Old Dominion Freight Line Inc (ODFL) — Q3 2015 Transcript

Good morning and thanks for joining us today for our third quarter conference call. With me this morning are David Congdon, Old Dominion's Vice Chairman and CEO, Wes Frye, our CFO and Adam Satterfield, our Vice President and Treasurer. After some brief remarks, we'll be glad to take your questions. I am pleased to report that Old Dominion produced very solid financial performance for the third quarter of 2015, including a 90 basis points improvement in our operating ratio to a third quarter company record of 82.1%, which contributed to a 10% increase in our earnings per diluted share. Our tonnage slowed this quarter from its double-digit phase for the first half of the year reflecting an uncertain economic environment that has affected the entire industry. This quarter is being compared against the third quarter of last year when tons increased 18.7%, a significant year-over-year comparison. Despite these headwinds, Old Dominion continued to win market share for the quarter and we experienced double-digit growth in shipments for the seventh consecutive quarter. The released result is further evidence that our progress of on-time, claims-free deliveries differentiates Old Dominion from our competitors and continues to resonate favorably in the market. Even with our strong 11.7% growth in shipments during the third quarter, our on-time service was 99% and our cargo claims ratio was 0.35%. The value our customers recognize underpins our superior service; we continue to achieve our yield objectives with revenues per hundredweight excluding fuel surcharge for the third quarter increasing 5.2%. As always, our successful long-term execution of our value proposition depends on the tremendous commitment and hard work of our dedicated employees. We will continue to invest in the equipment, infrastructure and technology, as well as the training and continuing education that supports our industry-leading team and their efforts to consistently produce superior performance. Thanks for your support of Old Dominion and now here is David Congdon.

Good morning, let me begin by saying that I too am pleased about the company's performance for the third quarter. Our business model, which we have been refining for nearly two decades now, is built around an innovative and flexible team of people, providing superior service at a fair price. We continue to invest significantly in the company to execute with discipline and to strengthen our customer-focused culture. We are fully committed to enhancing our market differentiation through consistent and sizeable investments in the resources, training, and education that our employees need to exceed our customer's expectations. By doing this, we can also continue to focus on yield management to ensure every account has a satisfactory return on that investment. While we are actively returning capital to our shareholders through stock repurchases, we are also committed to maintaining the balance sheet strength required to support the investments in the equipment, real estate, and technology that are necessary to provide our customers with the superior service they expect and depend on. With ongoing execution, we expect this commitment to enable us to continue to deliver on our unique value proposition and continue to outperform the industry. We remain confident in our ability to produce further long-term gains in market share, earnings, and shareholder value. Thanks for joining us today and now let's move to view our financial results for the third quarter in greater detail.

