Old Dominion Freight Line Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 7.13 | About: Old Dominion (ODFL)

Old Dominion Freight Line (NASDAQ:ODFL)

Q4 2012 Earnings Call

February 07, 2013 10:00 am ET

Executives

Earl E. Congdon - Executive Chairman and Chairman of Executive Committee

David S. Congdon - Chief Executive Officer, President, Director and Member of Executive Committee

J. Wes Frye - Chief Financial Officer, Senior Vice President of Finance, Treasurer and Assistant Secretary

Analysts

Scott H. Group - Wolfe Trahan & Co.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

William J. Greene - Morgan Stanley, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

A. Brad Delco - Stephens Inc., Research Division

Matthew S. Brooklier - Longbow Research LLC

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

David P. Campbell - Thompson, Davis & Company

Operator

Good morning, and welcome to the Fourth Quarter 2012 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 24 by dialing (719) 457-0820. The replay pass code is 2443579. The replay may also be accessed through February 24 at the company's website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed 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.

[Operator Instructions] Thank you for your cooperation.

At this time, for opening remarks, I'd like to turn the conference over to the company's Executive Chairman, Mr. Earl Congdon. Please go ahead, sir.

Earl E. Congdon

Good morning, and thanks for joining us today for our fourth quarter conference call. With me is David Congdon, Old Dominion's President and CEO; and Wes Frye, the company's CFO. After some brief remarks, we'll be glad to take your questions.

As you've seen in our news release, revenue increased 8.7% to $527.3 million for the fourth quarter from $485.1 million for the fourth quarter of 2011. Net income fell flat at $39.5 million compared to the fourth quarter of 2011, was strong given the harsh weather events, political uncertainty and economic environment experienced during the quarter. The 5.3% tonnage growth for the fourth quarter was below our expectations despite having an additional workday in the quarter versus the fourth quarter of 2011. Overall demand during the quarter was affected by Hurricane Sandy beginning in late October and by a series of winter storms in the Midwest and Northeast in December had the greatest impact on our results with nearly a 50% greater decline in sequential month tonnage per day as compared to our 10-year average. Despite the impact of these events, we still expect that Old Dominion's tonnage growth will exceed the average industry performance for the fourth quarter, indicating continuing increases in market share. Although the economy contracted and demand suffered during the fourth quarter, we are encouraged by our January increases in revenue per day and weight per day. While economic uncertainty continues to cloud our visibility into 2013, we will continue to execute performance consistent with the discipline and the business model that have made Old Dominion the leader in the LTL sector throughout the economic cycle. We have created clear market differentiation through our value proposition of on-time, claims-free service at a fair and equitable price. And as our outperformance of the LTL industry has demonstrated for years, we believe demand for this value proposition will only increase over the long term, driving growth in our financial results and shareholder value.

Thank you again for being with us this morning. Now, here's David Congdon to discuss our fourth quarter operations in more detail.

David S. Congdon

Thank you, Earl, and good morning. I'll begin this morning by pointing out that the softer industry environment we experienced in the fourth quarter was more a factor of sluggish demand than intensified competition. Our pricing during the quarter remained reasonably firm. And with an increase of 3.7% in revenue per hundredweight, excluding fuel surcharge for the quarter, our pricing met our expectations.

This performance demonstrates the continuing demand for our high-quality services, which are exemplified by our industry-leading service standards. This demand explains why we will continue to invest in sustaining and improving our service standards even in less-than-robust market conditions.

For the fourth quarter, our cargo claim ratio improved 14 basis points from the fourth quarter of 2011 to a 0.40% of revenue, and our on-time percentage was above 99%. Our commitment to these standards in a period of somewhat softer tonnage growth can result in some loss of efficiency as we consistently meet or exceed our high service standards.

For the fourth quarter, we did experience a slight decline in both P&D stops per hour and our linehaul laden load average. P&D shipments per hour were flat and we improved our platform pounds per hour. The more significant impact on productivity for the fourth quarter and on our operating ratio resulted from the greater-than-expected tonnage decline in December and the deleveraging effect it had on our operations.

As an example, while we expected an increase in depreciation and amortization as a percent of revenue as a result of our capital expenditures for the year, it was 70 basis points higher than the fourth quarter of 2011.

Over the previous 11 quarters of sustained improvement at our operating ratio, we've often discussed the potential for further operating ratio improvement given increased density and yield in a stable economic environment. We continue to believe that the incremental profit of 15% to 20% is possible in these conditions.

During 2013, we intend to expand our service center network as opportunities become available, although we believe much of our revenue growth will continue to come from further market share gains within our established network.

While our planned CapEx are lower in 2013 than 2012, we also will continue to invest in equipment and service center capacity to ensure that we are prepared to leverage any industry consolidation and growth opportunities. In addition, our investments in both training and education of our employees and in productivity-enhancing technology will remain priorities.

