Oct 24, 2013
Executives
Earl E. Congdon - Executive Chairman David S.
Congdon - Chief Executive Officer, President and Director J. Wes Frye - Chief Financial Officer, Senior Vice President of Finance and Assistant Secretary
Analysts
William J. Greene - Morgan Stanley, Research Division Christian Wetherbee - Citigroup Inc, Research Division Thomas Kim - Goldman Sachs Group Inc., Research Division Jason H.
Seidl - Cowen and Company, LLC, Research Division Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division David G.
Ross - Stifel, Nicolaus & Co., Inc., Research Division Thomas S. Albrecht - BB&T Capital Markets, Research Division Anthony P.
Gallo - Wells Fargo Securities, LLC, Research Division David P. Campbell - Thompson, Davis & Company Justin B.
Yagerman - Deutsche Bank AG, Research Division Scott H. Group - Wolfe Research, LLC
Operator
Good morning, and welcome to the Third Quarter 2013 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through November 7 by dialing (719) 457-0820.
The replay passcode is 1911778. The replay may also be accessed through November 7 at the company's website.
This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact, may be deemed to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release.
And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
[Operator Instructions] 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 third quarter conference call.
With me is David Congdon, Old Dominion's President and CEO; and Wes Frye, the company's CFO. After some brief remarks, we'll be glad to take your questions.
Old Dominion produced another strong performance for the third quarter of 2013. Despite a soft economic environment, the company produced its highest ever quarterly revenue and net income as we grew revenue and earnings per share by 12% and 18.6%, respectively.
We also continue to sustain our record service levels during the quarter. For further improvement in density and yield, combined with consistent productivity results, we improved our operating ratio by 120 basis points to an 84.1 compared to an 85.3 for the third quarter of last year.
Our 7.9% growth in tons per day strongly indicate that we continued to gain market share. We believe a tonnage increase of this size in a quarter in which we increased revenue per hundredweight excluding fuel surcharges by 3.6% is evidence that the pricing environment remains favorable and that demand is robust for our value proposition of on-time, claims free service at a fair and equitable price.
Most of you know the history of the significant and continuous investment we've made over the past decade to build our infrastructure, purchase equipment and deploy innovative technology that enables us to sustain industry-leading service standards. However, it is the people throughout our company who are our most valuable asset.
Our customers, shareholders and communities have been rewarded because of the strength and dedication of the OD family, as well as by Old Dominion's commitment with our employees, the tools and training to excel at their tasks. As a result, we believe Old Dominion is operating at a finely tuned pitch, one that we have sustained and improved over our many years of industry performance.
We believe the company is well positioned to continue to strengthen our prospects for long-term, profitable growth and increasing our shareholder value. We thank you for your interest in Old Dominion.
And now I'll turn the meeting over to David Congdon for his comments on the company's performance.
David S. Congdon
Thank you, Earl, and good morning. I'll start off by saying Earl is absolutely right by referencing the company's finely tuned operation.
In addition to delivering leading financial and service performance while investing significant capital, expanding and sustaining our network infrastructure and technology, we have also reduced our debt to total capital to its lowest level ever, while producing company record return on assets, equity and capital. We were pleased to report a few years ago that our cargo to claims ratio was creeping down for the relatively unimaginable level of 0.50%.
This was not by sheer luck, but as the expected result of our deliberate strategies to provide superior service. Because of our determination and continuing focus in this area, I'm pleased to report that we have just completed our second consecutive quarter of a 0.31% cargo to claim ratio.
We have consistently discussed and demonstrated our belief that given a stable to improving economic environment and improved density, yield and productivity, we could generate incremental margins of 15% to 20%. Because of the infrastructure, the workforce and information technology that we built over the many years to provide our superior service value proposition, we have strengthened our ability to positively affect density, yield and productivity.
For example, we believe we are consistently achieving increased market share and density because of our best-in-class service. Second, due to the long-term consistency of our yield management process, we have built and are expanding an attractive base and mix of business that values the transportation solutions we provide and customers who are willing to pay a fair and equitable price for our proven service.
And lastly, we have also had a long-term record of increased productivity and much opportunity ahead because of our long-term history of investment in systems, technology and processes. While this business model requires a strong commitment and continuing investment to remain finely tuned, our long-term success is proof of our ability to sustain the strength of the model over time.
In addition, by raising the standard of performance at our industry, we different -- we differentiate Old Dominion's capabilities and create more consolidation pressure on industry participants who are not positioned to compete effectively. To summarize my remarks this morning, there is no doubt our business model has proven successful at driving increased market share, industry-leading margins and superior shareholder returns.