Thank you, David. Good morning. For the third quarter of 2015, Old Dominion's revenue was $779.5 million, that's an increase of 4.8% from $743.6 million in the third quarter of 2014. Our operating ratio improved to 82.1 for the third quarter from 83.0 last year, and earnings per diluted share increased 10% to $0.99 from $0.90 in the third quarter of last year. Revenues for the third quarter reflect a 6.6% increase in LTL tonnage, which was comprised primarily of an 11.7% increase in LTL shipments offset by a 4.6% decrease in LTL weight per shipment. LTL revenue per hundredweight decreased 1.6% for the quarter primarily due to a reduction in the fuel surcharge. Revenue per hundredweight excluding fuel surcharge increased by 5.2%. The declining weight per shipment for the quarter had a positive impact on the revenue per hundredweight somewhat offset by a small decline in yields. On a monthly basis, LTL tons per day decreased sequentially by 1.2% for July from June, increased slightly by 0.1% for August, and increased 3.4% for September. This performance compares to our ten-year average sequential month trends, which show a decrease of 2.4% for July, an increase of 0.6% for August, and an increase of 3.2% for September. So on average, our sequential trends were slightly higher during the quarter when compared to our ten-year average. On a comparable quarter-over-quarter basis, LTL counts per day increased 7.7% for July, 5.8% for August, and 6.4% for September. Notably, we have had three sequential quarters of decline in weight per shipment, which we believe is driven by several factors including the truckload capacity challenges during the third quarter of 2014 that resulted in additional freight migrating to LTL carriers that was not repeated in 2015. Also, customers are modifying their LTL shipment patterns to smaller, more frequent shipments, alongside the softness in the economy. Looking to the fourth quarter, we expect LTL accounts per day for October to increase approximately 4.1% versus 2014. Sequentially, this represents a 4.4% decrease in tons per day compared to September, alongside a 2.8% decrease for the ten-year average. The increased tons include approximately a 10% increase in the number of shipments offset by a 5% decrease in the weight per shipment. Sequentially, the ten-year average for accounts per day in November and December is a 3% increase and an 8.7% decrease respectively. We also expect revenue per hundredweight excluding fuel surcharge to increase by 5.5% for October. In the fourth quarter, we will also face tough comparisons relative to last year, as monthly year-over-year LTL tonnage per day increased during the fourth quarter of 2014 compared to 2013 by 20.8% for October, 20.6% for November, and 18.5% for December. The fourth quarter of 2015 has the same number of workdays as the fourth quarter of 2014. As David discussed, the 90 basis points improvement in Old Dominion's operating ratio primarily reflected our increased freight density on yield as well as some improvements in productivity. While a significant decline in fuel prices affected our revenues due to a reduced fuel surcharge, it also resulted in a 316 basis point reduction in operating supplies and expenses. Other expenses expressed as a percentage of revenue were higher during the quarter, which was partially attributable to a lower denominator due to the decline in fuel surcharge revenue. Salary, wages, and benefits expense also reflected the partial quarter impact of a 3.5% increase in wages beginning in September, alongside an increased use of company-owned equipment rather than reliance on rail service. Capital expenditures for the third quarter of 2015 were $130.8 million. We expect total CapEx for the entire year of 2015 will total approximately $451 million, including land expenditures of $139 million for real estate, $278 million for tractors, trailers, and other equipment, and $34 million for technology and other assets. After anticipated asset sales, we expect total net CapEx of approximately $431 million. A preliminary CapEx investment for 2016 should be in the range of $430 million to $460 million. Our effective tax rate for the third quarter of 2015 was 38.4% compared with 37.1% for the third quarter of 2014. We expect an effective tax rate of 38.6% for the fourth quarter of 2015. This concludes our prepared remarks this morning, and operator, we'll be happy to open the floor for any questions at this time.

I guess there's been a lot of talk with investors about the LTL pricing environment, given some concerns from some competitors' statements. It looks like the yield net of fuel was pretty solid in the month of October as well. Can you give us a sense of what your contractual renewals trended last quarter as well as your thoughts about generating increases? I don't think I have seen one kind of hit the wires yet, but just curious how you're thinking about that?

Rob, it looks like it's about 3.5% to 4% is what we're seeing on the contractual.

And how does that compare to what you saw in Q3?

Yes, it's very comparable.

If I can shift over to the weight per shipment, it looks like that declined sequentially in the third quarter. I'm curious, David, what you think the drivers were there, because typically the weight per shipment decline I would expect to see an acceleration of shipment growth, because people are moving down to smaller shipments. It doesn’t look like that played out; is this just kind of the business mix shifting more towards retail and a little bit away from some of the traditional manufacturing LTL shipments or any color on whether that's just economic related or kind of business mix that you think's driving this?

Wes made some comments about that; the comparison to last year. There was some fall-off from the truckload competitors last year that we're not experiencing this year that has affected the weight per shipment. Additionally, the general macro trends of the economy have been a bit soft, with shippers utilizing smaller and more frequent shipments. This is what's being communicated by our sales force. The third point is, we are, of course, winning some market share, and if you look at our overall weight per shipment compared with our industry competitors, ours tends to be heavier. So, while we are winning market share, we are securing smaller shipments, which will also impact our weight per shipment slightly.

And Rob, it's not unusual for the weight per shipment to drop in the third quarter compared to the second. It did the same last year and the year before. This is typically because seasonal moves start to tick up, as you had already mentioned, with retail beginning to accelerate, which often leads to lower weights per shipment.

That makes sense. I think we're also seeing some shift to LTL just given the elevated inventories that we saw show up in the Q3 report as well. But I'll leave it there, thanks so much.

David, can I ask for you that maybe talk a little bit more about the pricing environment for the industry as a whole? It sounds like you're still getting some solid rate increases here, but naturally we've heard some other carriers that there have been a little bit of chinks in the armor, if you will, some other carriers trying to get a little bit more aggressive on price. Can you comment on what you're seeing from a competitive standpoint or do you concur that there are some other carriers out there that may be getting a bit more aggressive or is that something you're not seeing right now?