As Earl mentioned, despite limited visibility regarding the strength of the economy in 2013, we believe we are well-positioned to continue outperforming the industry by remaining true to our core business principles and strategies. Our business model is time-tested and our fellow employees in the OD family have proven their ability to execute. Because of these strengths, we are confident we will continue achieving our long-term growth objectives.

Thanks for your interest in Old Dominion, and now I'll ask Wes to review our financial results for the quarter in greater detail.

J. Wes Frye

Thank you, David, and good morning. Old Dominion's revenue for the fourth quarter was $527.3 million, an 8.7% increase from the fourth quarter of 2011. I'll also note that with the 12.1% growth in revenue for the full year of 2012, we crossed the $2 billion revenue milestone for the first time. The growth in revenue reflected a 5.3% comparable quarter increase in tonnage, which was 3.6% per day and a 4.5% increase in revenue per hundredweight. Our tonnage growth was comprised of a 5.1% increase in shipments and a 1.1% increase in weight per shipment. Revenue per hundredweight, excluding fuel surcharge, increased 3.7% for the quarter despite the increase in weight per shipment and 0.8% decline in average length of haul.

Sequentially through the quarter, tonnage per day declined 4.5% for October versus September, increased 3.5% for November and declined 12.5% for December versus a 10-year average sequential and expected decline of 2.5% for October and 8.4% for December.

As Earl mentioned, we've been pleased to see tonnage per day bounce back in January with a 7.9% sequential increase, versus December against a 10-year average increase of only 1.2%.

Pricing has also remained positive for January with a revenue per hundredweight, excluding fuel surcharge, of 3.3% for the month compared with January of 2012.

Although the first quarter has 1 less work day compared with the first quarter of last year, that's the first quarter of 2013, I'd also like to point out that Good Friday, which is normally in April, is on the last workday in March, which obviously is also the last day of the quarter. This will negatively impact our March sequential and year-over-year tonnage growth expectation although we still expect tonnage per day to increase in a range of 4% to 4.5% year-over-year for the first quarter.

Based on our experience in the quarter to date, we also expect our revenue per hundredweight, excluding fuel surcharge, to be -- to increase in a range of 2.5% to 3% for the first quarter.

Our operating ratio for the fourth quarter was an 87.2%, an increase of 30 basis points over the fourth quarter of 2011. Clearly, the loss of leverage attributable to a lower-than-expected revenue level had a negative impact on margins. By our estimation, Hurricane Sandy caused revenue in October and November to be approximately $2 million lower than expected, which when combined with a $7 million revenue reduction in December due to weather closings in our Midwest and Northeast regions, resulted in $9 million reduction in expected revenue for the fourth quarter. We believe the contribution margin on this lower revenue level resulted in a negative margin effect of approximately 60 basis points and $0.03 negative impact on earnings per share.

Capital expenditures for the fourth quarter was $63.5 million and $373.2 million in the aggregate for 2012.

For 2013, we expect CapEx, net of sales proceeds, to be approximately $270 million, including real estate expenditures of $95 million, equipment expenditures of approximately $150 million and technology and other expenditures of approximately $25 million. We expect to fund these expenditures primarily through cash flow as well as our available borrowing capacity, if necessary.

Total debt to total capitalization's improved to 19% at the end of 2012 versus 22.3% at September 30, 2012, and 23.9% at the end of 2011.

Our effective tax rate for the fourth quarter of 2012 was 38.6% compared with 34.2% for the fourth quarter of last year, which reflected alternative energy tax credits for an installed solar energy system.

We expect our annual effective tax rate for 2013 will average 38.1%.

This concludes our prepared remarks this morning. And operator, we'll be happy to open the floor for any questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Scott Group with Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

So I want to understand the tonnage versus margin commentary. This is the slowest level of tonnage growth in about 3 years, and I guess, the first time we've seen margins contract in 3 years. I guess, when you think about all the investments you're making in the network, what level of tonnage growth do you think you need to sustain margin improvement going forward?

David S. Congdon

I think that we certainly have a large investment, $373 million, and our CapEx last year was ambitious, but one that we felt was necessary in order to sustain our growth for the next couple -- next few years. But I think probably -- we don't have a number of tonnage growth, but I think that the fourth quarter was -- a few things that were unusual, and that's a drop-off in December, which as I mentioned was normally, historical and expected of just about 8%, was 12.5%. And most of that weather all occurred in the last 2 weeks of December and our depreciation went up from 5% last year to 5.7%. But I think that next year with just a normal GDP growth and a density growth that we expect, we'll still see the opportunity to regain incremental margins and margin improvement.

Scott H. Group - Wolfe Trahan & Co.

