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Executives

Earl E. Congdon - Executive Chairman

David S. Congdon - President and Chief Executive Officer

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

Analysts

Thomas Wadewitz - J.P.Morgan

David Ross - Stifel Nicolaus

Jon Langenfeld - Robert W. Baird

Jason Seidl - Dahlman Rose

Edward Wolfe - Wolfe Research

David Campbell - Thompson, Davis & Company

John Barnes - BBT Capital Markets

Justin Yagerman - Wachovia Capital Markets

Thomas Albrecht - Stephens Inc.

Christopher Ceraso - Credit Suisse

Old Dominion Freight Line Inc. (ODFL) Q1 2009 Earnings Call April 23, 2009 10:00 AM ET

Operator

Good morning, and welcome to the First Quarter 2009 Conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 2, by dialing 719-457-0820. The confirmation number for the replay is 6923401. The replay may also be accessed through May 23 at the company's website, which is odfl.com.

This conference call may contain forward-looking statements within the meanings of 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 Executive Chairman, Mr. Earl Congdon. Please go ahead, sir.

Earl E. Congdon

Good morning. Thanks for joining us today for our first quarter conference call. With me is David Congdon, our President and CEO, and Wes Frye, the company's CFO. We each have some brief remarks and then we'll be glad to take your questions.

The first quarter as you all know was an extraordinary period by almost any measure. With this said, we want to reorganize the tremendous efforts of people throughout Old Dominion who together enabled us to produce $4 million in profits in a quarter and which tonnage declined 12.4% and revenue by 19.8%. This environment, we think our performance and the strategic decisions in a long-term investments and operating philosophies that led to it, clearly demonstrates our fundamental strengths.

First quarter was characterized by the worst pricing environment we've ever experienced. And it provided a true test of our commitment to pricing discipline. David's going to add some more color about our pricing in a few minutes, but let me say that the stable pricing we achieved for the first quarter is tangible proof of our commitment. We expect that our yield management discipline may have cost us some tonnage in the first quarter and it may, going forward too.

But in our analysis, price discipline was a major contributing factor to our profitability for the quarter and we believe our results will compare favorably to our peer group when all companies have reported.

Our first quarter operating ratio demonstrated that our operating fundamentals remain very strong. Although it was impossible to fully counter the decline in tonnage, our estimate show that improved efficiency and productivity did make a significant difference in our results for the quarter.

For instance, we produced a 3.5% increase in line haul laden load average for the first quarter, a 3.4% increase in shipments picked up and delivered per hour and an 8.7% increase in platform LTL shipments handled per hour.

Through these improvements, we were able to actually reduce our direct variable cost as a percentage of revenue. These improvements are even more meaningful, considering they were achieved without reducing our high service standards.

We successfully maintained nearly 99% on-time service performance and safety and cargo claims records and industry leading levels. Keeping our promise of on-time claims-free service not only consistently differentiates Old Dominion in the market, but it is an essential element of our strategy to maintain and improve revenue yield.

To take advantage of industry consolidation opportunities, we have maintained assets and a strong balance sheet to respond aggressively whether through the acquisition or capturing new business from distressed competitors. We have trimmed our operations to a degree that incremental volume increases should draw substantial operating leverage. With our eye on the future, we continue to expand capacity and enhance our geographic footprint through the steady relocation of service centers into larger centers and the opening of two additional centers during the first quarter.

We have also completed a substantial part of our planned equipment expenditures for 2009 and are ready to respond to market opportunities.

In closing, we believe we are managing well through the economic downturn and are continuing our long-term record of outperforming the industry. The industry dynamics and the company's specific strengths that support out performance remain both valid and compelling, and will enable us to extend our record growth in a stronger economic environment.

So thank you again for your time this morning and now I'll ask David Congdon to continue with our prepared remarks.

David S. Congdon

Thank you, Earl and good morning. Most of you joining us today are familiar with Old Dominion's strong commitment to profitable pricing as an essential element of our ability to provide our customers the most comprehensive, highest quality service. In fact, we have repeatedly discussed our philosophy of not willingly or knowingly offering lower prices to win new business. Although we defend existing customer relationships against price competition, we believe that cutting competitors' prices to achieve volume undermines our value proposition that has taken years to create.

The impact of the economic downturn has no doubt increased pricing competition. In every meeting we have with analysts and investors, we are always asked; tell us about the pricing environment? Are there any irrational players out there? Is it more competitive regionally or nationally?

We've usually had answers based on general anecdotal evidence from our sales force and yield management departments, but we've decided to take these questions a step further with a survey that I want to talk about.

Last week, we conducted a survey of our entire sales force broken down into eight regions of the country, as well as a separate survey with our pricing and yield management departments. The surveys were designed to provide us separation about carriers serving next day and two day line markets and larger interregional and national carriers serving longer haul to five day lines.

Obviously, due to our operating infrastructure, we compete in all these markets. For each segment, regional or long haul, we asked our sales force based upon their discussions with customers, to pick three carriers that are the most likely and then three that are the least likely to have the cheapest pricing programs, as well as the three that have the best and then three that have worst overall service value.