We are excited about the numerous opportunities ahead for continued improvement, long-term profitable growth and further increases in shareholder value. Thanks for being with us today.
And now I'll turn it over to Wes to review our financial results for the quarter in greater detail.
J. Wes Frye
Thank you, David, and good morning. Old Dominion's revenue were $616.5 million for the third quarter of 2013, an increase of 12% and $550.5 million for the third quarter of 2012.
This revenue growth was driven by a 7.9% growth in tons per day, higher-than-the-expected range of 7% to 7.5% with an extra work day in the third quarter compared to the third quarter of lastly year, total tons increased 9.6%. Shipments for the quarter rose 8.7% and weight per shipment increased 0.8%.
Headwind per hundredweight increased 3.3% in the quarter, by the increased weight per shipment and a slight decline in length of haul. Revenue per hundredweight, excluding fuel surcharge, increased 3.6% compared to the third quarter of last year, just ahead of the expected range of 3% to 3.5%.
Sequentially through the third quarter, tonnage per day decreased 2.4% from July versus June and increased 1.4% for August and 3.5% for September. This trend was better than expected and slightly higher than the 10-year average sequential month change, which was a decrease of 2.2% from July, an increase of 0.6% for August and an increase of 3.3% for September.
Year-over-year tonnage per day during the quarter was 6.2%, 8.6% and 8.6% for July, August and September, respectively. We expect year-over-year tonnage per day for October to be up approximately 9% and be in the range of 9% to 10% for the fourth quarter overall.
We also expect revenue per hundredweight excluding fuel surcharge to increase approximately 2.3% for October and be in the range of 1.5% to 2.5% for the fourth quarter. While this range is less than our year-to-date increase of 3.1%, the guidance is more reflective of continued mix changes for contractual business with a 13% higher weight per shipment when compared to the weight per shipment of our overall LTL business.
A higher growth in our continued drayage volume and also a reduced length of haul. Revenue per hundredweight, which reflected continuously changing mix of business does not measure, however, our profitability.
Therefore, year-over-year changes in revenue per hundredweight do not necessarily reflect a change in pricing levels. We still maintain our positive yield outlook based upon our disciplined and consistent pricing strategy and believe that same outlook applies to the LTL sector overall.
Our operating ratio improved to 84.1% for the third quarter of 2013, a 120 basis point improvement compared to an 85.3 for the third quarter last year. We continue to realize savings from better purchasing and fuel efficiency, which were primarily accountable for the 150 basis point decline in operating supplies and expense as a percent of revenue.
Salaries and wages, however, increased in basis points, reflecting a 60 basis point increase in group health cost resulting from increased medical claims experience. The increase in depreciation and amortization as percent of revenue for the quarter, which was due to mainly to expansion and replacement, purchases of tractors, trailers and service centers was offset by reduced equipment repairs and maintenance costs and also service under leases.
Capital expenditures for the third quarter was $72.1 million and $219.8 million for the first 9 months of 2013. We expect CapEx, net of sales proceeds for the full year to approximately -- be approximately $305 million including planned expenditures of our $130 million for real estate, $150 million for equipment and $25 million for technology and other assets.
We expect to fund these expenditures primarily through operating cash flow as well as our available borrowing capacity, if necessary. Total debt to total capitalization improved 14.8% compared to 22.3% at the end of third quarter last year and we expect the ratio to be in the range of 14% to 15% at the end of this year.
Our effective tax rate for the third quarter of 2013 was 36.9% compared to 34.9% for the third quarter of 2012. We expect our effective tax rate for the fourth quarter of 2013 will be approximately 38.6%.
This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
Operator
[Operator Instructions] And we'll take our first question from William Greene of Morgan Stanley.
William J. Greene - Morgan Stanley, Research Division
What I'm curious about, some of the -- you went through a lot of the sequential changes and changes in tonnage, so that was very helpful. But I'm curious, on the OR, it actually got a little bit worse than in the second quarter despite the extra working day.
And I actually would've thought that it typically is flat and so the extra working day might have helped a little bit. Can you just talk a little bit about if there are changes going on in this mix that are going to affect the sequential change when we think forward from here, given what you told us in October?
J. Wes Frye
No. I'll reconcile briefly the second to the third quarter and it has really nothing to do with mix.
If you recall, Bill, in the second quarter, we reported a gain on the sale of real estate of 40 basis points which did not occur in the third quarter. And also, as I mentioned in my comments, our group health, which was very high in the third quarter, was 40 basis -- also 40 basis points higher in the third quarter than it was in the second quarter.
