Morning, thanks for joining us today for our third quarter conference call. With me this morning are David Congdon, Old Dominion's Vice Chairman and CEO, Wes Frye, our CFO, and Adam Satterfield, our Vice President Treasurer. After some brief remarks, we will be glad to take your questions. I am pleased to report that Old Dominion produced very solid financial performance for the third quarter of 2015, including a 90 basis point improvement in our operating ratio to a third quarter company record of 82.1%. That contributed to a 10% increase in our earnings per diluted share. Although our tonnage slowed this quarter from its double-digit pace for the first half of the year, reflecting an uncertain economic environment that has affected the entire industry. This quarter is being compared against the third quarter of last year, when tons increased 18.7%, a tough year-over-year comparison.
Despite these headwinds, Old Dominion continued to win market share for the quarter. We experienced double-digit growth in shipments for the seventh consecutive quarter. The strength of these results is further evidence that our promise of on-time, claims-free delivery strongly differentiates Old Dominion from our competitors and continues to resonate favorably in the market. Even with our strong 11.7% growth in shipments during the third quarter, our on-time service was 99%, and our cargo claims ratio was 0.35%. Because our customers value and depend on this superior service, we continue to achieve our yield objectives with revenue per hundredweight, excluding fuel surcharge for the third quarter, increasing 5.2%. As always, our successful long-term execution of our value proposition depends on the tremendous commitment and hard work of our dedicated employees.
We will continue to invest in the equipment, infrastructure, and technology, as well as the training and continuing education that supports our industry-leading team in their efforts to consistently produce superior performance. Thanks for your support of Old Dominion. Now here is David Congdon.
Good morning. Let me begin by saying that I too am pleased by the company's performance for the third quarter. Our business model, which we have been refining for nearly two decades now, is built around an innovative and flexible team of people providing superior service at a fair price. We continue to invest significantly in the company to execute with discipline and to strengthen our customer-focused culture. We are fully committed to further strengthen our market differentiation through consistent and sizable investments in the resources, training, and education that our employees need to exceed our customers' expectations. By doing this, we can also continue to focus on yield management to ensure every account has an appropriate return on that investment.
While we are actively returning capital to our shareholders through stock repurchases, we are also committed to maintaining the balance sheet strength required to support the investments in the equipment, real estate, and technology that is necessary to provide our customers with the superior service they expect and depend on. With ongoing execution, we expect this commitment to enable us to continue to deliver on our unique value proposition and continue to outperform the industry. We remain confident in our ability to produce further long-term gains in market share, earnings, and shareholder value. Thanks for joining us today. Now Wes will review our financial results for the third quarter in greater detail.
Thank you, David, and good morning. For the third quarter of 2015, Old Dominion's revenue was $779.5 million. That's an increase of 4.8% from $743.6 million for the third quarter of 2014. Our operating ratio improved to an 82.1 for the third quarter from an 83.0 last year. Earnings per diluted share increased 10% to $0.99 from $0.90 for the third quarter of last year. Our revenues for the third quarter reflect a 6.6% increase in LTL tonnage, which was comprised primarily of an 11.7% increase in LTL shipments and a 4.6% decrease in LTL weight per shipment. LTL revenue per hundredweight decreased 1.6% for the quarter, primarily due to a reduction in the fuel surcharge. Revenue per hundredweight, excluding fuel surcharge, increased 5.2%.
The decline in weight per shipment for the quarter had a positive impact on the revenue per hundredweight, somewhat offset by a small decline in length of haul. On a monthly basis, LTL tons per day decreased sequentially by 1.2% for July from June.
Increased slightly by one tenth of 1% for August and increased 3.4% for September. This performance compares to our 10-year average sequential month trends that show a decrease of 2.4% for July, an increase of 0.6% for August, that's six tenths of 1%, and an increase of 3.2% for September. On average, sequential trends were slightly higher during the quarter when compared to our 10-year average. On a comparable quarter basis, LTL tons per day increased 7.7% for July, 5.8% for August, as previously announced, and 6.4% for September. Comparable quarter growth in shipments for July, August, and September were 12.9%, 11.7%, and 10.7%, respectively. While our weight per shipment declined 4.6%, 5.3%, and 3.9% for the same months.
We've now had three sequential quarters of a declining weight per shipment, which we believe is driven by several factors, including the truckload capacity challenge during the third quarter of 2014 that resulted in additional tonnage migrating to LTL carriers that was not repeated in 2015. Also, customers modifying their LTL shipment patterns to smaller, more frequent shipments, and also as well, by the softness in the economy. Looking to the fourth quarter, we expect LTL tons per day for October to increase approximately 4.1% versus 2014. Sequentially, this represents a 4.4% decrease in tons per day compared to September, versus a 2.8% decrease for the 10-year average. The increased tons include approximately a 10% increase in the number of shipments, offset by a 5% decrease in the weight per shipment.