Okay. David, I thought I heard you mention that you think you can do 15% to 20% incremental margins going forward. We've been better than that in the 20% to 30% range the past 3 or 4 years. Is something changing, or are you just putting in a level of conservatism in that -- in your thoughts?

David S. Congdon

Well I'd say it's to some extent a level of conservatism in what we might want to say. But to reiterate what Wes said, as we continue to grow market share and have increased density across our network, combined with maintaining and improving our efficiency levels and with a good yield environment, which we are seeing and anticipate going forward at a modestly positive economic environment, we see continued improvements in our profitable growth and potential for continued improvement in our margins.

Scott H. Group - Wolfe Trahan & Co.

Okay, great. I just want to clarify one thing though, Wes. The tonnage numbers you gave by month, those were sequentials, I think. Can you give us the year-over-years?

J. Wes Frye

Yes, I can. The year-over-year in October was just over 4%, call it 4%. The November, it was 5.2% and then December was 0.8%.

Scott H. Group - Wolfe Trahan & Co.

And January?

J. Wes Frye

January was 5.6%.

Operator

And we'll take our next question from Chris Ceraso with Credit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So it sounded like when you walk through the revenue per hundredweight that that slowed as you went through the quarter. And then also your outlook for the first quarter, I think, you said was also a bit slower 2% or 2.5%. What's behind that? Why is your yields growth slowing?

David S. Congdon

Well, I think part of it is we're coming -- we're going full circle against tougher and tougher comparisons. I think the yield environments, both in 2012 and 2011, were fairly robust as most of the competition was trying to get -- or improve margins. So we're just circling back against a tougher comparison.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay, and that persist you expect throughout '13?

David S. Congdon

Not necessarily, but that's what we're going to see without visibility in at least the first quarter and we'll see how that turns out whether we become more optimistic on that -- on the pricing scenario.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then just as a follow-up on the CapEx, which is lower for both real estate and equipment, is the idea here that there are fewer opportunities, particularly on the real estate front? Or that you need to kind of digest and integrate and get leverage out of what you did in 2012?

David S. Congdon

From a real estate front, Chris, we have added a good bit of capacity this year to our network, nearly 5.5% more doors to the network. This included some expansion at a couple of our largest breakbulks in Morristown, Tennessee and Indianapolis so these major projects -- we've got a couple of major projects still going on in the first half of this year. But most all of our major projects are behind us right now, and the need for investments in real estate are just down a little bit from what they were last year.

Operator

And we'll take our next question from Justin Yagerman with Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

So Wes, on the tax rate, I'm assuming that some of the lower tax rate is just propane tax that we're starting to hear more about from the extension that we got? What's the true up in -- that you recognized in the first quarter on a year-over-year basis from that?

J. Wes Frye

Yes, just to give you a little more detail on that, Justin, I had mentioned in the comments that the average is 38.1%. If you want to look at it by quarter, by our estimation at this point, the first quarter that's when we'll recognize the tax credit is probably will be around 35.9% in the first quarter and then average 38.6% the rest of the year for the remaining 3 quarters.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, that's helpful in thinking about the modeling here. And then I guess along the lines of margin expansion and the dependence on tonnage growth. How do you think about your tonnage growth relative to the industry and the market share that you've been taking? What's the long-term rate relative to the market that you guys think is sustainable for OD on a full year basis in terms of your positioning?

David S. Congdon

What do you mean the rate of growth in market share? Or the...

Justin B. Yagerman - Deutsche Bank AG, Research Division

No, if the market's growing X, what do you guys think that you can grow above X as you look out over the long term? I mean, clearly, you've been taking market share and that's helped. I'm just curious how you think about that in terms of your relative positioning?

David S. Congdon

Well, historically, our rate of growth has ranged between 4% more growth than the market to sometimes as high as 8% or 9% in any given quarter. So I say 4%, 5% faster than the market.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. And so if you've added, David, 5.5% doors, I mean, I guess that, that kind of jives with that thought process and leaves you a little bit of room even if the market is flat. How do you think about network capacity right now and your ability to leverage any growth above and beyond any industrial growth that we see in the economy this year? Where would you peg kind of capacity utilization within the network right now?

David S. Congdon

Over the last 4 to 5 years, we have continued to -- as you've seen from our CapEx, we have continued to invest in our network and we have carried more capacity in our network than probably any other LTL carrier out there. And we're in the best shape than we've ever been right now for growth, especially because of the significant expansions of our -- 2 of our major breakbulk facilities. We think that, at this point, we could easily absorb 20% to 25% surge if there are any kind of industry consolidation event. The depreciation and amortization is embedded in our numbers. And as we continue our market share growth, we'll be leveraging against that fixed cost.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. And the last question along those lines, you guys do play in the long haul market a bit. Have you seen any freight deferral from Arkansas Best so far as they embark on something you don't have to deal with, a teamster contract negotiation?

