Old Dominion Freight Line, Inc.

Good morning and welcome to the first quarter 2019 conference call for Old Dominion Freightline. Today's call is being recorded and will be available for replay beginning today and through May 3, 2019 by dialing -457-0820. The replay passcode is 960-2170. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, that are 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 yourselves to just a couple of questions at a time before returning to the queue. We thank you for your cooperation. At this time, for opening remarks, I would like to turn the call over to the company's President, Chief Executive Officer, Mr. Greg Gant. Please go ahead, sir.

Good morning and welcome to our first quarter 2019 conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. OD team delivered another quarter of strong operating and financial performance, producing a .1% increase in revenue and a .9% increase in net income. Following seven straight quarters of double-digit increases in revenue, our rate of growth for the first quarter was slightly lower than our expectation at the beginning of the year. Our team responded by improving our yields and managing our costs. As a result, our operating ratio improved 190 basis points to 82.0. First quarter financial results demonstrate our team's successful execution of our strategic plan that, as you all know, has been in place for many years. This plan is centered on our OD family and the relationships we have built with our customers. These relationships are built on trust and our proven ability to provide superior service as evidenced by our 99% on-time service performance and .2% cargo claims ratio in the first quarter. We will continue to focus on providing superior service, which provides the foundation for our ability to continue to win market share and improve yields. We have often discussed the fact that the ongoing improvement in our operating ratio requires improvements in both our density and yield, with a positive macroeconomic and pricing environment supporting these initiatives. While our volumes have been slightly lower than anticipated so far this year, we remain cautiously optimistic on the domestic economy based on favorable economic indicators as well as general feedback from many of our customers. We are also encouraged by the general stability of the overall pricing environment, although we have recently seen some evidence of competitors losing their discipline. Our LTL revenue per hundred increased .6% as compared to the first quarter of 2018, although a portion of this increase was due to changes in the mix of our freight. LTL revenue per shipment increased .2% to offset the increase in our cost per shipment during the first quarter. Our yield management philosophy is designed to offset inflationary cost increases, while also supporting our ongoing investments in our employees, capacity, and technology. These investments help us improve our operating efficiency while also providing the capacity and technology to support our customers' needs. Our ongoing investment in service center capacity is also critical to achieving our long-term growth initiatives. We continue to invest in service center assets regardless of the economic environment, as doing so provides us with the network capacity to immediately respond to favorable changes in demand similar to what we experienced in 2017 and 2018. We recently reduced our planned expenditures for tractors by $10 million, however, to better match our fleet with current shipment trends. We have also continued our regular process of matching labor costs with current volume trends. We stated on our earnings call for the third quarter of 2018 that the size of our workforce was appropriate for anticipated business levels, and we continue to believe that is the case. While the average number of full-time employees increased as compared to the first quarter of 2018, the number of full-time employees at March 31, 2019, was .2% lower than our headcount at September 30, 2018. We do not anticipate any major changes in our headcount during the second quarter and expect to see a convergence of the -over-year change in headcount and shipments per day as we progress through the year. I commend the entire OD team for their performance during the first quarter of 2019 that drove our overall results. Our level of superior service continued and productivity improved in spite of the operational challenges that are typical for the first quarter. We are off to a solid start of the year and continue to have opportunities for continued growth in revenue and profitability. With an unmatched value proposition of providing superior customer service at a fair price, we remain confident in our ability to win market share over the long term and increase shareholder value. Thanks for joining us this morning and now Adam will discuss our first quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue increased .1% to $990.8 million for the first quarter. The revenue growth on a per day basis was .8% as the first quarter of 2019 had one less workday than the first quarter of last year. Combination of the increase in revenue and 190 basis point improvement in our operating ratio allowed us to increase our earnings per diluted share by .3% to $1.64. Revenue growth for the quarter was driven by the .6% increase in LTL revenue per hundred weight as our LTL tons per day decreased .4% as compared to the first quarter of 2018. While shipments per day increased .7% during the quarter, our LTL weight per shipment decreased 4%. As we have discussed over the past couple of quarters, we expected a decrease in weight for shipment for the first half of this year. On a sequential basis, the trend for both LTL tons per day and LTL shipments per day were both below normal seasonality. As compared to the fourth quarter of 2018, LTL tons per day decreased .6% as compared to the 10-year average decrease of .7% and our LTL shipments per day decreased .4% as compared to the 10-year average increase of 0.3%. April, our volumes are also trending below normal seasonality although our yield trend is holding steady. As a result, our growth in revenue per day is trending lower than our first quarter growth rate. April 2019 does include the impact of the Easter holiday which was included in March of 2018. Similar to the process that we described on our previous earnings call, we will provide the actual revenue-related details for April when we file our Form 10Q. Our first quarter operating ratio improved 190 basis points to .0% and included improvement both our direct operating costs and overhead expenses as a percent of revenue. Salaries, wages, and benefits as a percent of revenue improved 150 basis points and included a 60 basis point improvement related to our productive labor. We were pleased to see improvements in the productivity of our dock and our pickup delivery operations during the quarter. Our line haul laden load factor average unfortunately declined but that is fairly typical in an environment where wait for shipment is declining. Our aggregate overhead cost improved as a percent of revenue as well despite the 60 basis point increase in our depreciation costs due to the significant investments in capacity and technology. We expect depreciation cost as a percent of revenue to continue to be higher on a -over-year basis for the remainder of this year. Old Dominion's cash flow from operations totaled $206.2 million for the first quarter of 2019 and capital expenditures were $70.7 million. Based on our plan to continue to increase service center capacity as well as our regular equipment replacement cycle, capital expenditures are expected to be approximately $480 million for 2019. We returned $44.4 million of capital to our shareholders during the first quarter including $30.6 million of share repurchases and $13.8 million in cash dividends. Our effective tax rate for the first quarter was .1% as compared to .9% in the first quarter of last year. Currently anticipate our annual effective tax rate to be .1% for the second quarter of 2019. That concludes our prepared remarks this morning. Operator will be happy to open the floor for questions at this time.

