Good morning, and welcome to the Q2 2019 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 2 by dialing 719-457-0820. The replay passcode is 7,082,211. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance.
For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed on the forward looking statements. The company undertakes no obligation to publicly update any forward looking statements whether as a result of new information, future events or otherwise.
As a final note before we begin, we welcome your questions today, but ask in fairness to all that you limit yourselves to just a couple of questions at a time before returning to the queue. We thank you for your cooperation. At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.
Good morning, and welcome to our Q2 conference call. With me on the call today is David Condon, our Executive Chairman and Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report the OD team delivered solid operating results and financial results for the Q2 of 2019, including several new company records. We recorded our highest quarterly revenue of $1,100,000,000 and our highest quarterly earnings per diluted share of $2.16 We also improved on our industry leading operating ratio by 80 basis points to 77.9%.
While we have seen general softness with demand and the economy continues to give us mixed signals, we believe we are continuing to win market share and are maintaining our price discipline while doing so. Our ability to win market share even in slower periods is based on our superior service offering delivered at a fair price. Our on time service performance was 99% in the 2nd quarter, while our cargo claims ratio remained at 0.2%. In addition to providing these superior service metrics, we also improved the productivity of our operations. Our P and D shipments per hour improved 1.6% in the 2nd quarter, while our dock shipments per hour increased 5.4%.
Our line haul laden load average decreased by 1.6%, but this metric was affected by the decrease in weight per shipment. These service and productivity metrics reflect our team's outstanding execution of our long term strategic plan. I have been particularly pleased with the flexibility of our team and our business plan over the past couple of years. We responded to the material acceleration in volumes that occurred in late 2017 through 2018 and are now responding to lower than originally anticipated volumes this year. Managing through both the ups and downs of the business cycle is not easy.
So the consistency in our service and financial results has been remarkable. We have never wavered from our commitment to service despite the associated cost due to the support it provides for our ability to maintain price discipline. The importance of yield to our financial results couldn't be more apparent than it was in the Q2. We have said many times before that the keys to producing long term margin improvement include a combination of density and yield with the support of a positive economy and stable pricing environment. Although macroeconomic conditions were not ideal, the strength of our yield performance and improved productivity more than offset the loss of density and operating leverage during the Q2, which has allowed us to improve our operating ratio to a new company record.
As we look forward to the second half of twenty nineteen, we will continue to focus on controlling our cost. We anticipate the softer demand to continue, although it is important to note that we are well positioned to respond to any acceleration in volumes that might occur if the domestic economy regains momentum. Regardless of economic environment, we will continue to execute our long term strategic plan by providing our customers with superior on time claims free service at a fair price. We will also continue to make significant investments in capacity, technology and training and education of our OD family of employees. While these investments may increase expenses in the run, we have demonstrated how ongoing investment in our sales is critical to achieving long term market share with solid returns.
Consistent execution on our business fundamentals has helped us create one of the strongest records of growth and profitability in the LTL industry during periods of both economic expansion and contraction. As a result, we are confident in our ability to continue winning market share as well as long term prospects for further profitable growth and increased shareholder value. Thanks for joining us this morning. And now Adam discuss our Q2 financial results in greater detail.
Thank you, Greg, and good morning. Old Dominion's revenue increased 2.6% to $1,100,000,000 for the 2nd quarter. The combination of the increase in revenue and 80 basis point improvement in our operating ratio allowed us to increase our diluted earnings per share by 8.5 percent to $2.16 Our revenue growth for the quarter was driven by the 9.5% improvement in LTL revenue per hundredweight. Our LTL tons per day decreased 6.3% as compared to the Q2 of 2018 with LTL shipments per day decreasing 2.6%. These decreases reflect the softer environment for freight, and we also believe that some volume loss was due to our long term consistent approach to pricing.
We expect our LTL weight per shipment in the second half of 2019 to be more consistent with the same period of last year, which will also have an effect on our revenue per hundredweight. On a sequential basis, the trends for both LTL tons per day and LTL shipments per day were both below normal seasonality in the Q2. As compared to the Q1 of 2019, LTL tons per day increased 2.9% as compared to the 10 year average increase of 8.2% and LTL shipments per day increased 3.7% as compared to the 10 year average increase of 7.5%. For July, our volumes are trending below normal seasonality, although our yield trend is holding steady in terms of the actual reported revenue per hundredweight. We expect that our volumes to be a little weaker based on how the 1st month of each quarter has trended since July of last year as well as the way the holiday fell this year.