So when you combine those 2, it's actually 80 basis points. And if it weren't for those 2 occurrences or notwithstanding those 2 occurrences, the third quarter is very comparable, maybe even a little bit better now.
Whether or not we have real estate gains, it's just a matter of when we sell real estate. As you might imagine, since we are expanding and adding real estate, larger real estate, we routinely have excess service centers that are for sale, usually in the range of 10 to 20.
So it's kind of common and ongoing that we record gains. It's just that we had one sizable gain in the second quarter, and whether that's repeated or not, was just dependent upon the real estate sales.
And on the group health, there's ebbs and flows on how those expenses hit the income statement. Whether that increase is a trend or whether it's one of those ebbs and flows, it's difficult to define.
But still, those 2 items alone accounted for the difference in the ORs between the second and third quarter.
William J. Greene - Morgan Stanley, Research Division
Okay. On the fourth quarter, is it, based on what you know today, is that group health going to be an issue to that trend continuing?
J. Wes Frye
Bill, it's unclear at this point whether that third quarter was ebb up or -- and the fourth quarter will ebb down. So we can't really sustain that at this point, whether we -- that's just a trend in medical cost and Obamacare and all those other things are affecting our medical cost, we just have to wait and see.
But it is what it is, and I can't give you any clarification of how that's going to affect the fourth quarter at this point.
William J. Greene - Morgan Stanley, Research Division
Okay. And then just one last question, just from a cost perspective.
Do you feel like our service had much of an impact on the cost, was it a material sort of headwind for you, or were you able to adjust and it didn't really matter?
David S. Congdon
It was not -- this is David. Not at all a material headwind.
The initial impact we had was really over the first 2 weekends. We missed some dispatches but then we reengineered our schedules and we operationally overcome that.
The main effect that we have seen at our hours of service was that a loss in driver income from June until July, a lot of our drivers were able to get an extra -- made an extra trip on the Saturdays and then they could do a restart and go back to work on Monday afternoon. I'm talking about road drivers and this change in hours of service has basically reverted everyone back to the use of the 70 hours and 8-day clock, but we hope that the drivers won't be impacted in the long run.
And that they will figure out how to work within the system to maximize their number of miles and hours and so forth within the confines of the law.
Operator
And we go next to Chris Wetherbee of Citi.
Christian Wetherbee - Citigroup Inc, Research Division
Maybe just a follow-up on the question regarding mix. And so, as you think about the revenue per hundredweight and it sounds like pricing, kind of underlying pricing is better than sort of the guide that you're giving us for the fourth quarter, you can think about some of the business that's coming on on the underlying mix there.
Do you see that play out anywhere other than revenues, i.e, is there any sort of margin impact? I know, Wes, that you kind of implied that it wasn't really a big differentiator between second quarter and third quarter, but you had some of these mixed impacts over the course of the year.
Just trying to get a rough sense of where else we see that flow through in the model outside of just weakening the -- or softening the revenue per hundredweight growth a bit.
David S. Congdon
Chris, this is David, again. I will try -- let me put it this way.
The current business mix that we have in the company is obviously producing very strong results regardless of what the year-over-year differences are in revenue per hundredweight. Now, as we look sequentially towards the fourth quarter and beyond, we anticipate continued strong performance and we're, frankly, not that concerned over the mathematical difference in the year-over-year statistic.
That is just merely a resulting number of how you manage your business mix, how you manage every customer. We manage every customer through an operating ratio and you've got 15 different things that affect revenue per hundredweight.
So it's not something we're really concerned about because those -- the overall mix of different services and customers and so forth that we have right now is producing a rather strong end result in our operating ratio. So -- and we also have not, and I want to be real -- we have not made any strategic shift in our yield management philosophies and nor have we seen any negative turn in the pricing environment.
Christian Wetherbee - Citigroup Inc, Research Division
Okay, that's helpful. That was going to be a follow-up, so that sounds like that's continuing to -- I mean the numbers you put up suggest that there was no underlying softness in the pricing environment within LTL.
David S. Congdon
That's correct.
Christian Wetherbee - Citigroup Inc, Research Division
Maybe just a quick follow-up, so you think switching gears to 3PLs and you think about the expansion into the LTL business, you talk a little bit of how you guys think about the 3PL piece of your business, maybe give us an update on where it stands currently as a percent of your total and then how you think about sort the pricing dynamics there and it doesn't seem like that's having any negative impacts on the pace of pricing but just kind of curious how you manage that as that continues to grow as a piece of the pie.