Thank you. And to ask a question, please signal by pressing star 1 on your telephone keypad. If using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question and we'll pause for just a moment. And we'll take our first question from Todd Fowler with KeyBank Capital Markets. Please go ahead.

Great. Thanks. Good morning everyone. Greg, in your prepared comments you commented that you've seen some incremental pricing competition recently. Can you just provide a little bit more color around what you're seeing, maybe how widespread it is, and kind of your thoughts on the impact of that through the second quarter?

Well, Todd, we're just starting to see it with some of our larger accounts. We're not losing business, not accounts, but we're maybe losing certain lanes because we were outpriced. So we're just seeing some aggression that we had not seen in prior years. It's not widespread at this point, but we are seeing some. So I think time will better tell that story, but we have seen a little more aggression than we've been used to the last couple years.

Okay, and is that concentrated with a handful of specific players or is it more kind of broad-based than that?

Broad-based, Todd. We've seen it. There's not just a specific carrier by any stretch. It's broad-based.

Okay.

Some of what we've seen too is just a little change in shipper behavior in the sense of maybe trading out some of the freight that we may have been allocated from their book of business in the past to perhaps another carrier that just has a lower published rate. So it's not all that it's someone coming in and dropping costs as part of a bid process. We have seen some of that, and that's what we're referring to. But in some cases, I think shippers that had experienced cost increases related to transportation last year are coming out and looking at multiple ways to try to save some costs. But we still believe our value proposition allows them to do so by giving -in-class service and the other things that we provide. So that's what we'll be focused on. You asked about the impact on the second quarter. Right now, we're still continuing to see our yield trend hold steady. We were pleased to see the increases maintain as we progress through the first quarter, and that's continuing into April. It was last year about this time that some of our mix started changing as we progressed through the second quarter, and then definitely the weight for shipment changed significantly as we got to the back half of the year. So just running out what our revenue per hundred weight would be and kind of the normal sequential increases that we see as we go through contractual renewals, we expect that from just a reported revenue per hundred weight standpoint, a slight decrease in the second quarter, and then that'll converge more in the second half of the year with what true increases we're really seeing with accounts, and it won't have that same impact from the mix of freight that we've seen with the big decreases in weight for shipment.

Okay. So I'm just so I understand that comment. The decrease that you're expecting in the second quarter is the absolute reported yield sequentially versus the first quarter. Is that what that comment is?

Right. And I don't mean for a decrease. I'm just saying where we saw about a nine and a half percent increase in the first quarter, that may compress just slightly. But right now, frankly, it's holding steady as we go through April. And certainly we're not changing our pricing philosophy in any way and would expect to continue to get the cost-based increases that we always target with our accounts.

Understood. Just a follow-up then, or for my second question, you know, in this environment, understanding that density and yield are what really helps the incremental margins, you know, with the lower tonnage growth, you know, what are your thoughts on incrementals? Can they be, you know, kind of in your normalized range going forward? It sounds like you're getting some productivity improvements both within the labor and the DOC, and you also made some comments about overhead. So how do you think about incremental margins in an environment where tonnage is a little bit slower? Thanks.

I think that as we've seen in the past, you know, certainly the incrementals, the past few quarters have been really strong. This first quarter is, you know, similar to the environment where we've got revenue slowing a little bit, but we've been targeting taking cost out of the business. And it's why we often say we don't manage to the incremental margin. We're managing the business for the long term. So, you know, with that, though, we've got to make changes to the plan when it comes to the short run. And that's certainly what we've been doing with respect to cost in the first quarter. And we'll continue to target cost where it makes sense as we progress through the year. But to have an incremental margin, you got to have solid revenue growth, and especially when you're looking at something like our depreciation costs that, you know, have been up in the between nine to $10 million range to have that type of quarter over quarter increase, certainly to get a 25% plus incremental margin, you've got to have sufficient revenue growth. So, you know, we've never said that the 35% or, you know, over 40% margin was the right long term goal. We've continued to talk about 25%. And so perhaps as the revenue growth slows a little bit, then that number kind of converges back into what our longer term goal has been.