Overall, we continue to feel that the pricing environment is stable. This is based on the feedback from our pricing department as well as our sales force. You'll always have a pocket here or there where one tier or another may do something irrational or, in our opinion, perhaps foolish, which is nothing new. The way we see it, things are still somewhat stable. We specifically tried to ask if what we heard this week from another carrier was truly about price cuts, and we just don't see it that way yet.

Okay. That's helpful commentary there. Switching gears to the operating ratio; another good quarter here. Typically, I think in the fourth quarter, we see the operating ratio rise by about 150 basis points based on historic averages. Could you provide some insights into how we should think about that this fourth quarter? I know you don't give explicit guidance, but can you talk about some of the factors that might behave unusually this fourth quarter to the extent there are any?

You're right, Alex. We don't give any guidance on the fourth quarter, so you will just have to take our story variance and make your own conclusions on that.

Your load factor decreased by about 5% in the third quarter. I understand that's partly due to declines in weight per shipment, but should we be worried about this in terms of the density of your network? It appears this hasn't significantly affected your margins, which remain strong. How should we interpret these figures?

I just want to reiterate the fact that our tonnage weight is affecting our overall load average. However, keep in mind that we’re still seeing double-digit growth on shipments. So in an environment where the weight per shipment drops, you kind of expect your load average to drop as well, simply because you have lighter shipments. On the other hand, if you look at our productivity in terms of shipments per hour, shipments per stop, all those measures on shipments are still factors that contributed to our positive results for the quarter. So, we still achieved positive results regarding shipments when you view it in units rather than pounds.

I wanted to ask how does your market share strategy play out when the industry becomes competitive? I am thinking about your lower cost profile, particularly relative to where you guys were heading into the last downturn. Does that provide additional flexibility to balance volumes versus price, or should we take your earlier comments about irrational pricing behavior in the industry as a clear indication that you won't deviate from your strategy of price discipline?

Allison, I can assure you we are not going to deviate from our pricing discipline strategy. The notion of trading price for volume is not in our vocabulary.

Got it, okay. And then as a follow-up question on the salaries and wages one, you gave that as a percent of sales. Sequentially it looks like it increased more than the historical average. I know that there is a wage increase that was implemented, but Q3 is typically when you do that, so just wondering if there is anything unusual there, or maybe if your headcount is a little bit elevated relative to the demand growth that you are expecting for the quarter?

Yes, Allison. I mentioned in my comments that there are a couple of reasons for the increase. One is mathematically, when you have less fuel surcharge, you would expect those costs – outside operating expenses – to increase as a percent of revenue, and that's just one factor. Furthermore, when we faced challenges in 2014, we converted a lot of rail services to company-owned equipment and that has also resulted in increased salary and wages. Additionally, we have a new operational strategy shifting from a lease model to a company-owned driver model, so that is influencing our expenses as well.

Hey Earl, David, Wes, Adam, how are you guys? Quick question here, Wes. You went over a lot of numbers, and when you were talking about the sequential shifts in tonnage, you kind of lost me. Could you repeat that for us?

I can't because I was lost too. Let's go through that. So, in July, our tonnage per day decreased by 1.2% from June. The ten-year average says that the increase for July from June was 2.4%, so that was worse in the sequential trend. For August, we increased 0.1% from July, and the ten-year average is 0.6%. So that was a little less favorable. For September, we increased the tonnage from August 3.4%, and the ten-year average is 3.2%, which was above that. If you look at all those averages together, on average, our sequential trend was slightly higher than what would be suggested by the ten-year average.

Okay. That’s good; I just couldn’t keep up with your data.

I guess still not slow enough.

How will the weight per shipment be compared in a clean way in another quarter that is not affected by the truckload business? Will this take place in Q1?

Yes, we were facing truckload competition throughout most of 2014, so we won't really have a clean line of comparison until we get into 2016, most likely.

2016, okay. Also, in the quarter, did your mix shift any more towards third-party logistics, or has it been pretty stable?

Yes, I mean our percentage of revenue from third-party logistics has been growing slightly compared to the third quarter. But not by a large margin. Our ratios indicate that we're still getting good results, and we have a very strong relationship with 3PLs.

