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Old Dominion Freight Line, Inc. (NASDAQ:ODFL)

Q2 2014 Earnings Conference Call

July 31, 2014, 10:30 AM ET

Executives

Earl Congdon - Executive Chairman

David Congdon - President and Chief Executive Officer

Wes Frye - Chief Financial Officer

Analysts

Allison Landry - Credit Suisse

Scott Group - Wolfe Research

Bill Greene - Morgan Stanley

Chris Wetherbee - Citi

Rob Salmon - Deutsche Bank

David Ross - Stifel

Thomas Kim - Goldman Sachs

Todd Fowler - KeyBanc Capital Markets

Tom Albrecht - BB&T

Jason Seidl - Cowen & Company

Brad Delco - Stephens Incorporated

Operator

Good morning and welcome to the Second Quarter 2014 Conference Call for Old Dominion Freight Line. Today's call is being recorded and would be available for replay beginning today and through August 14th by dialing 719-457-0820. The replay passcode is 2918191. The replay may also be accessed through August 14th at the company's website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

As a final note before we begin, we welcome your questions today, but ask in fairness to all that you limit yourself to just a couple of questions at a time before returning to the queue. Thank you for your cooperation.

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

Earl Congdon

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

For the second quarter, Old Dominion continued to produce strong profitable growth. Our revenue and earnings growth accelerated to their highest rates in over a year, with a 19.1% increase in revenue, driving a 26.5% increase in earnings per diluted share. With our revenue growth far outstripping growth in the economy, we believe we are continuing to gain meaningful market share. As we've discussed with you often, we believe our ability to deliver superior on-time claims-free service differentiates Old Dominion in the LTL industry and has driven not only our long-term growth in market share, but one of the industry's strongest financial performances over the short intermediate and long-term.

Even though we grew tonnage at a double-digit level for the second quarter and were faced with productivity pressure brought on by expanding our workforce to handle such strong volume, we maintained 99% on-time delivery and our cargo claims ratio stayed at an exceptional 0.26% for the second quarter in a row. Our ability to produce this superior serviced performance, particularly in a quarter where tons increased at a rate that exceeded our expectations, again [validates] the strength of our organization and our commitment to our service.

To achieve these results while also producing a 82.5 operating ratio validates our business model and the continuous investment in our people, capacity and technology. To put it simply, Old Dominion continues to stand apart from the rest of our industry, and we are committed to raising the bar further on what it means to provide competitive LTL services. With continued execution, we are confident that we can achieve our long-term growth objectives, driving further growth in shareholder value.

Thank you for joining us in our conference call today. And now here is David Congdon.

David Congdon

Good morning to you, all. We've had another great performance for the second quarter, demonstrating our continued earnings momentum. While we've now produced our fourth consecutive quarter of double-digit revenue growth, the last two quarters have especially highlighted the company's outperformance of the LTL industry. We came through very poor winter weather with outstanding results in the first quarter. And even with Easter in the second quarter, we exceeded our high second quarter expectations for growth in turns and revenue per hundredweight.

This market position reflects the increasing demand for our high-quality services, which is evident in our expanding market share. For the second quarter, this demand drove our strong growth in turns per day and supported better than expected revenue per hundredweight in a pricing environment that has remained fairly rational. The resulting expansion in freight density and yield was primarily responsible for producing further operating leverage and incremental margins of 22.3% compared with the second quarter last year.

In addition for the quarter, we achieved an operating ratio of 82.5, which is the best quarterly OR we have ever produced and is 100 basis points better than our previous record, which was set in the second quarter last year. Looking forward, our objective is to expand our market share into double-digits by focusing on the continued execution of our proven business model. There will inevitably be challenges on our path to this goal. However, having proven the strength of our business model throughout the economic cycle, we are confident that Old Dominion will continue to produce long-term growth in its financial results and shareholder value.

Thanks for being with us today. And now, I'll ask Wes to review our financial results for the quarter in greater detail.

Wes Frye

Thank you, David, and good morning. Old Dominion's revenue reached a record $703 million for the second quarter of 2014, an increase of 19.1% from $509.3 million for the second quarter of 2013. Our revenue growth was primarily driven by a 14.9% increase in LTL tons for the quarter, above our expectations of 14%, 14.5%. This increase reflected a 12% increase in LTL shipments and a 2.6% increase in LTL weight per shipment.