Okay, that makes sense. I'll pass it along. Thanks for the time.

We'll take our next question from David Ross with Steele. Please go ahead.

Yes, good morning, gentlemen.

Hey, David.

So, in looking to continue expanding the service center capacity, are you running into any real estate issues yet, whether it's in terms of cost or availability?

David, we had our hands full last year with challenges all over the country, really, but we've been somewhat successful in finding either property or properties or land where we needed it. So, we're in good shape right now and we're continuing on with our plan as we developed it over the last couple years of hopefully opening somewhere between six and ten centers this year and continuing to buy the land that we see that we need for future growth. So, really, we're pretty good right now. I feel good about where we are and what we've got and what we're working on. I think we're in a good spot. We just got to continue on.

Do you have those sites generally identified or what's the plan if they're not available in the locations you want them?

They're identified and in most all cases bought. Yes. We have identified where we have the needs and in most all cases we have the land. We're working on permitting and all the due diligence and all that goes with that at this time. So, we're executing that plan.

That's good. And then, Adam, quickly on the customer, I don't want to call it rate pressure necessarily, but when you're talking about some lanes going away, not accounts going away, but certain lanes, how much of that is 3PL driven? I know you guys have a decent amount with 3PLs and I'm thinking maybe in this quarter some people are pressing the pricing button a little bit and maybe that's the channel where they're going or is 3PL not an outsized contributor to any of the market share switching?

We're actually seeing good growth with our 3PL related accounts or we did in the first quarter and that's where we've said that when we talk about customer demand trends and some of the positive feedback we've had, a lot of that is originating with the conversations with 3PLs. So, I think some of the lanes where we're seeing going away may be on some of our larger national accounts and again, I think it's getting back to where some accounts are just looking at their overall cost of transportation and maybe have got some internal pressures to try to save some cost. In many cases, we get feedback and this has played out many times over the years where we may lose a little business on price and we just don't feel like it makes sense to always try to give on price when we're given the level of service that we give but sometimes we lose a little business on price and it comes back to us on service down the road. That's certainly played out many times before and it could be that it comes back on service and it could be that it comes back on capacity and we continue to believe the industry's capacity constraint both from, primarily from a real estate standpoint but also when it comes to equipment and so, you know, often times we'll see and get feedback where we may lose a little bit of business but when end of a quarter or end of a month peak comes about and someone doesn't have the trailer equipment capacity, you know, customers call us right back and we've certainly got it and can help our customers.

Excellent. Thank you.

Once again, press star one to ask a question and we'll take our next question from Alison Landry with Credit Suisse. Please go ahead.

Thanks. Good morning. So, if I'm trying to think about the comments in terms of the below seasonally normal revenue per day trends in April and the commentary on some incremental competition as far as pricing goes, I mean, is there any way to sort of read into these trends, you know, from a macro standpoint? I mean, do you think things are feeling a little bit weaker or, you know, do you think that there's some other maybe transitory factors that are playing a role here?

I don't think it's weakness or we don't believe that right now and, you know, a lot of that gets back to just some of the macroeconomic numbers that we review and, you know, in particular given the amount of business that's industrial related for us, the ISM trends have continued to be positive and, you know, a lot of the conversation with customers continue to be positive in the sense of what they think their businesses will do this year. So, I think some of it is just, you know, some pricing pressures that are coming about, some large players looking to try to maybe generate some cost savings within their cost structure and oftentimes that may come at an increased cost. It may just go to a different cost center. So, that's why, you know, based on past history and given where our service levels are, we'd expect to get some business back in due time. But, you know, we haven't really necessarily seen any major capacity changes in the industry. So, we don't feel like anyone's done anything different that would go out targeting freight. But I think when, you know, given some of the weakness that's been in the first quarter, you may just have some other carriers that are out trying to get some freight back into their networks and that's just causing a little bit of weakness.

Okay. So, it sounds like some of what's going on with the lane shifts that these bigger customers, is that what you think is primarily driving the below seasonally normal revenue per day trends? Like more so than some macro issues, for example?

Thanks. I think you also, Allison, you've got to take into account the capacity in the truckload industry that's out there now. So, that's got to be having some impact. It's kind of hard to put your finger on exactly where that is in our network. But we know there's capacity there now. And this time last year, it wasn't quite the case. So, just a little bit of a headwind we've got to deal with until that capacity tightens back up.

Okay. And then in terms of the length of haul, it looks like it's ticked up slightly year over year for the last two to three quarters. Anything that is unusual there that's sort of driving the modest increase or is there, you know, some kind of, is this indicative of any type of underlying trend? Thank you.