Have you seen the 3PLs trying to get more aggressive with you guys on bringing on board business?

Well, of course. But that’s where the price discipline comes into play. Our added value impacts the decisions made by 3PLs, as they want to ensure they provide their customers with the best-in-class service to maintain their own customer base. Therefore, they recognize the importance of assets and the high levels of service we provide, which they are willing to compensate adequately for.

I wanted to circle back on pricing for a second and just get a sense. Can you give us any perspective on the benefit that the weight per shipment adds to the corporate fuel surcharge? I don't know if it's any different, but is it a little bit lower with that? I guess I'm just trying to make sure I understand some of the dynamics going on within that pricing.

The weight per shipment, I would say, is influenced by the 5.2% decrease, which is tied to the reduction in weight per shipment. However, as David already pointed out, we are still seeing increases in contractual business of 3.5% to 4%. So that’s the net effect.

Okay. So that's a reasonable proxy to use for sort of ex-weight per shipment?

Right, it’s reasonable. If you neutralize that difference in weight per shipment, we will still be showing some improvement.

Typically, when you think about sort of economic freight cycles, weight per shipment relative to tonnage, how do you see that dynamic playing out? I guess I'm curious if there are any relationships you've noticed in the past?

Yes, over the last couple of decades, I think any time we've seen weight per shipment fall off, it's typically a precursor to a softer economy. Conversely, when weight per shipment increases, indicative of larger orders, it suggests an improving economy. This correlation has persisted for quite some time.

One thing we are mindful of is that during the slowdown in '08 and '09, we did not see a drop in our weight per shipment; instead, we saw an increase in our weight per shipment. What was happening during that sluggish economy was that shippers, instead of shipping weekly, would hold their shipments and ship every two weeks. This resulted in a decrease in the number of shipments but an increase in the weight per shipment. However, in this current environment, we're witnessing the opposite: an increase in the number of shipments, which is a positive sign, but a decrease in the weight per shipment, indicative of more frequent shipments.

I think back in '08 and '09 it was just such a drastic change in the economy, that it caused the phenomenon that was just described. However, since we emerged from the recession in July of '09, we have seen a gradual recovery but not a strong rebound in the economy. It's been a steady but slow improvement. I do think you see the correlation between weight per shipment and the state of the economy. However, that dramatic period was unusual.

Right. Just to clarify, the weight per shipment drop this year is primarily related to the aftermath of the truckload circumstances last year. Secondly, the softer macros are driving fewer shipments, resulting in smaller shipments being sent more frequently. However, if you compare our weight per shipment this year, it still aligns quite favorably with 2013. The truth is that last year was a unique outlier. As for what happens next year, there's currently a lot of capacity available in the truckload market due to economic softness. If demand heats up, we expect there will not be enough driver availability to meet that demand. We'll have to wait and see, but the current weight per shipment aligns comparably with 2013.

The final quick one – about CapEx for 2015 you provided a range of what you're considering. Any detail you can provide regarding how you view capacity additions in the current environment? How do you think about that within the 2016 CapEx target?

Chris, we are anticipating growth for next year. We're optimistic about our sales, especially in light of the economic climate. We believe we have strong opportunities in the marketplace to gain market share by maintaining our peerless service levels, which is reflected in our CapEx guidance for next year.

With regard to your comment on market share gain opportunities, are you seeing any consolidation discussions among your competitors that might lean toward that path? We noted you've been primarily focused on yields over the last couple of years, but given the current environment and your comments about price stability, I’m curious if you're hearing anything that suggests competitors might look to rationalize existing capacity to maintain a firm pricing environment?

I'm not sure I quite understood the question. I'm sorry.

Sure, with regard to your share opportunity, clearly your service levels continue to improve as you reinvest in the business. I’m just wondering to what extent your ability to gain share could be influenced by potential rationalization amongst competitors in this softer environment, or do we just need to wait and see whether demand may reach a phase where that happens?

Are you suggesting that some of the LTL competitors may slow their investments in additional capacity, and thus be looking to Old Dominion as a resource? Is that what you’re asking?

Correct.

Okay, we don't know. It's too early to say.

All right, that's fair enough. It's still a very fluid market. You guys are the gold standard in the LTL industry; you've made tremendous progress in your cost structure. To what extent can you comment on the stickiness of that, and do you need volumes to increase next year to continue improving your operating ratio?