The sequential 10-year average in tons per day for November and December is 3% increase and an 8.7% decrease, respectively. We also expect revenue per hundredweight, excluding fuel surcharge, to increase 5.5% for October. For the fourth quarter, we will again face tough comparisons versus last year. Monthly, year-over-year LTL tonnage per day increased during the fourth quarter of 2014 compared to 2013 by 20.8% for October, 20.6% for November, and 18.5% for December. Fourth quarter of 2015 had the same number of work days as the fourth quarter of 2014. As David discussed, the 90 basis point improvement in Old Dominion's operating ratio primarily reflected our increased revenue density, lower yield, as well as some improvements in productivity. While the significant decline in fuel prices affected our revenues through a reduced fuel surcharge, it also resulted in a 360-point reduction in operating supplies and expense.
Some other expenses expressed as a percent of revenue were higher during the quarter, which was partially attributable to a lower denominator due to the decline in fuel surcharge revenue. Salary and wages and benefit expense also reflected the partial quarter impact of a 3.5% increase in wages beginning in September, as well as an increased use of company-owned equipment and employees in lieu of rail service. Capital expenditures for the third quarter of 2015 were $130.8 million. We now estimate CapEx for the entire year of 2015 will total approximately $451 million, including land expenditures of $139 million for real estate, $278 million for tractors, trailers, and other equipment, and $34 million for technology and other assets. After anticipated asset sales, we expect total net CapEx of approximately $431 million. Our preliminary CapEx investment for 2016 should be in the range of $430 million-$460 million.
Our effective tax rate for the third quarter of 2015 was 38.4%, compared with 37.1% for the third quarter of 2014. We expect an effective tax rate of 38.6% for the fourth quarter of 2015. This concludes our prepared remarks this morning, and operator, we'll be happy to open the floor for any questions at this time.
At this time, if you would like to ask a question, please press the star and one on your touchtone telephone. You may withdraw your question at any time by pressing the pound Touch Tone Phone. We'll go first to the line of Rob Salmon with Deutsche Bank. Your line's open.
Hey, good morning, guys, thanks for taking the question. I guess there's been a lot of talk with investors about the LTL pricing environment, given some concerns from some competitor statements. It looks like the yield net of fuel was pretty solid in the month of October as well. Can you give us a sense of what your contractual renewals trended last quarter, as well as your thoughts about a general rate increase? I don't think I've seen one hit the wires yet, but just curious how you're thinking about that.
Rob, it looks like it was about 3.5%-4%, is what we're seeing on the contractual.
How does that compare to what you guys saw in Q3?
Yes, very comparable.
Okay, great. If I can shift over to the weight per shipment, it looks like that declined sequentially in the third quarter. I'm curious, David, what you think the drivers were that there are, because typically, as the weight per shipment decline, I would expect to see an acceleration of the shipment growth because people are moving down to smaller shipments. It doesn't look like that played out. Is this just the business mix shifting more toward retail and a little bit away from some of the traditional manufacturing LTL shipments? Or any color, whether that's just economic related or business mix that you think is driving that?
Well, Wes made some comments about that. The comparison to last year, there was some fall off from the truckload carriers last year that we're not experiencing this year that has affected the weight per shipment. The general macro trends of the economy being a little soft. Shippers, their orders are smaller, and they're shipping smaller orders more frequently. That's what we're hearing from our sales force. The third point is, we're obviously winning some market share, and when you look at our overall weight per shipment compared with our industry competitors, ours is heavier. If we are winning market share, we're winning smaller shipments, which would also impact our weight per shipment slightly.
Rob, also, it's not unusual that the weight per shipment drops in the third quarter compared to the second. It did the same last year, and it did the same the year before, and I think maybe that's because as the seasonal moves start to tick up, as you had already mentioned, the retail starts to hasten a little bit as well, which typically is a lower weight per shipment.
That makes sense. I think we're also seeing some shift to LTL, just given the elevated inventories that we saw show up in the Q3 report as well. I'll leave it there. Thanks so much.
Thank you, Rob.
We will go next to the line of Alex Bechtel with Morgan Stanley. Your line's open.
Hey there, good morning. Thanks for taking my questions. David, can I ask for you to maybe talk a little bit more about the pricing environment for the industry as a whole? It sounds like you're still getting some solid rate increases here, but naturally, we've heard from other carriers that there's been a little bit of chink in the armor, if you will, from other carriers trying to get a little bit more aggressive on price. Can you comment on what you're seeing from a competitive standpoint? Do you concur that there are some other carriers out there maybe getting a bit more aggressive, or is that just something you're not seeing at this point?
Overall, we continue to feel that the pricing environment is stable. This is based on the feedback from our pricing department as well as our sales force. You will always have a pocket here or there of where one carrier or another may do something irrational or in our opinion, perhaps stupid, which is nothing new. The way we see it's still somewhat stable. We specifically tried to ask if what we heard this week from another carrier was true in our case, and we just don't see it that way yet.
Okay. That's helpful commentary there. Switching gears to the operating ratio, another good quarter here. Typically, I think in the fourth quarter, we see the OR erode by about 150 basis points if we look historically on average. How should we think about that this fourth quarter? I know you don't give explicit guidance, but maybe can you talk to some of the puts and takes that might be a little bit unusual this fourth quarter to the extent there are any, and how we should think about that?
