Good morning, and welcome to the Q1 2017 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 5th by dialing 719-457-0820. The replay passcode is 8,629,557. The replay may also be accessed through May 27 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're hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to update publicly 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. Thank you for your cooperation. At this time, for remarks, I'd like to turn the conference over to the company's President and Chief Operating Officer, Mr. Greg Gantt. Please go ahead, sir.
Good morning and thank you for joining us today for our Q1 conference call. I'm here today with Adam Satterfield, our Chief Financial Officer. David and Earl Condon could not be here today and they asked me to step in. I've met many of you previously at conferences or here in our office and I look forward to meeting more of you in the future. But for now, let's get started on our call and after some brief remarks, we'll be glad to take your questions.
We are off to a good start in 2017 and produced our best financial results in terms of year over year growth in revenue and earnings per share since the Q2 of 2015. We believe this is a welcome sign of an improving economy and are pleased that momentum with our revenue has continued to date in April. As we said in our Q4 conference call, we believe Old Dominion is well positioned to benefit from a stronger economic environment. We have the capacity to absorb an increase in demand for our superior service, which is consistently delivered by a team of employees that are dedicated to exceeding our customers' expectations. In the Q1, we delivered 99% on time and produced another company record for our cargo claims ratio at 0.2%.
Looking ahead, we remain cautiously optimistic about the economy and will continue to be prudent with our approach to managing labor and equipment capacity, regardless of how the operating environment unfolds. However, we are confident that by consistently providing our customers with superior service at a fair price, we can extend our long term record of consistently gaining market share. We believe an increase in market share adds network density, which combined with an improvement in yield can allow us to earn an appropriate return to support our business model and growth strategy. Our long term growth while also providing consistent training and education for our OD family of employees. Having refined our business model for the past 2 decades, we are stronger and more capable of executing on our strategies than ever before.
We believe that customer demand for the basic value proposition that we provide of all times, claim free service at a fair price will continue to grow over the long term. We are confident in our ability to continue meeting this demand in the years ahead, which we expect to drive long term growth in earnings and shareholder value. Thanks for your time this morning. And now, Adam will discuss our Q1 financial results in greater detail.
Thank you, Greg, and good morning. Old Dominion's revenue increased 6 0.6% in the Q1 of 2017 to $754,100,000 We had a 20 basis point improvement in our operating ratio and as a result, our earnings per diluted share increased 11.1 percent to $0.80 per share. The increase in revenue for the Q1 reflects an increase in both yield and LTL tons per day. LTL revenue LTL weight per shipment and decrease in in LTL weight per shipment and decrease in length of fall, which generally puts downward pressure on our revenue per 100 weight. LTL tons per day increased 2.4% as compared to the Q1 of 2016 with LTL shipments per day increasing 1.4% and LTL weight per shipment increasing 1%.
On a sequential basis, our LTL tons per day in the Q1 decreased 1.3% as compared to the Q4 of 2016. This change was slightly worse than our 10 year average sequential trend, which is a decrease of 0.8%. Although the quarterly average was below our long term trend, our volumes accelerated as we finished March and have trended favorably into April as well. For April, our LTL tons per day have increased approximately 4% on a year over year basis and our yield continues to trend favorably. Our Q1 operating ratio improved 20 basis points to 85.7% as compared to the Q1 of 2016.
This was the first improvement in our quarterly operating ratio since the Q3 of 2015 and occurred despite the 40 basis point increase in depreciation costs as a percent of revenue. Our operating ratio benefited from a 30 basis point improvement in insurance and claims expenses as a percent of revenue as well as improvement in our variable operating costs. The operating ratio also benefited from the increase in revenue, which helped create leverage on certain fixed costs. As we enter the Q2 of 2017, include cost related to our strategic decision to become the official freight carrier of Major League Baseball, which we expect to generate opportunities for increased brand recognition and market share growth. Multiminions cash flow from operations totaled $110,800,000 for the Q1.
Capital expenditures were $57,000,000 and we continue to expect total capital expenditures of approximately $385,000,000 for the year. We returned $8,300,000 of capital to our shareholders during the Q1, which included $8,200,000 in the form of a cash dividend, our first ever dividend payment. The average closing price of our common stock at 88 $0.74 during the Q1, we only repurchased $50,000 of our common stock. These purchases left us with approximately $200,000,000 available for purchase under our current $250,000,000 stock repurchase program. We intend for our share repurchase program to be the primary form of returning capital to shareholders over the long term, although there may be periods when our repurchases are limited.
