Q4 2019 Earnings Call
Please standby.
Good morning, and.
Into the fourth quarter 2019 conference call for old Dominion Freightliner.
Today's call is being recorded and will be available for replay beginning today and three February 14th 2020.
Dialing 7194, or five 708 Tuesday route the replay passcode eight.
Q1 0669.
A replay of the webcast might also be access 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.
Intended to identify forward looking statements.
Our hereby cautioned that these statements may be affected by the important factors among others.
Fourth in old Dominion's filings with the Securities Exchange Commission and in this morning's news release, and consequently, actual operations and results may differ materially from the.
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 no before we began we welcome your questions today, but we do ask in fairness to all that you limit yourselves to just a.
Couple of questions at a time before returning to the Q.
Thank you for your cooperation.
At this time for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer Mr. Craig.
Please go ahead Sir.
Good morning, and welcome to our fourth quarter Conference call.
With me on the call today is Adam Satterfield, our CFO.
After some brief remarks, we'll be glad to take your questions.
For the fourth core our results reflect another period with a slight reduction in revenue.
Was due in large part of a sluggish domestic economy.
The spot.
These economic conditions, we maintained our relentless focus on revenue quality and cost controls and are pleased with our consistent financial performance.
Well, our diluted earnings per share decreased as compared to the fourth quarter of 2018.
The decrease about <unk>.
Tax income was primarily due to a 30.7 billion increase in France benefit calls that was partially driven by changes to our Phantom stock plan.
Adam will address the Phantom stock plan expands in more detail.
Let's see amendments to these plans in December <unk> King <unk>.
Doesn't prevent fluctuations in our share price from materially impacting our earnings in future periods.
The overall operating environment in the fourth quarter felt some of what we experienced for most of 2019.
We walk again continued with a decrease in there.
Deal tones, although we were pleased to see our volumes performed in line with normal seasonality when compared to the third quarter of 2019.
This was the first time this year that we were inline with our normal seasonal trends.
We are we are encouraged.
Well this volume trend as well as economic forecasts for the industrial economy than it did improve in 2000 2020, although we're cognizant of increase political risk associated with an election year.
Regardless of all the economic and political environment, we will continue to focus.
So managing to things that we can control.
It starts with our steadfast commitment to delivering superior service at a fair price, while also diligently controlling our falls.
Oh job performance was 99% and our cargo claims ratio was 0.2% for the.
Fourth quarter.
Providing this level of superior service in periods with reduced operating density generally results in the loss of productivity and increased operating cost.
We operate right efficiency in the fourth quarter, however, and bring both RPM de shipments.
Oh and platforms, Shitless, Broward by 1.1% and 4.2% respectively.
We have said many times before that long term improvement in our operating ratio is dependent upon consistent improvements and density and yield.
Some of which required to support.
More of a positive macroeconomic environment.
Well, we didn't get a lot of help from the economy, our volumes were lower than expected for 2019, we improved our yields by maintaining a consistent cost based approach to pricing supporting bar Superior service.
Long term improvement in our yields has allowed us to make significant investments over the years to support our market share goals.
Despite the softer volumes in 2019, our capital expenditures totaled 479 million and we maintained our commitment to the ongoing expansion.
Our service Center network.
Although we only increased our operating surplus shouldn't count by one in 2019, we finished the construction of several other facilities, but did not officially opened them to avoid the increased operating falls.
We intend to open six day service.
Centers, and 2020, including ones that have already been completed and believe that adding door capacity do arnett work should ensure but it will not be a limiting factor into our growth.
Well 2019 was not the year. They would you expect it to be our team is proud of our financial.
So.
We finished the year with company records for annual revenue and diluted earnings per share.
We're not for the Phantom stock plan expense associated with the 53.7% increase in our share price.
We would have also improved our operating ratio.
So.
I would like to thank our old Dominion family of employees.
They are solid execution that produce these results in a challenging environment.
As we look forward to 2020, we will continue to focus on managing the fundamental aspects of our business and out here to the same business model that is.
Served us well through many economic cycles.
We firmly believe that if we can continue to execute on this plan, we can deliver even greater value for our customers and shareholders.
Do you for joining us this morning, and now Adam will discuss our fourth quarter financial results in greater detail.
[noise], Thank you, Greg and good morning.