We went on to ask what is most important to customers between price and service in today's environment versus a normal economic environment. And lastly, we asked an open ended question of how they solve the pricing environment?

We did the survey for three reasons: First, we want to more intelligently answer your questions; second, we want to validate or invalidate our yield management and service philosophies; and third, we are anxious to correlate the carrier rankings in this survey with their respective financial performance.

Well, first of all, our price competition is happening in all eight regions on both a regional basis, as well as in interregional long haul basis. Our suspicions of low price leaders as well as price disciplined carriers were confirmed. And there is a lot of irrational pricing going on out there. Although it will be a while before we have all the carrier results for the first quarter, it will be interesting to know a correlation between our survey and the first quarter financial results understanding of course that financial results are influenced by factors other than price.

We were pleased to find the overwhelming support our sales force gave our pricing discipline philosophy and practice. They all seemed to recognize that our philosophy is driving profitability at a time when industry expectations are that many peers will post operating ratios north of 100. They also see, from first hand experience, that instead of the lowest price, it is our ability to keep our promises to our customers and to maintain our high service standards that are key determinants of our relationships.

Despite the pressure brought on by intensified price competition, our sales professionals urge us to stick with this philosophy which they feel is the right thing to do. Given the combination of stable pricing we achieved for the first quarter and our positive margins, we certainly agree.

In closing, let me again summarize our company's specific strengths that differentiate OD in this market.

First, our comprehensive services are all delivered through one company that combines the best features of regional, interregional and national providers. We have no operational or integration issues like many of our industry competitors are facing. Despite the economic environment, 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 all-time service, safety and cargo records.

We expect that these investments and our demonstrated operational controls have enabled us to again produce the LTL sector's best operating margins for the first quarter.

In addition to having continued opportunities to pursue geographic expansion of our service centre network, we are well prepared with the existing capacity, 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 without ample liquidity and can act decisively on opportunities we choose to pursue.

Finally, we expect to continue to benefit from 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, although the current environment may continue to test some of our courses of action. Given this environment, we are 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 in earnings and shareholder value.

Now I'll ask Wes to review our financial results in more detail.

J. Wes Frye

Thank you, David and good morning. Old Dominion's revenue for the first quarter was 295 million, a decrease of 19.8% from the first quarter of 2008. This decline primarily resulted from a 2.4% decline in tonnage for the quarter, that's 11.1% on a per day basis, since there was one less day in the current quarter.

This reduction was a result of 17.5% decline in shipments, offset by a 6% increase in weight per shipment. With a 8.8% decline in revenue per hundredweight primarily related to decreasing fuel surcharges, revenue per shipment declined 3.2%.

Revenue per hundredweight excluding fuel surcharge declined 1% for the first quarter, which, considering the negative impact on revenue per hundredweight of the 6% increase in weight per shipment, essentially gave us pricing that was stable with the first quarter last year. As a result, revenue per shipment excluding fuel surcharge, increased 5% for the first quarter.

Our operating ratio for the first quarter increased to 96.6 from 94.3 for the first quarter last year, primarily due to the de-leveraging affect of lower tonnage for the quarter. To reduce this impact, we were able to control direct variable movement costs to appropriate levels for the reduced volume.

To achieve this, we were successful in continuing to improve our operating efficiency and productivity on our line haul dock and pickup and delivery operations. These improvements helped us lower variable costs as percent of revenue by 80 basis points for the quarter, compared with the same quarter last year net of the lower revenue due to lower fuel prices and thereby lower fuel surcharges.

Most of the 230 basis points increased in our first quarter OR compared to the previous year, was a result of de-leveraging affect of reduced volumes against certain fixed cost. More specifically, depreciation on tractors, trailers and real estate was up a 150 basis points, in part as a result, of the front loading of equipment purchases during the first quarter.

Also salaries were up 70 basis points, although we did reduce these costs to the extent we believe practical.

Net CapEx for the first quarter was 77 million, which represented over 40% of our planned capital expenditures of 190 million for 2009. We intentionally front loaded these expenditures, especially our equipment purchases totaling 46 million, to add the capacity to respond to industry consolidation opportunities. Should these opportunities not materialize during the year, our spending this year will reduce the equipment expenditures we need for 2010.

During the first quarter, we also continued to expand our service center capacity through opening two new service centers in Columbus, Georgia and Cheyenne, Wyoming, and we relocated nine service centers to large facilities. These moves and other real estate expenditures totaled $30 million for the first quarter.

Of our total 190 million CapEx plan for 2009, we continue to expect expenditures of approximately $90 million per equipment, $85 million for real estate and $13 million for information technology. We also expect to fund most of these expenditures with operating cash flow. Because of the disportionate (ph) expenditures in the first quarter, our debt to total capitalization increased to 32.6% at the end of the quarter from 31.1% at the end of 2008. We project our total debt to total capitalization to be between 32 and 34% at the end of 2009.