The actual growth rate in our revenue per hundredweight is lower than the first half of this year, however, due to tougher comparisons with the Q3 of 2018. A decrease in the growth rate was expected, and we want to ensure that this is in no way misinterpreted as a change to our long term pricing philosophy. We will continue to target increases that offset our cost inflation, while also supporting our continued investments in technology and service center capacity. We will provide actual revenue related details for July in our Q2 Form 10 Q. Our 2nd quarter operating ratio improved 80 basis points to 77.9 percent as a 110 basis point improvement in our direct operating cost as a percent of revenue more than offset the increase in overhead expenses.
Greg detailed the improvements in productivity, which resulted in a 70 basis point improvement in our productive labor cost. Operating supplies and expenses also improved 80 basis points, primarily due to lower fuel cost. Our aggregate overhead cost as a percent of revenue increased 30 basis points, primarily due to the 40 basis point increase in our depreciation cost. Given the significant investments we have made in capacity and technology and the deleveraging effect of lower revenues, we expect our overhead costs to be pressured as a percent of revenue for the remainder of the year. Old Dominion's cash flow from operations totaled $255,700,000 $461,900,000 for the second quarter and first half of twenty nineteen, respectively, while capital expenditures were $159,200,000 $230,000,000 for the same periods.
We continue to expect total capital expenditures of approximately $480,000,000 for this year. We returned $147,800,000 of capital to our shareholders during the Q2 and $192,200,000 for the first half of the year. For the year to date period, this total consisted of $164,700,000 in share repurchases and $27,400,000 in cash dividends. With the increase in repurchases during the 2nd quarter, we completed our prior $250,000,000 repurchase facility approximately 1 year ahead of schedule and began our new $350,000,000 2 year program. Our effective tax rate for the Q2 of 2019 was 26.1% as compared to 26.2% in the second quarter of 2018, and we currently anticipate our annual effective tax rate to be 26.1% for the Q3 of 2019.
This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
Thank And our first question today comes from Allison Landry with Credit Suisse.
Good morning. Thanks. So I wanted to ask one about pricing. From the Q1 call when you mentioned that, at least on the fringes that you're seeing a little bit of irrational or aggressive behavior from some of your competitors. Just wanted to get an update on that, if that's something that you saw persist in the second quarter, if there's been any sort of change in the pricing landscape.
It sounds like the yields are remaining steady, but curious on the competitive side.
Yes. Allison, this is Adam. And we still see it as pretty consistent with last quarter. And I think that when you look at our yield trends, certainly, they were very consistent with the Q1 as well. And I'll point out, we said in our prepared remarks on the Q1 call that we view the environment as stable and things went maybe a little sideways as part of the Q and A, but we continue to view things as stable.
And we're still getting consistent increases in our contractual renewals and so forth and still seeing our increases offsetting our cost inflation, which is the primary target that we go after each year as a contract is renewing.
Okay. That's helpful. And then on the resource side, since you guys were really ramping up on hiring through most of 2018 and now that demand levels are quite a bit softer. Do you think that you're sort of over resourced and you need to rightsize that a bit? And how should we think about that in the second half in terms of headcount levels and what impact that may have on productivity?
Thank you.
Allison, we have made the necessary cuts to reestablish our labor at the tonnage levels, but that we're working currently working. But we have made those adjustments. Obviously, we did. If you look at our productivity gains, and you can't do that without making the labor adjustments. So we feel pretty good about where we are going through the quarter, and business conditions will dictate what we do with labor going forward.
Got it. Thank you.
And we'll take our next question from Amit Mehrotra with Deutsche Bank.
Thanks, operator. Hi, everybody. Congrats on the big congrats, I should say, on the operating performance in the quarter. So I just wanted to ask about the weight per shipment comps. They obviously get easier and they're starting to get easier.
But shipments have now taken a bit of a step down. And Adam, I'm just curious about as you guys manage your cost structure, does the shipment driven decline in tonnage better allow you to adjust the cost structure? And if you could just talk about maybe your ability to protect profitability if tonnage declines or just being more disproportionately driven by shipments as opposed to weight per shipment?