With an average share price in the lower 80s to start the 2nd quarter, we have repurchased $2,600,000 of shares so far in April. Our effective tax rate for the Q1 was 38.6 percent as compared to 38.4% for the Q1 of 2016. We currently expect our effective tax rate to be 38.6% in the Q2 of 2017. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
And we will take our first question from Brad Delco with Stephens.
Hey, good morning, Greg. Good morning, Adam. How are you? Brad.
Greg or
Adam, could you talk about what you think the drivers were or what geographies are seeing strength with your comments about acceleration in late March and into April? And then Adam, could you give March tonnage and that April tonnage number you gave a +4, is that adjusted for Easter or is that with the tougher comp?
That's just what the number is today. That's the actual comp.
Okay. Thanks. And then in terms of just the general where you're seeing the strength and what you think really drove this late quarter acceleration into April?
Brad, we're fairly consistent across our network. Obviously, there's some better than others, but it's fairly consistent. We may have one here or there that needs some support and there's reasons for that, but our sales folks are on top of it. But for the most part, it was fairly consistent across the network.
To the other part of your question, Brad, the March volumes on a sequential basis, March was up 5.6% over February. Our 10 year average is plus 5%. And when you think back in the middle of March, we had some weather issues in the Northeast, but we just really finished that month out really strong. In April, the normal increase is 0.5% above March. And at this point, we're trending pretty much in line with that normal trend, maybe even slightly above despite how well we performed
in March. And would that be unusual considering you probably had what a half day on Good Friday?
I mean that Good Friday is baked into those long term trends. But you're right, Good Friday always is impacted pretty significantly. Good Friday, as you know, was in March of last year, but nevertheless, that's what the trend is right now. Okay, great. I'll leave it at
that question and get back in queue. Thanks.
Great. And we will take our next question from Brian Konigsberg with Vertical Research Partners.
Yes. Hi, good morning. Good
morning. Hey, I just wanted to touch on the revenue per 100, Wade. I think good result again in the quarter. I think you noted length of haul was down and you kind of performed despite that. Maybe just talk about what you see as far as trending the remainder of
the year
and how we should be thinking about pricing as the year progresses?
I mean, we think the pricing environment continues to be stable. We haven't seen a lot of competitiveness. You always see some spotty pricing issues, but it just it feels a little bit better. But I think we'd still characterize it as stable. And I think that we had good performance in the Q1.
There's no exact algorithm to normalize for changes in mix with the weight per shipment increasing and length of haul decreasing. But when you just look at the absolute revenue per 100 weight with and without fuel, they were both higher than where we were in the Q4. Granted our weight per shipment, if you just look sequentially, it decreased from the Q1 into the first. But even going back to last year and say the Q3 when weight per shipment was more in line with that quarter, I still think our absolute level is right in line or slightly better. So we will continue to target as we've always said 3% to 4% increase, a price increase with our contractual accounts as they renew.
And then when we evaluate new business and we brought on a fair amount of new business in the Q1, we go through our normal cost and pricing process and look to ensure that each account stands on its own from a profitability standpoint and that we earn a return that's necessary to allow us to be able to reinvest in the business and execute on our strategic plan.
Great. That's helpful. And if I could just add a follow on. Just kind of thoughts on the ability to add terminals this year. I know you were planning to add, I guess, all my numbers, 4 to 5, I believe.
Over the next several years, that 35 to 40 you're targeting over the longer term?
We're on target with what we had planned for this year. I think you probably know we're adding in some of the major markets. We've got one underway in Houston, one in Dallas, Chicago, suburbs of those, but we're well on those are well underway, but we'll see how it goes. It's difficult now to add real estates. It's hard to find land.
There's not very many existing structures available like there were 10, 15 years ago. So it's difficult, but we will add as we see the need and as we have opportunities. We're always opportunistic if we can be. But it's well underway and not sure about the 35 to 40 number, but we'll see how that goes. But we are adding as we see the need.
Got it. Thank you.
And we will take our next question from Chris Wetherbee with Citi.
Great. Thanks. Good morning, guys. I wanted to touch on the yield dynamic the month of March. Just want to make sure I understood sort of how that was playing out.
I think your quarter to date through February was almost 100 basis points or so lower than what ultimately finished out for the year. So just was there was it the new customers coming on to the network that got sort of that revenue per 100 weight boost? Just want to understand that a little bit better if we could.
Yes. Some of it, and I've talked often about it's hard to just look at yield on a 1 month basis and certain mix changes can have more of a pronounced impact. If you look back into last year, going from February of 2016 into March of 2016, our weight per shipment decreased in those months. And so the absolute level revenue per 100weight was a little bit lower in March. And so it made the month's comparison a little bit easier, if you will.