David S. Congdon

Justin, we're winning market share every day and it's really across-the-board from all carriers. There's no -- I couldn't comment on anything specific as it relates to ABF.

Operator

And we'll take our next question from William Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

I was curious -- if we can come back to some of the long-term numbers. I think you've talked about just, if I'm not mistaken, it's sort of a $3 billion target by 2015 or so, which essentially implies roughly 15% growth or so from here to there. Does that feel okay given the market dynamics, given the comps we've got now on the yields, some of the economic uncertainty? Or do you feel like no, that's still doable based on what you're seeing from customers?

J. Wes Frye

Bill, if think that's -- I think it's doable, but it depends on how we're feeling about the economic activity. And I think with the economic activity that we're feeling at this point, the answer is yes, we will reach that $3 billion without doubt. And whether it's 2015 or 2016, it's still maybe a little bit shady, but we'll get there close to that is our view.

David S. Congdon

I think when we established that target, we would have expected a little bit faster rebound from the recession at '08, '09. And obviously, the economic growth for our country has been pitiful for these last couple of years.

William J. Greene - Morgan Stanley, Research Division

Indeed. Okay, so second question is just on 3PLs. Some of the brokers noted that they actually saw some strength in LTL volumes in the fourth quarter. And so given your experience, maybe you can sort of remind us here's how we kind of think about the strategy as it relates to 3PLs, how profitable maybe is that business for you, do you want to try to cull it or grow it? Any color around that strategy would be helpful.

David S. Congdon

We do fairly a significant amount of business with 3PLs. And when we're pricing accounts within 3PLs, we price each account individually and we're not giving 3PLs any better deal than our account if we were dealing with that account on a direct basis. So that's how we deal with 3PLs and we'll just stick with that strategy.

William J. Greene - Morgan Stanley, Research Division

Was it notably stronger or weaker in the quarter from them?

David S. Congdon

Not notably one way or the other.

Operator

We'll take our next question from Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask you about your cost inflation and the productivity opportunities, how significant they are in 2013?

J. Wes Frye

I'm sorry, say again?

David S. Congdon

Ask that one more time.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

How would you view your cost inflation when you look at wage inflation, depreciation, that kind of combination? And then how much of that -- so is it 3%, 4%? Where do you think it'll be? And then how material of an offset would you expect from -- you guys are always good at investing in IT and various things that drive productivity.

J. Wes Frye

Yes, obviously, we gave a 3% wage increase in September. So by definition, our wage inflation is 3%. That will be there until we go full circle in September of this year. So we've been able, in the past, to offset that with price increases, a combination of price increases and also of productivity and we think we'll be able to do that this year. Obviously, in some of the costs, the inflationary pressure is higher and that -- one obvious things in the cost of the equipment and secondly in the cost of group health and health care, et cetera, which we're still a little bit uncertain about how to evaluate that. But I think that we'll be able to, with our density improvements, with our pricing, is be able to overcome that inflation and still improve margins.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. But if you just said, well, overall costs do you think as you get the 3% wage, but the overall number is probably north of that because of health care and equipment and things that are higher than 3%?

J. Wes Frye

I wouldn't say it's north of that. The cost of wages, et cetera, is about 50% of our costs. And there are some costs that we see have a no inflation we'll be able to probably hold down because of our own buying efficiencies, fuel as an example. Of course, fuel is passed through as a fuel surcharge. But I think that we have certainly the opportunity to keep costs -- some costs down that are also subject to some inflation. But I think probably the inflation that we'll see overall on average, including everything, is probably will remain in that 3% to 3.5%. And I think with the combination of our pricing and the combination of our productivity and density improvements, we'll be able to overcome that.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. And so you sound like you have some pretty good conviction on the margin side. Do you think that shows up in first quarter or is first quarter challenging to see a return to margin improvement, given that maybe the weather comparisons and so forth are a little bit difficult?

J. Wes Frye

Yes, we -- at this point, we're not giving guidance on the first quarter.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, but I guess -- so your full year comments is where we should take the confidence on margin improvement?

J. Wes Frye

Well, I mean you could spread that through the whole year, so I'll let you decide if that applies for the first quarter, but we did give you some, I think in this environment, some pretty positive tonnage growth relative to the market and also I think a fairly stable pricing scenario.

Operator

And we'll take our next question from Christian Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

Just thinking about the fourth quarter, you highlighted about $9 million of lost revenue from the storms -- in Sandy and the winter storms in December. I just wanted to understand if there's anything else we should be thinking about from a cost-specific standpoint in the fourth quarter related to those items or otherwise, or if it's more just kind of pretty big decremental margins on that lost revenue is kind of the right way to think about the fourth quarter costs?