We continue however, to have ample liquidity with available borrowing capacity on our unsecured revolving credit facility of $150 million and I'll note that this facility does not mature until August of 2011. Our effective tax rate was 39.3 for the quarter and project that it will remain at this same percentage for the remainder of the year.

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

(Operator Instructions). We'll go first to Tom Wadewitz with J.P. Morgan.

Thomas Wadewitz - J.P.Morgan

Yes, good morning.

David Congdon

Hi.

Thomas Wadewitz - J.P.Morgan

So what's -- what's your sense of I guess, the trend and kind of, I don't know if you mentioned this, I missed a little bit beginning of the call but, the trend in tonnage by month in a quarter and any sense of potential improvement as you look into April and what customers are telling you looking through second quarter?

J. Wes Frye

Our trend in tonnage, sequentially through the quarter year-over-year, actually got worse. It was 10% in January reduction in tonnage, 10.4 in February and increased to 12.7 in March. So, we saw a further deterioration in March. Although sequentially, the tonnage got better on a per day basis throughout the quarter but year-over-year, the percentage of decline increased in April.

Well in April, we're not seeing any improvement. We're still seeing tonnage declines in the double-digit in the 10 to 12% even in April, year-over-year. Although sequentially, in April it looks like it's back to sequential trends from March. But of course the sequential trends from March, March not being very good, we don't attach that to any positive trend for the most part.

Thomas Wadewitz - J.P.Morgan

Did you, I would have expected potentially from March to actually get a little bit better international side. Did you see that and obviously in reference to the integration activity and in the even in (ph) Roadway Networks, it sounded like they thought they lost some share and had some diversions. But did you see that that business come over or was that just not a factor?

J. Wes Frye

Yeah actually in the longer length of haul, we did see an improvement in the longer length of haul offset by continued price competition in the regional market but we did see improvement in the longer length of haul year-over-year as far as the tonnage decline.

David Congdon

And our average length of haul increased from where it was in December. We had an average of about 895 miles and it went to 917, 932 and then 933 miles in March. So, we did have a slight increase there in length of haul.

Thomas Wadewitz - J.P.Morgan

So do you think you actually had some business that came over from where I see (ph) in the national side and if so, is that business looks like its sticky so far?

David Congdon

No we did, but this was a price competition. We've had it come in the front door and go out the back door due to some of the irrational pricing that's going on in the market.

Thomas Wadewitz - J.P.Morgan

Okay. And do you see, I guess as you look out into the quarter, do you see signs that pricing has stabilized at this level or do you think pricing adds to the competition and the results of that hasn't necessarily bottomed?

J. Wes Frye

Well that remains to be seen for the quarter. At least through April we still see a fairly stable pricing environment.

David Congdon

For ourselves.

J. Wes Frye

For ourselves.

Thomas Wadewitz - J.P.Morgan

You put yourselves at stable, but do you think the market has stabilized there or not necessarily?

J. Wes Frye

I don't think so.

Thomas Wadewitz - J.P.Morgan

Right, okay. Great, alright, well good. It's good. Good performance in obviously a very tough market and I appreciate the time.

J. Wes Frye

Thank you.

Operator

We'll go next to David Ross with Stifel Nicolaus.

David Ross - Stifel Nicolaus

Hi, good morning gentlemen.

David Congdon

Good morning, David.

J. Wes Frye

Good morning, David.

David Ross - Stifel Nicolaus

Can you talk a little bit about how you are managing your labor through this downturn with tonnage down so significantly? It looks like you haven't taken any wage reductions. You think you've been appropriately minimizing hours or have you laid a significant amount of people off?

David Congdon

Well David, since our -- I'd say our peak employment back in September, we have reduced head count approximately 13% and we have reduced the hours on the remaining folks that are on the payroll. But overall our labor costs to revenue, ex-fuel (ph) is better than last year and that's because of the day-to-day control and management of our expenses and engaging our labor to the tonnage volumes. So, we are really proud of the job that our team's done and also proud of our employees for doing what they're doing to try to be more efficient with their work. I mean, it's a total team effort to keep our cost inline.

David Ross - Stifel Nicolaus

That sounds great. Also, if you could comment a little bit from a different regions in which Old Dominion operates. I know it's the seamless network there is also certain geographical regions where you have more or less density. What are currently I guess, the most competitive regions and are those in your highest density areas or lowest density areas?

David Congdon

Competitive, in what way?

David Ross - Stifel Nicolaus

In terms of pricing right now?

David Congdon

It's competitive everywhere. In the survey that we've done, we carved the country up into eight regions the way that we have the company managed. And when you look at the larger multi-regional national competitors, they were in every survey that we looked at, but they are not in each specific region. We looked at the smaller regional players with whom we compete. And it's just the pricing competition appears fairly even across the whole Nation.

Every region has smaller regional players still out there with the lowest, generally the lowest prices. You have some of the -- just a couple of other players that whose name pops up all over the country but it's on a regional international basis as a low price competitor.