You're right, Alex, we don't give any guidance on the fourth quarter. You'll just have to take our historic variance and make your own conclusions on that.
Okay. All right. Then just one last one here, if I could. Your load factor was down about 5% in the third quarter. I realize that's partially a function of the weight per shipment declines. Is this something that we should be concerned about at all with respect to the density in your network? It doesn't seem to have had a significant impact on your margins. You still have very solid margins, how should we just interpret that data point specifically?
I just want to reiterate the fact that our tonnage is one thing which affects our line load average. Keep in mind that we're still in double-digit growth on shipments. In a time when your weight per shipment drops, you expect your line load average to drop as well, simply because you just have lighter shipments. On the other hand, if you look at our productivity in terms of shipments per hour, shipments per stop, all those measures on shipments, it's still a positive factor and resulted in part of our positive results for the quarter. We still get positive results if you look at it in units instead of pounds.
Okay. Got it. Great. Thanks very much for the time, gentlemen.
Thank you.
We will go next to the line of Allison Landry with Credit Suisse. Your line's open.
Thanks. Good morning.
Good morning.
I wanted to ask, how does your market share strategy play out when the industry does get competitive? I'm thinking about your lower cost profile, particularly relative to where you guys were heading into the last downturn. Does that afford you additional flexibility to balance volumes versus price? Or should we take your earlier comments about irrational pricing behavior in the industry as a clear indication that you won't deviate from your strategy of price discipline?
Allison, I can assure you, we are not going to deviate from our pricing discipline strategy. The notion of trading off price for volume or volume for price is not in our vocabulary.
Got it. Okay. As a follow-up question on the salaries and wages line, thinking about that as a % of sales sequentially, it looks like it increased more than the historical average. I know that there was a wage increase that was implemented, but Q3 is typically when you do that. I'm just wondering if there's anything unusual there or maybe if your headcount is a little bit elevated relative to the demand growth that you were expecting for the quarter.
Yes, Allison. I mentioned in my comments that a couple of reasons. One is mathematically. When you have less fuel surcharges, you would expect those costs outside of the operating supplies and expense to increase as a % of revenue. That's just mathematically one factor. Another thing is in 2014, we were using a lot of rail up around the Midwest, Pacific Northwest. With the service problems from the rail carriers at that time, we converted all that rail to company-owned equipment. Part of that is converting. We've had tremendous growth in that area also. Converting that has put an increase in salary and wages, converting that to rail. You will notice as an offset, our purchase transportation is down as well, which reflects that offset.
Secondly, we have a drayage operation that we're converting from lease operator model to a company-owned driver model. That has an effect as well.
Okay. Excellent. Thank you so much.
Next, we will go to the side of Jason Seidl with Cowen. Your line's open.
Hey, Earl. David. Hey, Wes. Adam. How are you guys? Quick question here. Wes, you went over a lot of numbers, and when you were talking about the sequential shifts in tonnage, you kind of lost me. Could you repeat that for us?
I can't because I was lost, too. All right. Let's go through that. July Let me get to the numbers, get to the right ones. July, our tonnage per day decreased by 1.2% from June.
The 10 year average says that that decrease for July from June is 2.4%. That was less than the sequential. For August, we increased 0.1%. That's one tenth of 1% from July, and the 10 year average is 0.6%. That was a little less. For September, we increased the tonnage from August 3.4%, and the 10 year average is 3.2%, that was above. If you look at all that averages together, on average, our sequential trend was even maybe on par to slightly higher than what would be the 10 year average.
Okay. That's good. Sorry, I just couldn't keep up with you as you were rattling off all those numbers.
I guess still not slow enough.
No. The weight per shipment, not to harp it, when are you guys going to lap a clean comparison in weight per shipment? In other words, when is it not going to be impacted by the truckload business?
We were faced.
Is it going to be 1 Q?
Yeah. We were faced with this truckload spillover most of 2014. We won't really lap it until we get into 2016, most likely.
2016? Okay. Also, in the quarter, did your mix shift any more towards third-party logistics guys, or has it been sort of pretty stable?
Yeah. Our percentage of revenue to third-party has been growing slightly, and it did in the third quarter, but not by leaps and bounds. Our ratio indicates that we're still getting good results. We have a very good relationship with our 3PLs.
Have you seen the 3PLs try to get more aggressive with you guys on bringing on board business?
Well, of course. That's where the price discipline falls in.
Right.
Our added value. Really, just to make a comment there, the 3PLs need to provide their customers with best-in-class service because they wanted to obviously prevent turnover of their own customer base. They realize that assets are important. The other thing is high levels of service are important, and they're willing to make sure that we are getting compensated sufficiently for the investment and the service that we provide.
Okay. Wes, thanks for the time, as always.
Thank you.
Next, we will go to the line of Chris Wetherbee with Citi. Your line's open.