I don't think there's anything, you know, major that's going on there. It's up a few miles. And, you know, that could just be we're winning a little bit more share in some of those longer haul lanes. And, you know, the beauty of our network is we've got a very high quality regional, interregional, and national service product. And so, you know, we still believe that longer term we'll see the length of haul shorten and freight moving more within our regional network, if you will. But because of our high quality service offering, it's probably just that we may have picked up a little bit of, you know, incremental share in some of those longer haul lanes.

Okay. Excellent. Thank you. We'll take our next question from Chris Weatherby with Citigroup. Please go ahead.

Okay. Thanks. Good morning, guys. I guess I want to touch a little bit on Tanya's trends. And obviously as we're moving into the first quarter, it sounds like we're not necessarily even seeing a rebound here. I wanted to get a sense from a seasonal perspective, you know, if you'd expect to see something more meaningful this far along in April or maybe you start to see better seasonality as you move into May. I'm just kind of curious to get a sense of sort of how you would expect that physical seasonality to play out. And, you know, if you could see that, that time has reflected a bit more positively as you move through the second quarter.

That's the normal trend. And certainly we'd hope to, you know, to see that play out. I think that's just this first quarter was a little bit unusual with the different effects. And, you know, we started out in January with, you know, pretty nice revenue growth. And then we had a few snowstorms there at the end of the month that kind of moved through and some other weather impact that we felt like kind of depressed that. And you also had early part of the first quarter, the governmental shutdown. So there's a lot of noise that was hard for us to sort through as we progressed this first couple of months. You know, when we got into March, we felt like we would see, you know, break kind of get back to normal and see some of the buildup like you'd normally see progressing through the end of the quarter. And we finished the quarter with good results. You know, the month of March itself was just a little bit below what our normal seasonal pattern is. But we started out in such a deep hole in January. January on a sequential basis was down one percent. There's normally a three point four percent increase. So we were back above seasonality in February and then just slightly below. But, you know, just have started out April again with not seeing the strength in terms of the way revenue builds from the beginning of the month to the end. It's been pretty consistent, but certainly we'd hope to see some things start picking up what the normal spring season would be. But, you know, we've got a plan for it. We're planning. You know, obviously in the first quarter, revenue growth was a lot slower than what we saw last year. We're coming off a year with 20 percent growth. And, you know, we started talking last year about focusing on cost. And I think that we got ahead of the curve in the sense of looking at labor very intently kind of late fall. And that has continued. So certainly we'll continue to look at cost. And we've produced good results in the past in a slower revenue environment. And that's what we'll continue to look to. But certainly it'd be a little more helpful if we could get a little bit more revenue growth. And it's just not coming now. Okay. Okay.

No, that's great color. In addition to the Apex side, you know, thinking about the CapEx piece, you know, certainly there's an interesting opportunity over the long run to build that capacity and continue to sustain the growth. When you think about some of the shorter term dynamics, what would you sort of need to see to maybe take your foot off the gas from a CapEx or expansion plan standpoint? I mean, just trying to get a sense of, you know, what you need to see is there's significantly worse tonnage for you guys to dial back the capital and sort of decide to maybe take a little bit of a slower approach to the expansion. Just want to get a sense of how you sensitize that.

Well, we pull it apart in the sense of looking at what's the short term capacity needs. And that's primarily on the equipment front. And so, you know, we continue to monitor trends as we progress through the first quarter and made the decision to cut about 10 million dollars out of the tractor budget. And that's just keeping the fleet somewhat in balance with what current trends are. You know, so that's that's number one. You know, we can also with and this is what our normal process would be on the equipment that we would have replaced this year. If volumes are stronger than than what we anticipated for you hold on to some of that replacement equipment longer. And if need be, if they're softer, we can get rid of it a little sooner than maybe what we would have otherwise done. And so we try to go through that process to to manage the depreciation impact, if you will, from the equipment piece. You know, otherwise, on the technology side, we're continuing to make those investments and investing in tools and things that we think can can help us, you know, whether it's driving automation or process improvement, but ultimately is driving efficiency. And that'll help us on the call. So you've got to spend to save that. That's certainly what we'll do. And then, you know, the biggest piece of the budget every year, though, is is what we spend on the real estate. And and that gets to what our long term belief is in terms of how we can continue to grow the company. And, you know, these are investments that take their projects that take longer time to complete. And they don't really impact the income statement in a material way, since we like to own these assets. But we'll continue to make those investments there because we may not need it now, but we certainly may need it again. And I think when you go back and we had these conversations in 2016, the environment was slowing, but we continue to invest in the capacity. And had we not built up that door capacity, then we wouldn't have been able to grow like we did in 17 and 18. So it's important to get those assets in place now. And we certainly can can defer some of the openings. And that may be what we do in some cases, and that'll prevent some of the overhead costs that go along with with the service center opening. So that'll be one way that we can defer a little bit of cost coming on to the books. But but the capacity is a long term play. We certainly believe that we can continue to win market share with our service product and we want to have the capacity in place when when business level surge again.

OK, that's great color. And just to clarify that the tractor, the 10 million of the tractors at the difference from the 490 to the 480. Is that what that that delta is?