And so then that obviously brought up the quarter. But we like I've said and we continue to say, we still we always target earning the appropriate amount of revenue per hundredweight, if you will, and it's really that's not how we price, but we just look at all the business that comes to us and we had a lot of the growth that we had in the Q1 came from existing accounts and some of our 3PL accounts that were bringing new business to us. So that is going to have an underlying impact on mix. But we feel good about our performance with pricing and what we're doing and we're going to continue to target those same types of increases that we always have to ensure that we're offsetting our own cost inflation.
Okay. That's helpful. I appreciate the color. And then just wanted to circle back on your comment around the cost side and specifically, I think, the baseball contract. How should we think about that and maybe how that plays relative to your typical sort of strong incremental margins in a growing volume environment?
Just want to get a sense you could help us quantify some of those dynamics that would be great.
Yes. And I don't want to give specifics on the numbers, but obviously we'll probably see increases in our general supplies and expenses and our miscellaneous expense line items as well on the income statement. But on the last call, we talked about cost inflation for the year and we generally say 3% to 4%. And I mentioned at that point that we anticipated cost inflation more in line of 4% per shipment this year because we had some planned increases in spending that we were evaluating basically. And we've got the 3% wage increase that's driving most of our costs, But now we'll have a little increase from a sequential standpoint in the second quarter in those miscellaneous the general supplies and expenses and miscellaneous expenses.
So that would take us up that 4% level kind of for the year. But some of that, frankly, as we get more volume growth and we talked about this, it's creating leverage on our overhead cost. And so, obviously, we'd like to see continued increase in shipment counts and that could help offset that cost inflation as well as we had good productivity in our operations in the Q1. And we had improvements in our line haul productivity. We had improvements in our P and D.
Our dock was flat. But if you recall last year, we had really good productivity improvements in our dock. So that continues to be very efficient productive operation. And so those obviously will all go into helping
our cost.
Okay. That's helpful color. Thanks for the time. Appreciate it.
Thanks, Chris.
And we will take our next question from Amit Mehrotra with Deutsche Bank.
Hey, guys. This is Selwyn Clark on for Amit. Can you talk a little bit about your headcount growth in the quarter and why we saw that come down while shipments were up last quarter? And do you still expect us to grow in line with shipments over the longer term?
Well, it never grows exactly in line. I mean, obviously, a lot of times you'll see changes in our headcount in a growth environment increasing prior to the growth in shipments. But I think that we just continued the it was headcount was just down slightly really from the Q4 March compared to December. But it's just an ongoing evaluation of where we have people and where we make changes and some of that could it can be just spread across the country based on volumes in any particular location or even here in the offices. But anyways typically our headcount increases are generally ahead of growth in shipments because we like to get our people in, get them trained on our systems and how we handle business so that we don't have any let down in service knowing that service really has been the key driver to our long term growth and market share.
Okay. Yes, I mean that kind of is the reason why I thought headcount would be up in Q1. You typically don't expect it to go the other direction.
And then I guess next, are
you seeing any sort of shift in mix given the ongoing changes in retail and e commerce? And do you think that that's part of the driving force kind of behind the decline in weight per shipment and shorter length of haul?
I mean, retail for us is about 25% of our revenue. We did have some growth with some of our retail accounts in the Q1. I mentioned we had some growth in our 3PL managed business as well, whether or not that's kind of 3PL or retail related or industrial, It's sort of under the covers of all the accounts they bring to us. But long term, I think that you'll see the industry continue to benefit from from e commerce trends and it just depends on where you are on the supply chain. For us, we're not doing the final mile delivery to home.
We've got some residential deliveries. It's less than 2% of our deliveries, but most of our freight is going to be further up supply chain going into distribution centers or fulfillment centers.
Okay. That's helpful. That's it for me. Thanks guys.
Guys. And we will take our next question from Jason Seidl with Cowen.
Thank you. Hey, Adam.
Hey, Greg. Hope you guys are well this morning. Wanted to talk a little bit about sort of the mix of business and how it might relate to a potential tightening in the truckload capacity as we go throughout the year move into 2018. Is this something that we should expect? Is this something that Old Dominion expects to happen, granted it would be more of a late impact for this year versus the rest of the quarters?
Jason, we're expecting that. We'll just have to wait and see. We keep hearing anecdotally of some small carriers fall away already. So don't know that we can account for a whole lot at this point, but we are expecting that later in the year. We'll see where it goes, but definitely have that on the radar.
And do you guys think this will help actually improve the pricing dynamics, which have admittedly been very, very solid for the LTL sector? Yes.