Hey, thanks. Good morning, guys. Wanted to push back on pricing for a second and just get a sense. Can you give us any sense of sort of the benefit that weight per shipment adds to sort of core pricing ex fuel surcharge? I don't know if it's any different, but is it a little bit lower with that? I guess I just want to try to make sure I understand some of the dynamics going on within that pricing.
There's no question that the 5.2% is influenced by the reduction in weight per shipment. As David already pointed out, we are getting contractual business, 3.5%-4% of increases. It's the net of that.
Okay. That's a reasonable proxy to use for sort of ex Weight per Shipment.
Right. It's a reasonable-
Okay
proxy. If you neutralize that difference in Weight per Shipment, we would still be showing some improvement.
Okay. That's helpful. I appreciate it. Typically, when you think about sort of economic or freight cycles, Weight per Shipment relative to tonnage, I guess, how do you think about it sort of leading that dynamic? I guess I just want to get a sense if there's anything, how the Weight per Shipment trends might be sort of foretelling tonnage trends going forward, I guess. I don't know if you've been able to sort of glean a real strong relationship in the past.
Yeah. Over the last couple of decades, I think whenever we have seen weight per shipment fall off, it's a precursor to a softer economy. When the weight per shipment gets larger, orders are getting bigger and the economy is improving. That's a general correlation that I think has existed as long as I can remember.
There's been one thing that went kind of contrary to that, when we had the slowdown in 2008 and 2009, we actually did not see a drop in our weight per shipment. We saw an increase in our weight per shipment. What was happening, because of the sluggishness of the economy, our shippers were, instead of shipping weekly, were holding the shipments and shipping every two weeks. We saw a decrease in the number of shipments and an increase in the weight per shipment. In this cycle, this environment, we're seeing the opposite. We're seeing an increase in the number of shipments, which is a positive sign, but a decrease in the weight per shipment. What's going on is more frequent shipments. One of the reasons is we're seeing smaller but more frequent shipments.
I think back in 2008, 2009, it was just such a drastic change in the economy that caused that phenomenon that Wes just said. Now, since we've been coming out of the recession, we've just been in a steadily increasing, but slowly increasing economy since it was pronounced, I guess, in July of 2009 that we came out of the recession. We've just never seen any kind of a strong rebound of the economy. Now it's just kind of gradually gotten soft and in a gradual shift of the economy. I think you do see the correlation between weight per shipment and the economy.
Yeah.
That drastic time period was different.
Right. Just to make sure, there is no question that the weight per shipment drop this year is definitely related to the greatest degree to the spillover of the truckload last year. The second thing is the macro is causing fuel widgets are being demanded, so that's causing it also. As I mentioned, some customers are just shipping more frequently with smaller shipments. If you look at our weight per shipment, this year, it actually compares quite favorably to 2013 and years before. It was just that last year was an outlier. What will happen next year? Right now, there's a lot of capacity in the truckload market because of the, call it, the economy softness. If that heats up a little bit, is there going to be enough driver availability? Is there going to be enough capacity that that can't happen again?
We don't know. We just have to wait and see. Our weight per shipment-
Okay
Our weight per shipment is really quite comparable to 2013.
That's really helpful, color. I appreciate it. One final quick one. Just when I think about CapEx for 2016, you gave a range of how you're thinking about it. Any detail you can provide behind that, particularly how you think you want to address capacity additions in the current environment? Just how do you think about that within that 2016 CapEx target?
Well, Chris, we are anticipating growth for next year. We're bullish on ourselves more so than the economy. We think we continue to have opportunities in this marketplace to continue to win market share with our superior service levels. Within that CapEx range, there is definitely some CapEx for growth.
Okay. That's great. Thanks for the time, guys. Appreciate it.
Next, we will go to the site of Tom Kim with Goldman Sachs. Your line's open.
Thanks very much. With regard to your comment on market share gain opportunities, are you seeing any rationalization or talks, at least amongst your competitors, that might be leaning toward that path? We obviously know that they've been mostly focused on yields over the last several years. I'm curious, just given the environment and to what you're saying about the pricing environment being stable, I'm wondering if you're hearing anything that your competitors might be looking to maybe get a bit more to rationalize existing capacity to keep the pricing environment firm. Thanks.
Not sure I quite understood the question. I'm sorry.
Sure. Just with regard to your share opportunity, obviously we appreciate that your service levels continue to improve as you reinvest in the business.
Yes.
I'm wondering to what extent your ability to gain share could also be bolstered by possibly competitors maybe rationalizing in this more softer environment, or do we just need to wait and see demand maybe retrace more before that might happen?
Are you saying, Tom, that the possibility that some of the LTL competitors will not invest in additional capacity, and therefore it has to find a resource, and that could be us, that are? Is that what you're asking?
Correct.
Okay. We don't know.
All right. Fair enough. Obviously, it's still a very fluid market. I think a lot of us are just concerned that, obviously demand trends have been slowing, particularly in the industrial space, and we all get that. Look, you guys are clearly the gold standard for the LTL industry. You've made amazing progress on your OR and your cost structure. To what extent can you comment on the stickiness of that, and do you need volumes to increase next year to keep your OR down, keep going down? Thanks.