Also contributing to the revenue growth, LTL revenue per hundredweight for the second quarter increased 3.7% or 3.6% excluding fuel surcharges despite the impact of a 2.6% increase in weight per shipment and a 1.4% decline in our average length of haul. This increase in revenue per hundredweight just exceeded the high end of our expectation of 3% to 3.5% for the quarter. Our results for the quarter also include the impact of a 4.3% general weight increase that was effective on May 1.

Directional changes in weight per shipment and length of haul have been consistent now for 10 consecutive quarters, reflecting the ongoing shift in our freight mix to higher weight contractual business and to increased volume in our next-day and two-day regional lanes.

The second quarter of 2014 monthly LTL tons per day decreased 1.6% from April to March, increased 3.4% for May and 3.3% for June. Historically, sequential trends for April, May and June increased by 1.2%, 0.3% and 2% respectively. On a comparable quarter basis, LTL tons per day increased 4.1% for April, 15.5% for May and 14.8% for June. And we estimate July LTL tonnage to be approximately up 18% versus the same period last year.

In the third quarter of 2014, assuming normalized sequential trends, we expect LTL tons per day to increase in a range of 17% to 18% compared to the third quarter of 2013. We expect revenue per hundredweight, excluding fuel surcharge, to be up in a range of 2% to 2.5% for the third quarter compared to the third quarter of last year.

Old Dominion's operating ratio improved 100 basis points to 82.5% for the second quarter from 83.5% for the second quarter of 2013, driven primarily by our increased freight density and yield. We also continued to benefit from savings from fuel purchasing strategies and fuel efficiencies, which contributed to a 50 basis point reduction in our operating supplies and expense.

Capital expenditures were $138.8 million for the second quarter of 2014 and $218.6 million for the first half of the year. We estimate CapEx for the entire year of 2014 will total approximately $375 million, including planned expenditures of $132 million for real estate, $196 million for tractors, trailers and other equipment, $47 million for technology and other assets. We expect sales of assets during 2014 to be approximately $20 million for a total net CapEx of approximately $355 million. And we expect to fund these expenditures primarily through operating cash flow as well as our available borrowing capacity if necessary. The total capitalization was 12.9% at the end of the second quarter of 2014 compared to 13.4% at the end of 2013.

Our effective tax rate for the second quarter of 2014 was 39% compared with 38.6% for the second quarter of 2013. We continue to expect an effective tax rate of 39% for the remainder of 2014. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Allison Landry of Credit Suisse.

Allison Landry - Credit Suisse

You mentioned wanting to achieve double-digit market share. So I was wondering if you could comment on where you think you might be now and maybe roughly how long it would take you to sort of achieve that goal?

David Congdon

At this time, Allison, depending on what you use for denominator, whether we're in $30 billion to $34 billion industry or a $50 billion industry, we're somewhere in the 6% to 8% market share range now. And growing into double-digits is in our five to 10-year timeframe.

Allison Landry - Credit Suisse

And then, David, I think it was you who mentioned that there was, or maybe it was Earl, that you guys saw some productivity pressures during the quarter, just given that the volume or tonnage growth was so strong. Could you maybe expand upon that a little bit and maybe talk about some of the metrics during the quarter?

Wes Frye

Productivity, actually we had some improvements on line haul. Where we had a little bit of deterioration in productivity is in the platform and in the P&D, mostly in the platform. But we had to add roughly about 12% more people on the docks. And the training on that is three to nine months before they become efficient with how we do things, so to speak. So we have quite a bit of training pressure. And we attribute some of that reduction in that training. With a 50% increase in tonnage, we expect some productivity enhancement. And also during that training, maintaining a 99% on-time service with 0.26 claims ratio we think is very amiable from our management group and our workers to be able to accomplish that.

Operator

Next from Wolfe Research, we'll go to Scott Group.

Scott Group - Wolfe Research

So Wes, in terms of the pricing guidance, we saw an acceleration in pricing in the second quarter. Looks like you're talking about a deceleration in yields net of fuel in the third quarter. Is it just mix? Is it the tougher comp with the GRI?

David Congdon

It's a couple of things. One obviously is the tougher comp with the GRI that happened in May and last year was in July. So that goes full circle once we get to the third quarter. We still have weight per shipments that we expect to maybe a little bit in line with the second quarter. So we still have that as well as reduced length of haul. But the second quarter was an easier comparison on yields, but keep in mind that yield guidance of 2% to 2.5% is just that, 2% to 2.5% on yield. From a pricing standpoint, including the impact of that increased weight per shipment and decreased length of haul, we still thing we're pricing 3% or better, which I think is still in this economy is very comparable.