Okay.
The Major League Baseball comp? If it tightens like we expected or like it could, it would have a positive
effect on the price.
Now the contract for Major League Baseball that you called out, you didn't obviously get into some specifics on exactly how much it was adding. But could you talk a little bit about, is it just going to be a 1 quarter cost or is this something that's going to impact 2017 in terms of just upfront cost?
It's more so over the second and third quarters, if you think about the baseball season, that's where we'll be spending the money is during that season. So the Q1 didn't have those costs in it really and there may be some in kind of the the beginning of the Q4, but the majority of it will be in the second and third.
In the second, third. I'm assuming you guys in the second quarter right now are going to take all the bats out of Shea Stadium because apparently my team is not using them right now. All right, gentlemen, that's all I have. I appreciate the time as always.
And we will take our next question from Ravi Shanker with Morgan Stanley.
Thanks. Good morning, guys. Just sort of a bigger picture question. I mean, there's this debate on soft data versus hard data there when comes to
the broader
economy. Given what you're seeing on the ground and the trends in March April, are you kind of feeling confident that that soft data strength is translating into hard data pickup as well? Or do you think it's too early to tell
for the rest of the year, I mean?
We've talked about this before where we started seeing the pickup in ISM and industrial activity and we started seeing that and our volumes going back into the 4th quarter were all trending favorably and then we took a little bit of a step back in February, where we were under normal sequentials. And February though was a bit of an odd month with only 20 workdays and we had some weather in it and just the way the days fail. Certainly, the pickup in March and then the way March finished and then the acceleration again into April, we're feeling pretty good about that. But as Greg mentioned, we're continue to be more cautiously optimistic because we want to just make sure that we really see not only the the same momentum with the economy, but also in freight volumes. And so we continue to stay on top of it and managing capacity both from a people standpoint and an equipment standpoint.
Certainly, we've gone through this many times before and we will make sure that we have the people in place, be it our drivers and those working on our docks to be able to handle our customers' freight and pick up in their business and so forth. But it seems like now some of our numbers are coming in line with these macro industrial numbers and 60% of our business is industrial related. So those now are going hand in hand and it's kind of reconciling with feedback that we've received from our customers and from our sales force in the field as well that have been indicating for some time that our customers seem a little bit more optimistic about the pace of the economy and maybe the direction that we're headed.
Great. And just one maintenance follow-up. Did you give us the trends for weight per shipment and revenue per hundredweight in April so far?
The tonnage, I didn't give weight per shipment. I just indicated that tons are up about 4% to date through April. And that yield continues to perform well and pretty much in line with the performance that we've seen in the Q1.
Okay, got it. Thank you. That's all I have.
And we will take our next question from Allison Landry with Credit Suisse.
Good morning. Thank you. Just a quick clarification on your last comment, the April tons down or I guess up about 1%. Was that that was a sequential reference?
I said 1, I meant to say 4. We're up tons on a year over year basis, the tons in April are up approximately 4%.
Okay. Year over year. Okay.
Right. Now the normal sequential I think I gave this earlier, the normal sequential increase in April from March is a +0.5 percent and we're right in line with that just slightly above it is kind of how we're trending right now.
Okay, perfect. Thank you for the clarification on that. So thinking about the incremental margins right around 19%, with the uptick in pricing and tonnage, could you talk a little bit about maybe why you didn't see a little bit stronger contribution margins?
I'll say we felt pretty good with the 19% after the year we just went through with
Sure, absolutely.
So getting back to that point and actually having some OR improvement feels good to us. And a lot of that just comes from the top line. But the normal sequential change in our operating ratio from the Q4 into the first is about 100 basis point deterioration that's pretty much where it works really about 130 basis points. So we did a little bit better from a normal sequential standpoint. But the reality is we still while we feel better, the revenue is up 6% and we've still got a lot of cost in the business and we added a lot of CapEx last year and this depreciation continues to be a headwind for us from an OR standpoint and that may moderate a little bit.
We've talked about we've just got to grow into some of the investments that we made last year. So we still got a little bit
of anyway. Sure. Okay. That actually that makes a lot of sense and understood on the sequential change in the OR and certainly on finally getting to a point where you're seeing the year over year margin improvement. And just in terms of just the last question here, I guess it was back in September of 2015, you held an Analyst Day and highlighted for us several of the different technology initiatives that are underway.
And just wondering if you could provide us with an update on where that stands. And I think one of the bigger projects or perhaps the biggest project, Operation Delta, what the progress is tracking like there? And then is there a way to frame the productivity benefits that you've realized so far and how we should think about that going forward? And with hopefully within the context of an improving freight environment?