I've addressed this in the past that if we continue to win market share and put density across the network with a reasonably decent pricing environment, which we believe we still are in, and we are continuing to improve efficiencies in little ways across the entire company, that our operating margins can continue to improve. We still see it that way. If those variables change, i.e., the pricing environment got worse, usually that's because of a worsening economy. By the way, we don't see a worsening economy. We don't get any feedback from our sales force that customers are worried about a worsening economy. I think we're going to keep seeing a steady economy, which should mean a decent pricing environment. I think all the factors are still good for continued margin improvement, at least as far as we're concerned.
Okay. That's really helpful. Can I squeeze in just one last one? Obviously, you've got this strong balance sheet, given that your stock has pulled back pretty significantly, would you be inclined to let your leverage ratios move up and buy back stock while still sustaining your CapEx plans?
Yes, we've continued to buy stock. This year, throughout the third quarter, we had bought up to $85 million, and so far in the fourth quarter, we've bought another $20 million. In total, we've bought up to $105 million on the current $200 million facility now. We think we can continue to invest heavily in the LTL network, which we intend to based on our CapEx guidance for next year, but we can also execute buybacks as well.
Thanks very much.
Next, we will go to the side of David Ross with Stifel. Your line's open.
Yes. Good morning, gentlemen.
Morning.
Morning.
These questions have not been quite as tough as the moderators from last evening's debate.
One of you will be next.
If I could just ask on the cost pressures you guys are seeing in the business heading into 2016. You just put in a wage increase. I assume there'll be another wage increase next year because that's how it goes, especially in a driver market that's difficult. Besides that, what are you worried about or what are you telling customers about that justify the rate increase? Is it equipment costs going up, maintenance costs going up, trailer costs going up, et cetera?
All of the above. We're generally facing increases in all costs. Capital equipment and real estate continues to rise. The price of property continues to rise. For real estate, for example, we were able to take advantage of some real good real estate deals years ago. As we're looking at real estate today and the size of facilities that we need, there's no deal in real estate now. Everything's expensive from the land to the construction cost, even if occasionally we'll run across a large service center that suits our needs, they're not cheap like they had been in the past. You just generally have cost increase pressures across the board, including your wage increases that justify the need for modest price increases each year.
Excellent. Thank you.
Next, we will go to the side of John Barnes with RBC Capital Markets. Your line's open.
Hey, guys. Thanks for taking my question. In terms of all the conversation around maybe about a weaker macro environment kind of playing out and recognizing that you're doing incredibly well on the margin performance, can you talk a little bit about when and if you start putting contingency plans in place from a cost reduction perspective? Is it that you actually feel like you'd need to make cuts in the event of a weaker macro, or is it just that maybe you slow down the pace of hiring or something like that in the event that you're still taking some market share, even in that kind of environment? Thanks.
John, we keep an eye on our largest cost area, obviously, is labor costs to move shipments, pick up and delivery and dock and so forth. We're watching that on a daily basis, hourly basis down at the supervisor level, actually. Historically, when you look at any given year, September is usually your peak in shipments and tonnage per day. Then as Wes pointed out on the sequential trends, what you've got and what you see in September usually kind of carries out to the end of the year, and we've built up to handle that peak volume. We're not hiring through for the rest of the year, except for replacements of people that we might lose or just anywhere that we might see that we need to add someone.
We keep our finger on the pulse, if we were to see a slowdown, we can take action if we need to reduce headcount. We don't see the need for that at this point in time. You still there?
Yeah, thanks. I appreciate you taking the question.
Next, we will go to the line of Todd Fowler with KeyBank Capital. Your line's open.
Great. Thanks. Good morning, everyone. I guess just to start, David, what % of your freight do you think at this point is retail versus industrial manufacturing end markets?
Retail is in the 10%-15% range, industrial manufacturing somewhere in the-
40
40%, 45%.
What would be the other, I guess 40% or so?
Well, a good measure of that would be the 3PLs, we don't have the transparency underneath that to see what the mix is.
Okay. That helps, Wes. Just to make sure I understand how you're thinking about the third quarter, obviously you gave us the sequential trends, it sounds like that there was normal seasonality during the third quarter, the October decline versus September is a little bit greater. Are you seeing more softness now as you move into the fourth quarter versus what you saw in the third quarter?
The tonnage comparisons are even
Tougher
tougher.
Are even tougher year-over-year in the fourth quarter than they were in the third quarter, approaching 20% for the fourth quarter of last year. It's a very tough comparison.
I guess what I'm referencing, Wes, is you gave that October was down, I think 4.4% versus September versus a normal decline of 2.8%. I was just trying to get a sense of was September stronger, and that's why October's taking a step down? Is it just that it's kind of within the range of what you would normally see, maybe a little bit weaker, but nothing too concerning?
We think the macro is definitely has some softness in October.