J. Wes Frye

Well, I mean, we always go through a certain amount of actuarial computations and those costs can change every year depending on what the actuaries say. So we may have a little pressure on that. But the other thing is just on how the quarter ended. It was -- now the stars were aligned on how the quarter ended from a holiday standpoint and then that just causes a lot of the issues depending on how Christmas fell compared to the previous year. It just affects your costs. You've got a revenue stream that all of a sudden stops, but you still have your linehaul running to try to get that to destination.

David S. Congdon

To elaborate further, we, although we say that we had one more work day in the quarter, that includes December counted as 20 days. And because of New Year's Eve and Christmas Eve falling on a Monday, we really only had about 18 in the third actual good revenue days in the month of December. It's like Christmas Eve we might as well have been shut down. We only did $200,000 of revenue. And on New Year's Eve, it was about $3 million. So they were really, really slow days and we didn't really have a full 20 work days in December.

J. Wes Frye

And Chris, as I mentioned in my comments, if you're going to get 99% plus on time, you eat that inefficiency in that cost. The shipment's got to run whether it's $200,000 for that day or $8 million. And so that does have an effect that we discussed, but not in terms of quantitatively.

Christian Wetherbee - Citigroup Inc, Research Division

Sure, sure. That's actually very helpful. And when you think about the December slowdown, was it kind of the last 2 weeks or so was really when you saw that deceleration kind of obviously you highlighted those 2 days at the very end of the month, but was it kind of mid-December is when you started to see volume really trend off hard?

J. Wes Frye

It was even as at a conference in early December that we gave an update and we know that range to 5%, 5.5%, but to say that it was probably closer to 0.5% -- to 5%, we were still confident that the sequential overall would still be pretty much in the range of the normal sequential downtrend from November. But in the last 2 weeks of that is when those -- the storms in the Midwest and the Northeast hit that just really tempered that. And as Dave mentioned, we had that one day that was only $200,000. So that December and that last part of December was really the period of time that you can't make cost adjustments in that short of time and so you'd really lose a lot of leverage. And that, as I mentioned, has fortunately has come back in January with almost an 8% sequential increase. Now don't take that 8% as nothing too stellar because the denominator in that being December was pretty low, but still it was significantly above what would be normal in January and we're still seeing, at this point and as early in February, we're still seeing some pretty good sequential trends in February as well. Early in February, but still seeing good trends.

Christian Wetherbee - Citigroup Inc, Research Division

And the reason why you kind of keep a total tonnage number that's a little bit lower than what you've been seeing for the first 6 weeks or so is factoring in, I guess, also you have fewer workdays and I think you also mentioned Good Friday quasi-holiday kind of at the very end? So we should be thinking about with 1 fewer work day and then maybe a holiday that's pulling forward into the first quarter as maybe a little bit lighter from a workday perspective? Is that the right way to think about it for the first quarter?

J. Wes Frye

Yes, that is correct. I mean, it's hard to tell exactly what that Good Friday will have. But typically, it'll be at least 50% less revenue on that Friday, which would be the strongest Friday of the quarter, obviously, 50%. Now how much of that Friday revenue will move to earlier in the week or move into April is unclear. But I think it's probably a split between the 2, but it's difficult to determine. But you're right, that kind of tempered our overall outlook sequentially was that holiday.

Operator

And we'll take our next question from Jason Seidl with Dahlman Rose.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

David and Wes, would it make any sense to try to get some of that broker business back over time seeing as a lot of your broker business tends to be the smaller customer who probably has better margins that you guys can go after directly?

J. Wes Frye

It's been a long-term trend that as the smaller customers are seeing the benefit of using 3PLs to improve their pricing and their, I guess, their systems regarding LTL, we don't really see that going back. But we've embraced -- as David mentioned, we've embraced the 3PLs are a fact of life. But on the other hand, we've also recognized that we have to be very value-added in price -- from our prices. We've been dealing with 3PLs. And fortunately, the 3PLs are beginning to realize that it's not all pricing and they do need asset-based carriers that provide very high levels of service. And so I think we've been successfully growing that 3PL business, and obviously with our margins, growing it profitably.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Okay. And shifting gears a little bit. We've concentrated a lot about on tonnage and pricing as we always do in all these calls. In prior calls, you've hinted at potential expansion outside of the LTL realm and you guys have done so. Could you talk about growing the non-LTL business and what you guys are seeing for 2013?

David S. Congdon

Our other product lines are our OD Global business, which includes container drayage, LTL back and forth between the United States and all of North America, our ocean freight forwarding business, and those -- our growth in that area is above the growth rate of our LTL business and so we see continued expansion in that. Our expedited business as well, which comprises about, say, 3% of our total revenue. We're growing nicely in those areas as well. And we still have some warehousing business that we're doing on the West Coast and the East Coast that we're trying to pursue and grow in that area as well.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

And this growth, David, all going to be organic or are you guys looking at acquisitions as well?