Sure. And shipments is something we've been trying to talk more about this year just given the disparity with the weight per shipment and the changes we saw from in the first half of twenty eighteen compared to the second half. But I think you can already see what the response has been and we feel good that we saw some of this slowing last year and I felt like we got a little bit ahead of the cost curve. But where our shipments were still trending positive in the Q1 of this year, they turned to negative. But we talked about our headcount coming in alignment with our change in shipments.
And if you look now and compare our headcount where we were at the end of June versus where we were at the end of September, we're down right at 4%, just that one point versus the other. And when you look at the change in shipments per day in the Q2 of 2019 versus the Q3 of 2018, we're down in similar type of range, it's down about 4%. So we've got the headcount pretty much in alignment with where shipments are, as Greg just said. And I think in doing so, certainly, we saw the improvement in productivity as we progress through this quarter. And our direct cost performance, as I mentioned, has really been great.
So we're seeing that improvement in our productive labor costs. We're getting some improvement in some of our operating supplies and expenses and some of that is fuel driven, but that's been able to more than offset the loss of leverage that we've seen in our overhead costs.
Yes. And would you just related to that, I would have imagined you have some opportunity on the overtime side and the hour side. And we didn't really see that come through just given salaries, wages, benefits per employee were actually up a little bit. I don't know if that partly related to some inflation in fringe costs and the Phantom shares. But if you could just talk about your ability to maybe control hours prospectively from here just given the decline in the revenue trends?
I think that's what that benefit that we're seeing. So in our productive labor costs, just the labor component has improved 70 basis points as we talked about. But we did see a little bit of inflation, if you will, in our fringe benefit costs during the period compared. So we talked about and I mentioned, I think, going into this year that I anticipated a fringe rate around 34%, and that's about where we were in the Q2. Last year, our fringe rate was 32.8%.
So we had a little bit loss there and some of that was just we had a little bit of favorability in the quarter last year. And on the overhead side of our labor cost, it's pretty flat from an overall standpoint percent of revenue, and that's because a lot of our compensation is performance based. And so without the same type of growth in maybe some of the metrics we saw last year, that's a little bit lower and it's just they're kind of coming out in the wash versus fixed salaries and so forth and then that performance based piece.
Right. And just one quick follow-up, if I could, just on pricing. I mean, you've talked about yield, but Adam, I was just hoping you could parse out within that yield, what's actual same store pricing, so to speak? And what's the because it's a little bit tough to figure out because of the weight per shipment and then just slight increase in length of haul, not much, but slight. Just trying to understand what the kind of core pricing is within that yield number.
Yes. We stopped giving that contractual renewal number primarily because I think that Russ and maybe some of the other carriers as well, it never necessarily seemed to reconcile into what the components are. But what I'll say is we always target revenue per shipment. That's what we're looking at is the shipments we handle and the revenue for those shipments and then the cost per shipment and we're still getting our renewals kind of in our long term target range that's 80 basis points to 100 sort of north of cost inflation. And we always we go through, we look at what we anticipate cost inflation is going to be on a per shipment basis each year.
And then we need that extra, as we talked about, with the ongoing and continuous investments in our real estate network and in our technology systems that where we try to drive operating efficiencies. So we've continued to get increases. They're not as strong necessarily as what we saw last year, but we didn't expect that coming into this year. Our pricing philosophy is more on account by account basis and each account's operating ratio should stand on its own. And some of those lower performing accounts, we got higher increases last year that we didn't necessarily think would should repeat.
So I feel good about the way our renewals are trending and certainly that's showing up and is the big reason why. I mean, Greg said in his comments, but the yield performance is what drove this record setting quarter for us both in revenue, OR and EPS.
Right. Okay. That's all for me. Thanks for answering my questions. I appreciate it.
And we'll take our next question from Chris Wetherbee with Citi.
Hey, thanks. Good morning. Maybe could I ask you just to run through what the tonnage numbers looked like in the month of June? I don't know if you had mentioned that before, but it looks like they stepped down a little bit from what the quarter to date had been through May. Just curious what that number was?
Sure. Yes, on the tonnage side, we had a 7% decrease in tons in the month of June and that was after a 5.8% decrease in both April May. And then on the shipment side, we had a 3.4% decrease in shipments per day in June, and that followed a 2.1% decrease in April and a 1.9% decrease in May.