I've addressed this before, that as we continue to win market share and improve density while maintaining a reasonably favorable pricing environment, which we still believe we're experiencing, along with ongoing improvements in efficiency across our operations, we can expect our margins to keep improving. Should those variables change, such as worsening pricing, we could foresee deterioration in margins due to an overall declining economy. However, we are not currently seeing indications of an economic downturn from our sales force, so we are optimistic about sustained improvement in margins ahead.

Can I squeeze in this one last question? You've got a strong balance sheet, and given that your stock has pulled back quite significantly, would you be inclined to initiate buybacks while still sustaining your CapEx plans?

Yes, we’ve been engaging in stock buybacks this year; throughout the third quarter we've purchased shares worth approximately $85 million. In the fourth quarter, we've bought an additional $20 million, totaling around $100 million when all is said and done. We believe we can continue to invest heavily in the LTL network, which we plan to, given our CapEx guidance for next year; simultaneously, we can engage in buybacks as well.

These questions haven’t been quite as tough as the moderators from last evening’s debate, but if I can just ask about the cost pressures you guys are seeing in your business heading into 2016. You've just finished implementing a wage increase, and it seems like another wage increase will follow next year due to market conditions. What other factors are you worried about heading into 2016? What are you telling customers to justify the rate increase? Is it the equipment costs, maintenance costs, trailer costs going up, etc.?

All of the above, we are generally facing increases in all costs: capital, equipment, real estate continues to rise in price, and even within the real estate market, properties are expensive. We have taken advantage of good real estate deals in prior years, but as we evaluate real estate opportunities today, we find that everything is costly—from land to construction. We are generally experiencing cost increase pressures across the board, including wage increases that justify the necessity for annual pricing adjustments.

In light of the conversations about a potentially weaker macro environment playing out and recognizing that your margin performance has been incredible, can you talk about when and if you may start putting contingency plans in place to reduce costs? Would you feel the need to make cuts if you perceive a weaker macro pressure, or merely slow the hiring pace?

John, we continuously monitor our largest expense, labor, to move shipments: pickups, deliveries, and dock work. We're careful about this, and we monitor it on a daily and hourly basis, right at the supervisory level. Historically, September usually peaks in terms of shipments and tonnage per day, and as Wes pointed out with our sequential trends, what you see in September typically carries on through the end of the year. We are not actively hiring for the rest of the year, other than to replace people that we might lose or add anywhere that we deem necessary, but we are keeping our finger on the pulse and can take action if we see a need to reduce headcount, though we do not see a need for that at this point.

Alright, thanks. Good morning, everyone. I guess just to start, David, what percentage of your freight you think at this point is retail versus industrial manufacturing markets?

Retail comprises around 10% to 15%, while industrial manufacturing accounts for approximately 45%.

And then what would be the remainder, I guess around 40%?

A good measure of that would be our engagement with 3PLs, and we don’t have transparency beneath that mix to be precise.

Okay, that’s helpful to us. And just to clarify about the third quarter, you gave us the sequential trends, but it sounds like there was normal seasonality during the third quarter, yet the decline in October versus September was a little bit greater. So, are you seeing more softness as you move into the fourth quarter compared to what you witnessed in the third quarter?

The tonnage comparisons are tougher year-over-year in the fourth quarter than they were in the third quarter, approaching 20% for the fourth quarter last year, so that creates a very challenging comparison.

What I’m referencing is, as you indicated that October was down 4.4% compared to September versus a normal decline of 2.8%, so I was just trying to gauge whether September was stronger, resulting in a down step in October, or if this feels like it’s just slightly weaker but nothing overly concerning?

We do perceive some macro softness in October. To provide a bit more context, I've looked at our non-operating regions and summarized which regions performed stronger or weaker; it’s interesting that our strongest regions enjoyed favorable comparisons last year, while our weaker regions for October faced tougher comparisons. Overall, to me, our growth seems pretty balanced, and if there is slight weakness, it’s mostly located in oil and gas-related states and regions in the Pacific Northwest to the Gulf Coast region. Although there's some softness, it's not drastically weak.

Okay, that helps, and David, you've made me feel bad for checking espn.com this morning for the rest of my time. Just one final question for Wes, it sounds like you’re saying fuel didn’t have a significant impact on the operating ratio in the third quarter. Did I catch that right? Would you care to quantify the impact of fuel on the OR as we look into the fourth quarter?