Minions revenue for the fourth quarter of 2019 was $1.0 billion, which was a 1.7 per cent decrease from the prior year.
Revenue for the year increased 1.6% to a new company record of 4.1 billion.
For the fourth quarter, our earnings per diluted share decreased 7.7% to $1.80 due to the combination of the decrease in revenue and 260 basis point increase in or operating ratio.
Earnings per diluted share for the year increased 3.8% $7 in 16.
Six cents, which was also a company records.
Our revenue results for the quarter reflect before and a half percent reduction in LTL tonnage that was partially offset by the 2.7% increase in LTL Robyn revenue per hundredweight.
Excluding fuel surcharges LTL revenue per hundred weight in.
<unk>, 4%, which was in line with our expectations.
On a sequential basis LTL tons per day decreased 1.6% as compared to the third quarter, which is in line with normal seasonality.
LTL shipments per day were down 3.8% on a sequential basis.
It was just slightly below the 10 year average decrease of 3.3%.
For January or revenue per day increased 0.2% as compared to January 2019.
Hey per hundred weight, excluding fuel surcharges increased 4.1% offset the three.
6% decrease in LTL tons per day.
The increases in our fourth quarter and annual operating ratio or both attributable to increases in or fringe benefit cost for the periods compared.
For the fourth quarter or fringe benefit cost increased to 39.7% of salaries and wages from.
30.7% in the fourth quarter 2018, due primarily to changes in Phantom stock expense.
Fourth quarter of 2018 included an 8.4 million dollar reduction in expense that was due to the decrease in our share price for that period.
This compares to.
<unk> point $1 million of expense in fourth quarter 2019 resulted from the previously disclosed amendments to these plans as well the increase in our share price during this quarter.
All of our other combined cost improved as a percent of revenue for the court, we were able to offset the increases in insurance.
Yes, and depreciation with improvements in operating supplies and expenses and salaries and wages.
Our team did a nice job of matching labor current revenue trends, while also improving productivity.
Our average headcount was down 5.6% as compared to the 4.1% decrease in L.
Deals shipments.
Currently believed our workforce is appropriately sized for current shipment trends in our fleet is in good shape as well.
<unk> levels began to improve however, we will likely need to add to our workforce. This year.
Well the minions cash flow from operations totaled 236.
Point $4 million from fourth quarter, and 983.9 million for the year well capital expenditures were 109 million and 479.3 million for the same respective periods.
We returned $49.2 billion of capital to our shareholders during the fourth quarter and 200.
Hundred $95.5 million for the year.
For 2019. This total consisted of $241 million and share repurchases and $54.6 million in cash dividends.
We were pleased that our board of directors approved a 35.3% increase and the quarterly dividend.
23 cents per share commencing in the first quarter 2020.
This action reflects the boards confidence in our prospects for continued growth and affirms our commitment to returning capital to our shareholders.
Our effective tax rate for the fourth quarter of 2019.
It was 24% as compared to 26.6% in the fourth quarter of 2018 for the year, our effective tax rate was 25.3%.
We currently expect an effective tax rate of 25.5% for 2020.
This concludes our prepared remarks.
This morning, operator, we'll be happy to open the floor for questions at this time.
Thank you if he would like to ask a question. Please signaled by pressing star one on your telephone keypad.
You are using his speakerphone. Please make sure your mute function is turned off to allow your signal to reach our clinic once again that a star one at this time.
And we'll go first to Jack Atkins Stephens.
Good morning, guys. Thanks for taking my questions.
Morning deck.
Adam if I could just go back to your your comments around January Greg I'd Love to get your thoughts on this as well, but I. Appreciate the added color there on the first of all to the quarter.
You could just sort of expand a bit about sort of how the market's feeling to you guys. So the first call it four or five weeks of of the year.
Obviously, we got a little bit better than expected PMI Fred.
This this week and then.
But we have some offsets there with this.
Production halted Boeing and some of these things happening with global trade. So we'll just be curious to get your your take on the market how it feels to today and are you continuing to see stabilization in your view relative to normal seasonality.
Thanks, Jackie it does seem to be stabilizing and.
Terry from our customers and communications that I've had with them for the most part seem to be positive. So we're we're positive on where we are and what would look like going forwards.
Oh, let's hope that.
And friends School you the rest of the year.
Okay, that's great that's great.