Okay, okay. That's helpful. And the July commentary, although you don't give the number, the suggestion was the transition from 2Q to 3Q is a little weaker than typical seasonality would suggest?
It is. And it seems like this trend has been in place now for the last several quarters, but I think that our revenue trends have been really consistent as we progress through the quarter, but we kind of start this 1st month out of the quarter below normal seasonality and it's been that way since going back to July of last year. And so we've been pretty well below in January April this year. And so but what we've seen is a consistency from the start to the end. So we'd expect to see things continue to build.
But July had a has a negative setup. And like I mentioned, we expected to see it a little bit weaker just the way all the days fell with regard to the holiday and continuing through the month. But I would expect to see it pick up kind of back above seasonality in August.
Okay. Okay. That's very helpful. And then just mechanically, as we think about the revenue per 100 weight that you report and the relationship with the weight per shipment, I think you mentioned that weight per shipment is going to begin to sort of move towards comparability or flat relative to the second half of last year. Just mechanically, that has sort of a negative impact on the revenue per 100weight growth.
Can we just sort of walk us through or remind us sort of that relationship, is it 1 for 1 as you see that sort of decline start to normalize the impact on the revenue per 100weight?
Sure. There's no completely linear way to track and to adjust for weight per shipment and the other mix changes. You've got length of haul and class of freight that impact that reported metric as well. But typically and we're still seeing the increases, like I mentioned, on contracts that are renewing. And there's no one renewal period for us.
They're renewing and we're evaluating contracts every day as they come up. So we'd expect and historically it's shown that you'd expect to see holding mix constant a little bit of an increase going into the Q3 out of the second. And so with that said and based on the acceleration that we saw from 2Q to 3Q last year, just assuming a little normal acceleration in the actual reported number in the second quarter going into the 3rd, then that may change that growth rate metric somewhere between the 5% to 6% type of range.
Versus where we've been close to double digits this year.
Yes, exactly. Okay, great. Thanks very much for the time. I appreciate it.
And we'll take our next question from Ravi Shanker with Morgan Stanley.
Thanks. Good morning, everyone. So just another question on the tonnage here. I mean, your tonnage doesn't run negative for very long. I mean if you go back to last 15 years, it's kind of usually for like 4 quarters in a row.
I think you're already at that level. Does it feel like tonnage is going to imminently flip positive in the second half and going into 2020? Or do you feel like the macro environment is too far too uncertain to make that call?
It still feels a little bit soft and I know our comparisons get a little bit easier in the last part of the year, but it still feels a little soft. So we don't expect our tonnage to flip to positive. But hopefully, the macro will pick up and we'll have a better end than we expect. But right now, it just appears to be a little bit soft. Consistent, that's the good thing.
It is really consistent day to day, but it's not seeing the levels that certainly that we did last year this time.
And Robbie, I'll just add, it's when you look at all the macroeconomic numbers that we pay attention to, particularly on the industrial side, It's still showing growth, but certainly that hasn't reconciled to freight across the transportation landscape, I'd say, and it's not just us. But there's it's been hard to read the tea leaves because you've got a lot of metrics that suggest positive trends and maybe not as strong as certainly as what we were seeing last year, but still all showing positive. And I think the one bright spot in everything is the fact that the consumer is still healthy. And so there's a lot of good economic data on that, if you will. And so in that regard, if consumers keep consuming, somebody's got to produce and ultimately ship that freight.
Got it. That's really helpful. And just maybe as a follow-up to that, when you think of what your OR has historically done kind of in those negative tonnage environments, I think in 2016 your OR deteriorated, but so far you've kept it improving. Again, you spoke of a number of initiatives that you're putting in place. But is your messaging here that you can continue to keep improving the OR even in the negative tonnage environment?
Again, obviously, if you go into recession, all bets are off. But if it continues in the current environment, the OR can keep improving even with the tougher comps that you have?
Ravi, the we've done it now for a couple of quarters, and I think that I was pleased with the sequential operating ratio performance from the Q1 into the second. We've the operating ratio improved 4 10 basis points and the long term average is 440. So comparing back to periods where we've had slower revenue growth, it's sort of been in 3.50 basis point kind of range. So I felt good about our cost trends there. Typically, the Q3 is very consistent with the 2nd.