David Ross - Stifel Nicolaus

So, I guess when you talk about the competitor regional players especially historically, you've done good job of little tuck in acquisitions here and there to fill up in network. Would you characterize this environment as being good for acquisition, because of potential low prices for players or would you consider it may be bad for acquisition because you can't really take on the business at their price?

Earl Congdon

David, Earl here. The atmosphere is probably better but that's not to say that -- there is not a long line of sellers waiting to dispose off their companies in our opinion and finding something that really fits is not all that easy. But we are in a great position to make an acquisition should something become available.

David Ross - Stifel Nicolaus

Thank you very much.

David Congdon

Thank you.

Operator

Over next to Jon Langenfeld with Baird.

Jon Langenfeld - Robert W. Baird

Good morning, guys nice quarter. When you think about your competitors and may be you see that from your sales people, but do you think there is a bigger element of your competitor's price over the last year that's been gained through the fuel surcharge and so the pricing pressure that they're trying to go through and experience is trying to recoup what they've lost in the fuel surcharge?

J. Wes Frye

Jon, Wes. I am not sure I'm following. Are you saying, since there is a lower fuel surcharge, because of lower fuels, is there been an accelerated effort to increase base rate?

Jon Langenfeld - Robert W. Baird

Yeah, I mean -- well I guess the question is that the pain that maybe your competitors are seeing versus yourself might be rooted in the fuel surcharge, because I think over the, over the last couple of years you've said that we have not seen the fuel surcharge as a big source of profit whereas, I think your competitors definitely have. So, I m just trying to part some may be some of the relative gains here as the pricing strategy have. You maintained more discipline over the last couple of years with rising fuel prices than your competitors?

David Congdon

John, I think that the all the carriers have had to strike a balance between base rates, discounts and fuel surcharges, and its hard to make a hard and fast statement that they are to really try -- its hard to answer your question. Yeah, to say that other people have addressed it differently than us and are feeling more pain over fuel cost. The marketplace with every account that you deal with, there is a mix of base rate, discount and fuel surcharge, and to get a competitive price between OD on one hand and carrier XYZ on the other hand, we are pretty much in the same ballpark with the competitors on the pricing formula for various accounts.

Jon Langenfeld - Robert W. Baird

And do you think that when we have your rate discussion with customers, from your perspective, is the rate conversation easier because fuel prices are a lot lower today than they were a year ago?

David Congdon

I don't think there is such a thing in this market as an easy conversation. But our model looks at the overall profitability of the account. And so, we don't necessarily make a distinction about what's fuel surcharge and what's base rates. We're looking at trying to get the improvement and the overall profitability and that's a negotiated points between base rates and fuel surcharge.

J. Wes Frye

And operating characteristics.

David Congdon

And operating characteristics. In some cases, it could be that we're getting delayed at deliver or delayed at pick up and so if you can address those issues, you could make the account more profitable by just being able to handle the account more efficiently. We try all of the above to try to improve the yield of any customer.

Jon Langenfeld - Robert W. Baird

And do you have any guesses as to what the pricing pressure is out there for the broader industry? I mean if you guys are flat assuming that's by the best of the group, what do you think the general pricing environment looks like?

Earl Congdon

The transportation people with our customers are under tremendous pressure from upper management to save money. As we all know that this economy is putting pressure on everybody so the pricing pressures are horrible.

Jon Langenfeld - Robert W. Baird

And would you have the guess as to how, I mean, are we talking five to 10% for the broader market?

David Congdon

I'll share a statistic out of our survey with you. The weight of price versus service today is 80% price, 20% on service and if the economy were good, it was 52/48, I think, 52% on price and 48% on service if the economy were good. So, that gives you a sort of a relative picture of how important price is to shippers today.

Earl Congdon

And yet if the trade-off is horrible service in order to get a wonderfully low price, they can't live with horrible service. So they really are wanting decent, at least decent service along with the low price.

Jon Langenfeld - Robert W. Baird

And have you seen the anecdotes at least within your book of business where customers have gone away here on these rates and have come back because of service yet, or is that still yet to come?

David Congdon

It happens every week with us. Customers leave us for price and come back for service.

Jon Langenfeld - Robert W. Baird

Got you. Okay. Good job again and thank you.

J. Wes Frye

Thank you.

David Congdon

Thank you.

Operator

We will go next to Jason Seidl with Dahlman Rose.

Jason Seidl - Dahlman Rose

Hey guys.

J. Wes Frye

Hi Jason.

Earl Congdon

Good morning, Jason.

Jason Seidl - Dahlman Rose

I jumped on late, so I apologize for asking this, did I get this correct that tonnage was down 10% January, 10 in February and 12 in March, or did I miss-hear you?

David Congdon

No. That was correct.

Jason Seidl - Dahlman Rose

Then, how did you end up down 12% for the quarter? I guess that's what I'm not calculating in my head up here.

David Congdon

Well the numbers are individually are per day and we were down 11%.

Jason Seidl - Dahlman Rose

Okay. That's on a per -- that's on a per day basis not on an absolute basis?