Here and then I guess, we're on the on the cost side for a moment Adam could you kind of help us think through the puts and takes when we think about.
The sequential progression of or I know there are a lot of moving pieces in the fourth quarter and you know I guess it from a bigger picture perspective, how are you guys thinking about you know.
Cost inflation on a per shipment basis.
And in 2020.
Sure you know obviously the biggest item that we dealt with in the fourth quarter and called out was the that adjustment for the Phantom stock expense that was a.
Big headwind, if you will and especially when you consider.
Fourth quarter 2009, or 18, rather included 70 credits.
Went the opposite way.
We have talked last year about how those healthy operating ratios probably somewhere in the neighborhood of 150 basis points, the 200 basis points last year.
So I think that.
Yeah, we've got that that.
It was in our fringe benefits line.
You know there probably a couple of other things that stand out in this quarter that were a little unusual obviously, the the insurance line for one.
Probably the easiest wanted to see.
We had.
We get to our annual actuarial assessment and usually make those adjustments in the fourth quarter. So.
That ticked up to 1.8% or revenue typically averages.
Around 1.11, 0.2% throughout the year and that's our cargo claims ratio which is.
2% and.
And then typically the balance is our auto exposure, but we had an unfavorable adjustment related to our annual actuarial assessment there.
You don't see is there some credits that can offset that on favorable.
That are in some of the other line some of those are in the fringe benefit line, we had a favorable.
We will adjustment related to the same actuarial assessment or workers comp liabilities or some other credits they're going to.
Operating supplies and expenses lines, all those other things nothing material to call out a one way or the other individually, but you know kind of had just some puts and takes in those other lines that would most likely.
Normalized as we progress into.
First quarter next year.
Okay. That's that's helpful. Thanks, Thanks, very much for the time.
Yeah.
Well go next to Chris Wetherbee with Citi.
Hey, Thanks, Good morning, I wanted to see if you could elaborate a little bit on the tonnage trends you saw through.
Quarter I apologize if you did go through that I might've missed it but particularly December it looks like it improved a little bit and I'd like to wait till the Q comes out or the K I guess in this case to give a sort of alive. The current month, but any sort of thoughts just directionally on how things are trending here early in one Q.
Yeah.
Well for the fourth quarter.
To start with that we were pleased to see that the overall for the quarter.
We were in line with what our normal sequential trends.
Yeah, typically are and we did that both on the tonnage side and just revenue in general.
Kind of performed as is the 10 year average I guess as.
So that was good to see and you know it's really the first time, but that's happened this year.
Really good back.
Into last year in the back half, we started seeing a little bit of unfavorable trends as well.
So that was good to see.
Addition to the January.
We gave the number but the year over year January the tons.
Were down 3.6%.
Revenue flat.
That was we're starting to see the progression, where we were revenue was down about 2.5% third quarter on a per day basis.
Down a little bit.
Yes.
The fourth quarter on a per day basis, and now you know, it's a it's flattish, but we're on the good side to flat being just slightly positive. So all kind of good trends are seeing developing.
Okay. That's very helpful. I appreciate that and when I think about the Phantom stock. If you were just thinking about the.
Tire year, and what that means as we sort of transition into 2020 in terms of the tailwind I guess there'll be a tailwind to growth potentially from the cost that you incurred at 19 that won't be recurring but can you sort of just sum. It up just we know what the total number is you for the full year when I look at that clean going into 2020.
Yeah Yeah.
I think we talked about that in prepared remarks, but.
The volatility that we've had with that program you know what kind of went up and down.
We progressed through.
This year and frankly, it's been doing that trending along as we progressed.
Through the last couple of years is a share prices increased.
You know, it's always nice to be able to go back and say just like Greg did that are share price increased 50% or over 50% this year, but that the way the accounting was on that program. It resulted in expense so.
In total.
We had about $35 million of Phantom stock expense in 2019.
That compared to when you get back to 2018, we only had about $6 million.
Big.
Overall headwind, if you will but.
That number went into the overall fringe benefit line.
I think that we'll see a little bit of improvement there for this year, but oh I'm still looking at that overall that total probably being somewhere in the neighborhood of 34% the salaries and wages.
We progress into 2019, we won't have we were north of that 34%.
For 2019, because of that Phantom stock expense, but we'll still a face some cost inflation related to our health programs pharmacy.
Costs continue to increase of things that we'll see that.