And long term, the operating ratio is typically up 20 to 30 basis points. And so I feel good with what we've done with respect to our cost. Certainly, we've got a few other things that we can focus on with respect to saving some money and protecting some of the costs there. But even at its worst, kind of going back into some of the periods in 20092015, that was a 60 basis point increase. So we've still certainly got more room rather in terms of where we were last year in Q3 to show some slight OR improvement.
And that's definitely the goal for us is to continue to try to protect the bottom line to grow our earnings and to improve the operating ratio.
Understood. And just last one for me. IMO 2020 is around the proverbial corner. How are you guys thinking about that and maybe any ripple effects through the transportation space when that does happen?
I think at this point, we're going to take the wait and see approach. I mean, obviously, we're prepared for growth if it comes back. As I mentioned in my earlier remarks, we have continued to execute on our gaining capacity our plan to gain capacity. So I think we're in a good spot if in fact it's better than we expect it to be. So if it's not, we'll make adjustments and proceed accordingly.
Again, I think we've proven that we can make the adjustments that we need to make in a positive or in a negative environment. So hopefully with what we've done particularly the last several quarters, you see that we are able to do it. So let's just hope that things pick up.
Understood. Thank you.
And we'll take our next question from Jack Atkins with Stephens.
Hey, guys. Good morning. Thanks for taking my questions. Greg, I guess first one would be for you. Just curious and I know you said things still feel kind of soft out there, but curious to know what you're hearing from your customers about their expected business trends in the second half of the year.
I think UPS yesterday on their conference call said they expected industrial production to be slightly negative in the Q4. As you sort of aggregate your customer conversations over the past couple of months, how are you thinking about underlying business fundamentals heading into the second half of the year?
Yes, relatively positive honestly. For the most part, most of our major customers are fairly busy. So it seems to be from that standpoint positive and that makes you feel good. The other side of that is our it seems like our customers are extremely happy with our performance and what we're doing. And I think that has put us in a very, very good position to continue to gain share as we go forward.
But that is definitely a positive. Our customers do seem to be busy and that's a good thing for the industry in particular.
Okay. That's helpful. And then following up on that, Adam, you talked about July being a little bit below normal seasonality, but the expectation that August will maybe be a little bit better than normal seasonality. As you think about the Q3 in aggregate from a tonnage perspective, is it your thought that we're kind of at the point now where we should as a whole kind of return back to more towards normal seasonality when we think about 3Q versus 2Q or is it just too early to make that call?
I don't think we want to give that guidance at this point, but we'll continue to watch it and continue to adjust as we need to in handling the freight that we get.
And our next question comes from Scott Group with Wolfe Research.
Hey, thanks. Good morning.
Hi, Scott.
So Adam, your comment about weight per shipment flattening out, is that something you're seeing in July? Is that where you think you're going to get to in the second half? And then is it flattening out because it's starting to move up sequentially or is it just flattening out because the comps are just a lot easier?
The comp, if you recall last year in June, our weight per shipment was about £16.20 and then by July, it was about £15.60 And most of that related to we were just getting in a lot of heavier weighted shipments, truckload spillover type of freight and we made some operational changes to try to control the exit of that freight versus letting it happen to us naturally. And so we saw an immediate effect on our weight per shipment then. And we've kind of been in this sort of 15.50 to kind of 15.80 ish pound range flexing up and down, and there's some seasonality aspect of that. But yes, I'd say that it's been pretty consistent this year, which has been another bright spot that we hadn't necessarily seen that going any lower that you might expect from a read on the economy per se.
Okay. In terms of pricing, are you saying that the competitive pricing environment you start to see a little bit in the Q1 is improving now or is it that it's the same, but we are not freaking out about it as much as maybe we reacted last quarter? And then revenue per shipment has been growing 5%, 6%. Do you think that's sustainable in the back half of the year?
I would say on your first question, we're still saying it's stable just like we did last year or last quarter rather. And certainly, it's I think that, that was coming off of 2 years of favorable very favorable environment. But so it's very consistent with what we're seeing. And from a revenue per shipment standpoint, I would say ex fuel, certainly, that continues to be the target. Coming into this year, we talked about our cost per shipment expectation of somewhere around 4.5%.