I'm sorry, can you repeat that?

The tractor reduction of 10 million dollars, the expense, the spending on tractors, is that the difference from 490, which I think he gave us last quarter to 480? It is.

OK,

that's helpful. Just want to clarify that.

Thank you very much. Great.

We'll take our next question from Ari Rosa with Bank of America, Merrill Lynch. Please go ahead.

Hey, good morning, Greg. Hi, Adam. First, really quickly, I wanted to get I don't know if I missed it in the press release, but just what was the cargo claims ratio and the on time deliveries for the quarter? I know you usually provide that, but I think I missed it this quarter.

It was in there. The on time service was above 99, slightly above 99 percent. And the claims ratio was zero point two. Got it. OK, so pretty consistent with

past quarters. So just wanted to revert back to this question of the pricing competition and maybe discuss it from a slightly different angle. Maybe you could talk about what's your ability to maintain an operating ratio in the 80 percent range if we see that pricing competition kind of step up or conditions deteriorate a little bit from where they are currently?

I think what you have to look at is how we've performed in the past. And, you know, 2016 was a flat revenue year for us and we lost 60 basis points on the the O.R. that year. And it was all on the depreciation line. And so that's about the headwind we had in the first quarter for depreciation, despite the fact that we improved the operating ratio. And don't want to lose sight of the fact that we improved at 190 basis points in the first quarter and still produced above 20 percent growth and earnings. But, you know, certainly as the revenue slows, you know, we go through and we're continuously and this is a minute by minute, day by day process managing our labor costs with labor trends. And then we just go up and down the income statement as well and look at if we've got discretionary spending in some places that we can eliminate. That's exactly what we try to do because at the end of the day, our goal is to grow the profits of the company. And from a long term standpoint, it certainly makes more sense for us to maintain our pricing discipline. We may lose a little bit of volume in the short run and that causes a little cost creep on a per shipment basis with things like overhead in general. But certainly we'll continue to manage it and set the company up for long term profitable growth.

Got it. That makes sense. And then, Adam, you mentioned that you see the industry as being somewhat capacity constrained. I just wanted to see if you could maybe give a little more color on what you mean there and what specifically you see as the constraint to that capacity expansion.

I think that's primarily on the service center side. And, you know, the reason we believe that is just looking at over the long run the number of shipments per day that, you know, at least the public carriers you can go through and review. And, you know, how many shipments per day one is handling today versus yesterday year. The investments in capacity over time, which there haven't been a significant number of service center openings outside of us and one of our larger competitors. And that's the reason why you've seen a lot of the market share consolidation concentrated in two main carriers over the years. So it takes investing in indoor capacity to be able to grow the business and with an industry that's still operating with mid single digit profit margins, then making those investments may not always make sense. And that's probably why we've not seen any significant measure of capacity investment. So, you know, it's something that we don't necessarily hear others talk about. We feel good about our measure of spare capacity and generating our ability to grow. I think that we're still probably in the 15 to 20 percent range when it comes to the spare capacity of our service center network. But that's probably closer to where we got on the lower end of that scale last year, given the investments that we made through last year in this first quarter. And some of this softness, we're probably back up to about the 20 percent into that range now. So, you know, that's a good thing for us. And that's why we want to keep adding to the capacity. If you recall, we like to keep a measure of about 25 percent in place. So, if that capacity measure continues to increase for us, you know, certainly we'd feel better in that regard and having the system set up and designed for when the growth returns to the business.

Got it. That's a great answer. Thanks for the caller there.

We'll take our next question from Amit Maratra with Deutsche Bank. Please go ahead.

Thanks, operator. Hi, everybody. Just surprisingly expanding on the price commentary. So I guess everyone's memory goes back to 2009, 2010 timeframe, but we obviously had a pretty big industrial recession in 2015 and 2016 as well. Did you see a similar small breakdown or any breakdown in industry pricing discipline in 2016? Because your performance, as you said earlier, Adam, was held up very well around that time. I just want to compare and contrast and just make sure I'm not misunderstanding the severity of your pricing comment.

I think that pretty much the first half of 2016, we saw a little bit of increased competitiveness and it was pretty selective. And I think rationalized by the end of the year. And so, you know, it wasn't broad based then. And there's nothing that's broad based now. It's certainly I know we're spending a lot of air time talking about it. You know, we still saw a very nice increase in both our revenue per hundred weight and revenue per shipment in the first quarter. Certainly believe that that strength can continue into the second quarter. But, you know, we don't see anything that's broad based at this point that should cause too much panic. But certainly we're starting to see it. And that's why we mentioned it and just want to get it out there. But, you know, we would expect and intend to completely maintain our our same approach that we always have. And that's, you know, an approach with our customers that's based on consistency and based on our cost inflation and the need to continue to have above cost increases to support the ongoing investments in capacity. That our customers demand from us as well as investments in some of the technological tools that we're being asked to deliver on as well that not only can help us manage costs but can help our customers eliminate cost as well.

