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Executives

David S. Congdon - President and Chief Executive Officer

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

Analysts

Thomas Wadewitz - JPMorgan

Jon Langenfeld - Robert W. Baird

Jason Seidl - Dahlman Rose & Co.

David Ross - Stifel Nicolaus & Company, Inc.

John Barnes - BB&T Capital Markets

Justin Yagerman - Wachovia Capital Markets

Thomas Albrecht - Stephens Inc.

Edward Wolfe - Wolfe Research

Old Dominion Freight Line, Inc. (ODFL) Q4 2008 Earnings Call January 29, 2009 10:00 AM ET

Operator

Good morning and welcome to the fourth quarter 2008 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 2nd by dialing 719-457-0820. The confirmation number for the replay is 3004857. The replay may also be accessed through February 28th at the company's website which is at odfl.com.

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.

At this time, for opening remarks, I'd like to turn the conference over to the company's President and Chief Executive Officer, Mr. David Congdon. Please go ahead, sir.

David S. Congdon

Good morning and thanks for joining us today for our fourth quarter conference call.

With me is Wes Frye, the Company's CFO. Earl, our Executive Chairman is out of the office today and not available to participate. Wes and I will have some brief remarks and then we'll be glad to take your questions.

I'll begin this morning by acknowledging the obvious, which is that the fourth quarter was extremely difficult for the national economy and for the transportation industry. Our results show that we are not immune to the impact of the downturn. The decline in tonnage for the quarter was the first we have experienced in over eight years and our decline in revenue was the first we have had since 1995 when we were a much smaller, less diversified company.

While our tonnage for the fourth quarter did not fall as much as we thought it would in mid December, the declining trend accelerated each month of the quarter. Furthermore at this point, we have not seen any indications that would provide much potential for a near-term recovery in the economy.

Within the context of this environment, Old Dominion has continued to produce results that lead the LTL industry segment. The OD team did a great job in the quarter to counter the deleveraging effect of reduced tonnage through outstanding operating performance and disciplined pricing. As a result, while our margins were pressured for the quarter, we were solidly profitable.

We continued to gain market share and we have yet to see any other LTL company with a fourth quarter operating ratio close to our 93.2. For you guys in the OD management that are listening to this call, you deserve a major pat on the back for a job well done. As we have discussed previously, we certainly want to work as efficiently as possible in this kind of environment.

But our primary concern is to continue providing outstanding customer service, which is an essential part of our value proposition and our efforts to sustain and improve revenue yield. We achieved both of these goals for the quarter. Our productivity statistics, on-time service performance, safety and cargo claim metrics remain at industry leading levels.

Our long-term focus on providing superior customer service is a key foundation for our disciplined pricing strategy. Our pricing is determined on an account-by-account basis and reflects many variables that, in aggregate, tell us exactly what services we are providing our customer, the value of those services and the pricing needed to meet our account profitability objectives.

As the stability of our revenue per hundredweight excluding fuel surcharge throughout the second half indicates, we have succeeded in producing industry leading results without sacrificing pricing to achieve volume. This performance is only possible, we believe, because our customers understand that pricing is just one aspect of the value our comprehensive, integrated services represent.

That said, we have continued and will continue to defend existing customer relationships against competitors who are throwing out cheaper prices to attempt... to achieve higher volume.

Our philosophy remains consistent and firm that we will not, willingly or knowingly, offer lower prices to win new business. We believe that using price in this manner undermines our value proposition that has taken years to create and is essential to our long-term growth.

In our model, the economics of price cutting just doesn't make financial sense because it takes a 3% to 4% increase in tonnage to offset a 1% decrease in pricing just to break even from an earnings per share standpoint and even more tonnage growth to maintain an equal profit margin. This is difficult to achieve in a good economic environment and almost impossible in the recessionary freight environment that we are currently in.

We believe that our continuously strong operating fundamentals truly differentiate Old Dominion in the industry today. As a result of our successful long-term strategies, we believe we are the best positioned LTL carrier to weather the current storm, capitalize on industry consolidation and to continue strengthening our ability to resume a significant rate of profitable growth as the economic cycle improves.

I will summarize the strengths that support this leadership positioning.

First, our comprehensive services are delivered through one company that combines the best features of regional, interregional and national providers. Since we have expanded this business primarily through organic growth, we have no operational or integration issues like many of our industry competitors are facing. We continue to invest in the company, creating new value-added services and employing the latest technology that allows our dedicated non-union employees to produce industry leading on-time service, safety and cargo records. These investments and our demonstrated operational controls have enabled us to produce the LTL sector's best operating margins.

In addition to having continued opportunities remaining to pursuing geographic expansion of our service-centered network, we are well prepared with the capacity, the service products and other infrastructure to benefit from industry consolidation, either through the exit of the industry participants or through acquisition. We have maintained a strong balance sheet with ample liquidity and can act decisively on opportunities we choose to pursue.

In closing, the success we continued to achieve is not happening by accident. It is a direct result of our well seasoned management team and the hard work and determination of our entire OD family.

We are committed to our proven long-term strategies, even when the short-term environment may challenge some of our courses of action. We're being appropriately cautious with regard to our current and near-term operations. But we remain clearly focused on building this company to achieve long-term growth and earnings and shareholder value.

Now, Wes, you want to discuss some more details?

J. Wes Frye

Certainly, and good morning. Old Dominion's revenue for the fourth quarter was $336 million, a decline of 6.4% from the fourth quarter of '07.