David S. Congdon
3PLs currently make up somewhere in the neighborhood of 25% of our revenues and we just have a method of working with 3PLs whereby we look at each individual account that they bring to the table and we cost them and price them on their own -- on each account's merits and that's basically what we do.
Christian Wetherbee - Citigroup Inc, Research Division
Okay. So no, no negative impact that you're seeing on the pricing environment or the pricing within Old Dominion as a result of the 3PL increases?
David S. Congdon
No. Not all.
Operator
And we go next to Thomas Kim of Goldman Sachs.
Thomas Kim - Goldman Sachs Group Inc., Research Division
Can you just give us a little bit more color in terms of how we should be thinking about wages and wage inflation as we look out to 2014?
Earl E. Congdon
Tom, we did give a 3% wage increase in September. And also, we actually -- we've often said, the success of the companies, we like to recognize the employees and try to provide additional compensation to them.
And in addition to the 3%, we also enhanced the vacation that our employees get. And so there was a little bit of a headwind in the third quarter of us accounting for the additional vacation time that we provided to employees wasn't material but it's just one of those other things.
So we enhanced our vacation benefit and also gave a 3% wage increase effective in September.
Thomas Kim - Goldman Sachs Group Inc., Research Division
Thank you. And just in general, with regard to the access to labor and the driver shortage that we continue to hear about, can you just give us some update in terms of what you're seeing with regard to your ability to grow and whether this is becoming increasingly a challenge for you?
David S. Congdon
Thomas, unfortunately, the LTL business does not experience the driver turnover that the full truckload carriers do, because our drivers are more on a scheduled basis and the local drivers are basically working Monday through Friday daytime with some Saturday work as well, but everyone knows what their job expectations are every week, and they get a lot of home time. So consequently, our turnover rate is 10% or less and if you take out normal retirements and people just becoming unable to do the job anymore for disability purposes and things like that.
The other turnover -- about half of that 10% is real turnover of people leaving for one reason or another or for disciplinary reasons and the other half of the 10% is just normal turnover. So therefore, we're not having a lot of trouble of bringing drivers on.
I think our success is breeding success in the area of hiring and attracting attractive personnel across the entire -- all job categories and classes.
Operator
And we go next to Jason Seidl with Cowen & Company.
Jason H. Seidl - Cowen and Company, LLC, Research Division
A couple of quick questions for you guys. Wes, do you guys see any impacts in the quarter from some competitors shutting down some of their Western operations?
Or are you seeing anything in October from that or even for the potential labor actions at ABFs?
J. Wes Frye
I can't say. I assume in your first part of the question, you're referring to Buy Trend.
Jason H. Seidl - Cowen and Company, LLC, Research Division
Yes.
J. Wes Frye
No. I would assume that Buy Trend's market share on the West Coast was pretty small anyway.
But we -- I can't say we've seen any effect to speak of and as far as ABFs labor, we don't really have the visibility of whether we're seeing any of that, either. So I can't really answer the question, one way or the other.
Jason H. Seidl - Cowen and Company, LLC, Research Division
Okay. And I guess my next question is a little bit longer term.
I mean, obviously your balance sheet is just in fantastic shape, best as it's ever been, at least since I've been covering you. And looking out, I'm just curious sort of what's the plan as you sort of reach your maximum build out and you started reducing your capital expenditures going forward, what's your plan to distribute sort of your free cash flow?
J. Wes Frye
Well, I mean, we'll see that when that cash flow builds. We will look at the alternatives.
One of those alternatives being to return some cash to the stockholders. But we're still a growth company.
We still are investing pretty heavy dollars back into the company for growth and have been good stewards of that as return on invested capital to our shareholders, both in terms of the return on invested capital and on share prices. So we look at all those things, but we still think that we have some growth potential and we'll look at that and see what kind of capital would be necessary to do that.
But then, we'll look at the shareholders as well. We'll have to put that all in the bucket and see what makes sense and what's best for the company's growth and what's best for the shareholders.
Jason H. Seidl - Cowen and Company, LLC, Research Division
And Wes, in the past, you guys have mentioned that buckets included potentially some non-LTL business, but stuff that might have some sort of a tie in to you guys. I mean, is that still out there for you to sort of expand a little bit?
J. Wes Frye
It is. And those, what we call the adjacent businesses that we're in, we're doing organically now.
It's not as if that we aren't into those businesses. Whether we accelerate the growth in those business through an acquisition is certainly something we continue to consider and evaluate.