David S. Congdon

We're pretty much organic, but we also are fairly often presented with opportunities to do acquisitions in those spaces and we look at them carefully and we're kind of in between a rock and a hard place over acquisitions like that. As profitable as we are today and considering the return on capital that we have with our current business, when we start looking at these ancillary businesses and we look at our desired rate of return, the price we're willing to pay for an acquisition is low compared to what some other people are willing to pay. And so it makes it difficult for us to even do an acquisition. But anyway, we're doing well, growing organically and obviously with an 87.3% operating ratio -- or 87.2% operating ratio for the fourth quarter of this year, that is darn respectable. And we, obviously, like our current mix of business, and organic growth is working well for us.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

I would say that 87-plus percentage is actually just fine, and I know that you guys will be prudent about what you pay for acquisitions in the future.

Operator

And we'll take our next question from Brad Delco with Stephens.

A. Brad Delco - Stephens Inc., Research Division

Wanted to ask a question, the first one, Wes, on -- is there any way of breaking down your cost structure between variable and fixed? Just trying to wonder what that late decline in tonnage versus expectations in December. Was there not enough time for you guys to kind of adjust the cost structure, or was there any reason in particular why you kept it as is in anticipation of business picking back up in the first half?

J. Wes Frye

Yes, and that's a good question, Brad. But when you see a significant drop it's pretty difficult in that short amount of time to really adjust your overall infrastructure at all.

David S. Congdon

We managed our variable costs pretty well, very well during those latter 2 weeks of the year, but we were impacted mostly on the fixed cost side of the business.

J. Wes Frye

Yes, but keep in mind that in a sudden drop in revenue that some costs that are normally variable, for example, pickup and delivery. Your pickup and delivery for example, it becomes a fixed cost. You send that person out and all of a sudden he goes out and 3 businesses that were open the day before are closed today. And so your shipments per stop, et cetera, goes down. He becomes a fixed cost and that has a real deleveraging effect pretty quickly.

A. Brad Delco - Stephens Inc., Research Division

Got you. And then one other item I want to come back to, noticeable decrease in CapEx this year and trying to think about that in context of kind of incremental margins. I think there was a comment that you guys continue to expect to achieve your historical rate of 15% to 20%. Are we in an environment where that can happen? And I guess, are you seeing any, is this a CapEx read or should I be reading from the CapEx guidance that you're expecting kind of less investment on the growth side and kind of trying to achieve better utilization this year?

J. Wes Frye

Well, the CapEx, if you just break it down, last year, we spent $143 million on real estate and this year it's $95 million. So that's a big part of the CapEx reduction. And then also, last year, we spent $215 million on equipment and it's $150 million this year. And certainly the one big reason why that reduction is there is last year CapEx at $250 million had a fairly significant amount of catch-up and replacement cycle benefit that was as a result of the previous years that we were just holding off some of the CapEx. But certainly the $150 million this year does include obviously some growth as we already have given guidance in the first quarter. So it does include some growth in there.

David S. Congdon

But we also feel like we had some excess capacity with equipment today and so we put in a little bit little less for our anticipated growth for next year because of the excess capacity with equipment.

A. Brad Delco - Stephens Inc., Research Division

Got you. Just a quick follow-up on that though. Do you normally see incremental operating costs associated with making those real estate investments? And I guess kind of to the point is are we going to see less of that this year with reduced CapEx budget on the real estate side?

J. Wes Frye

Investment in real estate, Brad, is not necessarily a variable short-term cost. I mean, we make decisions on a real estate based on what we expect our needs are in 3 and 5 years, and so it's an upfront cost. So obviously, the real estate investment in 2012 are $140 million would have had a slight negative effect on our margins. But going forward, all of that will come back, not only from a cash flow, but from a margin standpoint. So we make those decisions on real estate in more of a longer-term perspective. And while it may have a short-term effect on margins, we think the long term will be much more positive.

Operator

And we'll take our next question from Matt Brooklier with Longbow Research.

Matthew S. Brooklier - Longbow Research LLC

So had a question, you had 2 major breakbulk facility projects. I think it was in Morristown, Tennessee and then there's one in Indianapolis. So just curious to hear if there was incremental expense during maybe third quarter or fourth quarter with those projects that was a headwind and if potentially maybe you lost a little bit of utilization as you transition into those bigger spaces?

J. Wes Frye

Yes, I don't think we lost utilization, but obviously when you combine both of those projects, we're talking about roughly a $30 million to $35 million investment. And all of that depreciation, which was capitalized obviously would have hit the fourth quarter, as I mentioned in my comments overall, because of the lower-than-expected revenue in the fourth quarter against our depreciation. Our depreciation was at 70 basis points in the fourth quarter compared to previous year. And part of that was -- would have been due to that investment in Indianapolis and Morristown.