Scott Group - Wolfe Research

What we're hearing from some of the other guys that underlying contractual pricing is accelerating. Are you seeing that?

David Congdon

Well, we consistently applied reasonable and fair and equitable pricing to our contractual business all along. So we'll continue to do that consistently. I'm not sure whether the rest of the industry stands on that and whether they're trying to recover more than what we need to because of our consistency of pricing discipline.

Scott Group - Wolfe Research

And then just a follow-up on the market share targets, it seems like that's implying some sort of expectation for maintaining a low double-digit plus topline rate the next five or so years. Is that kind of the way you guys are thinking about the business? And if that's right, is this level of CapEx we should expect going forward? Does this go up from here? How are you thinking about that?

David Congdon

Obviously we expect our market share continually to increase and to double-digit at some timeframe. Whether that can be three to five years or longer would depend somewhat on macro in line with other factors. But we don't expect it to stay at 8 for five years and then all of a sudden go to 10. We expect it consistently to increase as we have already demonstrated over the last few years. From a CapEx standpoint, obviously we'll stay on a very reasonable replacement cycle for our equipment and spend CapEx to the extent that we maintain our average age on that point. We don't really address how much of our CapEx going forward would grow. Obviously that will depend on what that growth is. But we expect our CapEx to be meaningful as we continue to grow our service and our network. We do expect our CapEx as a percent of revenue as we continue to grow our network to decline in the years to come.

Scott Group - Wolfe Research

To get to double-digit market share, you need to grow your topline, grow to mid double-digit annually. Do you think that that's a sustainable run rate is what you're saying?

David Congdon

We do, yeah.

Operator

Next we'll hear from Bill Greene of Morgan Stanley.

Bill Greene - Morgan Stanley

So, Wes, I want to chat little bit on OR. Fantastic OR in the quarter. Now we usually model you sequentially. We look at seasonality. And if I do that here, I get another record for the third quarter. So are there factors in the third quarter you want to caution me against getting too bullish on the third quarter because of things we got to think about?

Wes Frye

One thing that didn't affect year-over-year because it's in both quarters is we did have gains on the sale of real estate in the second quarter that was about half operating point. And we had that same in the second quarter of last year. So year-over-year, that is comparable. But sequentially, we don't expect any material gains on sale of real estate in the third quarter. So that's one thing sequentially that you need to consider. We did give our wage increases in September 1, which we plan to this year. So that's another thing to consider in the third quarter compared to second quarter.

Bill Greene - Morgan Stanley

Is the wage increase larger than normal, or is it just sort of in line with historical averages, because otherwise you'd think the sequential change would always have that?

Wes Frye

Yeah, we haven't discussed at this point what that wage increase will be.

Bill Greene - Morgan Stanley

And then, Wes, when we look at this sort of tonnage growth and we look at what's going on overall in the marketplace, trucking, even affecting rail, things are getting tight. So do you feel like the cost inflation you're going to experience is going to accelerate going forward?

Wes Frye

When you say cost inflation, what do you mean, because 67% of our cost is our own people? As you know, we use very little purchase transportation. And the amount of purchase transportation you see on the release includes some of our non-LTL drayage operations. So the purchase transportation specifically for LTL is very small. And so we don't expect a lot of inflation on that. The inflation on our own cost lies in the own wage increases that we get and then additional cost of equipment, et cetera. And of course the cost of fuel is passed through fuel surcharges.

Operator

We'll move next to Chris Wetherbee of Citi.

Chris Wetherbee - Citi

Maybe just a question on the dockworkers, you talked about increasing, I think, 12% is what you said for folks on the docks. You think about the third quarter and the growth that you're getting in tonnage and you're seeing that pick up 17% to 18%, is there going to be incremental hiring that we can expect in the third quarter and maybe a little bit of productivity expense that goes along with that? I guess I'm just trying to make sure I understand sort of how the staffing levels look like relative to the third quarter volumes.

Wes Frye

Yeah, sequentially the third quarter from a tonnage standpoint, we do expect it to be higher than the second. And of course you can pretty much calculate that yourself based on the guidance that we gave. So I would suspect there would be some additional hiring in the third quarter, probably not as much hiring that we had in the second quarter compared to the first. But as I had also mentioned, if you recall, just the training in the second quarter still has some legs going into the third quarter. It takes 60 to 90 days to get the new employees to be efficient. So that would still affect somewhat the third quarter. And then we'll hiring additional people also in the third quarter.