Operator
And we go next to Todd Fowler, KeyBanc Capital Markets.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
David, I guess, I'm curious to get your thoughts on what is driving the change in mix in the heavier weighted shipments. I used to think of it as more of a function of the economy, but from what we're hearing, that doesn't seem to be the case, and I guess I'm curious, any sort of insider thoughts you'd have to what's resulting in the acceleration in a year-over-year tonnage increases and the change in mix?
David S. Congdon
Yes, it's hard to say, Todd, that our approach to aiming business, you're always calling on new accounts and you're trying to increase business with existing accounts. You are responding to bids, both for new accounts and existing accounts, and as we've done this, it's just, the end result is what it is.
It's not a particular focus on trying to get heavier weighted freight versus lighter weighted freight or any particular direct focus on anything but our normal business growth processes and the end result just is, what it is.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Okay. So it's nothing strategic within the company and you also don't -- wouldn't attribute to anything external like hours of service in the truckload market, spillover freight from that or something along those lines.
It sound a lot like revenue per hundredweight where it's kind of an end result of a lot of different things.
David S. Congdon
Yes, that's exactly what it is.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Okay. For my follow-up, Wes, I'm curious kind of what your thoughts are with the Christmas holiday this year being on a Wednesday.
I think last year there was a bit of a hiccup with the margins in the operating ratio in the fourth quarter because of the timing of the holidays. How are you thinking about the timing of Christmas this year?
What should you do from a work day perspective and a cost perspective?
J. Wes Frye
Yes, you recall, Christmas last year had a couple of influences as did the fourth quarter overall. We were influenced very significantly in October and November through Hurricane Sandy, and then I think the fiscal cliff, in addition to how the month ended in December last year in the fiscal cliff, uncertainty caused some economic downturn that we kind of saw in the last 2 or 3 weeks in December.
So I'm not sure of what to expect this year, but my guidance in tonnage of 9% to 10% was reflecting that we should have a fairly easier comparison this year going into the holiday season. Whether it's strong or not, remains to be seen.
But at least the comparison is easier because of the downturn we saw in December of last year. Typically, for example, from November, December, we see our tonnage decline about 8% to 9%, and last year it declined 12.5%, well above what would be normal.
And our expectations is, at this point, that not to happen this year, but we'll have -- that remains to be seen.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Okay. So in your tonnage guidance, you've incorporated the comparison issues last year from the Friday of things, as well as thinking about the potential timing of the -- not the potential, but the actual timing of the holiday season this year.
J. Wes Frye
That's correct, Todd.
Operator
And we go next to David Ross with Stifel, Nicolaus.
David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division
Are there any regions here in the U.S. or segments in customer industry verticals that you see as stronger or weaker than others right now?
J. Wes Frye
It's hard to say on the customer industry verticals, we don't have good visibility into that, but in looking at the regions across the country, it looks like the Midwest, Central State, Ohio Valley and North, sort of the northern half of the country is a little bit above average. And at average or below is our Southern and Midsouth regions and the West, which is primarily California and Pacific Northwest is off a little bit below average.
But we continue to see good growth across all regions of the country. Just the northern half stayed a little stronger than the southern half.
David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division
And on just your comments about October to date. It sounds like it started off -- the fourth quarter started off strong just like the third quarter ended.
It's a little bit different from what we've heard from a lot of other people. Is that really what you're seeing that the strength is still there?
David S. Congdon
Yes, I don't know if I would characterize it necessarily as strength. I would characterize it as a little bit of an easier comparison.
And although Sandy hit the 29th of October 2012, those last 3 days were fairly material in terms of our overall October last year. So we're going against that this year with a easier comparison, not anticipating another event, such as we had last year.
But that's part of it. But I wouldn't characterize it really as strong.
I would think that any, just like we saw in the third quarter, any additional uptick we're seeing is not from macro, but still from marketshare.
David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division
So October, if you had to rate it versus September, would be a little bit better, about the same, a little bit worse?
David S. Congdon
Sequentially, October is down about normal for what you expect for September into October to be.
Operator
And we go next to Tom Albrecht with BB&T.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
I wanted to just clarify a couple of things. First of all, everybody gets caught up in these yields and that.
I'm just wondering if you just talk about price increases on renewals of business, which is more of an apples-to-apples as opposed to new business and mix changes? What are you realizing on price increases?
J. Wes Frye
Our contract business is around 3%, it's what we're seeing this year.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
Okay. And then, Wes, you gave a number -- I don't know if I'd heard it correctly, there was little static on the line.