As presented in our news release, a decline in shipments of 11.8%, combined with an increase in the weight per shipment of 7.8% resulted in a 4.9% decrease in total tons. The increase in weight per shipment was primarily a result of a 4% increase in LTL shipment weight with the remainder caused by a higher mix of volume shipments. While an increase in weight per shipment has a positive impact on operating efficiency, it also causes the revenue per hundredweight to be lower as does the 3.3% decrease in length of haul for the fourth quarter.

We believe these measures primarily explain the 1.4% year-over-year decline in revenue per hundredweight excluding fuel surcharge. Consequently, we believe our pricing remained relatively stable for the quarter, both from a year-over-year as well as a sequential view.

We remain committed to a disciplined pricing approach by understanding the cost of our services and by working with our customers so that they understand, are willing to pay a fair price for the value that we provide. This decline combined with the increase in weight per shipment gave us a 6.3% increase in revenue per shipment, excluding fuel surcharge.

To offset the financial impact of reduced tonnage, we focused on improved productivity and management of our variable as well as overhead cost. As a result, our line haul, pickup and delivery and dock operations experienced meaningful productivity improvements. During the quarter, we saw a 3.7% increase in our laden-load average... line haul laden-load average, a 2.9% increase in shipments picked up and delivered per hour, and a 16.7% increase in platforms pounds per man hour. These improvements resulted in a 60 basis point decline in the percentage of these costs on a direct basis to revenue.

While these efforts could not fully offset the deleveraging impact of reduced revenue on our fixed and semi-fixed costs, it did contribute to our maintaining a relatively strong GAAP operating ratio of 93.2 for the quarter while also maintaining by the way a 99% on-time delivery and very tight standards.

Our net CapEx for the fourth quarter was $75.7 million, $60 million of which was opportunities to acquire available real estate, bringing the total CapEx for the year to $183 million, down from $195 million for 2007. Almost two-thirds of this 2008 expenditure were acquiring what we view as real estate opportunities or expanding undersized existing facilities.

Our net cash provided by operation activities for 2008 essentially funded those expenditures as well as debt reduction that contributed to a significant improvement in our debt to total capitalization to 31.1% at the end of '08 compared to 35% at the end of '07. For 2009, we anticipate capital expenditures of approximately $190 million, which includes approximately $89 million for equipment, $85 million for real estate and $13 million for information technology. We again expect to fund most of those expenditures with operating cash flow and cash on hand. We also have $175 million in availability under our existing credit facility which doesn't mature until August of 2011.

As presented in our news release, we remain very cautious in our near-term outlook because of the economic environment, its impact on competitive pricing and a negative trend in tonnage and shipments throughout the fourth quarter. With limited visibility about the duration and depth of the economic downturn, we cannot provide financial guidance with necessary degree of confidence. As a result, we will not be providing guidance until further notice.

And 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

Certainly. (Operator Instructions). We'll go to Tom Wadewitz with JPMorgan.

Thomas Wadewitz - JPMorgan

Yes, good morning.

David Congdon

Good morning.

J. Wes Frye

Good morning.

Thomas Wadewitz - JPMorgan

Let's see, so where do you think the impact is going to be as we have what appears to be a pretty active bid season? And clear... you said pretty clearly your approach on pricing, which makes a lot a sense. But to what extent can you resist the downward pressure on price if shippers, on a broad basis, put a lot of business up for bid?

David Congdon

Tom, we have been very successful for the last number of years with our pricing philosophy and our value proposition. So I don't think it's going to be a whole heck of lot different than it has been in the past. And we should be continuing to be successful with our approach with customers.

Thomas Wadewitz - JPMorgan

So...

David Congdon

Our bids to year round. It's not like it's all of a sudden, we are going to have a big bid season and all the prices are going to be adjusted. The contracts that we have with customers go pretty much year around and we are not having any trouble convincing our customers on our value proposition.

Thomas Wadewitz - JPMorgan

So you think you can, I mean, maybe you see a little more pressure. But you don't anticipate seeing a big step up in pressure on rates in terms of what you are able to achieve?

David Congdon

Not for us. Maybe some others... other carriers might choose to play the price game but we are just... we weigh every single account on its own merit and look at this. We have a certain profitability that we expect to achieve and that we've got to achieve in order to give the service levels that we are giving. And that's the value proposition and it sells well when you in fact have the underlying value.

Thomas Wadewitz - JPMorgan

All right, that makes sense. Let's see, the tonnage front I may have missed this. I don't know if you've said by months or talked about that it all. But can you give us a sense of what the progression was in tonnage year-over-year by months and if you have any comments on what it looks like in January so far?

J. Wes Frye

Yes, Tom. We didn't get the specific numbers, but October we saw tonnage basically flat, down two-tenths of 1%. That accelerated to 6% year-over-year down in November and then 8.5% down in tonnage in December. We're expecting January at this point to be also down in the high-single digits. January has been really negatively affected by weather. I jokingly asked our Senior VP of Operation if there has been any day this month or any period this month that we haven't had some effect of winter throughout our system. Expecting him to say no, we haven't. He did say that it was Monday that we didn't have much of an effect. But we have virtually had a weather effect that's contributing to this high single digit. Short of that, and I'm not sure what the effect has been to tell the truth, but it has had an effect, but we are expecting January to be down in tonnage in the single high digit.

Thomas Wadewitz - JPMorgan

Okay. And do you think that... it seems that you've had this pretty... but in transports in general, seeing a pretty sharp falloff in December and January demand. But I think there is an anticipation that this can't be representative of the run rate and the economic activity has to pick up a little bit off of this very low base. Are you hearing that from any of the customers that February or March would look like they would pick up a little bit from the low level in December January?