The increased rate of inflation, so on that program as well as some of the other.
Recall that that go into those fringe benefit lines.
Okay, that's really helpful.
Hi.
Yeah, Yeah, the high class problem to have the definitely I suppose in the rearview. Thanks very much for the time appreciate it.
Well go next to on it and mirror Ultra with Deutsche Bank.
Thanks, Operator, hi, everybody. Thanks for taking my question. So Adam just helping US with you know what productive labor costs were in the quarter as a percentage of revenue and then I know you talked about headcount going up or are trending up a shipments increase that obviously makes sense, but if you could just help us think about you know.
Increasing headcount relative to shipment growth is it kind of proportional as you see two 3% accretion shipment growth that's kind of what we should expect on head count I think that was just be helpful. And then [laughter] last very specific question is DNA took a big step up in 19 and I just want to know what the right way to think about as in 2020.
All right I'll try to see.
Like remember all those questions, but that was one question by the way I was just three parts.
In pink less than one [laughter].
Yeah, I guess, but anyways the productive labor costs were pretty flat in the fourth quarter compared to last year, a 27.9% for both of them.
Periods compared but that's actually a good thing you know we look at all of our direct operating costs combined.
When you've got a period, where fuel prices are fluctuating.
Our fuel costs were down.
The average price per gallon was down a little over 6% in.
He was 19 versus 18, so typically that impacts obviously your fuel surcharge revenue as well as fuel expenses. So you see revenue going down your operating supplies in expenses going down as a result of the drop in fuel price, but typically the labor would go up slightly as a percent of revenues.
I think we've got that benefit.
And overall in the salary wages and benefits line I think that you can kind of see.
That trend sort of playing out one of the things that a couple of things that sort of benefit that line performance based compensation.
Lower for the fourth quarter this year and that frankly, just relates to the fact that.
Revenue was down in the operating ratio was lower those are kind of two ingredients that go into most of our bonus programs or head count in the fourth quarter. It was down versus the third quarter typically you've got but increase a sequential increase if you will.
From the third into the fourth so like we said in the prepared comments typically first quarter head count on average is kind of flattish with the fourth quarter and I think that where we see trends right now that we're in pretty good shape on the head count.
Obviously these trends.
Tend to play out if we can.
See our volumes start to grow then likely that would mean that we would be adding to our head count later in the year in and that would be a good thing actually.
As we hope that were in that position.
With the workforce, but you know the fleet, we kind of addressed that and prepared.
Comments as well I think that we're in good shape, we made orders last year anticipating kind of mid single digit growth.
Gross and on the volume side, and we ended up with mid single digit.
The increase in tons, so, we're probably a little bit heavy and theres a lot of carrying costs both in the depreciation line.
As well as though the maintenance and repair costs don't know that heavier fleet. So those are things that.
Hopefully will grow into the fleet that we have as we progress through 2020.
Yeah, So deep DNA more flattish and 2020 I guess it depends on when the new at the revenue given came in but I guess more flattish in 2020.
Well, we've still got a you know.
Decent sized capex program not as much on the equipment side, but.
It's still $315 million or some of that will be technology, which has a.
A shorter depreciation period, so you get hit with a little bit more of that.
You no longer term I think when you look at kind of the change in that average or the annual depreciation rate.
Rather it's somewhere in kind of the five percentish range of.
The overall capex budget for the year, but since we've got a continuation of the real estate in the real.
They are making up the majority of the Capex plan.
Then it certainly should be lower than that but we certainly expect it to be increasing as we progress through the year continue to execute on that Capex plan right and then the share count last question for me the share count is that so the fan the weight of the way the fan.
Thing works I guess now it's the variability of stock price will have no impact on the fringe benefit costs and you're just going to add a little bit district, guys is there like a far down 357000, increasing the share count is that simply out works.
Yes, the diluted shares will reflect that that will go.
Two.
You know that diluted share count if you will those shares that are outstanding and we'll give that detail.
To that should be.
In our 10-K filing, but you can kind of go back and look at last year's TNK as well and see kind of the outstanding shares.
Were they are not a lot of impact.
So the fourth.
Quarter, given the timing of when that program or when we made that change if you will but certainly that that will impact diluted shares going forward.
Okay very good. Thank you for taking my questions appreciate it.
Well go next to Jason Seidl with Cowen and company.
