Wolfe - Analyst
Sure.
Leo Suggs - Chairman, President, CEO
But we do have confidence that it's very accurate.
Edward Wolfe - Analyst
How about ...
Patrick Hanley - CFO, SVP, Director
Ed, just a little more flavor. Probably the weight per shipment, as Leo mentioned, is - ours is - I don't know if it's double, but it's at least a third more than others are reporting. That's probably the single biggest issue driving that differential. The other thing is the .6 six negative you talked about that number was, I believe, like a 1.6, 1.7 in the second quarter. So, we are making progress quarter over quarter. And then lastly - and I think we've talked about this previously as well - we had one major account that was - where we were doing a lot of parcel business. And that account is what's driving that weight per shipment differential up potentially more than others.
Edward Wolfe - Analyst
What is that grandfather on that account?
Patrick Hanley - CFO, SVP, Director
It came out over a period of time. It will grandfather probably by the end of the year in completing it.
Leo Suggs - Chairman, President, CEO
Just to put some numbers on that, our weight per LTL shipment was up 7.6 percent. So that's pretty substantial.
Edward Wolfe - Analyst
Absolutely. Would you say then historically weight per shipment is a good sign for the economy, but maybe with the hours of service and the truckload capacity shortages it's just not so much an indication of the economy this time around but some of the economy and some of the changes in the truckload world? What's your sense of that?
Leo Suggs - Chairman, President, CEO
I hope it's both. I know that the - we certainly have seen some shipments that had moved to the truckload industry as stop-offs that have now come back because it makes more sense for them to move as LTL. I don't know exactly how much that is, but I think all of it has had an impact.
Edward Wolfe - Analyst
OK. Just - you guys are in every length of haul in every lane. What's your sense - is there any difference in pricing between, say, the Overnite market and the longest haul markets you do, or is it fairly evenly spread, the pricing, right now?
Leo Suggs - Chairman, President, CEO
I think it's fairly evenly spread.
Edward Wolfe - Analyst
OK. Thanks a lot, guys, for the time.
Operator
The next question is from Scott Flower with Smith Barney. Please go ahead.
Renin McAustin - Analyst
Hi. Good morning. This is actually Renin McAustin (ph) on behalf of Scott. Just a quick question getting back to tonnage. I think you had said earlier that September looked like tonnage was up around eight percent and October is acting around six percent. I was wondering how that has progressed from maybe July and August, if you could just give some - what that was year over year in July and for August.
Patrick Hanley - CFO, SVP, Director
If you - when we talked about July it was probably more near the 10 percent range, and then it trended down. It goes back to what we've been saying about retail fell off in August. We had the 100 plus accounts where we went after more aggressive pricing, and that had an impact too. But both of those brought it down from where we were in July. But I think the other comment was we're - towards the end of September and into October we're now seeing retail come back. Leo said it's too early to tell you exactly where that's going to be. We're, I guess, optimistic that retail is coming back from what we'll call softness in August.
Renin McAustin - Analyst
Got it. Thank you very much.
Operator
The next question is from Mark Levin with Davenport & Company. Please go ahead.
Mark Levin - Analyst
My questions have been asked and answered. But just a real quick question to the extent you have any ability to forecast this yet. But any idea of what pension expense might look like in '05 versus '04 and versus '03 as well? I realize it's still early, but just any guidance on that would be helpful.
Patrick Hanley - CFO, SVP, Director
Well, I mentioned earlier that we plan on spending about $45 million in funding. I would expect the pension expense will be less than that, but it's going to be more in the (inaudible) dollar range. And that's probably - it's too early to tell you, but I would guess it's going to be up probably close to 10 percent, I would think, to where we are today.
Leo Suggs - Chairman, President, CEO
Yes. I'd say 40 to 45, but we'd have to put so many caveats on it. We couldn't even write that down because we don't have the discount rate and all that that we don't have till the end of the year, which is, as you know, really moves the numbers.
Mark Levin - Analyst
But right now you feel like up 10 percent to sort of $40 million to $45 million range is a reasonable assumption?
Leo Suggs - Chairman, President, CEO
Yes, it's our working number till we get more information.
Mark Levin - Analyst
OK. Great. Appreciate it. Thank you, guys.
Operator
The next question is from Mark Rosa with Thompson Davis. Please go ahead.
Mark Rosa - Analyst
Good morning, guys.
Leo Suggs - Chairman, President, CEO
Good morning.
Mark Rosa - Analyst
Could you tell us the number of tractors, trailers and employees that you had at the end of the quarter?
Leo Suggs - Chairman, President, CEO
Well, we can tell you the number of employees.
Mark Rosa - Analyst
OK.
Patrick Hanley - CFO, SVP, Director
It's about 15,000.
Mark Rosa - Analyst
Fifteen thousand?
Leo Suggs - Chairman, President, CEO
Yes. And that's an increase of about 3.8% compared to the same time last year versus - year to date tonnage growth of about 8.9%. So - our tonnage growth at that point of 8.9 percent.
Mark Rosa - Analyst
Are we seeing some productivity gains?
Leo Suggs - Chairman, President, CEO
That's right.
Mark Rosa - Analyst
Does that have anything to do with the shorter transit times in the Midwest?
Leo Suggs - Chairman, President, CEO
It's a combination of a whole group of things. Certainly in a growing environment you have an opportunity to improve density and density is probably the greatest single key to productivity in the business so-I would say that is the number one factor is the ability to increase your density both on your local city routes and your over the road line haul routes.
Mark Rosa - Analyst
OK. Thanks a lot guys.
Operator
Those are all the questions I have in the queue at this time would you like me to repeat the instructions?
Leo Suggs - Chairman, President, CEO
You know, the only thing I would mention ,--would talk to in generality is that I just want to give you information that Motor Cargo also was impacted by this softness in business and so you will see them noted in our segment reporting when it comes out in the Ten Queue. They had an unfavorable impact on our operating ratio probably of about three- tenths in terms of the operating ratio improvement. That is something that occurred. So then in July, they start turning around in August and September and is continuing in October , so we are expecting much better performance from them in the fourth quarter. But you will see that in the Ten Queue but I just thought I would give you a heads up.
Patrick Hanley - CFO, SVP, Director
Great. I think that's it. Thank you
Operator
Ladies and Gentlemen, thank you for joining today's conference. This concludes the presentation you may now disconnect. Good day.