David Congdon

Not necessarily from customers, but we track our sequential trends. And while we don't think the sequential trends will lead back to historical proportions, we think that they will some sense have some bearing. So if for nothing else we do expect at least February March to sequentially track at some level.

J. Wes Frye

They track a little better.

David Congdon

So it's little better at some level, yes.

Thomas Wadewitz - JPMorgan

Okay. So if you look at those March... February and March year-over-year in terms of tonnage, you would think they would be a little better than the down high single digits?

David Congdon

We do.

Thomas Wadewitz - JPMorgan

Okay. All right. Great, well, I appreciate the time. Thank you.

Operator

We'll go next to Jon Langenfeld with Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Good morning guys. Nice job in the quarter.

David Congdon

Thank you, Jon.

Jon Langenfeld - Robert W. Baird

So a little bit on the pricing side or maybe just conversations you are having with customers. I mean how many outside of new bids and formal bid processes are customers just coming to you to talk about their freight bucket more and what their strategy is for their carrier selection and asking you if you can do more without doing the official bid process?

David Congdon

I would say that these conversations do take place. But there is an awful lot of activity out there in the recent couple of months with the carriers concerned about industry consolidation, potential for some industry consolidation. And so we've had a lot more of those type of conversations recently with some concerns happening in the marketplace. But the discussions with the customers, a lot of these are the folks that we currently do business with. But then some customers are companies that we don't do any business with, but like I tried to say earlier, we are very determined to maintain profitable pricing. We are in this business to serve customers for the long run and to deliver on our promises and to do it with the highest levels of service available in the industry. And consequently, it's only fair for us to expect and to earn a reasonable rate of return.

Jon Langenfeld - Robert W. Baird

Yes, I know, good enough. How do you balance... volume is down 10% in December. That's probably better than the markets, so you continue to take share. But how do you monitor that? I mean you've got to be... seems like you've got to be on your toes here in terms of the balance between price and other companies taking your share. And my guess is in this bid process, it's going to be pretty complex in terms of trying to toe the right line.

David Congdon

Well, we are winning some and we are losing some. We lose... if we would lose a bid, it's because of the price that we are... that the pricing does not meet our requirements. But we continue to have just like to give an anecdotal evidence here that customers come back to us for the service levels that we provide later.

I mean we have customers leave for price but then they keep coming back. It is a balance, but we believe as I told you earlier, reducing price by 1% requires 3% to 4% offset of tonnage in order to breakeven on an EPS basis and even more tonnage to offset, to have the same rate of return, same operating margin. So if pricing gets to a point where it's just an absolute and clear loser, we're going to walk away from it. Because if somebody's going to hold it and it's a clear loser that freight is going to come back into the marketplace eventually because companies can not operate freight in loss and stay in business. So we are going after the long run. We would rather deal with softer tonnage and manage the blocking and tapping of our business which we are clearly doing, as opposed to playing the price game and knowingly losing money in a big way on our account.

Jon Langenfeld - Robert W. Baird

Yes. Fair enough. Now if you think about the bid process, I mean where... when do most of these bids get awarded? I know it's spread out, but I mean is this something that you would expect by March to have a new business shifted into your freight bucket or is this more of an April timeframe? What are you thinking there?

David Congdon

Jon, again, it's around the year. It just goes all year along with us. I think the only difference is that there it is some stepped up activity going on right now surrounding the potential for industry consolidation.

Jon Langenfeld - Robert W. Baird

And if I put... if I am a shipper and I put out a bid today, mid or large sized shipper put out a bid today, am I looking basically four weeks, six weeks to actually have it implemented... the results implemented?

David Congdon

I think it all depends on who the shipper is and the complexity of their own internal network to change rounds on purchase orders. Some can change in a week and some might take a little bit longer. I think with the technology today the... it's easier to change, but you've got... they may have orders in the pipeline that are already rounded in a certain way that they cannot change very easily. So given the soft freight environment there aren't a whole lot orders in the pipeline either.

Jon Langenfeld - Robert W. Baird

Yes, true.

David Congdon

Right. So I would say you could change more rapidly than to be prolonged.

Jon Langenfeld - Robert W. Baird

Okay, good. Thanks for the color.

Operator

We'll go next to Jason Seidl with Dahlman Rose.

Jason Seidl - Dahlman Rose & Co.

Hey guys.

David Congdon

Hi.

Jason Seidl - Dahlman Rose & Co.

A quick question regarding the tonnage trend. You are down sort of almost double-digit levels I think you said into some write-down 8.5%. And you are about down the same in January, but that's with tough weather, so can I infer that maybe January is not quite as bad in terms of the underlying demand than December?

J. Wes Frye

I think that's generally true, and I don't know what percentage point you would take off of that high-single digit due to weather, but maybe slightly better year-over-year but that's not to say good.

Jason Seidl - Dahlman Rose & Co.

No. Are your January comps easier than your December comps?

J. Wes Frye

I haven't checked to see what the comps, but I think I think probably a little bit easier.

Jason Seidl - Dahlman Rose & Co.

So they are a little bit easy. So net-net, January's probably then, once you factor out whether you factor in easier comps, you are about the same as December demand then.

J. Wes Frye

That's probably good reasonable statement.

David Congdon

I'd statements. And another point, our March last year was a lousy March. So that one is probably an easier comp. Is that fair to say?