David Congdon

Yeah.

Jason Seidl - Dahlman Rose

Okay. Now that makes a lot more sense now. And when you talked about April being down 10 to 12%, that's on a per day basis as well or is that absolute?

David Congdon

Yes, it is.

Jason Seidl - Dahlman Rose

That's on the per day basis. Okay. That's good. Earl, I appreciate the commentary and the thoughts on the pricing market from you. You've seen a lot of cycles. In the LTL industry, on the bid packages going forward for the industry, are you expecting even more pressure and do you think you guys can sort of hold the line especially given those survey results that 80% of the shippers care more about pricing service?

Earl Congdon

The pressure is out there. We don't see any relaxation as yet. The transportation people as I said are under tremendous pressure to save money everywhere they can. But yet they don't want to leave us and take a chance on a really poor service in order to make a substantial saving. So, they are weighting whether to stay or leave and they'll try to squeeze a little bit out of us in order to be able stay with us. And those negotiations were going on a daily basis.

So if anything, we'll be feeling pressure on to give some smaller reductions in order to protect what we -- the business basic we currently have.

Jason Seidl - Dahlman Rose

Okay. That's good color. And next question may be more for David, but have you guys sat down and assessed the impact of what General Motors is doing to sort of for the supplier business that you guys may hold?

Earl Congdon

No we haven't needed to assess that. We actually do not participate in much at all of their inbound supply business.

Jason Seidl - Dahlman Rose

Okay. Now that's very good. Listen gentlemen, I appreciate the time as always.

David Congdon

Thank you, Jason.

Earl Congdon

Good bye Jason

Operator

We'll move next to Edward Wolfe with Wolfe Research.

Edward Wolfe - Wolfe Research

Hey, good morning.

David Congdon

Good morning.

Earl Congdon

Good morning, Ed.

Edward Wolfe - Wolfe Research

I hear that shipment size being going up not just for you but for all the LTLs throughout all of 08 after being down in 07. I mean, so typically when the economy shrinks so do shipment size yet here you are up 6.6, how do you explain that?

David Congdon

Ed, it's a couple of things. One, we saw last year a tendency for shippers to combine shipments in order to get a lower overall revenue per hundredweight. That was a part of it. Secondly, the spot quote activity going on out there were -- if shippers have anything over 5,000 pounds regardless of what their current pricing arrangement is, they are tending to call in and call around for a spot quote and a cheaper price. So, and those shipments, the spot quote shipments in our book are way somewhere in the eight to 9,000 pounds category last time I looked.

And our overall statistics also includes our container division and Wes did that have much of an impact on that too?

J. Wes Frye

No, the change in that wasn't that great. But certainly the demographics of our weight mix had an influence on that 6%. But even when you go underneath and just look at the LTL and exclude all the volume shipments, we were still up for our weight per shipments. We're still up doing the quarter-over-quarter over 3%,

David Congdon

But that was LTL meaning less than 10,000 pounds.

J. Wes Frye

It was less than 8,000.

(Multiple Speakers).

David Congdon

Or even less -- okay, alright.

Edward Wolfe - Wolfe Research

If your spot quote's normally eight or 9,000 pounds what's your non-spot average weight?

David Congdon

Our spot quote's average in fact in the quarter, specifically it averaged 8600 pounds.

Edward Wolfe - Wolfe Research

And then what about your contractually, your non-spot, what was that?

David Congdon

Contract -- contractual, is 1560. I mean when you look at our tariff, its 1124. So you combine all that you get our average weight overall but even when you exclude all the volume related, which would include spot quote volume, container. Our average weight for LTL was 1443 pounds compared to just under -- less than 1400 for same quarter last year. So it was still up actually 3.1%.

Edward Wolfe - Wolfe Research

When I do the math, Wes it looks like unlike all your competitors you weren't are really hurt by fuel year-over-year this quarter. Is that because you're buying it more in bulk? How do we think about that?

J. Wes Frye

Well, certainly 80% of our fuel purchase is in bulk but I would imagine most of the LTL carriers certainly have fuelling facilities at their locations and was having a high percentage of bulk capabilities as well. I don't know what it is, but at least 80% of ours is bulk purchases and we do have a slight price from the -- compared to the retail. But one of the things, one of the factors that improves our fuel expenses up, we had several programs of improving miles per gallon and we've had some success in that over the year.

Edward Wolfe - Wolfe Research

Am I looking at that right that year-over-year there is not much impact one way or the other from fuel when you add it all up?

J. Wes Frye

Fuel surcharges?

Edward Wolfe - Wolfe Research

When you -- the lower surcharge and the lower cost kind of balanced out relative to a year ago.

David Congdon

I would say there has been some impact from the lower fuel on overall spreads. And it's the lower fuel has caused some negative impact during the quarter compared to the first quarter of last year.

Edward Wolfe - Wolfe Research

Can you quantify that?

David Congdon

Excuse me.

Edward Wolfe - Wolfe Research

Can you quantify is it more than a couple of pennies?

J. Wes Frye

I haven't calculated. I hate to put a number out there.