And we want to continue to try to get increases on a revenue per shipment basis that are north of that we are, and I think we'll continue to see that. Including fuel, though, we do we've seen it in the Q2, and it's definitely continued into July, where we're seeing fuel rates down versus where they were last year. So that will be a little bit of a headwind on that fuel metric with the fuel and as well as just top line revenue performance in general. Okay.
And just real quick, I may have missed it. Did you say if you think headcount is going to be flat or down, maybe up sequentially?
I'd expect it to stay somewhat flat through the 3rd Q4. Okay.
Thank you, guys. Appreciate the time.
And our next question will come from Jason Seidl with Cowen and Company.
Thanks, operator. Good morning, gentlemen. In your non industrial business, were any of your customers talking about the tariffs impacting them in the first half of this year from a pull forward perspective?
Certainly, it's been a conversation point, particularly customers. We visited several weeks ago out on the West Coast, several of us and heard a little bit more of it out there. But overall, our retail business continues to perform well for us. And I think we've got a very good product, many retailers that have been optimizing their supply chains, got programs in place that really favor high service carriers and certainly that's been a big benefit for us and we've seen good growth in that element of our business. We call it our must arrive by date business, but it's just managing the on time and full type of programs that many retailers are putting in place.
So that's been good for us and has been a bright spot.
So is it safe to say that it's come up, but probably not really impacted the 1Q volumes that much?
Well, it's hard to say. I think there's been an impact there, but we're just continuing to gain market share that maybe has offset any individual customer that may be feeling a little bit of pressure, but we're just we're continuing to gain market share in that piece of our business.
Okay, fair enough. Also, there's been some bankruptcies in the LTL side in the last 6 months. Have you guys picked up much freight from what you can tell from either of those bankruptcies?
We have picked up some, but they were both very, very small, but we definitely did pick up some. We had kind of a flurry of phone calls and opportunities from the get go. And I'm sure we've kept some of that business, but most probably all the business that we initially took on. But they're very, very small, so not a big impact, but we did get some. Not a big impact.
Honestly,
I
Honestly, I'm not sure either of those were large enough to move the needle a whole lot. Okay.
Fair enough. Listen, I appreciate the time as always.
Thank you.
And we'll take our next question from Ari Rosa with Bank of
So the first question I wanted
to ask you just was about some of the capacity additions and the extent to which you think that might have a drag on the OR in the second half of twenty nineteen or going into 2020, certainly with incremental margins in the mid-40s and I think it went north of 50 this quarter. Maybe you could address what you think of as the sustainability of those levels given the capacity adds?
Well, some of that incremental margin is just a function of the way the math is working. And we've talked many times before about the fact that we don't manage the business to incremental margin. We're independently trying to put on revenue at a good OR and always trying to take cost out of the business. And I think in the 1st and second quarters this year, that cost element has certainly caused a benefit to that metric. But most of the capacity additions that we make don't have a huge impact, and speaking of servicing our capacity, but have a huge impact on that depreciation line.
Certainly, the equipment costs have added depreciation to us and we were anticipating growth in shipments this year and at least in the Q2, we're seeing those down. So our fleet is probably a little heavy versus where we'd like it to be and we cut $10,000,000 out of our CapEx going into this quarter on the tractor side to help a little bit, but there's other carrying costs besides the depreciation on the fleet and we've seen some inflation there as a result. And some of that kind of gets buried overall in the operating supplies and expenses, but there's certainly been some excess fleet maintenance costs there. It's just we've got probably more tractors than we need at this point. But some of that will just transition as we go 2020, and we'll be looking at what we think the demand environment and what our growth potential for that year will be and will somewhat get offset likely in our 2020 CapEx plan.
That's great color. Actually leads well into my next question. So I wanted to talk a little bit about free cash flow conversion. Obviously, the net income numbers that you guys are putting up are quite impressive, but the free cash flow has trailed that a little bit and that's obviously partly the nature of asset intensive businesses. But if there is a slowdown, do you think there's a little bit of an opportunity to maybe improve that free cash flow conversion?
And how much of an eye are you guys keeping on that?
Well, it depends, is the easy answer to say. But one of the things that we look at will be what other opportunities may present themselves. And what we've seen in slower periods in the past is that gives us an opportunity to potentially accelerate some service center expansions and potentially some opportunities of existing facilities. And so we certainly are going to keep our eye open for those opportunities. We've got long term market share goals, and we think we've got a long runway of growth ahead of us in that regard and it will require significant investments in service centers.