J. Wes Frye

March. At least that particular month might be an --

David Congdon

Recall, March last year Jason had the Easter Holiday in it.

Jason Seidl - Dahlman Rose & Co.

Yes I remember. Well hopefully you guys don't have this weather to extend in the March, that won't be too good. On the real estate side, can you talk to us a little bit about how many terminals that means you guys plan on adding? Or do you it all upgraded terminals?

David Congdon

Most of these... you are talking about '08 or '09?

Jason Seidl - Dahlman Rose & Co.

'09, '09.

David Congdon

Probably only three or four additional terminals.

J. Wes Frye

That are committed for right now for '09.

David Congdon

Right. Yes.

J. Wes Frye

However, as real estate opportunities arise, we probably still have nearly 40 on our list of cities that we would like to open in the future, maybe 35 to 40. And if real estate opportunities arise and it's the only game in town, we will do as we have in the past. And that's buy it or try to lease it or go... and ahead and open it while that opportunity is there.

David Congdon

Yes. For the most part, the facilities are either leased that we want to own because of opportunities on the market or it's just facilities we simply have outgrown. We were not, we still are growing facilities even in this environment.

Jason Seidl - Dahlman Rose & Co.

That's understood. That's good color guys. On the fuel surcharge, obviously fuel came down pretty dramatically in the fourth quarter. It's at a much lower base. Can you talk about how that impacts your results a little bit here in 1Q?

J. Wes Frye

Well, there is two impacts. If you recall, the first quarter of '08 that we saw a negative impact because of fuel surcharge caps that we had in place which we I think have done a good job mitigating through the rest of the year. And obviously in the fourth quarter of '08, obviously, those caps were not an issue and so that spread that we lost in the first quarter, we got back in the fourth quarter. But there is no doubt that the level of a fuel cost and consequently fuel surcharge, there is some slight negative impact in the quarter. As an industry, we have negotiated fuel surcharge and lose our base rates and I will say that it's probably affected us no more than 20 to 30 basis points.

Jason Seidl - Dahlman Rose & Co.

Okay, fair enough. Last question and I'll turn it to somebody else. You know you guys did preannounce the quarter to better than expected. What was the delta? What changed? What did you guys not see when you guys put out your preannouncement?

J. Wes Frye

Yes, for the most part, it was three items. The revenue as we stated in that last half for the year, last five days to be specific in December was about $2.5 million better than expected. In other words, we were expecting a really negative trend throughout the Christmas season, especially in view of the fact that how Christmas specifically fell and it came in better than... I am not suggesting it was a real surge; just came in better than our expectation.

Jason Seidl - Dahlman Rose & Co.

Okay, understood.

J. Wes Frye

And keep in mind that if you are going to provide and we... even in the quarter, in this downturn, we provided a 99% on-time service. If you commit to that then, picked up a deliver and line haul at some point becomes a fixed charge. And so with the additional incremental revenue that we had, we were able to better control that cost as opposed to the revenue levels that we expected. The other thing is although roughly 80% of our revenue by the time the 23rd of December came along was known for the quarter; we were still in audit. And therefore not all of your costs are known until you get the appropriate audit. And as you know, actuaries come in and look at reserves and we quite frankly were expecting a negative reserve adjustment that did not happen. And so those were the principal things that happened that caused much of the difference between what we were feeling in mid December and what our ultimate results were.

Jason Seidl - Dahlman Rose & Co.

Wes, that was very helpful. I appreciate it. Thank you for your time as always guys.

J. Wes Frye

Thanks Jason.

Operator

Next to David Ross of Stifel Nicolaus.

David Ross - Stifel Nicolaus & Company, Inc.

Good morning gentlemen.

David Congdon

Good morning.

David Ross - Stifel Nicolaus & Company, Inc.

Weight per shipment has been rising really since 2003 and you would have talked a little bit about the fourth quarter. I think 4% of its increase is due to higher weight per LTL shipments and the rest of it was due to increased truck load shipment. Is that kind of... where do you see those going forward I guess as accounts become much harder. Is there much weight per shipping you see you should gain or is that likely to tail off at the...

David Congdon

Yes, it's hard to tell, but we think that there is a dynamic shift in this economy on weight per shipment, just combining shipments. And we think that that will continue, but not necessarily increase. So we are assuming that the weight per shipment will kind of just hold steady that most of that dynamic ship has happened. And so that's our assumption.

David Ross - Stifel Nicolaus & Company, Inc.

Okay, that makes sense. And for length of haul decline during the quarter, you talked on the last conference call about not wanting to compete as much in the long haul markets because you thought I guess that was a little bit more price competitive. Is that one of the reasons that I guess the regional group pass in the long haul this quarter as well?

David Congdon

Well it's not that we did not want to compete in the long haul markets. It's just that there were a couple of carriers out there butting heads on pricing, trying to gain that long haul market share. And some of that pricing was outside of our profitability parameters where we've just chosen not to participate in certain business over the price. Said another way, the price that we were willing to haul it for was just too high for those particular customers and we just didn't want to get in the price war.

David Ross - Stifel Nicolaus & Company, Inc.

And is the Oak Harbor strike out west (ph) still helping you guys on the tonnage side?

J. Wes Frye

Not material.

David Ross - Stifel Nicolaus & Company, Inc.

Okay. In your Canadian operation, Wes, you noted that I guess the change in length of the haul reporting was due to how you accounted for some Canadian shipments.