Edward Wolfe - Wolfe Research

Okay. As you go out, as the pricing pressure around you is great and in second quarter you got an Easter comp that's tough versus a year ago and the fuel headwind becomes tougher versus a year ago. How do you -- for operating ratio, normally seasonally second quarter is a better quarter than first. But with all those other inputs UPS just gave guidance where they say that second quarter is going to be worst than first, which usually isn't the case with them. How do we think of the seasonality versus the headwinds from fuel Easter pricing?

J. Wes Frye

Well we haven't given guidance and don't intend to give guidance for the rest of the year, because of the lack of visibility. But certainly, historically, the second quarter operates for us two or 300 basis points better than the first quarter just from seasonality. What it will look like this year, will be based on the ongoing sequentially tonnage trends which we still don't know yet.

Earl Congdon

And the weather makes a big difference too, that should help the second quarter versus the first quarter.

David Congdon

Correct.

Edward Wolfe - Wolfe Research

Okay. Hey, thanks for the time guys and on a relative basis my god, terrific job.

David Congdon

Thank you.

J. Wes Frye

Thank you, Ed.

Operator

We'll hear next from Thompson, Davis, & Company's David Campbell.

David Campbell - Thompson, Davis & Company

Yes, good morning. I wanted to ask you about your other revenues, your logistics revenues and so forth. How -- could you quantify them or how much -- was it up or down versus the first quarter of 08?

J. Wes Frye

Logistics were up slightly but its still such a small portion of our overall. At this point, it still doesn't have a material fact on either revenue or earnings.

David Campbell - Thompson, Davis & Company

You don't expect it to have any material affect in 2009?

J. Wes Frye

Well, probably not. I mean, after all we are pretty much in a global recession here. So, we expect that to reflect not only the economic environment here but globally as well.

David Campbell - Thompson, Davis & Company

And what about the increasing export activity in your container business, is that going to be a factor?

J. Wes Frye

Well, certainly. We did see last year and our export business from the containers declined. And so, we don't expect that to improve at this point.

Earl Congdon

Actually our container revenues were down more than our domestic revenues.

David Campbell - Thompson, Davis & Company

Okay. Thanks good job. Thank you very much.

Operator

We'll go next to John Barnes with BBT Capital Markets.

John Barnes - BBT Capital Markets

Hey, good morning guys.

J. Wes Frye

Good morning.

John Barnes - BBT Capital Markets

Hey Wes, I think you talked a couple of times in the past about just holding on to a little bit of equipment and may be not getting too aggressive on cost yet with the idea that may be their commission (ph) landscape changing even out there like a carrier failure or something. As you said here today and that's obviously been delayed. Where do you stand in terms of keeping those cost layered in now? Have you begun to strip those out and kind of rid yourself for the excess equipment or is the plan that kind of continue to maintain some excess just in the event of, of an event like that?

David Congdon

And so, we added 10% numbers of units to our fleet of this year and they were replacement vehicles. We have kept all of the trades. They are propped on our yards. We've got space for them. As you know used equipment values are not all that high right now. So we intend to hold on until we see if there's going to be any industry consolidation because we are in a beautiful position to take on a lot more tonnage and think it would be imprinted to eliminate the older units at this time.

But as we mentioned in our prepared remarks, if there is no industry consolidation, we're in beautiful position to reduce our equipment CapEx, but 2010 also we got a lot of vengeance for about $9,000 each less by buying them in 09 than if we were to buy them next year. So, but we are being hit with some added depreciation this year because of what we did. In fact, if you were to eliminate that added depreciation, I believe our overall would be pretty close to what it was a year ago for the first quarter.

J. Wes Frye

Right keep it in mind that equipment bits are parked against the fence. First of all, it's for the most part fully depreciated so it's not hitting the income statement back in that way. And secondly, we didn't even retagged that equipment. So we didn't spend the money on the ongoing cost of tagging, so it's not really cost us a lot of basis points on the just keep it in reserve for any future opportunities.

John Barnes - BBT Capital Markets

Okay. And then from a personnel standpoint, I know you've reduced head count from the peak, I think you said 13%, but do you have the drivers in place for that extra equipment or how quickly could you bring it on if you needed to?

David Congdon

Yes, that's the tougher part of the whole equation but the number of hours per week that our people are working is down in the lower 40 hours -- close to 40 hours a week. And if we needed to gear up by 30% and go to 52 hours a week, we could do that for a short range and we have a list of folks that we could call back to work and we've taken applications for employment also this year just to be able to bring people back on board as quickly as possible.

John Barnes - BBT Capital Markets

All right, very good. All right guys, a nice quarter. Thanks for your time.

J. Wes Frye

Thank you, John.

David Congdon

Thank you.

Operator

We'll hear next from Justin Yagerman with Wachovia Capital Markets.

Justin Yagerman - Wachovia Capital Markets

Hey. good morning gentlemen.

Unidentified Analyst

Hi.

J. Wes Frye

Good morning, Justin.