So we can accelerate some of that in a slower environment where in the past other carriers have made service centers available, then I think we'd certainly look at accelerating on that opportunity.
Okay, great. And just remind me, I think we talked about it last call, but remind me what's the target or the long term target in terms of where you might like to get to in terms of service center footprint?
That constantly changes right now. I think we're at 2 35 service centers today and we've kind of got a list of about 40 service centers or so. But as we've gone through time, what we figured out is as the company gets bigger, the network plan and configuration changes. And we've kind of figured out with growth that it's more efficient for us to have multiple service centers in metro areas. We've been doing some other operational changes around some of our break bulk locations and managing break versus local freight.
So there's multiple elements to it, and we don't know what we don't know. So I think we get smarter as we go when it comes to the configuration of the network, but we're trying to build it with optimizing efficiencies both in our line haul and our pickup delivery operations. So my guess is, as we approach the $275,000,000 it may be that
Okay. Sounds good. Thanks for the time.
And we'll take our next question from Todd Fowler with KeyBanc Capital
Markets. Great. Thanks. Good morning. I think that you typically put in the annual wage increase sometime during the 3rd quarter.
And I was wondering if you could share any expectations that you have from that for this year from a timing of magnitude standpoint?
The same timing as always. We always give our annual wage increase effective the 1st Friday in September, and that will be the same this year as well.
And Greg, just from a magnitude with the labor environment and with what you're expecting on the pricing side, is that something maybe below
where it's been
in the past couple of years? Or how do we think about kind of the magnitude of what you'd be putting through this year?
It's going to be somewhat similar, Todd, but I don't really want to talk about numbers exactly there, but it will be somewhat similar to what we've done in the past. We haven't announced
this internally yet, so we're not prepared to
You're not going to give us the first look. That's fair. But Adam, so with the commentary on the sequential OR progression, and I think you said typically 40 to 50 basis points of deterioration 3Q versus 2Q, that's something that you would expect or that would be embedded in kind of that thought process on kind of a typical seasonal change within the OR? Correct. Okay.
And then, Adam, you made the comment on the expectations for the fringe for the full year to be around 34%, and it sounds like that that's you're in that range for 2Q. I think in the Q4 of 2018, you had it's a really difficult comp on the fringe side. I know that we've got some of the year to play out, but can you help us think about anything that we should factor in for the second half on the fringe side that would make the benefits be different than the 34% that you're thinking about? Or is that something you think you've got pretty good line of sight into at this point?
Well, last year in Q4, we had several favorable adjustments. And typically, the operating ratio was about 200 basis points higher in the 4th quarter versus the 3rd. Last year, it was only 30 basis points higher. Some of that was we go through an annual process of actuarially evaluating our certain insurance reserves and we had favorable adjustments in our workers' comp and our auto liability claims. And we just had several favorable adjustments similar to that, that rolled through that fringe line in the Q4 of last year.
I think our fringe benefit rate was between 30% to 31%. And that reflected some of that favorability in the workers' comp. I think we had favorable group health trends in that quarter and then favorable phantom stock adjustment as well. So we just had a lot of favorability that rolled through that quarter. And you never know which way some of those actuarial adjustments are going to go.
And that's why when you look at kind of that Q4, while I mentioned the second and third quarter is very, very consistent year in and year out. There's more variability from that 3rd to 4th quarter for that reason.
Okay. But for a starting point, it sounds like we should think about Q4 sequentially versus Q3 and be careful if we're doing Q4 year over year comparison just given the number of benefits in the Q4 of last year?
Right.
I wouldn't necessarily expect those to they can go either way, but wouldn't necessarily expect all of them come in, in the same magnitude and all in the same direction like they did last year. That was very unusual when you look at that 3rd to Q4 of 2018 type of performance.
Well, if Greg gets his wish and the tonnage comes back, we won't have to worry too much about those things, I guess. So
And we'll take our next question from Matt Brooklier with Buckingham Research.
Hey, thanks. Good morning. Just going back to service centers, I think you talked previously this year about opening or expanding on 6 to 10 locations. Adam, I'm just curious to hear your thoughts about that number, if we're going to be at the higher end or lower end. And if you have the service center count for Q1, that'd be great.