Yes. We did talk about that at the Analyst Day and the reality is we've put a lot into it. It's reflected in our numbers. We've done a lot of hiring. We're just finishing up kind of the first phase of some of what we've done and a lot of it was really just getting the infrastructure right and some of the different data center built out and boxes put in place.
But we're it's probably taken longer than what we initially anticipated to go through this conversion product of changing our code. And the most important thing we didn't want to do is impact our current systems, the technology that we're providing to customers delivering every day. And so we've continued to program in the old environment to meet customer needs and we felt like that was important. So it's kind of adding to this overall modernization initiative. So with that said, we're just kind of finishing this first phase on it.
Honestly, we're going through an evaluation of right now of what's gone right, what hasn't gone as well as we would have liked and trying to reassess kind of where we are and how we think we're going to get this total project accomplished. But again, the most important thing was making sure that our systems and I think from a technology standpoint, if you visited our docs, we've got a high utilization of systems in place for managing our freight and we want to make sure that nothing impacts that overall and obviously in an optimal best case scenario and what the intention of the project was, was not only getting to this new environment, but as you mentioned, would be generating some operating efficiencies and so forth. So we're not there yet, but certainly we hope to be.
Okay. Thank you so much for the clarification.
And we will take our next question from David Ross with Stifel.
Hey, good morning, gentlemen. Good morning, David. Can you talk about your average fleet age right now on the tractor side, what your targets are? And then any maintenance issues you're having? The average fleet age at the end of last year was about 4.5 years and that was a slight improvement from where we were the year prior.
And really those all the investments that we made last year that continue to bring it down. But we're continuing to see the maintenance cost or maintenance per mile is trending favorably as we bring in new equipment into the network. And generally, those costs are from a maintenance standpoint are better. And if you think about kind of where we are in the life cycle and the way we use equipment for kind of 10 to 12 years for a tractor, we're getting to the point where we're cycling through. If you think about 10 years ago was when we went through a major engine change.
So some of those units, we have had some maintenance and reliability issues with and maintenance costs increasing. So a lot of that $155,000,000 of CapEx this year on equipment, we might could have got by with a little bit more, but we felt like it was the right thing to do to go ahead and cycle out maybe more of those older 307 type engines that we had in the fleet. And you guys do all the maintenance in house or the majority of it? Yes, we do most of it in house with the shop locations that we've got spread throughout the country. But there are certain places where we've got to outsource that.
Are you seeing any issues with recruiting technicians?
It's difficult in some places, David, but you just have to work harder at it. But it is difficult in some places.
Yes, better or worse than the driver situation?
Place to place, it varies. It just depends. But we're doing fine.
Excellent. Thank you very much.
And we will take our next question from Todd Fowler with KeyBanc Capital Markets.
Great. Thanks. Good morning. Adam, to your earlier comments about growing into the investments that you made last year, how do you think about the sort of number of quarters or tonnage growth right now that you could sustain and keep the leverage on the depreciation line before you'd have to be making sizable investments again. I'm just trying to get a sense of I don't really know if it's a question about excess capacity, but it's probably more of a question about it feels like that you've got some leverage in the model now based on the investment last year.
And if you continue to see this sort of tonnage growth, can you sustain that leverage?
Well, I still look at it as we're making sizable investments this year with the 385,000,000 dollars CapEx and the $155,000,000 on the equipment side. But where we were in the Q1 just to get depreciation back to just a flat basis would require double digit growth in revenue. Going into the Q2, in kind of the back half of the year, I think we've got an opportunity for that
depreciation line to start
normalizing if we can continue to I think in the Q2 kind of where we are, it would similar type of thing would take about 10 percent or so for our depreciation to kind of normalize it was 6.2% last year in the second quarter and to get to where we are. The good thing about this year, last year, if you recall, it was out of necessity, but we accelerated the delivery This year, we This year, we're really just starting to take delivery in April on the equipment side. So we're back to more of a normalized cycle and maybe taking a little bit of heat off of the sequential change in depreciation.
Is the thought process that you can get depreciation back down to 100 basis points lower than where it is right now as a percent of revenue? I think that that's where it's been and maybe going back 3 or 4 years ago?
Todd, I don't think that we will get back to that level. A main reason why is think about some of the operational changes that we've made with purchased transportation. And so there's an element of that that was spend for equipment for those owner operators or truckload substitution that we were using. So there's an element of that, that now will be in our depreciation line. And whether that's just again in our line haul operations and we're pretty much 100% using our own people and our own equipment for line haul.