Justin Yagerman - Wachovia Capital Markets

I wanted to get a little bit of detail on your new terminals. Interesting, you guys surprised having a few buyers in the real estate market right now. What are values looking like? Are you getting relative deals out there on terminals in the marketplace? And then I guess, where are you sourcing these from? Are they coming from competitors that are exiting out of it, certain geographies?

David Congdon

Well, we have purchased, how many is it Wes of the wire sea (ph)?

J. Wes Frye

11.

David Congdon

11 of the wire sea properties, but some of those properties were some prime properties that we purchased and I would say that the price that we paid for them was not a far sale deal whatsoever. The attractive service center properties are still holding their value pretty well in the marketplace. We did purchased a couple of facilities up in the Midwest from the fair of low carrier out there, second on account was in Michigan, where to tell you that we are holding off on moving into until further notice. We're serving the areas very well from other facility.

But we are continuing to take advantage of opportunities we see out there.

Justin Yagerman - Wachovia Capital Markets

It's more strategic that you don't want to wait until someone within a bankruptcy proceeding when you may not be able to get a hold of those or may not be able to get in quick enough to get them so you're securing the ones that you want strategically now?

David Congdon

That's correct. And in fact, through July, we have about six service centers that we're going to be moving into, that will expand our capacity. We have one new service center that came out of Warasi (ph), a new city that we plan to go into, but I don't want to talk about the specific cities right now.

Justin Yagerman - Wachovia Capital Markets

Okay. Keeping on that theme, when you guys talk to customers right now, is there a sales picture -- with your sales guys, if this thing is actually going to happen and Warasi could go out of business you need to establish a freight relationship with us now. You need to be in the certain action line of customer in order to get the extra capacity you need. Isn't when they go out? How's that sales pitch going right now?

David Congdon

Well, we've always said to customers that in the event of any kind of major industry event, its better to be on board with us because we are going to take care of existing customers before we can take on brand new customers who don't use us at all. So, it's important to come on board. And that's, that's been kind of a pitch forever.

Justin Yagerman - Wachovia Capital Markets

How quickly does pricing turn in that kind of a scenario and if it is a contract customer, what are the -- what's the ability to change pricing within that dynamic if and when something like that could happen.

David Congdon

Generally our pricing Justin, is higher than YRCs and we have passed up numerous opportunities to take over some of their business at their prices and we just won't do it. So if they go out, usually the pricing is already in with those contract customers and sometimes we already have a smaller share of the business and that business will come on to us in the event that they go out at our price and not at YRCs.

Justin Yagerman - Wachovia Capital Markets

Got it. In terms of -- in terms of competitive dynamic in the market, UPS put up a number in their tonnage this morning that looked like it was a bit better than the rest of the market. I was just curious if you are seeing them as a more formidable competitor in some of the lanes that your operate in. We haven't heard too much about UPS freight in the last couple of years and it just seems like they lost tonnage at a slower rate than many of their competitors out there this quarter. So I was curious what your thoughts were on that?

J. Wes Frye

Justin they don't breakout the supply chain and the freight. So, it's difficult to really access it. Neither do they give you operating performances. And at this point, we don't know any of the weight characteristics and whether any of that the freight that they're taken on was a divergence from UPS, packaging in anyway. So, it's hard to answer that question specifically at this point.

Justin Yagerman - Wachovia Capital Markets

Now that's fair. I mean I guess I was just looking for something more anecdotal if you guys are seeing them in the marketplace in a bigger way?

David Congdon

No more than we have over many, many years. I mean they're out there. They're a formidable competitor.

Justin Yagerman - Wachovia Capital Markets

Okay. And I guess, Wes, you talked about, I guess, the potential for being free cash flow neutral this year. Just judging by what you are saying from your CapEx plans, it doesn't sound like that's likely within -- unless the economy picks up or you do see a big tonnage windfall from a competitor exit. Is that a fair characterization with the thought that your debt to total cap may rise a little bit this year?

J. Wes Frye

Yeah that is, but we don't expect our debt to cap measurably. As I mentioned in my comments, may be after 34 -- 32 to 34% and that's with I give in this market, a fairly aggressive CapEx that we think is there for opportunities especially on the real estate side. We'll continue to look at that.

Justin Yagerman - Wachovia Capital Markets

Got it. I would tend to agree with that. Thanks a lot guys. I appreciate the time.

J. Wes Frye

Alright, thanks.

Operator

We'll go next to Tom Albrecht with Stephens Incorporated.

Thomas Albrecht - Stephens Inc.

Hey Wes, David, Earl, most of my question have been answered. I did have a question. Might seem a little silly in the context of the right discussions but is it fair to assume that most of the GRI has already been whittled away?

David Congdon

I would say that it pretty much has. It would be my conclusion based upon the revenue per hundredweight for 559 type business compared year-over-year.

Thomas Albrecht - Stephens Inc.

I'm trying to remember, it seems like several years ago there was one year where carriers may put in the second GRI. Would there be any thought internally to trying to do that as we move away from the winter months where its always a little bit tricky to make it stick anyway?