J. Wes Frye

Yes, we restated... we have restated for all of those that may be compared to last year and see that the number for last year has changed. We were actually calculating line haul to the endpoint in Canada, where in fact we were only delivering to the border and it was given to another... our Canadian partner carriers. So we corrected that calculation and that's the reason and we'll send out to those that requested restated line haul numbers for the past four years.

David Ross - Stifel Nicolaus & Company, Inc.

Okay, that makes sense. And do you see Canada as being an entry point where you would no longer partner with a carrier but maybe either buy a partner carrier or just grow organically up into that area?

David Congdon

David, we are very happy with our arrangements up there right now, but that's obviously also in our longer range thinking that we are interested in our own operations in Canada.

David Ross - Stifel Nicolaus & Company, Inc.

Okay. And then last question is on the technology; you guys have always been very good at investing heavily in your operations network, the technology infrastructure. Are there any new technology improvement initiatives you guys have underway for 2009 that you can talk about?

David Congdon

There is one in particular that I am very excited about, and that is, we have made a commitment to put computers in the trucks. I'll refresh everyone that we have had handheld computers with our local drivers, and those communicate over selling your networks back and forth to our systems right now. But they don't have any GPS involved. So we have made a commitment to move ahead with people in that or probably have heard their names with their blue device in the trucks and we are in the midst of... we went through a pilot last year with three different vendors and chose people there.

And we are in the process of doing one of our major service centers right now and also working through a number of business processes that we want to put in and make sure are up, running, in place ready to managed before we roll past doing out Greensboro service center. And the target of for those... for that device is to focus on fuel, efficiency from a driver and tractor standpoint as well as fuel accountability, to implement electronic on-board recorders for the longs, for our long haul drivers. To also have a better handle on our pickup delivery cost and the time in and out of our stops and the miles and so forth.

And there is probably a dozen more internal processes. Another big, big thing is safety. We are very exited about being able to see the driving behaviors of our drivers and to integrate this with our carries' lane departure warning devices which will give us a real-time indication if we've got a sleepy driver driving down the road. Think what that might be worth. If a guy is making sudden stops or if we have got an inordinate... an excessive amount of departures from his lane for a given... for the distance he's traveling that we get an alert and we can call the guy up on his cell phone or ring him on the computer and say get off the road and take a nap. That is just saving two or three or four of those type of things where you have a $2.750 million deductible per accident can pay for the whole project. So we are very excited about that process going forward and see a lot of opportunities to continue to improve our efficiency.

David Ross - Stifel Nicolaus & Company, Inc.

Thank you very much.

Operator

Next to John Barnes with BB&T Capital.

John Barnes - BB&T Capital Markets

Hey, good morning guys.

David Congdon

Good morning

J. Wes Frye

Hi John.

John Barnes - BB&T Capital Markets

Going back to the discussion on fourth quarter guidance. Could you just give us an idea, when you made the changing guidance on December 23rd, how late in the quarter did you have good information at that point. I mean were you basing that off data through the end of November or were you putting much up to date with the flash report or something like that. I am just trying to get how much data you had before you made that call?

J. Wes Frye

Basically, we had closed our October, November and had some... obviously, some sense for our labor costs, at least through that point.

John Barnes - BB&T Capital Markets

Okay. But didn't have any day... you didn't have data at that point on volumes or anything?

J. Wes Frye

We have all of that everyday, every hours. We actually had data on the volumes. That's the revenue line. But we didn't have visibility on the remainder of the month that had a fairly positive, much better than we had anticipated when we gave the guidance. But as far as the cost side, we had total visibility at least obviously through October-November in labor for the first three weeks.

John Barnes - BB&T Capital Markets

Okay. And the $2.5 million... Wes, you said it was $2.5 million better. And I'm sorry if I missed this, was that $2.5 million better revenue, was it $2.5 million better operating income, I'm just trying to get to read there?

J. Wes Frye

No that's billion, million higher revenue for the last six days of that month.

John Barnes - BB&T Capital Markets

What do you...

J. Wes Frye

So in other words, John, we were very pessimistic on what the revenue was going to look like for the remaining of December when we put out that guidance.

John Barnes - BB&T Capital Markets

Okay, all right. And then or has it $2.5 million on the revenue side. What were you forecasting at the time, you though you are going to have in terms of an adjustment to your reserves? Do you know kind of what you had in mind when you lowered...

J. Wes Frye

We did. We thought we'll have anywhere from 3 to 4 million of negative adjustment in some of our reserves that when we got the actual review it did not happen.

John Barnes - BB&T Capital Markets

Okay, that's helpful. All right, in terms of CapEx as you go into 2009, could you just talk about contingency plans in case there is some type of event, like a failure or something like that in this space and what's your intensions are? I talked about this a little bit before back in November but now that we are six or eight weeks later, just kind of curious have you updated your plans on how much equipment you might hold on to that type of thing?

David Congdon

Yes, we have not changed our plan from probably what we've discussed that you... previous discussions. We're bringing in about a 10% increase in our trucker fleet in first quarter of this year. They are actually trained tractors, who are not aiming for growth and we hold on those trades. That will give us about a 10% cushion parked against the fence and same thing for trailers.

John Barnes - BB&T Capital Markets

Okay, so the same thing?

David Congdon

Trailers will take a little bit longer.

John Barnes - BB&T Capital Markets

Okay. All right, very good. Thanks for your time guys.

Operator

We'll next to Justin Yagerman, Wachovia Capital Markets.

Justin Yagerman - Wachovia Capital Markets

Hey good morning guys. How are you doing?