Yeah. And just related to that, I guess pockets is maybe the better way to think about it or phrase it. Pockets of price competitiveness. Is it more carrier driven related to, you know, specific expansion plans and maybe a heightened fixed cost structure that they have? Or is it more, you know, customer driven? I guess it goes hand in hand, but more customer driven as maybe customers are to trade down, you know, to more economy or price, more price sensitive in a volume environment? I mean, any bifurcation there?

I think what we're seeing, we're just we're seeing our customers shop because they think the environment's favorable to to get lower rates. And that's what we're seeing now in some cases. And that's some of the business that's that's crept away from us. It's just been opportunistic competitors, you know, taking the decrease that we weren't willing to take. So that's what we've seen so far. It's early in the game and we'll see where that goes. But so far, like Adam said, it's not broad based. It's just a few places here and there. But it's still more than we've seen the past couple of years.

OK, Adam, one housekeeping one for me. The salaries, wages and benefits in the quarter per employee. It took a bigger step down than I would have just imagined given some of the upward pressure on the fringe cost that you called out last quarter. Can you just talk about that? I mean, from just what you did to manage that, to bring it down year over year? And how should we think about the rest of the year from a composition benefits per employee?

Sure. You know, I mentioned that from a productive labor standpoint, that was about 60 basis points of that overall improvement that we had. Our fringe benefit costs in general were pretty close with where we were in the first quarter. You know, we did have a rebound with some of that retirement plan expense, the phantom share program that we've had. But we had a similar increase last year. Actually, I guess the expense that we recorded for that program was about two and a half million dollars less in the first quarter of 19 versus where it was in the first quarter of 18. But, you know, otherwise, it's just been a process of going through and, you know, in some cases, working fewer hours, evaluating positions and needs, maybe deferring on some of the planned additions and just going through and looking at and evaluating how we can best manage those costs. And that's a process that we've really undertook late last year. And that continues. But that's an ongoing thing. And that's a big reason why we've been able to produce or were able to produce last year a sub-80 operating ratio. You've got to manage cost in good times and in bad times. And certainly that's what we always stay focused on every day.

Got it. Thanks for taking my questions. Appreciate it.

We'll take our next question from Scott Group with Wolf's Research. Please go ahead.

Hey, thanks. Morning, guys. Adam, Adam, can you actually give us what April revenue per day is doing? And then I don't know if I got the March tonnage number, if you can give that. And then on April, can you say if tonnage is still negative? I presume it is. But can you just sort of directionally talk there?

I'll give you the March was the wait per day was down .2% on a year over year basis and shipments were up .1% on a year over year basis. And so for April, very similar to what we talked about on last quarter's call, we're going to wait until the full month is finished versus having a conversation about interim numbers and then how that reconciles the final numbers. So once we get through with the month, we'll publish those details, but just directionally, you know, what we've seen is where shipments in the first quarter averaged a little over .5% increase. They flattened out in April. And so that's really what's caused, you know, the revenue growth to compress a little bit. You know, the yield trend, as we said earlier, is continuing to hold steady with the same type of increase that we saw in the first quarter. And that's what you would expect. I mean, certainly the answer that I gave earlier where, you know, you'd intend for a little bit of compression was just really related to how the prior year number was changing and how it was accelerating as we progressed through the quarter. And some of that was mixed driven. But, you know, just looking at the actual revenue per hundred weight number that we produced in the first quarter and kind of carrying that through into the second quarter with some, you know, some slight increase would generate a little bit of compression. But, you know, we're still seeing the accounts that are turning over. We're getting good increases on. We did just push through our general rate increase. That will become effective in May this year versus June of last year. So that'll help. And we're just going to continue to stay focused on managing the operating ratio for each account on an account by account basis. And that's been successful for us in the past.

Okay. And just to put some of these pricing competitive things in context, maybe can you share what your pricing renewals where they're tracking right now?

Yeah, we don't give that level of detail, but it's certainly we talked about the fact that it's cost based type pricing. Our cost excluding fuel in the first quarter, we're up .4% to be exact. And we targeted and I think we talked about this on the last call, a cost inflation excluding fuel in about the .5% range was our expectation going into this year. And, you know, I think we can continue to stay on that pace. That becomes the basis. But, you know, above that long term, we've had about an 80, somewhere between 50 to 100 basis point delta in terms of what our cost inflation is and then the add on for what the revenue per shipment has changed. And again, when we talk about it, you've got to have the contribution from yield to cover the cost inflation, but there's also got to be something there to support the level of capital expenditures it takes to grow our network and make these investments that we have over time. If we hadn't done this, obviously, we wouldn't have been able to achieve the growth that we have over the last few years and certainly wouldn't be able to achieve the top line growth that we think we're still capable of going forward.

And the competitive environment you're talking about, is that put that 80 to 100 basis points of sort of real pricing, is that at risk now or are you still able to get that in terms of what you're seeing in the market right now?