Something about 13% increase, I don't know if that was referenced to weight, right...?
J. Wes Frye
Yes. I was talking about some of the mix changes and in talking about our guidance.
And the fact that we're growing contractual business, and that business, the weight per shipment in contractual business is about 30% higher than what it is for our overall LTL business, which would result, as you would think and as you would know, in a lower revenue per hundredweight.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
Yes. Yes.
And then lastly, sometimes, especially during periods where the economy is either changing or there is regulatory issues, you've shared some data on the growth in heavier shipments above either 5,000 pounds or 10,000 pounds. Do you have any of that data available?
J. Wes Frye
On the spot quotes, I think David kind of mentioned that, that would be kind of flowing over through many supply demand issues on truckload. We're not really seeing that and even -- and but we manage that.
We are not a truckload carrier. So if we get truckload, we would be making sure, it's profitable.
The delusion that's coming into us, we'll start increasing rates and so we kind of manage that volume. We will prefer to haul our normal LTL, which is what our network's based on, but we're not seeing any real influx in that spot quote for those heavier shipments in the 8,000 to 10,000 pounds.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
Okay. And then, I just thought of 1 other question.
On the depreciation, it came in about $1 million higher than I was looking for. Do you have either a '14 estimate or even just a thought on the fourth quarter, we're going to see another sequential jump?
Earl E. Congdon
Yes. It's little early.
We're not going to give those numbers yet. We haven't completed our CapEx budget for next year, so I couldn't possibly do that anyway, but...
Thomas S. Albrecht - BB&T Capital Markets, Research Division
How about Q4?
Earl E. Congdon
I'll put it this way. Most of our equipment CapEx requirements this year has been delivered.
So the effect on depreciation should start to even out into the fourth quarter.
Operator
We'll take our next question from Art Hatfield, Raymond James.
Unknown Analyst
This is actually Derik on for Art. Would it be fair to assume that about half of what you're doing on the equipment side this year is dedicated for growth purposes, and then just looking forward on the service center side, what do you guys see in terms of growth potential there?
Earl E. Congdon
As far as equipment, no, I wouldn't say half of our equipment this year is growth, but most of it's replacement. And as far as the service center side, we've often stated, we are around 221, 222 now, and we expect as we continue to penetrate markets deeper, it may get up to 250 or even a longer-term even 270, just depends on what the market presents itself at.
And we still have some expansion in terms of our service center network.
Unknown Analyst
What is the normal replacement CapEx then?
J. Wes Frye
Normal equipment, it's a fluctuation between $120 million to $130 million a year.
Unknown Analyst
Okay, great color. And then you mentioned in the press that you're starting -- or that you're continuing to gain market share.
Are you seeing that more in the next day or the 2 to 4 day lanes? And then I think in the past, you provided some commentary on the geographic regions, your share in those regions, any color there would be great.
Earl E. Congdon
Yes. Our general trend across the country is toward -- is growth in regional distributions.
So the general growth in the LTL growing markets are the next day and 2-day market. So, but as far as our business mix is concerned, it's all over the board, as we address the needs of our customers and 1 customer who might be -- they might have a hurting spot for long-haul, and so we are able to solve that problem for them, and another customer might be in 2 or 3 day lanes, and we've solved their issue there.
So there's no specific focus on any length of haul. For us, all freight is good, it's just a matter of how you price it.
Operator
And we go next to Anthony Gallo of Wells Fargo.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Wes, you mentioned that the contractual business is heavier weight per shipment. What percent of your overall business is contractual?
J. Wes Frye
It's about 45%. Actually it's approaching 50%.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Okay. And then I've always thought of heavier weighted shipments as potentially being more profitable to the extent that handling requirements might be less.
Are there other factors that I need to consider or am I off-base with that thought?
J. Wes Frye
I think, generally since 99.95% of our shipments across the dock is through a forklift, and the forklift doesn't care whether it is 1,000 pounds or 1,300 pounds, it takes pretty much the same. So from the P&D standpoint, yet, there's maybe a little bit of a positive effect, but as far as the linehaul, it takes similarly the same space in the trailer, there's no real advantage that -- it all really points more on density than it does just pure weight on itself.
You got a carton of bolts. There's a definite -- and those bolts weigh 1,000 pounds.
It's definitely better than 1,000 pounds of pillows, is what I'm saying. It depends on how that weight is distributed and what commodities it is in.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Okay, that make sense. And then just a housekeeping item.
What was the other expense in the quarter, below the operating income line that was pretty big this quarter?