Matthew S. Brooklier - Longbow Research LLC

Okay, okay. So it sounds like just the depreciation impact that was the most meaningful during the quarter.

J. Wes Frye

I don't think there was any direct costs or loss in efficiency. In fact, probably the opposite would have been more efficient extending the capacity in those facilities.

David S. Congdon

And as the construction project wound down, because we had to operate around the construction in both of those facilities early in the year. Then when we were able to open those facilities and finish, we became more efficient.

Matthew S. Brooklier - Longbow Research LLC

Okay, good to hear. Where are we from a terminal count perspective? I think you had 2 new terminals that opened in first quarter of '13. Just want to get a sense for what the count is here and then maybe as we go through this year how many additional potential terminals we could add and then maybe what parts of the country do you think there's opportunity to establish new service centers?

J. Wes Frye

At the end of the year, we had 218 service centers, and that was only 2 more than what we had at the end of December. And we haven't finalized plans for this year, but probably wouldn't open more than 2 to 4 service centers this year. And of course, as we always state and qualify that statement should there be opportunities that come along, that could change and we always are looking for opportunities in areas that in the longer term that we know that we want to expand.

David S. Congdon

One of our competitors made some mention of downsizing their network and that could cull us some service centers to come on the market. They were not really thinking about right now that might be opportunities to go into some markets that are on our list.

Matthew S. Brooklier - Longbow Research LLC

Okay. And then getting back to the CapEx side, you walked us through the spend on equipment for '12 and it steps down a little bit in '13. There was some catch-up in replacement spend in '12. I'm just curious to hear how much of that catch-up and replacement what was driven by bonus depreciation and then we get half of that going away in '13. Maybe you could just talk a little bit about how that's impacting your spend from '12 to '13?

J. Wes Frye

Matt, we really base our decisions on equipment based upon our needs from an operating standpoint, not from a depreciation standpoint. So although we got the benefit from bonus depreciation, our decisions on when we added the equipment wasn't based on that.

Operator

We'll take our next question from David Ross with Stifel.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

With the upcoming growth, continued extending the network, we're going to get more freight through there in the next couple of years, can you talk about how you view your sales force? How much did it grow in 2012? Are you looking to grow it any further in 2013?

David S. Congdon

I think we have maybe a very modest growth in the sales force in '12. I'd rather not comment on how many we have. But we will probably have some growth in the sales force, especially if we add a few service centers. But I wouldn't expect any major growth in the sales force for 2013.

J. Wes Frye

Dave, we track sales productivity pretty closely so adding sales, and we always make sure that they're adding revenue and so even though we added salesmen last year we also added revenue per salesman, so we always look at that metric very closely.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then can you comment a little bit on the competitive landscape over the past couple of months. We've heard some talk of temporary seasonal pricing out there. Didn't know if that impacted your volumes in the fourth quarter or not?

J. Wes Frye

We've got a little bit of anecdotal feedback of little bit of pricing, but nothing that would amount to a trend at all. But it's hard to tell. I don't think it affected our December. But if it did, it would be very insignificant.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And lastly, Wes, on the CapEx, tractors versus trailers, in the 2013 budget is that going to be -- is one growing faster than the other? I assume the bulk of it is tractors?

J. Wes Frye

Well, the bulk of the dollars will be tractors, just because they cost $100,000-plus per unit. But as far as numbers, it's pretty equal. We try to keep a balanced ratio between tractors and trailers.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

But average age of the tractor fleet is about in line with where you wanted? And the trailer fleet, it's about in line with where you want it now?

J. Wes Frye

Yes, that was one reason fairly significant expand in 2012 is to get that average age down to a more optimal level. And I think it's pretty much there.

David S. Congdon

We've been a little heavier on the trailer spend in the last 2 years because of -- we actually, by the end of this year, we will have a 100% deck fleet with our trailers and we wanted to go that direction. So that's caused us to be a little heavy there.

Operator

We'll take our next question from Ben Hartford with Baird.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

This is Kenton on for Ben. Had a couple of questions maybe on the expense side. In terms of the D&A expenses on an absolute basis, do you guys have a rough sense for what that's going to trend like in 2013?

J. Wes Frye

Yes, we'll give you updates as the year and the quarters progress, but not at this point. We should see -- I have to say that our percentage of revenue should start to temper. We're certainly not going to see a 30 or 70 basis points increase in appreciation in 2013 over '12. It'll start to become more of a comparable number probably and maybe even then on the revenue level, maybe even a positive.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then on the purchased transportation side, you had mentioned that some of your non-LTL offerings were growing at a rate above LTL -- your LTL growth rate. Is it -- would that have an impact on your expectations in terms of your absolute purchased transportation growth? Would that change?