I can put a little color on this. October, I was doing a little study this morning. We have a report by our nine operating regions and kind of looking at which regions are stronger than others. It's interesting that our strongest regions happen to be up against easy comparisons last year. Our weakest regions for October are up against harder comparisons for last year. Overall, to me, it looks like our growth is pretty well balanced. If there is some weakness, it would be in what we might call the oil and gas related states and regions of the Pacific Northwest, the Gulf Coast region, and our central states regions. It's not terribly weak at all for us in those regions. They're still relatively good. If there's any weakness, that's where it is.
Okay, that helps. David, you just made me feel bad for looking at ESPN.com this morning. That's where I spent my time. Just one last one, Wes. It sounds like that you're saying that fuel didn't have a significant impact on the OR in the third quarter. Did I catch that right? Do you care to quantify maybe the impact of fuel on the OR just as we think about it sequentially going into the fourth quarter? Thanks.
The impact, it was relatively neutral. Very little headwind on the reduction in fuel surcharge. I would say if at most, it would maybe be 10 basis points.
Okay. Thanks for the time this morning.
Next, we will go to the line of Ari Rosa with Bank of America.
Hey, good morning, guys. Nice quarter. Just wanted to ask first, so in terms of the market share gains, wanted to get a better understanding of, first, where that's coming from, and second, as you look forward over the next few quarters, where you're targeting your efforts for additional market share gains?
Our market share gains are really kind of across the board. There's no particular company or region of the country where they're stronger than another. We have a very balanced service product with multiple regional operations, multiple interregional, connecting regions with adjacent regions and national service. We're competing with the small regional players, the multi-regional companies, and the national players, and we just get a little bit here and there. It's just a matter of working with a customer and getting your foot in the door and proving yourself and then building your business, and it's happening all over the company.
Okay, great. Recently, I guess we've seen some challenges from some of your peers. I'm wondering, in the opportunity to gain share, how quickly could you guys ramp up scale if that were necessary. What would that entail?
Well, the unique thing that we have going for us is that we have continually invested in our company. We've invested in real estate significantly and have continued to build service centers with excess capacity to handle future growth. If something drastic were to happen in the marketplace with a competitor failing, for example, the hardest thing to ramp up is labor. That would be the hardest thing, but we have excess capacity in our real estate and excess capacity in trailers to handle a surge. Obviously, you can rent tractors and trailers. The hardest thing to ramp up in short order would be drivers and dock people. We certainly don't anticipate anything drastic in the competitive marketplace happening in the near term.
Okay, that's helpful. Then just the final question I had was, it seems like the CapEx plans to confirm, Wes mentioned it was $430-$460 anticipated for 2016. Is that right?
Correct.
It seems like that's a little bit elevated relative to what it's been in the past. Is that a new shift for you guys or is there something structurally different that you're seeing that is allowing you to put more money to work?
It's pretty much on plan for the most part for what our CapEx was this year or will be this year. In terms of looking at as we get larger, as a percent of revenue, the CapEx that we're looking at next year is actually smaller as a percent of revenue. Much of that CapEx is still going into expanding network and expanding real estate.
Yeah, I guess that's what I'm asking is that, is there a kind of a ramp-up period that we see and then it comes down as a percent of revenue as you get to a point where you feel comfortable with where your service center network is, maybe the number of tractors you have, et cetera?
Yeah, we expect to obviously maintain our fleet on the replacement cycle. As David mentioned, we expect growth. So it's all included that, on the real estate, we'll spend what we need to spend to take opportunities. Certainly as a percent of revenue going forward, we do expect our CapEx as a percent of revenue to start to drop.
Okay, great. Very helpful. Thank you.
We will go to the line of Brad Delco with Stephens. Your line is open.
Hey, thanks. Good morning. I guess, Wes, I don't know if this is accurate or not. Is this your last earnings call?
It is.
I do want to take the opportunity just to thank you and congratulate you on a long career. I guess my follow-up question for you would be, how much have you guys accrued at this point for your retirement bonus?
It's $3.99.
Per share?
No, it is in total.
To get to the-
They wouldn't hear me.
To get to the real question, wanted to ask about your exposure to specifically XPO, what the acquisition might mean to you from a 3PL perspective. Are you at risk at losing that business now that they have a sort of internal source to move that LTL freight? Is that somehow offset with other opportunities that may come about? Just to give some perspective on that would be great.
Directly, we do very little business with XPO Logistics directly. We don't see really very much risk there. However, we do a lot of business with other 3PLs. We think that we will probably gain market share on that front.
I heard that yesterday that potentially some 3PLs may just sort of be challenged to provide some of the information to a carrier now that is effectively owned by a non-asset-based logistics provider. You do think that's an area of opportunity for further market share gains?
Well, yes.
Okay. Well, Wes, thank you very much. If you wanted to go out with the fourth quarter of 2016 EPS guidance range, I'd welcome that as well.
I will. They may take away my $3.99 fish bowl.
Well, congratulations and best of luck to you.
Thank you, Brad.
Brad, thank you for bringing this up. And we, w e're going to miss Wes. He's been with Old Dominion for 30 years and has meant just the world to our company in adding value to what we do internally with his expertise in financial management and analytical skills and the whole thing. We're going to miss him.