The impact was relatively neutral; there was very little headwind on the reduction in fuel surcharge. At most, it may have accounted for a 10 basis point effect.

Hi, good morning, guys. Great quarter. I just wanted to ask first: regarding the market share gains, could you provide a clearer understanding of where that's coming from and then as you look into the next few quarters, where do you plan to target your efforts for additional market share gains?

Our market share gains are quite broad and not limited to any specific company or region; they are pretty evenly distributed. We have a balanced service product with multiple regional operations and interregional connectivity. We're competing with small regional players, multi-regional companies, and large national players. Incrementally, we are making gains in various areas, working closely with customers to enhance our service and performance across the board.

Given the challenges some of your peers are facing, I'm curious about your ability to gain share. How quickly could you ramp up scale if that becomes necessary, and what would that entail?

The unique advantage we have is that we have continuously invested in our company. We've significantly expanded our facilities by constructing service centers with excess capacity to handle future growth. So, in the event of drastic changes in the marketplace, such as a competitor's failure, the most challenging aspect to scale up would be labor. However, we have extra capacity in both our real estate and trailer resources to manage a surge in demand. Obviously, renting tractors and trailers is feasible, but the labor force is what's truly more difficult to scale in the short term. We certainly don't anticipate any drastic changes in the competitive landscape materializing in the near future.

That's helpful to know. Regarding your CapEx plans, Wes mentioned an anticipated range of $430 million to $460 million for 2016, is that correct?

Correct.

It appears that this is somewhat elevated compared to past levels. Is this a new trend for you, or are there structural changes motivating you to allocate more investment?

The planned CapEx for the upcoming year aligns closely with what we have invested this year or will invest this year. However, as we grow, we might see CapEx as a percentage of revenue decrease. Much of the CapEx will continue to be directed toward network expansion and real estate growth.

So you're suggesting there's a ramp-up period where spending increases, and then it may decline over time as you achieve stability with your service center network and fleet?

Yes, we're looking to maintain our fleet on a replacement cycle, and as David mentioned, we expect growth as well. But regarding real estate, we will invest where necessary to capitalize on opportunities. Generally, we expect our CapEx as a percentage of revenue to decrease moving forward.

Hi, thanks, good morning. I guess Wes, is this your last earnings call?

It is.

Well, I want to take the opportunity to thank you and congratulate you on a long career. My follow-up question for you is how much have you accrued at this point for your retirement bonus?

It is $3.99 million total.

To get to the real question, can you discuss your exposure to XBO and what the acquisition might mean for you from a 3PL perspective? Are you at risk of losing that business now that they have an internal logistics provider, or could that potentially lead to other opportunities?

Directly, we do very little business with them, as XBO primarily focuses on a different segment. Therefore, we don’t see much risk there. However, we have significant business relationships with other 3PLs so we expect to potentially gain market share in that front.

Got you. We’ve heard some discussions suggesting that some 3PLs might find it challenging to provide adequate information to a carrier now that they are effectively owned by a non-asset-based logistics provider. Do you see that as an opportunity for additional market share gains?

Yes.

Okay, Wes, thank you very much. I would welcome any fourth quarter 2016 EPS guidance you might have.

But then they may take away my $3.99.

And Brad, thank you for bringing this up. We're going to miss Wes; he has been with Old Dominion for 30 years and has meant the world to our company in adding value to what we do internally, with his expertise and financial management, analytical skills, and everything else. We're going to miss him.

Well, I'm sure. Fortunately for Adam, he has very big shoes to fill.

Hey, if you’ve ever seen Adam speak, his feet are larger than mine, so he is definitely capable of doing that.

Thanks, morning guys. I know there's been a lot of questions on pricing; I don't know if anyone asked about your pricing expectations for next year. Do you think that the 3% to 4% range you're seeing on contractual renewals is a good placeholder for next year?

We don’t give guidance on that, Scott. However, as David already mentioned, there’s no reason why, if macros are favorable, we should not expect to see that LTL competitors must maintain pricing to improve their respective debt caps and to fund needed capital. We would be surprised, but we expect pricing to be broadly stable for most of next year.

When you assess the sequential tonnage drop in October, are you seeing any performance variations with the 3PL business relative to that trend?