At the end of the Q1 or we're currently sitting at 235 service centers is what our current count is. And just based on completion schedules, we think that we'll finish another 6 service centers this year. But as we talked about, I think, on our last quarter call, some of those service centers, we may just defer the actual opening of those facilities until we start getting into the normal ramp of freight in the spring of next year. So they will be finished and will be ready, just may not be that we pull drivers and stab them up and so forth, just keep things as they are and then move the operation in early 2020.
Okay. So even with lower tonnage levels, you're still committed, it sounds like, to opening up more service centers is just the timing maybe a little bit different than you had previously thought entering the year?
Of that total 6, 2 or 3 of those will probably just be open and will be open for business. But once you're committed and in these projects, they fit in the long term plan and that's some of what we've talked about. Our long term plan is just that, it's for the long term, and we think we've got plenty of revenue growth opportunity. The decisions we're making now are going to be helping us for the next several years. And much like the investments we made in 2016 was freight when freight was slower.
Had we not made those expansion projects and the real estate team completing the projects when they did, we certainly wouldn't have been in a position to handle the increased revenue that we saw in 20 172018. So we've got to keep those projects going. We think they're critically important to our long term future, and we want to make sure we complete them and move on to the next location where we know that we've got some capacity needs. And overall, we'd like to maintain about 25% excess capacity in the system. And even with the 7 openings that we had in 2018 and what the expectation of what we'll complete this year, our excess capacity that is, is in about the 20% ballpark.
So we want to make sure that we keep these goings these projects going and put ourselves in good shape from when we know the economy will pick back up. And certainly we believe that our service will continue to drive market share growth for us.
Okay. That's helpful. And then, we heard from some of the truckload carriers that the driver market actually has become a little bit less competitive. Curious to hear your thoughts. I know it's not an apples to apples comparison, but LTL market drivers, has the market gotten a little bit looser here?
And if so, do you think that could be beneficial from a cost inflation perspective?
We're certainly in good shape for drivers right now. We're not hiring other than maybe in a few selected locations, but we're really in good shape drivers right now. So we don't see that as an issue going forward. We are continuing to train some additional drivers, but at a slower pace than we did it last year. But we don't expect any issues from that standpoint at all.
Okay. That's helpful. Appreciate the time.
Our next question comes from David Ross with Stifel.
Yes, good morning. Adam, just a quick knit to start on the communications and utilities line item. That was down year over year. I don't know if there's anything one time in there or what the run rate should be going forward?
Nothing material that's in there as any kind of adjustment. There's always some minor adjustments one way or the other that kind of run through theirs. We may be moving into or out of one contract into another. That expense remains relatively consistent quarter to quarter, I think.
And so from here, do
you expect it to be about 2nd quarter level for the rest of the year?
It was a little bit lower than where we were in the first, but so it may step up a little bit more. We do have some costs that will continue to come on board as we're looking at
ELD,
communication systems and switching over into a new platform. We've been working on that project this year, and so that may have caused a little bit as we're kind of in the middle of transition, a little bit of reduction there in the Q2. But so it will probably be stepped up a little bit higher.
Yes, that was my next question just for some more color on your HEYO BR to ELD transition. Where does that stand? Are you going to have it done before the deadline? Is it going better than expected?
It's going good, David. As any project, major project like this, you roll out, there's always a few snafus here and there. We're working through those. But it's going well, and we certainly expect to have it completed well before the deadline.
And does that change at all how you run the network? Do the ELDs essentially do anything different from an Old Dominion perspective than the AOBRs did?
No, sir. We'll have the same communications abilities that we had, so no changes at all.
The big thing for us is just working through and making sure we get all the telematics type of information and into our own systems for evaluation. Tracking the hours is the easy part. It's all the data we get and what we do with it that we want to sure that we're not missing out on.
That's why you can't just plug them in and turn them on and go to work. It's a little more complicated than that. But we're working through it. We've got a pretty aggressive team on that project, and we're working through it, David.
Excellent. Thank you.
And we currently have no questions in the queue at this time. I would like to turn it back to our presenters for any additional or closing remarks.
Well, we certainly thank you for all your participation today. We appreciate your questions. And please feel free to give us a call if you have anything further. Thanks and I hope you have a great day.
And that does conclude today's conference. Thank you for your participation. You may now disconnect.