David S. Congdon

Well, certainly, mathematically, our drayage operation is all lease operators, which is accounted for in our income statement as purchased transportation. And we've seen very good growth in that sector on the drayage. So mathematically, that would cause our overall purchased transportation to be higher, but it's only because of that drayage operation growing at a pretty good level.

Operator

We'll take our next question from Todd Fowler with KeyBanc Capital Markets.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Wes, I know it's early. I just wanted to follow up on the comments that you made February. The comment that you said was February has improved sequentially versus where you were in January. Was that the right comment? And then if there was...

J. Wes Frye

Yes, and that's only with about 3 or 4 days in February, but -- and that could change depending on weather and other circumstances. But at least for the 3 or 4 days, it's -- February's growing with a pretty good expectation. Now the expectation in February is that it, sequentially from January, would be tempered because January was so strong relative to December. But at this point, February's still looking at pretty good. But that's with still quite a few days in February to go.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Yes, I hate to spend a lot of time. We only have a couple of days of trends. But just the follow up on that would be then what do you typically see February versus January? I think you gave some historical numbers on the sequential improvement from some of the months in the fourth quarter. What does February historically look like versus January?

J. Wes Frye

The 10-year average in February compared to January is that February should be, from a tonnage standpoint, should be 2.6% higher. The guidance that we gave for the quarter would -- implies that it would not be that high simply because January was so strong at 7.9%. So it's a mathematical thing, not an actual thing.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Got it, yes. And again, we only have a couple of days so I don't want to dwell too much on it, but that helps. The only other one I had is, if you wouldn't mind, can you give just a quick reminder on your end market exposure? I'm just trying to remember how much of your end markets are kind of retail and furniture and those sorts versus manufacturing?

J. Wes Frye

Yes, we've been usually 40%, 45% manufacturing; about 20% to 25% retail; and about 20% to 25% on third-party logistics, which includes all of the above, which we don't have the visibility underneath. And then the rest of it's made up of some of our container-added value business, et cetera. But that is just a general makeup.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

And then within the fourth quarter, was there anything that stood out as far as one of those areas being stronger or weaker than the others?

J. Wes Frye

No, not really.

Operator

We'll take our next question from David Campbell with Thompson, Davis & Company.

David P. Campbell - Thompson, Davis & Company

I just wanted to clarify one thing about what you said about the first quarter. You said up 4.5%, I think, versus last year.

J. Wes Frye

4% to 4.5%.

David P. Campbell - Thompson, Davis & Company

4% to 4.5%. That includes the impact of the Good Friday and 1 less day, is that correct?

J. Wes Frye

It does, yes.

David P. Campbell - Thompson, Davis & Company

So on a per day basis, what's that equal to?

J. Wes Frye

We didn't give that number. Obviously, on a per day basis, it'll be a little more.

David P. Campbell - Thompson, Davis & Company

Okay, okay. And the other question I had was weather in February, I mean there's a big storm approaching in the Northeast. How was the weather a year ago? Are we looking at some possible negative comparisons because of weather?

David S. Congdon

Potentially, at least the weather is hitting us primarily over this weekend as opposed to middle of the week.

J. Wes Frye

Dave, let me clarify your previous question about the quarter overall. It's not 1 more day in the quarter, it's 1 less day.

David P. Campbell - Thompson, Davis & Company

Yes, I know, 1 less day, right.

J. Wes Frye

And probably if you look at the tonnage growth because of the 1 less day, it'll probably in the 2.5% to 3% range.

David P. Campbell - Thompson, Davis & Company

The total tonnage?

J. Wes Frye

The total tonnage. And that includes not only the 1 less day, but the fact that the Good Friday is on the last day of the quarter.

David P. Campbell - Thompson, Davis & Company

Right, right, right. But in terms of weather, did we have anything comparable last year? Do you remember how February was impacted by weather last year?

J. Wes Frye

And that's a positive in January. We were up 5.6%. If you recall last January, we had no weather issues at all. So from that standpoint, January of this year was going up against an easy comp and still we were able to increase tonnage by 5.6%.

David P. Campbell - Thompson, Davis & Company

Right, right, right. There's certainly nothing wrong with that. I gather from other commentaries that January was better, but you're keeping ahead of the industry.

Operator

It appears there are no further questions at this time. Mr. Congdon, I'd like to turn the conference back to you for any additional or closing remarks.

Earl E. Congdon

Thank you. And as always, we thank you, all, for your participation. We appreciate your questions and your support of Old Dominion. Please feel free to give us a call if you have any further questions, and we look forward to speaking with you on the first quarter call. Bye.

Operator

This does conclude today's conference. Thank you for your participation.

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Old Dominion (ODFL): Q4 EPS of $0.46 misses by $0.04. Revenue of $527.3M (+8.7% Y/Y) misses by $7.97M. (PR)