Well, I'm sure. Fortunate for Adam, he's got really big shoes to fill, or unfortunately, I should say.
If you've ever seen Adam's feet, they are bigger than mine, so he's very capable of doing that.
Well, thank you guys for the time. Best of luck.
Thank you, Brad.
Next, we'll go to the line of Scott Group with Wolfe Research. Your line is open.
Hey, thanks. Morning, guys.
Hey.
I know there's been a lot of questions on pricing. I don't know if anyone asked about just your pricing expectations for next year. Do you think that 3%-4% range that you're seeing on contractual renewals, is that a good kind of placeholder for pricing next year?
We don't give guidance on that, Scott.
As David already mentioned, there's no reason why, if the macro is halfway decent, we still think that the LTL competitors have got to maintain price in order to improve their return on invested capital and even to provide funds to invest in capital. That we would be surprised, but we expect pricing to be stable for most of next year.
Okay. When you look at the sequential tonnage drop in October, can you see was the 3PL business any better or worse within that trend?
No. I have to tell the truth, I haven't done any detailed analysis to see where that is, Scott.
Okay. When do you think you start to see some of that market share come over from Con-way?
That's hard to say.
Well, I think it's if.
Yes.
It's still uncertain exactly what they will do at Con-way and how they would execute on that, so it's hard to say.
Yeah.
Okay.
When they put the IT together, if they don't do it properly, and it's going to be very difficult, it could cause some business to come over.
Okay. Just last question. Is there, in your mind, a difference in the margins that you get on organic tonnage growth versus market share tonnage growth?
Well, by definition, there should not be. We price whether it's organic or whether it's additional. We still price it to earn the margins that we need relative to investment.
I guess the point of the question is if in a slower economy, if more of the growth just is going to come from market share and less from organic growth, in your mind, that doesn't have any implications for the margins or margin improvement?
How are you defining organic growth as just general growth in the economy?
Yes.
Yeah, it's hard to say.
If market share is from deeper penetration of existing customers taking away, then we do get some leverage because now we're getting multiple pickups that were going to competitors that are coming on our truck. There's some leverage there.
Yeah. We could be getting market share and just starting fresh with a brand-new customer who's only giving us single shipments to begin with, and the margin on that's worse than one where you get additional shipments from the existing side.
Yeah.
It's hard to answer your question, Scott.
Okay. Understood. All right. Thank you for the time, and again, Wes, best of luck. Congrats.
Thank you, Scott.
Next, we'll go to the line of Thom Albrecht with BB&T. Your line's open.
Hey, guys. Most of my questions have been answered, but a couple things. Let's say the economy stays in this soft patch for a while. What's your preferred course of action to continue to grow? Would it be to expand your sales force and bring in more brand new shippers or to rely maybe disproportionately on the relationships 3PLs can bring you?
Hell, we've been in a soft patch since the recession ended, almost.
It's a fresh soft patch more recently.
We have not added that many salespeople to our ranks or to our sales force over the last couple of years. We've been pretty stable with the size. And we're just successful winning market share that way, even in a soft patch. If it got worse, would we increase the number of salespeople? I don't necessarily think so. Would we try to increase our focus on 3PLs? I don't really think so. We're just steady as she goes with our strategies, and they seem to be working regardless of the economic cycle we're in. I just see us staying focused on doing what's working for us now.
Lastly, maybe just a little clarification. David, at the Analyst Day, you described the economy as somewhat soft. At the same time, earlier in the call, you said that the feedback you're getting from the sales force is not necessarily indicating a decelerating economy, and yet some of the October data suggests maybe it has. How do I package all that together?
Keep in mind, Thom, that the comparison in October is against almost a 21% increase in tonnage last year.
Sure.
Yeah, it feels a little bit soft doesn't mean down, and that's what the indications are. Soft is the 2%-3%, in our view, on the GDP is still soft. That's how we're defining that.
Wes, you were looking at shipments, and shipments sequentially in the fourth quarter-
Is on-
Are right on target with the 10-year sequential trends. We're not seeing a softness on our shipments.
The number of shipments.
On the number of shipments per day. They're just smaller because of the softness in the economy, primarily.
Yes.
Wes, did you give the November, December 10-year average for shipments? I know you gave it for tonnage.
10-year average for shipments?
Yeah. Just for November and December.
I'll provide it. When you say average, are you talking about the 10-year average sequentially?
Yes. On shipments, not tons.
Yeah. For October, the sequential in shipments is down 3.3%. That's what it was in October of this year from September. The 10-year average is 3.5%, you can see it was actually better sequentially.
Okay. Then do you have November, December?
November, we expect it to be up 1.7% from October, then down 9.6% in December compared to November. Yeah.
Those are the 10-year averages.
That's the 10-year averages.
Right. That's exactly what I was looking for.
Yeah.
Okay, guys. Thank you.
Okay.
Next, we'll go to the line of Benjamin Hartford with Baird. Your line's open.