David Congdon

Hey Justin how are you?

Justin Yagerman - Wachovia Capital Markets

Good. Wanted to ask you a couple of question here on the heavier weight shipment and I mean a lot of your competitors are seeing their weight per shipment decline. Sounds attributable to an increase in truck load freight and may be some of those LTL profile freight as well as you said. But is that something like you are directly out there marketing in a big way and I mean, at least on the truck load side, is that some place that you are gaining a bit of traction relative to your competitors you think?

David Congdon

I wouldn't say so. We are still having of a significant increase in spot quote shipments this year as a spot quotes, I think as I just say it all the time that shipper has an 8000... basically anything over 5000 pounds, they are tending to call around to think that they can get a better deal than their current price levels dictate. And our average spot quote shipment lies in the 8000 to 9000 pound category and I think that they are about double this year versus where they were last year, the quality of shipments.

J. Wes Frye

Yeah just to be specific during the quarter Justin, our volume which is in the 8000 to 10,000 pounds with an 13% of our total tonnage. It's only about 4% of our revenue, but it's up... last year, but 13% of our tonnage went to 16% of our tonnage and 6.5% of our revenue. So although it's still only 85% of our tonnage roughly or 16%, it still has a meaningful impact on the weight per shipment since it's around 8000 to 10,000 pounds.

David Congdon

Another factor in this thing too is probably what total impact it has. Our container division has grown modestly in those shipments late 25 or 6000 pounds, we changed that our leadership and our management of that division almost two years ago. And that team is just doing a great job of growing that business in excess of the growth rate of the company. So that's impacted us just a little bit as part of that 15% to 16%.

J. Wes Frye

Yes, but that's about the only thing that we've... if you want to say, we've marketed better is probably the container division. The rest of it is just sort of the natural what's going on in the market, I'd say.

Justin Yagerman - Wachovia Capital Markets

That's fair. Curious, I mean when I look at your performance throughout the year, you guys have had better tonnage experience, stayed positive longer than most of your competition. But in fourth quarter, the drop off in the delta on a sequential basis is fairly severe. What changed as you want from third quarter to fourth quarter maybe that was company-specific to Old Dominion as opposed to the industry. Did you have a significant segment of customers that fell off and started to dip into that decline? Where would you actually identify that tonnage drop off? Because I mean, you really were much more resilient I would say than the competition for the duration of the year and I mean still obviously lower declines than a lot of the other guys have reported out there so far. But nonetheless, the drop off in Q4 was fairly dramatic.

David Congdon

We don't have our regional changes, yet to be able to say, if it's one region of the country or another. But in general Justin it's been across the board everywhere and what you are seeing with our tonnage declines is purely economic. It's not any fall off of certain customers or segments of the business or anything like that.

J. Wes Frye

Justin, in the third quarter I guess what you're getting through, our tonnage was up in the 5%-5.6% range and in the fourth quarter it was down 5%. So it's a 10 percentage points spread and your question is that deeper than the competition? I know, I haven't made the account calculation but anecdotally, we balance pricing against tonnage and we chose to be disciplined on pricing. Now anecdotally if we've given not any tonnage as result of that, maybe may be not. But you got to look at the results.

Justin Yagerman - Wachovia Capital Markets

No absolutely. I mean and they do speak for themselves. I guess what I am wondering about is from a pricing standpoint, you guys have been firm in saying that you won't go out and under bid to win business and I don't think that you guys do that. But what I would think is that maybe you out operate your competition and as a result, your pricing is lower. And making you more competitive in a lot of the markets that you go into which has always been to your benefit. But are you seeing now industry pricing comedown to a point where that competitive factor is getting diminished because you've got competitors out there who are just willing to run at a loss?

David Congdon

One of your points that you just made, I think we are a low-cost fast service provider and that does win customers. So, another metric that we have is a market share metric that we watch from a national traffic database and the universe of carriers that report to that, their volume both in shipments tonnage and revenue was awful worse than ours and consequently, our market share did increase. So we're kind of tracking with the group, but not as bad as the group. I am not sure if that probably answered all of your point.

J. Wes Frye

If you look at our revenue per hundredweight and less exclude fuel surcharges for comparable purposes in the second quarter, our revenue per hundredweight was lower then it was in the fourth quarter. So we have done a good job maintaining price stability and that was the basis of our comments. So that in the fourth quarter of '08, our revenue per hundredweight would actually better than both the third quarter and the second quarter. So I think whatever we are giving up in tonnage, we are making back in price stability and trying to maintain margins.

David Congdon

And we are just firmly believing that ratio that we talked about on price versus tonnage that it's better... I mean in declining pricing... declining tonnage environment, if you're going to want to maintain your profitability, you better keep your prices right.

J. Wes Frye

We get feedback from our sales force of discounts out there that in double digit discounts out there in the market. And my gosh, our formula is if you price... reduce your price 1%, you need 3% to 4 % more tonnage just to break even. So that kind of implies a 2% additional discount. Does that mean you need 30% to breakeven or more tonnage? Well you know, that's not possible in this environment. So it just seems to be crazy.

David Congdon

Let me elaborate on what he just said. There is a particular carrier out there who's offering a 12% discount off the current pricing of any carrier of the YRC Group. Now that's just sort of a blanket thing, they are faxing some letter of intent out to customers. And YRC has been cutting prices, to try to survive. Because their tonnage has been falling off, it can't keep the tonnage out. So that's 12% off already low pricing, how can you go another 12%. With our rationale that takes 3 to 4% tonnage to offset 12 I think they got to grow their tonnage 40% to offset this thing to us, that's financial suicide.