It's been pretty successful in the first quarter with getting the rate increases that we felt like we needed. And, you know, I think we talked about last year, and this goes back to our management on the account by account basis. Last year, we managed our accounts on the account level profitability and some of the underperforming accounts last year, we were able to get more increases on to maybe, you know, they may have been staggered or we may have faced pressure on a particular account back in 2016. So we addressed some of those, but, you know, obviously the environment, we were able to get nice increases last year and some of that, what's embedded in this, you know, the nine and a half percent increase that we're seeing on a hundred way basis now, is still just a continuation of some of the increases from last year and that mixed type of change that's embedded in there. But, you know, we've been very successful so far this year with the increases and, you know, I think that it's a lot easier to have conversations with customers that are cost driven and what we're facing than it is just sitting down across the table and having a conversation about what the environment's like. I'd rather us be based on what our service level metrics are with the account, what we can give them in terms of capacity, what we can give the account in terms of technology. Those types of conversations are more relationship based than they are just being a commodity.

Okay, and then just last one. So in 2016 when we last talked about this sort of pricing dynamic, we all sort of talked about one carrier. Is it different this time around?

I think like what Greg said, it's definitely not, you know, one person that is driving this. It's just, you know, a couple of players in specific places that are going out and, you know, maybe being slightly more aggressive. But, you know, it's certainly not anything that's, you know, focused on one particular person, one particular area, and it's not anything that's been, you know, overly aggressive, I'll say, at this point either. I just think it's been very selective in certain places and we'll see as other carriers produce their, or release their results for the quarter and as we progress through the second quarter, if, you know, what the impact on profitability is. Because we've talked in the past of a 1% decrease in price typically takes about 5% or so improvement in volumes to just offset from a bottom line standpoint. So the price for volume game has not played out over the long run and it's certainly not something that we want to play.

Okay. Thank you, guys.

We'll take our next question from Ravi Shankar with Morgan Stanley. Please go ahead.

Thanks. Morning, guys. Apologies for following up on this topic here, but I think it's important to clarify. Adam, I think you said earlier on the call that the pricing competition was broad-based and I think you just also confirmed that it wasn't restricted to just a few players, but then you also said later on that it was not broad-based. Can you just help us understand this? Are you saying this is multiple players, but only in certain regions and with certain customers?

Oh, and I apologize if I've maybe I said it incorrectly, but it is not broad-based. It's not something that's pervasive. It's not in any particular region. It's just a few carriers, you know, here, there, and I say a few, meaning that it's not one, but it's not everyone. It's been just in here and there and kind of everywhere. Selected

accounts. Certain accounts, not broad-based all over accounts, just certain accounts.

Okay, Gart, in your experience with this, I mean, is this usually how it starts before it kind of snowballs or do you think that the industry right now is disciplined enough that this can be nipped in the bud?

I think that it'll be something that won't play out. And, you know, our our belief and go back to 16 where that was a slower environment. Our belief then and our belief now is when you've got an industry that's capacity constrained, it's a very consolidated industry with 80% or more of the revenue now in the top 10 players. And the industry's operating ratio is still in the mid single digit range that that's not really a setup that would support multiple carriers getting aggressive with pricing. You know, when you go back in time, when there's been more of a difference in price wars and so forth, you had multiple players that may have been in a little healthier position financially. But, you know, I think that over the last decade, it's been proving, especially when you look at our results, that if you have a disciplined approach with pricing, that can lead to margin improvement. And so we would certainly expect to not see any kind of broad-based or deep discounting or anything like that to play out. And at the end of the day, you know, the environment is still positive. The macro environment is still positive. GDP is still growing. I think consumer information is still positive. Industrial information is still positive. So, you know, the overall macroeconomic backdrop is still good. And the conversations that we've had with customers, we've got customers that are still anticipating growing their businesses. So, you know, everything overall from that backdrop standpoint is positive. And I think, you know, perhaps what you've seen is in the first quarter, you know, there's a lot of discussion about the impact of weather on revenue trends and so forth. And so maybe some people fell behind the curve a little bit with volumes and now are just seeking to go out and fill out, fill up whatever measure of capacity they may have had before. And so they're looking at certain lanes and trying to get some freight in those lanes. And, you know, we're not sure what some of the other players are seeing. And I guess we'll see that in the next couple of weeks. But it's certainly not something that we would expect to see, you know, any kind of massive discounting in any way.

That's really helpful. And finally, apologies if I missed this, but did you give what your excess capacity is right now?

Closer to the 20% range now. Probably still in the 15 to 20% kind of ballpark, but closer to 20 now.

Got it. And just so that we can dimension it, if you were to pull back on like all of your growth investments, whether it's discretionary stuff, whether it's tech or additional capacity, how much will that add to your OR approximately?

If we were to pull back,

we're not planning on pulling back on our real estate.

I know, but if you were, I mean, let's say the world fell apart in the next six months, I mean, just so that we can kind of dimension that, just how much defensive like a cushion you have in your OR right now.