Chris Wetherbee - Citi

Thinking about the balance sheet a little bit, debt to capitalization seems to be roughly the lowest level we've seen in quite some time. I guess as you think about the improved profitability of the business, the cash flow generation, how do you think about that? Is there anything that you might want to do differently as far as deployment of cash flow? Obviously, CapEx needs are going to be there as you continue to foster that growth. But just thinking about that, whether you buy back, dividends, anything else we can be thinking about?

Wes Frye

Yeah, we get asked that question and we continue to evaluate some return to the stockholders in terms of either dividends or stock repurchase. We're leaning toward stock repurchase. And so we'll discuss that and evaluate that continually as our cash flow and our debt to EBITDA continues to decline. So we'll continue to evaluate those alternatives from the investor standpoint.

Operator

Moving on to Deutsche Bank's Rob Salmon.

Rob Salmon - Deutsche Bank

If I'm looking at the ancillary or the non-LTL revenue, it looks like that growth rate accelerated in the second quarter. Can you talk a little bit about what's driving that growth rate? The growth in kind of the non-LTL services, it looks like backing into something around $19 million or about 18% growth in the quarter.

David Congdon

The non-LTL, most of that is our drayage operation, and we've had some good success in growing that in the quarter. So that's most of it. Also included is also truckload brokerage, which has had some success as well our global reporting. There's the three segments on that. They're still very small relative to our total, but we have had meaningful growth in that.

Rob Salmon - Deutsche Bank

And then in terms of the pay increase, Wes, that you alluded to, do you think it has to be more or less than kind of historical and how should we be thinking about your line haul expense, given some of the challenges that some competitors have noted as well as the tough driver environment in truckload?

Wes Frye

Well, we have not announced our pay increases yet, and we don't want to do it over this conference call as to what we're planning on doing there.

Rob Salmon - Deutsche Bank

It was just related to drivers. I know you guys had kind of called out toward the end of last year some headwinds that you had experienced with regard to the hours of service. Certainly what we're seeing truckload driver pay inflation significant right now. Are you guys in the line haul side of the business needing to make any adjustments there?

Wes Frye

No, not really. Our road drivers are very well paid, especially as it compares to truckload drivers. So our turnover is very well and we've had pretty good success in hiring drivers. As our business ramped up this year, finding road drivers was a little tougher than P&D drivers. It was a little bit restrained, but we got through and gotten through the year so far and maintained our 99% on-time service.

Operator

We'll go next to David Ross of Stifel.

David Ross - Stifel

To continue on the driver pay theme, do you have incentives for your drivers on top of base wages whether it be for fuel efficiency or picking up new business?

David Congdon

Really it's a safety incentive for driving accident-free.

David Ross - Stifel

Okay. But nothing on the fuel side?

David Congdon

No, just the incentive to do better, so that we can give a good raise.

David Ross - Stifel

And then, Wes, could you comment a little bit on the new IT platform. You mentioned on the fourth quarter call that that was going to be rolled out over the next year or two. Is that still on track? Any update on the progress there would be great.

David Congdon

Dave, the IT modernization efforts are well underway right now, with examining numerous of our operating systems. We've got 4.5 year, 5 year process in three major phases, looking at all of our systems and converting to new hardware platform with Oracle. So it's well underway.

Operator

We'll go to Thomas Kim of Goldman Sachs.

Thomas Kim - Goldman Sachs

As you think about growing your share, and I can appreciate a lot of your growth has been organic and you obviously have done very well with that, I'm wondering whether you're considering about or whether you need to consider diversifying into other component businesses to sustain that long-term growth that you are anticipating?

David Congdon

For the time being, we are successfully winning market share with the business model that we're under. And we think that we should continue staying focused on that, and that will be the best return on our invested capital to do so. However, we always keep our eyes open for diversification opportunities as they may arise and also for potential acquisitions within the various spaces that we currently occupy.

Thomas Kim - Goldman Sachs

And just on that last comment, what would be the framework in which you would deem be to sort worthy of considering M&A?