Thanks. Quick question on tonnage growth relative to salary, wages, and benefit growth. If you look over the past five years, salary, wage, and benefit growth, the growth rate has outpaced tonnage growth by about 200 basis points. I'm interested in whether that relationship should hold or even widen over the next couple of years, given this trend that you've talked about with regard to smaller, more frequent shipments. Any perspective on that as we think about 2016 and beyond?
Part of that increase, there's a couple components there. Number one is fringe benefits, which is medical, group health, workers' comp, which as you know, has always been inflationary for the most part. Secondly, some of that increase in wages, and especially wages, as I mentioned, is substitution for lower purchased transportation. In fact, for our LTL division, we are hardly using any purchased transportation whatsoever. It's all on green Old Dominion trucks with company drivers. Some of that's just an offset to that.
Is it fair to think about that relationship holding? You've got some offsets. Maybe you could help us understand what the offsets would be, or is it just we should think about that 200 basis point spread as being constant even with this trend toward more frequent shipments?
I guess as we'd already also talked about, some of that mathematically is due to the fact that the fuel surcharge is so much lower. Whether it goes in the future, some, I hate to say it, will depend on what the fuel cost is and how that affects fuel surcharge. That'll have a relationship going forward. I'm not sure what the expected relationship will be because of the top line and then that, and how quickly we continue to substitute purchased transportation with company-owned equipment, especially in our container drayage division.
D&A took a sizable step up sequentially. It was $42.5 million level. Is that a clean base, we should build from that as we go through 2016?
Well, we don't give guidance on that. We'll give you some more details on our CapEx breakdown on the January conference call into what is equipment, real estate, and then maybe you will have a better basis to make your own calculation on that then.
Next, we will go to the line of David Campbell with Thompson, Davis & Co..
Yes, thank you. Thank you for taking my question. How would you describe your expedited business in the third quarter? Was it up as much as the overall LTL tonnage? Were the shipments same relationship as your general business?
Expedited revenue was up better than overall revenue for the quarter, yes.
It was up better than?
Yes, higher than.
Is that anything you would consider an indicator of future business activity? Because I would think expedited would be weaker than the general business.
Well, except for just growth, whether you call it through market share or our own focus on that, which offsets it. When you say an expedited, we talk about expedited more domestically, not globally.
Right. Okay. Thank you very much, and congratulations, Wes, on your retirement. I'm going to miss you, too. Thank you.
Thank you, David.
We have a follow-up from Alex Bechtel with Morgan Stanley. Your line's open.
Hey there. Hey, thanks for taking the follow-up. Hey, Wes, can I ask you to just repeat the 10-year historical sequential trends in tonnage for November and December?
Yes. For in tonnage, sequentially, let me get to it. Put another way. Okay, the sequential trends in tonnage for November, the 10-year average is 3% up from October, and a reduction of 8.7% in tonnage for December.
Got it. Okay, thanks for that. I guess just one more. Wes, do you have a rough estimate for how much you would need core pricing to increase in order to sustain margin expansion? Said another way, if the market wasn't able to give you pricing, so let's say if pricing was X, it would be difficult for Old Dominion to expand margins.
Well, our margin improvement is based upon three things. We need to see a macro that's behaving halfway, that's at least positive. We have to see discipline from pricing in the LTL sector. Of course, the last thing, both of which are not necessarily within our control there, Thirdly is the own leverage that we all have from density growth. I guess there really is a fourth thing, that's that we remain disciplined on pricing because we are providing best-in-class service. How much we think we can still the last two things, which is density on margin improvement and the fact that we still providing best-in-class service, I think still allows us to be able to increase margins through the combination of those two.
If those are affected by a macro or by a price aggressiveness out in the market, which is not in our control, we'll have to see how that goes.
As far as a specific number on, I think he's asking if yield went from 3% positive to zero, or what would the number be for us not to be able to improve margins? How much-
I answered that question.
Very vaguely. We don't know that. We're not going to give you the answer, I think is what he said.
Okay.
We haven't really run that calculation, to be honest with you.
Okay. Another way to ask it is just how much do you need to just offset basic inflation? Are you able to roughly estimate that, or also a little bit tough?
Well, I'll just say that obviously, we impose our own inflationary factor in wages by giving a 3.5% increase, and of course, that doesn't apply across the board. We think we are, in fact, getting some of that back through improved productivity, and we'll get some of that back through just density. To make up for that, it has to be a pretty positive number. It wouldn't be 3.5%. It would be something less than that.
Yeah. Because wages are what, 60%?
60%. 46% of our total cost.
You need 2% almost to offset wages.
To offset that, yeah.
Okay. That's actually really helpful. Appreciate the time. I'll just echo my sentiments, Wes. Congrats on a great career, wishing you the best of luck.
Thanks, Alex. I appreciate it.
We have no more questions in queue. I'd like to turn the conference back over to Earl Congdon for our closing comments.
Well, guys, as always, we thank you all for your participation today. We appreciate your questions and your support of Old Dominion. Please feel free to give us a call if you have any further questions. Thank you again, and good day.