And then in our container drayage operation where we had previously used owner operators. And today, we're running that model using employees and our own equipment as well. That's
a helpful reminder. Thanks, Adam. And just for my follow-up, weight per shipment has been pretty stable, really going back through the better part of last year. Is this where weight per shipment is going to settle out kind of in the new environment or would you expect it to drift back up if the economy picks up, particularly in some of the heavier weighted industrial type shipments?
I'd like to see an increase and that was the other element that gave us some confidence in the Q4 when our weight per shipment, it had been trending around 15.50 pounds and it went up to 1600 pounds in the Q4. Now we've kind of trended back down a little bit and I don't think that that is related to the economy. Generally, you would think rising weight per shipment, better economy. When I look through and I've said this a couple of times now, but some of the changes, if I look sequentially in weight per shipment, many of those are coming from customers, particularly 3PLs that we had some pretty good growth with. And so I think it's just new business that's been brought into us.
So it's not necessarily an existing customer that's got fewer widgets on each shipment. It's just we're getting a different mix of customers within that 3PL managed business.
Okay. Yes, that makes sense. And then of course I think that there was it's pretty well documented some available truckload capacity here in the Q1 as well. So okay, thanks for the time this morning. I appreciate it.
And we will take our next question from Scott Group with Wolfe Research.
Hey, thanks. Good morning, guys. Good morning. So just a follow-up on labor shipment. Adam, can you give us the monthly sequential change in weight per shipment and then anything you can tell us about weight per shipment sequentially so far in April?
Yes. The weight per shipment, it had decreased from where we were in December, it decreased down to about 15 £170 in January and then 15.57 and 15.59 in February March respectively. And so those were what we did and pretty much kind of in that same category in April. Somewhere it's kind of just trended back to that 15.50 pound range and again, we'd like to see that moving north. Right now, I think where the shipments and the tonnage, we got more tonnage in the Q1 than shipments and that can be a better thing.
But you start getting to a point where the weight per shipment stays kind of flat, we can have more shipment growth than weight like we did in 2015.
Okay. So if weight per shipment then is, call it, flattish year over year kind of in the Q2 so far, should I'm guessing rev per 100 weight should be better in the Q2 than what we saw in the Q1. Is that fair?
If weight for shipment stays about the same in the second quarter as the first, then I think the revenue per hundredweight would be around the same point. We'd like to see it increasing a little bit sequentially as we've got contracts that turn over and we'll be getting increases on those.
I was thinking on a year over year basis.
Year over year basis?
Yes.
Even on a year over year basis, so Q2 last year was the weight per shipment was 15 59. And so we're right in that same ballpark. So perhaps from where we are, you may see some acceleration in that year over year change, yes.
Okay. Okay. And then
That's 2.4% that we just did in the Q1.
Right. That's what I was thinking. Okay. That's helpful. And then if I look typically from the Q1 to the Q2, it looks like you get the operating ratio improves 4, maybe 5 points.
It's been a while since we've done 5 points, Scott.
Okay. So 4 points, that's right. Yes, okay. So 4 points. Given kind of what you're talking about of some of the incremental costs, should we be expecting something more muted than that?
Or are there any other kind of factors that we should be thinking about as we think about normal margin progression 1Q to 2Q?
The average is about 400 basis points as you said. The last 2 years, it's improved about 360, I think in 2015 2016. So I think based on the comments that we made about increased cost into the Q2 from the first that we really haven't had in years past. It's going to be more of a challenge, I guess, to get to that number than we've had in other years.
Okay. But you're not quantifying how much of an impact that cost inflation is going to have?
But we did say that we anticipated inflation now at about 4% for the year really. And it was if you take cost and I'm excluding fuel from that, obviously fuels up over 20% in the Q1, but it was about 3% cost inflation on a per shipment basis in the Q1. It would be 4ish or so in the Q2.
Okay. And just last thing real quick. Do you think fuel on a net basis was a positive or negative for you in the quarter?
That's always a hard one in a slippery slope, I think. It was something that we deal with as the prices go up and down. And last year it was down all year and we deal with that when you go through your pricing conversations with your customers and what the ultimate was the revenue that a customer brings to us and what are the costs associated with handling that business. Now in the short run, obviously, if you've got a little bit more fuel surcharge revenue, then that creates probably a little bit of leverage on non fuel related, petroleum related product costs. But certainly, we're seeing tremendous cost inflation in the operating supplies and expenses line.
And it's not only fuel, but it's other lubricants, tires, any kind of petroleum based product, we generally get cost increases on when fuel is higher.
Okay. Thanks a lot for the time guys.