Earl Congdon

We're not real excited about acquisition right now for the reason David stated. We're protecting our service levels, because that's why we're as successful as we are. And acquisition has really got to be tempting and we look at them all the time. But we almost always turn them down. So it's not a major thing for us right now because of the fact that we're so successful doing what we do. If we see that slowing down, we'll get more interested in acquisitions, I expect. But as of now, we're just trying to grow organically and I think we're pretty successful at it.

David Congdon

As we look at asset-light type acquisitions and companies of any size, it appears to us that that marketplace has overpriced a lot of these companies. They're sort of the multiples of EBITDA that companies are paying and the private equity funds are paying. They tend to price us out of the market. And we're also a bit constrained by our own success. The fact that we're earning greater than 15% return on invested capital, if we plug that expectation into an acquisition, we might only come up with three to four times EBITDA, and people are paying to eight to 10 times EBITDA. So we tend to price ourselves out of the market because of our own success.

Operator

KeyBanc Capital Markets' Todd Fowler has our next question.

Todd Fowler - KeyBanc Capital Markets

David, I think in the past, you talked about the business is growing at some sort of multiple of where industrial production is or some other economic metric. And it feels like that the last couple of quarters, the growth rate has been faster than that. And I'm curious if you can comment as to why you think that is? Is that success with your 3PL partners? Is it a shift towards e-commerce and where you are positioned with the next-day shipments? I'm just kind of curious kind of your view on the growth rates relative to where you've been historically.

David Congdon

Todd, I really believe it's just a matter of our overall total service products that we're offering to anywhere from mom and pop shippers to large shippers where we have a direct relationship, to our relationships with our 3PLs. We just have a darn good service product that sells. And we're just playing on and winning market share.

Todd Fowler - KeyBanc Capital Markets

But you've had a darn good service product for long time. And so I guess I'm trying to get a sense of if there is something that you're seeing in the market that's different now, or why people are realizing that more now than what they were, even if you look at the growth rates a year ago?

David Congdon

I think the second quarter, we had such a strong tonnage growth because of, I think, the macro was behaving a little more appropriately. We've seen the initial indications of GDP in the second quarter being as much as 4% compared to down 2% in the first quarter. So I think we're all kind of flirting along with that. It remains to be seen what'll happen in the second half. But for sure that's part of the second quarter in addition to our market share. I think in the first quarter, we had a strong growth despite the weather, because we simply will provide you service and provide you coverage even in those areas that we're negatively impacted by weather. We were still running our equipment safely obviously to service our customers.

Todd Fowler - KeyBanc Capital Markets

This is kind of a damned if you do, damned if you don't type question. But when you look at the growth rates, is there ever a point where you say growing in the high-teens is too much and we want to moderate the growth to make sure that we've got the employees and we've got the efficiencies and those sorts of things in place? Or do you feel that the business is positioned that it can grow at the high-teens and continue to produce results like you had this quarter?

David Congdon

Today our operating people darn sure have sweat on their brow living with the growth rates that we have been sustaining over this last year especially. So I'm really proud of our management team and all of our service center managers, all of our drivers and dock workers and all who are delivering this superior service product. And we've had our nose to the groundstone. Our people have really come through and done a great job.

Operator

We'll hear next from Tom Albrecht of BB&T.

Tom Albrecht - BB&T

Wes, I wanted to ask you, on miscellaneous expenses, it was $1.8 million versus $17,000. What was in that? Was that the deferred comp? It seems like that used to be down below the line?

Wes Frye

A couple of things. Last year, we had some positive results and some of our cost was lower than normal. This year, fortunately it returns back to normal. The other thing is we've discussed modernization and while most of our modernization expense will be capitalized, accounting principles dictate that some of it has to be expensed. And some of that increase is due to the cost that we are realizing from our modernization efforts going forward.

Tom Albrecht - BB&T

When you talk about other expenses, what's an example of other, not related to the modernization?

Wes Frye

What the other thing is in there is the gains of sale, but that's comparable. There was a favorable impact last year, so an easier comparison, and the effects with some of our modernization in there this year.

Tom Albrecht - BB&T

So let me ask you kind of a bigger picture question then. Your weight per shipment continues to go up. And when we look at the public companies, some are up, some are down. Are there certain days of the week that make more sense to play in the truckload spot market, or is it geographical? Can you just talk about the philosophy of when that occurs versus maybe part of your weight per shipment just coming from customers doing better?