We're not going to give any color on that. I think that, you know, when you look at the depreciation and how it trends, you know, we obviously we've had a little bit of a headwind 60 basis points in the first quarter. Much of the OR impact is going to be what the top line does, but, you know, there's if you go through and just sort of look and anticipate where that overall capex plan is, then obviously from a real dollar standpoint, you're going to see increases from there. And I'll let you figure out the OR impact based on what your forecast for revenue for the rest of the year will be.

Thank you. We'll take our next question from Matt with Buckingham Research Group. Please go ahead.

Hi, all. This is Kyle Robinson from Matt. I just have some question about expenses. We've talked about the revenue side of the weather and how it's impacted things. I was curious if you guys, you may be any potential insurance claims or fleet management expenses coming up in the next quarter maybe because of the difficulty with weather, the freezing and the flooding.

Our insurance line typically averages somewhere from, you know, just call it around .2% of revenue, 1.1 to 1.3. You know, that's pretty consistent in the first three quarters of the year. Those two line items include our cargo claims ratio, which we talk about every quarter. And that's generally between 0.2 to 0.3%. And then, you know, that just call it a 1% delta. That's the auto claims that we have for, you know, truck and so forth. And so that's pretty consistent. And then we have an annual true up in the fourth quarter every year where we go through an actuarial process. So there shouldn't be any material changes as we progress through the first three quarters of the year. Certainly wouldn't anticipate, you know, that changing in any material way as we continue to manage the cargo claims ratio with the all time low levels like they have been.

Great. Thank you. I appreciate it, Carl.

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

Hey, good morning, guys. Adam, the cash balance has built over the past couple years. Debt levels are low. Free cash has improved. Is there any business reason to maintain this level of net cash balance? Or could we see an acceleration in capital returns? How are you thinking about that cash management strategy?

Well, a couple of different ways. You know, one, we obviously want to the first priority is always going to be investing in ourselves. And, you know, like what we've discussed earlier, we'll continue to look at opportunities on the real estate side. And, you know, we certainly don't necessarily have, you know, any kind of goal per se to continue to build cash on the balance sheet. But, you know, with position of strength, if opportunities present themselves, as other carriers may look to sell properties and generate some cash flow that those that may be, you know, facing significant levels of debt or have other capital needs. In the past, that's been an opportunity for us and that could accelerate. And certainly, we take advantage of any opportunities that might present. You know, I think looking out over the longer term, we've still got, you know, a terminal list of about 40 properties or so that areas where we think we need a service center at some point. And so if something becomes available and fits the bill for where we'd want to be, we'd certainly take advantage of that opportunity. And then, you know, from a capital return to shareholders standpoint, certainly, I think that's something that we can increase. You know, we increase the dividend going into this year and, you know, we're giving out a little bit more dollars in that program. And then from a share buyback standpoint, you know, when you go back and look in the fourth quarter, we stepped up our purchases there when the price declined. And so that's something that we'll continue to monitor as the, you know, price fluctuates. And we can certainly step up just in general some of those purchases. And that may be something that we do. But certainly, you know, our program in the past has been to buy more when the share price is lower. And I think that we'd continue that type of mentality going forward.

Is there a way to think about what the average cost per service center is to build of the 40 that you have remaining? I know each one is going to be different. But is there an average cost per new service center that they could share?

Well, the service centers themselves, the averages doesn't vary all that much from place to place. It's typically the land where you have the big variances. But the average cost of building is not all that different from place to place.

Right. And in the total cost to develop a property, is there an average? Is there a rule of thumb that we can think about?

Including the land. Including

the land.

The land cost, that's the biggest variable, as Greg said. We'd rather not give what our cost is. But there is a general sort of cost per door that target that we have and would rather not share that level of detail. But the biggest variance is the land cost. And you can have same property in Kansas versus the LA area. And the LA will be in the tens of millions of dollars. And that's what we're starting to see. And while we've talked about some of the investments out west and in the northeast, those two markets in particular, the service center cost, cost to have a facility, and it's more of the embedded land cost, is significant. And in the northeast in particular, it takes a long time to grow and to find available properties there. There's many cases where we've got a target at need and it may take years before you find a suitable location and an available location to be able to move into. So that's why we try to stay so far ahead of our growth curve, particularly in those areas, the metro areas, Chicano land, out in California. Those are areas that we definitely have got to stay out in front of or your network ends up becoming a limiting factor to your growth. And certainly we don't want that to

happen. Understood. And the last one, has your perspective around acquisitions changed at all or is still the emphasis very strongly continuing to penetrate share organically in LTO?

That's certainly our top priority is to continue to grow our share, to invest in ourselves and continue to grow our share. That's our top priority at this point.

Okay, that's helpful. Thank you. Thank you.

We'll take our next question from Scott Grubb with WULFF Research. Please go ahead.

Hey guys, I'm all set. Thank you.

And there are no further questions. I'll turn the conference back to Greg Gant for closing remarks.

Thank you all for your participation today. We appreciate your questions and please feel free to give us a call if you have anything further. Thanks and I hope you all have a great day.