Justin Yagerman - Wachovia Capital Markets

No it's fair point and I appreciate all the color on what's going on in the industry. It sounds like it's very, very comparative. Wes, on the purchase transportation line, it looks like you guys have done a nice amount of leverage. Is most of that fuel or are you getting better pricing with your interline partners or just handling more regions yourselves in this type of environment?

J. Wes Frye

Principally it's... in that line is our container operation which is all lease operators. The rest would be called as OD line haul or rail that we've been using and although containers are slightly higher percent the other we are using more of our own equipment. So that's significantly reduced.

Justin Yagerman - Wachovia Capital Markets

Got it. And I guess not to harp on it, but was the last week of December just extremely strong from a tonnage standpoint not necessarily, you mentioned 2.5 million more revenue for six months, but delta between the 6 to 7% guidance and the 4.9% that you guys ended up with, is fairly large to make up for in a week. I mean it was --

J. Wes Frye

Hey Justin. I can't help but laugh. -- was strong. This is such a -- enough and strong about this market.

Justin Yagerman - Wachovia Capital Markets

Yeah, all right. Fair enough guys. I appreciate all the time and thanks for answering the questions.

J. Wes Frye

Okay Justin.

Operator: We'll go next to Tom Albrecht, Stephens Incorporated.

Thomas Albrecht - Stephens Inc.

Hey David, Wes and everybody else. Wes, you talked about how you thought that you may needed to have increased the reserve. But the audit went well I guess. But when I look at your expenses, insurance and claims was 4% of freight revenues and more importantly in an absolute dollar sense was 11.5 million and it's been between 7 and 8.5 million in recent quarters. Was that not a reserve adjustment there?

J. Wes Frye

It was, but it was offset by a positive adjustment. And workers' comp it's actually part of fringes, so that in the essence it is washed out.

Thomas Albrecht - Stephens Inc.

Okay, so, but workers comp would be in the SW&B line, right?

J. Wes Frye

It would be yes.

Thomas Albrecht - Stephens Inc.

So are you also thinking that you wouldn't have got net workers comp or were you thinking you are going to have big increase in your bad debt reserves?

J. Wes Frye

No combining all of them together, we are expecting that possibility of a negative.

Thomas Albrecht - Stephens Inc.

Okay.

J. Wes Frye

And how it turned out was there was a negative into the BIPD that's in the insurance line but that was offset by a positive in the workmen's comp line.

Thomas Albrecht - Stephens Inc.

Yeah. And, so on the BIPD was that new accidents or just truing up reserves on prior incidents?

J. Wes Frye

It's truing up reserves base upon actuarial computations.

Thomas Albrecht - Stephens Inc.

Okay and then what was your bad debt expense during the quarter.

J. Wes Frye

Bad debt expense as a percent of revenue. Well I haven't calculated that number. I have to get back to you.

Thomas Albrecht - Stephens Inc.

Yeah I was just curious because when you are in a recession, I just want to keep track of that stuff. And then cargo claims had been going really well. I didn't... I don't think that I heard you guys explicitly talk about that percentage this quarter. How did that go?

J. Wes Frye

It's still very good. I think we ended our claims this year at like 0.86 and the last six months of this year was 0.92. And that even includes over... and that's with less fuel surcharges, a whole lot less in the last in the last couple of months. So we are still a sub 1% on our claim ratio and versus last year, we've about 29% improved our claim ratio.

Thomas Albrecht - Stephens Inc.

Okay. And was it like 0.6 mid year or is that just the whole fuel revenue surcharge?

J. Wes Frye

That was a peak of the fuel surcharges. So as a percent of revenue it's influenced by that number.

Thomas Albrecht - Stephens Inc.

Sure. Okay, and then back to Justin's question on operating supplies and expenses, I know in the 2007 10-K diesel fuel cost, including fuel taxes were basically about 14% and 13% in '07 and '06 that have supply line. Was it in 2008 or just as good even in the fourth quarter?

J. Wes Frye

Fuel surcharge as a percent of revenue?

Thomas Albrecht - Stephens Inc.

No the fuel cost including fuel taxes, in '07 that item was -- ?

J. Wes Frye

We don't that specific in our numbers on that.

Thomas Albrecht - Stephens Inc.

Okay. But you kind of have it in the 10-K, I would assume, because you had in the 10-K in recent years.

J. Wes Frye

I can't give you those numbers off top.

Thomas Albrecht - Stephens Inc.

Okay. What are your thoughts on the GRI? Last year every body went as early as they had gone in a decade or more, lot of February GRIs, what's your thoughts right now?

David Congdon

We're planned on taking one. We have not decided the exact timing but it's coming fairly soon, but we are going to give our customers a warning, adequate warning before we implement it.

Thomas Albrecht - Stephens Inc.

And any sense whether it would be comparable to less than or greater than last year's?

David Congdon

I'd rather not say it right now. We'll just have to wait and see what the... till we make our announcement.

Thomas Albrecht - Stephens Inc.

Okay. I think that's it. So guys, thank you very much for the time.

David Congdon

Okay. Thank you.

Operator

We'll go to Ed Wolfe with Wolfe Research.

Edward Wolfe - Wolfe Research

Hi thanks. Good morning guys.

David Congdon

Good morning.

J. Wes Frye

Good morning.

Edward Wolfe - Wolfe Research

Can you just give the trends of the yield net of fuel were a negative 14. I know there is a lot of mix and stuff for the quarter. How did that play out through the months kind of like you did the tonnage?