J. Wes Frye
[Indiscernible]
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Yes, $389 million -- I'm sorry, $389,000.
J. Wes Frye
That's how we account for some of the nonqualified plans that we have in the company. And that those nonqualified plans are based upon movements in stock price.
And so it's just a normal fluctuation as the stock prices of each of those investments fluctuate and change. We had a gain last year and that was a negative this year and it's hard to predict.
You guys can probably tell what the Dow is going to do next week, so you can probably give us that number.
Operator
And we'll take our next question from David Campbell of Thompson, Davis & Company.
David P. Campbell - Thompson, Davis & Company
I just wanted to ask if you can tell me how many employees there were at the end of the third quarter and the end of the second quarter?
David S. Congdon
Well, you do a loop because I got at the end of the third quarter, it was 13,991. Those are full-time employees.
David P. Campbell - Thompson, Davis & Company
Right. You don't have the second quarter right now?
David S. Congdon
Yes, I'll give it to you. Do you have another question while I'm looking?
Here it is, David. At the end of the second quarter it was 13,303.
David P. Campbell - Thompson, Davis & Company
And do you think that level of employment is going to be about the same for the next 6 months or is it not [indiscernible] today?
David S. Congdon
I mean, based on the volume levels. So we were basically into and through the peak season, so we would not anticipate any additional employees coming on until probably when business picks back up in March.
J. Wes Frye
Yes, that's the typical progression.
David S. Congdon
And from attrition between now and March, where the levels would maybe taper back down some through the holidays and then come back for March.
David P. Campbell - Thompson, Davis & Company
Right, right, right. Well, it's certainly nice to be adding employees, and I'm sure that the point of the situation is good.
Do you have an estimate of how much the holiday accrual increase vacations will cost in third quarter?
J. Wes Frye
In the third quarter, it was around $800,000 to $900,000. Not a lot from our earnings per share but still a good size number, almost $1 million.
David P. Campbell - Thompson, Davis & Company
And that's in the onetime adjustment, right?
J. Wes Frye
No, no. That's -- part of that is an adjustment catch-up, but also, we would expect our vacation expense since we're giving a higher benefit -- well, to some extent, we'll have to accrue that every quarter.
Not that $800,00 or $900,00, but the expense in general would be a little bit slightly higher.
Operator
And we go to Justin Yagerman of Deutsche Bank.
Justin B. Yagerman - Deutsche Bank AG, Research Division
When in September was the pay adjustment? Was it just on the first, and so I'm thinking about that $1 million on the holiday accrual.
Is that going to be $3 million a quarter going forward, is that the way to think about that?
Earl E. Congdon
No, not really. That $1 million -- once you've given a benefit, you have to address all of those employees that have already passed those anniversary dates, and do a catch-up.
As I've mentioned, not necessarily, the catch-up will be reoccurring, but obviously, we've giving a higher benefit, so there will be some small incremental cost to our fringes going forward.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Okay. And then in terms of, was it September 1 for the wage increase?
Earl E. Congdon
It was. Not exactly.
First Friday.
Justin B. Yagerman - Deutsche Bank AG, Research Division
But when was that first Friday was...
Earl E. Congdon
It was 1 month on the quarter, was it?
J. Wes Frye
Yes.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Wes, on the balance sheet, you've been asked about cash, I know, I've asked you about this in the past, as you think about going forward, but asked a different way, I guess, you've got the lowest debt to cap you guys have ever had, it's going to go basically sideways to the end of the year, and arguably, it could go lower next year if you guys don't do anything, depending on what your CapEx budget looks like. Where are you guys -- where do you think about an optimal capital structure from a debt to cap standpoint from the company, and would you consider using the balance sheet to support the stock if you ever felt like that -- you weren't getting the right valuation for your company?
J. Wes Frye
We look at our capital structure and we don't necessarily think that we need to be debt-free before we consider returning any cash to the stockholders. What that number is, we're not to say, but we are willing to have some leverage there even though we may be producing cash flow, but, so if that answers your question.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Yes. I mean I'm just thinking, it wasn't that long ago you guys were comfortable at 30 plus debt to cap and now you're well below that, so.
J. Wes Frye
Right. We're a lot more comfortable now.
Justin B. Yagerman - Deutsche Bank AG, Research Division
I hear that. On the weight per shipment side, I know a lot has been asked on it.
But is there a specific industry that you're getting this higher weight per shipping freight from or is it really more of the influence of your Drayage business? If it's not, the truckload or spot core businesses, I think somebody else had asked earlier, just trying to zero in on what's driving that.