David Congdon

We have not considered that yet Tom.

J. Wes Frye

We would like to put one in every week.

Thomas Albrecht - Stephens Inc.

Up with that in your suggestion box -- anyway, that's all I had. Thanks guys.

Operator

We'll go next to Stephen Micitiac (ph) with Tight (ph) Capital.

Unidentified Analyst

Yeah, hi. Can you just comment is the change in your operating ratio year-over-year impacted at all by the decline in fuel prices?

J. Wes Frye

Well certainly yes. I mean because -- its kind of offset to most extent. When you look at the cost of fuel, obviously, it's much lower because of decline in fuel prices. But since revenues also declined due to the lower fuel surcharges, if you look at the other expenses, they would have an increasing effect because of the lower revenue.

Unidentified Analyst

Yeah, that's what I'm kind of getting at, the numerator shrinks, but the denominator shrinks also but is there any way...

J. Wes Frye

In my comments, we are not talked about the increase in depreciation and decrease in direct variable cost, what I did was adjust that for the lower fuel prices so that you could see the real change excluding the effect of lower fuel surcharges.

Unidentified Analyst

Okay. I missed that. So those changes year-over-year as a percentage of revenue you gave earlier were net of fuel.

J. Wes Frye

That is correct.

Unidentified Analyst

Okay, great.

J. Wes Frye

So, you can get a real sense of what the real change is not influenced by the fact that they would have been in up anyway because of the lower fuel surcharges.

Unidentified Analyst

Okay. And then in terms of your volumes year-over-year, there must be some benefit from the fact that over the course of the last 12 months, you've expanded your, the numbers of service centers, right?

David Congdon

I wouldn't say that the numbers of service centers in the last year have demonstrated our tonnage materially. May be the service centers added in the previous two or three years may have continue to help us a little bit, but not the most recently added ones have not helped.

Unidentified Analyst

They don't ramp that quickly.

David Congdon

And they are small too small.

J. Wes Frye

Small.

Unidentified Analyst

Yeah. Okay. Great thanks very much

Operator

And we will take a follow up from Edward Wolfe.

Edward Wolfe - Wolfe Research

You know what, it's been asked and answered. Thank you very much.

Operator

Thank you. We'll go next to Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

Hello, thanks. Good morning. Just one question here on the trucks that you mentioned. So you bought some extra trucks. You're thinking that may be the demise of a competitor is imminent, but it is fair to assume longer that that doesn't happen you're going to have to struggle a little bit with some extra carrying cost for that equipment?

David Congdon

Well we want to make sure that the characterization is correct. We didn't buy extra trucks. They were all intended to be replacements and what we did is to trade ins we kept and parked on the fence.

Christopher Ceraso - Credit Suisse

Right.

David Congdon

So, it does, in effect end up with extra trucks for sure. And I would also say, we don't say the demise is imminent. It's -- we just don't -- we don't know anymore than anyone else does whether how they're going to do. It's just part of a contingency plan in the event that it happens.

But certainly as we've mentioned is that 40% of our overall CapEx and more like half of our tractor purchases were already put on the books in the first quarter. So, certainly that has a negative effect especially on depreciation when we saw depreciation just for tractors alone, the operating point compared the last year.

Christopher Ceraso - Credit Suisse

So, going ahead and replacing those trucks and front loading the CapEx and keeping the older ones, it's not a signal that you think something is imminent?

David Congdon

It's a contingency plan in the event that something happens and we don't know whether it's imminent or not.

Christopher Ceraso - Credit Suisse

Okay.

David Congdon

That's anybody's guess.

Christopher Ceraso - Credit Suisse

Earlier in the call you had given some color on volume trends month-by-month so we could see how things looked at the end of the month. Will you do the same on pricing on an ex-fuel basis for you?

J. Wes Frye

I don't have it on ex-fuel?

Christopher Ceraso - Credit Suisse

What about with fuel?

J. Wes Frye

On -- excluding, we did see a slight -- well it's hard to look at it including fuel, because during the quarter last year the prices of fuel was increasing and this year the prices of fuel was decreasing. So, it's not necessarily meaningful, but we did -- because of that we did see a year-over-year acceleration of the revenue per hundredweight decline throughout the quarter. But it's because of the difference in the trend of fuel price in this year compared to the last year.

Christopher Ceraso - Credit Suisse

You can't really tell us the underlying rates were getting worst as well?

J. Wes Frye

Not off hand.

Christopher Ceraso - Credit Suisse

Okay. Thank you very much.

J. Wes Frye

Okay.

Operator

And gentlemen, there are no further questions. Mr. Congdon I'll turn things back to you for closing remarks.

Earl Congdon

Thank you. And listen, thank all of you for participating today. You asked some excellent questions and we appreciate your support of Old Dominion and feel free to call us if you have any further questions.

Good day.

David Congdon

Good luck.

Operator

That concludes today's conference.

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Source: Old Dominion Freight Line Q1 2009 Earnings Call Transcript
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