And we will take our next question from Ari Rosa with Bank of
America. Nice quarter in a
challenging environment. So first question, wanted to touch on the cadence of CapEx throughout the year. What you think it might look like? And also if you could touch on what you think your ability might be to add trucks profitably in this environment?
Yes. We only spent $57,000,000 in the first quarter and most of that was on the real estate side, very little in the equipment. And so generally that starts picking up in the second and third quarters. Obviously, the new equipment that we're bringing in and cycling out the out the old, we'd rather have it in our operations. And all of
our new trucks, as you
know, start out in line haul. So we're putting the most fuel efficient equipment on the road to get the most mileage out of. So we like to have that in place as business starts picking up through the Q2. And on the real estate side, it really just it varies from year to year based on any kind of project or if there's a large item that is in the mix that may have been a lease facility that we buy and so forth. But on the equipment side, that's the one that's more standard in the sense and that's what impacts the income statement the most as well.
The land and structures is not as significant of an impact.
And Adam, could you touch maybe on that question about ability to add to the fleet profitably?
This is Greg. We right now, we're expecting if business continues to accelerate, we're expecting to hold some trades if we need to. We'll see where that goes. We're not getting rid of our the older part of our fleet as our equipment comes on. We will hold that and get rid of it as we deem that we need it or not.
So that's where we are right now. We're we know we can add to the fleet if we need to. How quick? We just have to wait and see at the time. But right now, there's no plans to do that.
Our first attempt will be to keep our trades a little bit longer till we get in the slower season. We'll keep them as long as we need to.
Okay. Fair enough.
That's a solid answer. And then just
quickly if you
could talk about kind of what the competitive environment looks like and if you're seeing opportunities for new bids coming in the door, if you're seeing customers switching more frequently given kind of what's going on with ELDs and maybe some flow through from truckload?
I know that we're seeing anything different from normal at this point, especially on the ELD side. I think it's probably a little early for that and a lot of uncertainty as to what that's going to do from a firm capacity point and long term capacity standpoint in the truckload environment. But I'll say that we are well positioned and we think maybe the best positioned LTO carrier from the investments that we've historically made in network capacity and our ability to hire and bring on drivers and so forth to meet growth. We've done it before and we think that we'll be able to do it again. But we're sitting, I would say, with at least probably on average 25% capacity in the real estate network.
So we think that gives us a tremendous advantage to flex up and handle growth as it comes our way.
Okay, great. That's really helpful. And then just really quickly my last one. A number of carriers mentioned some challenging conditions in California. Just wanted to hear if you guys experienced any of that and if those challenges have abated?
Every day.
Fair enough. But it sounds like it was pretty bad at the start of Q1 and maybe now has alleviated a
little bit. Is that fair to
say or you guys are still seeing some network fluidity issues?
Nothing we can't deal with. This is not stopping us. We're dealing with them as they come up, but nothing we can't work around.
Okay, fair enough. Thanks for the time.
And we will take our next question from Ben Hartford with Baird.
Adam, a few modeling questions. Did you provide the actual tonnage growth year over year in March or for March?
The actual for March was 3.5%.
Okay. That's helpful. And then can I confirm the working days progression this year and next year?
Yes. Hang on a second to get to it. So we had 64
in the
Q1, 64 in the second, 63 in the third and 62 in the Q4.
And then next year, do we go 64, 64, 64, 62?
Actually 64, 64, 63, 63.
Okay. The tax what's the expected tax rate for the balance of this year and any placeholder for 2018?
Well, we said 38.6% for the Q2, but I guess we'll have to continue to wait and see what comes out of Washington and be as good as ours in terms of where corporate taxes go. But right now, if trends continue, 38.6% is kind of what our annual effective tax rate is.
Okay, that's great. And then now that you've instituted the dividend, how do you think about from your standpoint, how do you think about any sort of progression from this $0.10 per share quarterly dividend? Is there a dividend yield target that you have in mind? Are you taking a wait and see approach? I mean, how are you thinking about planning future dividends here going forward?
Yes. I mean, it's more of a wait and see approach. And like I said, we won our share repurchases really to be the primary form of returning capital. But obviously, we got a very strong balance sheet with debt to capital in 4.7 percent and we continue to look for opportunities along our capital allocation plan for where we can allocate additional capital. And we've got a heavy CapEx spend again this year, but we'll continue to look at ways primarily to invest in our LTL business first and we'll continue to look at the other ways to invest in some of the smaller businesses that we have the non LTL services or standard drayage or truckload brokerage and see if there's anything else along those lines.