To tell you the truth, I did not bring any detailed reports regarding that to this call, Scott.

When do you expect to see a market share shift from Conway?

That is difficult to predict. I believe it's uncertain what actions they will take with Conway and how they choose to execute their strategy. Should they not manage it properly, that may present an opportunity for business to migrate to us.

Okay, and finally, is there a difference in the margins that you get on organic tonnage growth versus growth in market share?

By definition there shouldn't be. We price whether it's organic or additional; we still strategize to earn the margins needed to fund our investments.

So, if the economy slows down, and your growth will lean more heavily on market share rather than on organic growth, you believe this will not impact your margins?

Are you defining organic growth as growth solely resulting from general economic acceleration?

Yes.

Okay, that makes it clearer. It's hard to predict.

It's difficult to quickly answer that question.

Most of my questions have been answered, but a couple of things. Let's say the economy remains in this soft patch for a while—what is your preferred approach in the face of that? Will it be to expand your sales force and recruit new clients, or to disproportionately leverage the relationships with 3PLs?

Since we have experienced a soft patch since the end of the recession, we haven’t added many salespeople to our ranks over the last couple of years. We've kept the size of our team stable while successfully winning market share; even in a soft patch, we manage to do that. If conditions get worse, I'm not sure we would necessarily expand our sales team. I don't think we would change our focus toward 3PLs either. Our current strategies are working effectively for us, despite the current economic cycle. Thus, we plan to remain steady.

Finally, I want to clarify: David, during the analyst day, you characterized the economy as somewhat soft, while also mentioning that your sales team hasn't identified signs of an impending deceleration in the economy, but various October data suggests otherwise. How do I reconcile that information?

Keep in mind, Tom, that the comparisons in October are against a 21% total tonnage increase from last year.

Sure.

There may be some softness in the metrics observed, but ‘soft’ doesn’t imply ‘down.’ It’s more like 2% to 3%; the GDP is still trending near flat, and we classify that as soft.

So while you're observing shipments, the data indicates that shipments are indeed in line with our decade-long sequential trends and currently track well with the same numbers we have consistently seen. Trends indicate that while the shipments have smaller weights, they have remained stable overall.

Wes, did you share the November and December ten-year averages for shipments? I know you provided those for tonnage.

I'll provide that. When averaging, are you referring to the ten-year sequential averages?

Yes, for shipments, not tons?

For October, the sequential average in shipments is a 3.3% decline compared to September. The ten-year average indicates a decrease of 3.5%, meaning this year has been better comparatively.

Could you specify the November and December ten-year sequential averages?

It is projected at a 1.7% increase in November relative to October, followed by a decline of around 9.6% in December compared to November. Those estimates reflect the ten-year averages.

How would you describe your expedited business in the third quarter? Was it up to the same extent as the overall LTL tonnage, and were shipments in the same ballpark as your general business?

The expedited revenue grew at a better rate than overall revenues for the quarter.

Is that performance indicative of future business activity? I would expect expedited service to be weaker than your general business.

We anticipate growth from both market share and our intentional focus on that, which offsets any potential declines. When we refer to expedited, we are discussing domestic services, not global.

Thanks for taking the follow-up. Hey Wes, could I ask you to reiterate the ten-year historical sequential trends in tonnage for November and December?

Sure, in terms of tonnage sequentially, November's ten-year average shows a 3% increase relative to October, followed by an 8.7% decrease in December compared to November.

Got it, thank you for that. Lastly, do you have a rough estimate of how much core pricing needs to increase for margin expansion? Alternatively, how would you quantify that if market pricing were to be static? It seems like there needs to be a certain level for maintaining the margins.

Our margin improvement is driven by three factors: we need to see reasonable macroeconomic conditions in place, we must maintain discipline with LTL pricing, and lastly, we leverage increases in operational efficiency. The extent to which we can maintain margin improvement is somewhat reliant on external factors, particularly pricing pressures not in our control.

When asked how much we would need to offset basic inflation, are you able to estimate that amount?

I would say that we impose our inflationary expectations in pay, yielding a typical increase of around 3.5%. Not all segments will reflect that rate uniformly. We believe we can recapture some of that loss through improved productivity and operational efficiency—leveraging density is essential.

Wages comprise about 40% to 50% of our total costs, so you'll need to see about a 2% price increase to offset that inflation effectively.

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