Wes Frye

We're still growing in the larger contractual business, which has a weight per shipment that is more like 1,700 pound or even a little more. So just mathematically as we continue to take on large contractual whether it be 3PLs or direct, your weight per shipment is going to continue to go higher. Also in up economies, you're shipping more widgets. So if the economy is behaving well, we can expect weight per shipment to be up that way as well. From a truckload standpoint, we do use truckload in some cases, and we call it spot quotes, but we manage that very closely. Obviously our costs are related to providing LTL service and a truckload rate per mile, call it $1.55, just doesn't compensate us for the heavy and extensive network that we have to support. So we really don't see getting into truckload on the spot basis measurably. And if we do, we price it such that we do have a pretty good margin on it. But that isn't what we would expect to increase our weight per shipment measurably going forward.

Tom Albrecht - BB&T

In general though, have you seen a greater rate of growth with shipments over 5,000 and maybe even 10,000 pounds?

Wes Frye

Not really. In shipments, obviously it's flat to down. If the revenue is up in the case, it's because we're charging to compensate us for taking on that truckload. And of course truckload brokerage is one of our value-added services that if our customers need that service, we will take into the truckload brokerage and get him the resources from that side.

Tom Albrecht - BB&T

And then lastly, on the fuel, you've commented on fuel management buying practices. Was there also an element with just better MPG for newer equipment?

David Congdon

We've had a continuous improvement in MPG really going back since 2010. And it's been better managing fuel mileage down to the driver level and the replacement cycle with newer equipment, the installation of the skirts on the trailers, which we're 100% skirted fleet now. All of that has come into play with continuous improvement in fuel economy.

Operator

Next from Cowen & Company, we'll hear from Jason Seidl.

Jason Seidl - Cowen & Company

Just quickly, when you look at your mix of business between sort of more local and national accounts, was there any noticeable shift in the quarter?

David Congdon

There's been shifts in that for years that higher percentages of our business is in the contractual larger as opposed to what we call the smaller terra type and that's occurring within the industry and a lot of that's going to 3PLs. But on the other hand, we work very closely with 3PLs on that front as well. So it's a trend that's happening. We're doing well managing that. And so it basically just is what it is.

Jason Seidl - Cowen & Company

Wes, you also talked a little bit about your pay increases coming up. Are you having trouble in other areas besides maybe some drivers and hiring people maybe such as mechanics, dock workers? I'm just kind of curious how tight the labor market is for you?

Wes Frye

Well, we've increased our employee in the second quarter this year over last year by 14%. And although that's been something of a challenge, we're able to do that. And so we've been successful in adding not only on the docks, but also the driver force.

Operator

We'll hear now from Brad Delco of Stephens Incorporated.

Brad Delco - Stephens Incorporated

Wes, it's maybe for you just real quickly. You commented that your debt to cap ratio is probably as low as it's been in at least quite some time. Where do you feel comfortable with your debt to cap ratio? If you decided to deploy some capital, what's the comfort level on that number?

Wes Frye

We've had as high as 40% in large growth and we can do that, but there had to be an opportunity which we're probably not intending to do. But in the 15% to 20% we think would be good just looking at our cost of capital and looking at our capital structures a reasonable frame.

Brad Delco - Stephens Incorporated

When you look at your incremental margins in the quarter, I think they were just north of 22%, very close to where your overall book of business is running. Is there any way to sort of parcel out where you think this new tonnage that's coming on? Is it more profitable than legacy business or business that's been in your model for a while? And have you changed the targets at all for your sales force in terms of what type of freight they have to bring on and what the OR is? I guess the bottomline is, is the freight that's coming on incrementally more profitable or priced differently than what you have existed in your network?

Wes Frye

Brad, I'll have to say no to your question. We're seeing our tonnage growth, our revenue growth really pretty strong and uniform across the entire country. And so the entire sales force is just bringing on business, growing with existing accounts. And there are no targets to bring on to freight at lower operating ratios than we historically have. In fact, our pricing is really the same. We haven't changed that at all over the last while. And so it's just across the board.

Operator

And gentlemen, it appears we have no further questions at this time. Mr. Earl Congdon, I would like to turn the conference back over to you for closing remarks.

Earl Congdon

Guys, as always, thank you all for your participation and those excellent questions today. We appreciate your support for Old Dominion. And please give us a call if you have any further questions. So thank you and good day.

Operator

And again, that does conclude today's conference and we thank you all for joining us.

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Source: Old Dominion Freight Line's (ODFL) CEO David Congdon on Q2 2014 Results - Earnings Call Transcript
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