But and kind of it will just be a continual evaluation, I guess. We're still early with the dividend and we'll continue to look at it and talk about it in the senior management group and Board.
Sure. Makes sense. And the last one, if I could. The other revenue line item was down about 50% year over year. What was the driver of that?
And what's a representative number for an annualized other revenue figure for 2017?
Yes. Actually the non LTL revenue was $13,900,000 and that compares to $13,200,000 in the Q1 of 2016. And I think a lot of people I think we've talked about this before, but the statistics that we give in our earnings release, they do not include the adjustment that we make at the end of every quarter for revenue recognition. And the reason we do that is we want the revenue to be a match with associated weight. So I think a lot of people are using our revenue per 100weight and our weight to try to back into what LTL revenue is and then the non LTL piece.
So a lot of times people will miss and have that revenue recognition impacting the non LTL. But it was actually an increase and most of that is coming through. We've had a little bit of growth in our truckload brokerage business.
Okay. That makes sense. Thank you for that. Appreciate it.
And we will take our next question from David Campbell with Thompson, Davis and Company.
Hi. Thank you very much. I wonder if you could explain to me exactly what you're doing for Major League Baseball. In terms of delivering cargo, are you doing it to all baseball teams? And what percentage of the gain in freight in April would come from Major League Baseball?
I mean, is it a material number?
It's just another marketing and advertising opportunity just like any other opportunity along those lines that we might have. And so it's I don't know that it's ever possible to say that one piece of freight came from commercial or a trade publication or whatnot. But we felt like it was a good opportunity. You will start seeing the MLB logo on some of our trailers. There are opportunities with certain games, All Star Game, World Series and so forth.
And we have separate deals with several teams in MLB that we use for various marketing and entertainment activities. So certainly, the objective with this is to continue to show an increase in brand recognition. And ultimately, we believe that it will be able to help us achieve some of our longer term market share growth objectives.
So it's more of a promotional cost than it is revenue growth?
Well, certainly, we hope that it and believe that it will lead to revenue growth. But I don't know, I mean, it's just like any type of marketing and advertising. It's hard to pinpoint a one for one relationship. We have multiple forms of advertising.
Okay. Thank you very much. All my other questions have been answered. Thank you.
And we have one question remaining in queue at this time. We will go next to Tyler Brown with Raymond James.
Hey, good morning, guys.
Good morning, Tyler.
Hey, Adam, I know you noted higher weight, lower length of haul negatively impacting the yields. But I'm just curious if you're seeing any changes in the more, let's call it, the less talked about characteristic of class? And specifically, are you seeing any downward pressure in class as the industrial economy has kind of stabilized here?
Not per se, nothing that stands out from one material direction or the other and movement there. But you're right, I mean, class is the other element of mix that really has never talked about, but they can certainly have an impact there.
Okay.
And then can you quantify the improvement in line haul
and P and D? Quantify the improvement? Yes, we had in the line haul, our late load average improved 0.9% and our P and D shipments per hour improved 1.6%. 1.6%.
Okay, good. And then Adam, this is a bigger picture question and I know you don't give guidance, but can you just talk about whether you think the OR can improve for the full year? I mean, if you've got unit cost inflation tracking up 4%, your contract renewals, let's just say, mix adjusted or whatever, probably up less than that. Do you feel that there's operating leverage that can make up the difference or just any thoughts there, if you're willing?
I may borrow a line from my mentor, Wes Fry, to say, yes, we don't give guidance on the OR. But obviously, every day we're focused on trying to drive productivity and improvement to the bottom line and want profitable growth and we're managing the business to generate that. So certainly, we're focused on it and a lot is going to be just dependent on the revenue growth for the balance of the year. And as we said earlier, and even in this quarter, we had a big headwind on the depreciation line. And so that's just sort of getting things right sized and kind of growing back into the network that the investments that we made last year.
And certainly, we didn't think it was a wise decision. We could have eliminated a lot of equipment last year, and we think that, that would have been very shortsighted. But now we're getting back into it and we think that we can generate leverage. And we've said many times, the long term keys for margin improvement are improving density and improving yield, but you need a positive macro and economic environment to support and pricing environment to support those initiatives. And certainly now we're getting the benefit of added volumes and network density.
The yield is still trending in the right direction and the economy seems to be improving. So perhaps we get all of those ingredients working for us this year.
Okay. Well, I appreciate the time.
And there are no further questions from the phones. I will turn the call back to Adam Satterfield for closing remarks.
Thank you all for your participation today. We appreciate your questions and please feel free to give us a call if you have anything further. Thanks and have a great day.
And this does conclude today's conference call. Thank you again for your participation and have a wonderful