J. Wes Frye

You say net of fuel?

Edward Wolfe - Wolfe Research

Yes. They are a positive one. I am sorry minus one. They run for hundred net of fuel.

J. Wes Frye

I am looking for it.

Edward Wolfe - Wolfe Research

Thanks Wes.

J. Wes Frye

Why don't you ask another question. I will get back to you on that.

Edward Wolfe - Wolfe Research

Sure David can you talk a little bit about whether there is much of a difference in the competitive nature in the markets either in long haul versus regional or some parts of the country geographically versus other?

David Congdon

Nothing, significant has really changed there. We compete in all of the markets regional, inter-regional and long-haul and have service basically in throughout the United States in all of these markets, so.

Edward Wolfe - Wolfe Research

That's what I'm asking, I mean are you seeing any difference in any of them..

David Congdon

Ed you know... in what way, you mean from a service transit-time standpoint?

Edward Wolfe - Wolfe Research

No. From the pricing of certain products either a long-haul or the regional right now more competitive?

David Congdon

I think everyone across the board is scraping for freight and price competitiveness is out there. Maybe some of the small regional players might have a little bit less over hit and can price a little cheaper than some of those larger carriers can. But there is not... I'd say there is not a real regional differences.

Edward Wolfe - Wolfe Research

Not worst in the Midwest for instance?

David Congdon

No, not necessarily.

Edward Wolfe - Wolfe Research

I imagine or did you use, you said 3 to 4% tonnage to offset 1 percentage of price. Did you use to say 5% tonnage. Have you gotten more efficient?

J. Wes Frye

We did revise the capitulation based upon the '08 numbers as opposed to the '07 numbers when we made that statement for. So, the fact that... our labor, despite the fact that the fuel cost is down consequently which place an upward pressure on direct cost as a percent of revenue. We still improved our direct labor as a percent of revenue in the fourth quarter. So, that would have an effect on order efficiency and we have implemented technology, and to monitor and as David already mentioned to our operating folks, they've just done a terrific job controlling labor. So the answer to your question, yes. And by the way on the quarter... on the monthly, it was fairly consistent throughout the quarter as far as the percent changes excluding fuel surcharge month by month.

Edward Wolfe - Wolfe Research

So December and January we are down about 1%.

J. Wes Frye

I would say that maybe a little bit higher in December, but it stayed consistent in the October and November about 1% and went up to about 1... negative 1.7 % in December

Edward Wolfe - Wolfe Research

And January-December?

J. Wes Frye

January, we haven't calculated that number yet.

Edward Wolfe - Wolfe Research

Okay. Thanks for the time. I appreciate it.

J. Wes Frye

Okay.

Operator

And we'll take a follow up from Jon Langenfeld of Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Can you just a little bit about the cost initiatives in place and maybe magnitude and how far into that quarter were you before you implemented those?

David Congdon

Jon, first of all we manage cost and have been managing cost and productivity aggressively all along and that's a major reason why our operating ratio has led the industry for the last several years now. So managing cost is just something we do all the time. But as we were seeing trends coming off the summer that declining trends and tonnages and shipments in August, September just October, November all the way through the third and fourth quarter, we took appropriate steps to adjust to those new tonnage and shipment levels. So and that's our result had been with that.

Jon Langenfeld - Robert W. Baird

But nothing that you see is additional lay offs or major cost initiatives that anything out of an ordinary other than just scaling the business further to meet the volume environment?

David Congdon

That's basically what we have done. And feel like we are at pretty good shape with our quantitative people on the payroll and our labor... and our control of hours and things like that. Now, obviously, if the economy is to fall off further, if we go into some kind of a spiral or into a depression that would dictate some action. But we just are just managing the day to day rocking and tackling.

Jon Langenfeld - Robert W. Baird

Great and then Wes, do you have the cash number at the end of the year and then cash flow for operations?

J. Wes Frye

Cash was around $28 million. I can't give you off the top of my head the cash flow from operations.

Jon Langenfeld - Robert W. Baird

Okay, great. Thanks a lot.

Operator: And we'll take a follow up from Jason Seidl with Dahlman Rose.

Jason Seidl - Dahlman Rose & Co.

Hey guys. Back to the comments on the GRI; if I recall last year you guys had fairly good retention of the GRI as you move throughout the year. Regardless, of when you announce it and also regardless sort of what levels as you try to announce this year. Do you anticipate that it might be a little bit tougher given current market conditions to maintain the GRI as you flow throughout 2009?

David Congdon

It would stand the reading that it might a little tougher to maintain it. But we believe that the fact we have such a higher level of service and broad ranges of services and our value proposition is so good that our ability to retain price increases, necessary price increases will be good.

Jason Seidl - Dahlman Rose & Co.

Okay, I appreciate the color guys. Thank you.

Operator: And we have no further questions.

David Congdon

Okay. Well folks you can see from our results and the discussion that we had today that we are clearly differentiated from the LTL group. We have got rock solid blocking and tackling going on. No issues and in our opinion nothing in our way of continuing to pursue our long-term strategies. And again our top management team, I want to thank you guys for making these results possible and thank all of you analysts and investors for your questions and your support of Old Dominion. Feel free to give us a call if you have any further questions. Good day.

Operator: Ladies and gentlemen, this concludes today's conference. We appreciate your participation and we disconnect at this time.

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Source: Old Dominion Freight Line Q4 2008 Earnings Call Transcript
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