J. Wes Frye
Yes. We have some good growth in our drayage and obviously at an average weight per shipment 25,000 pounds, that has an influence, and as I already mentioned, we are having good growth from contractual, getting additional market share and also additional penetration from some large shippers, which typically has a higher weight per shipment.
So those are the 2 main things on the mix And on the revenue, which has influenced the revenue per hundredweight.
David S. Congdon
Manufacturing-oriented shippers are heavier concentration than retail. For example....
Justin B. Yagerman - Deutsche Bank AG, Research Division
That was correct.
David S. Congdon
But that's a very general statement, manufacturers.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Okay, that's helpful. And then the last question, because it's a long call already.
You said I think your 221 facilities and your goal is to get to 250 or 270? Do you have any thoughts on timeline for that, I know it depends on the real estate market, maybe some color on how tougher you see the real estate markets has been these days.
Earl E. Congdon
It's just hard to say. We maintain a list of cities that we have in mind for the future and if a real estate opportunity presents itself in one of those cities and is the only game in town, we'll decide to open up.
So it really hinges more on real estate availability opening up than anything else. We don't have -- to be honest with you, we don't have any new cities that we're targeting right now that we're trying to buy land and build.
Most of everything that -- well, I'll take that back, there are less than a handful where we're thinking about that. So it's more so, looking for places to come on the market.
Operator
And we'll take our next question from Scott Group of Wolfe Research.
Scott H. Group - Wolfe Research, LLC
Wes, just 1 quick modeling question. Tax rate was a bit late in the third quarter.
What should we use going forward?
J. Wes Frye
Well we gave -- in my comments, I gave the 38.6% but -- and I just want to make a comment on our tax rate real quickly, is that Wall Street tends to dismiss any tax rate that comes in lower than what your guidance is and as if it didn't really happen. I just want to make sure that all of you understand, you manage your taxes just like you manage your labor and any other form of expense.
And so don't be so quick to just dismiss it and say that's not what your results are for the quarter. It is in fact what the results are for the quarter, just as you -- what you spend in labor and equipment and in other -- fuel, et cetera, it's part of the quarter.
We do have a system of looking at all of our taxes, but we're in all 50 states plus the federal, and managing it as aggressive as we can, and of course within the law. So it would be unusual if you just don't quickly dismiss the fact that we did have some incentives in the third quarter and was able to reduce our tax liability by that.
So going forward, I gave the guidance of 38.6%. Now we could very well look at the other incentive credits and others and get that lower.
It's just, depends on when we actually file for those and get those to be effective. But that's the number we're giving at this point, Scott.
Scott H. Group - Wolfe Research, LLC
Ok. I was a couple of minutes late on the call, so I must have missed that and certainly hear what you're saying on the tax rate side and for sure, it's good for cash flow if you're at the lower tax rate.
So the tonnage guidance of 9% to 10%, if I take the midpoint, 9.5%, it actually implies sequential tonnage that's - it's actually worse than what we normally see in fourth quarter. [Indiscernible]...
J. Wes Frye
Actually, when I look at sequential tonnage overall, it's fairly in line with the 10-year average sequential.
Scott H. Group - Wolfe Research, LLC
Okay, okay, so that, I guess, answers my question. And then last thing, on purchased transportation, that's been going up in the past couple of years.
Is that all just associated with the other revenue or is there anything changing in terms of the LTL side and how you're doing with PT?
Earl E. Congdon
If you go back enough years -- you need to go back into our historical financial statements. You may not realize that in the second quarter, we made a discussion that we actually change the way we accounted for some of our purchased transportation that was netted out in the revenue line.
So we changed that accounting method, so that we recorded the purchased transportation as part of the revenue, and therefore, had to record the actual purchase transportation cost down in that purchased transportation line. So if you compare that to some of the historic number, it looks like it's higher.
But it isn't. It's actually still at a fairly consistent level and just so you know, most of our purchased transportation is due to our drayage operation, which uses lease operators.
We use very little purchased transportation in our LTL sector, just in some backhaul lanes and certain parts of the country on rail and maybe some truckload to where we have an imbalance and even that is only around 2/10 of 1% or less.
Operator
And this does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr.
Earl Congdon for additional and closing remarks.
Earl E. Congdon
Well, thanks again for your participation today. We appreciate your questions and your support for Old Dominion.
Feel free to give us a call and then if you have any further questions, thanks.
Operator
And this does conclude today's presentation. Thank you, all, for joining and have a nice day.