Thank you operator could you guys touched a little bit on sort of LTL pricing it feels like it's.
Still pretty stable out there in the marketplace and sort of how shippers are communicating to you what to expect for 2020.
Yeah I.
I think that it's been.
Stable and certainly it was pretty much in line with what we thought it would be in the fourth quarter and I think what we talked about.
Third quarter call for how that trend would play out so we continue to go through.
Our bid process and a continued to.
Headwinds, but obviously with revenue down in the back half of last year, I guess, there were more losses and a than wins overall.
If you will so as we transition into this year I think that you've seen some of our competitors yield numbers compress as they went through the back half of last year and that was just probably is.
Their own bid situations kinda went through and I think we talk to a.
After the first quarter call that we started seeing a little bit of competitive response.
You know and kind of the March April time frame of last year.
That pretty much played out in I think it played out in the competitive yield numbers.
Is that were disclosed for the public carriers as well. So yes, we would expect the continued to try to get our cost based pricing and continue to execute on this type of consistent approach that we've had a year in and you're out and so.
I think Jack asked earlier, but our cost and.
Ladies and projections kinda underlying cost for for this year probably.
Somewhere around 4% on a per shipment basis and that becomes the baseline for.
The conversations that we have with our contractual customers and go we'll go into our thinking.
When we get to the point of announcing the G. R.
For a tariff based business as well.
Okay. That's that's great color and the other thing.
Any reaction for many years.
Can you repeat that you know not yeah, no any any reactions from your customers about the impacts of the krona virus at all on their.
Hi, James.
Just trying to think I'll first quarter might workout.
Not to my knowledge, we haven't heard anything negative related to that so far thankfully.
Okay.
I mean knock on wood gentlemen, thank you for your time.
The thing.
Well go next to Ravi Shanker with Morgan Stanley.
Thanks morning, everyone. Just wanted to follow up on the insurance comments and thanks for the color in your prepared remarks.
I'm really surprised that that you guys have such a low historical claims ratio and.
Obviously, our such amazing operators are seeing a spike in insurance rates I mean, if it does bad for you what is it likely Miss industry and I think you said you had some kind of actuarial hit it was in a particular incident that drove that I mean any color there would be helpful.
Yeah, not necessarily one a particular accident that.
The hits and in the fourth quarter, Yeah. We go through an annual process, where the actuaries look at.
Paul what have been claims going back for old years and.
Some years you have positive development in some years you have a unfavorable development. When you go back to the last year in the fourth.
Sure.
We did have a positive adjustment in that period I think our expenses were 0.9%.
Revenue, where did it trended up 1.1, 0.2% or so.
For the first three quarters of the year so.
This year was just a several claims that are still open to that had.
It's a month favorable development to them and then.
I also look at.
The expense that.
Was applied for.
The accidents that we had this year and said yeah, we'd expect that.
Things should get back to normal.
Next year, and you know a lot of that and the reason that we've got the favorable trend.
Over the long term is the focus that we have on safety continue into best in technology.
On our units and continuing to invest in a in training on proper safety protocol for our drivers and I think that's played out long term and.
Improvement that we've seen or accident frequency.
Let's see ratios as well as the general severity of trends, but like many of the other carriers, we will be facing some inflation on the premium side.
Yeah, we're kind of in the midst of renegotiating that this year, but.
We have the majority of kind of our auto expenses related to the.
Self insured piece that.
That we fund.
So we'll have a the increase did on premiums and.
And then we'll just continue to look to manage and hopefully mitigate any.
Any inflation or be a the self insured piece that world for.
God. So do you feel like the inflation would have been much worse, if you didn't have the deck.
Sure I, obviously the technology is helped.
It's hard to say one for one but we certainly we spend a lot of time.
Going through in evaluating the.
Oh Gee over the years as we put it in the trucks, but yeah, we feel like we've got a.
Technology the accident.
Avoidance systems that we have in place now the the forward facing.
Cameras and could collision detection systems, and so forth certainly we would expect.
To see that continue to play out with reduced.
Accidents severities over the years and hopefully.
Vinnie accidents, a one would be the ultimate objective, but certainly lessening the severity.
As a benefit to us all.
Got it and just one last one.
The last few years has been probably the most water title that no doesn't darts industry us in seen in a long time doesn't it looks like it's going to get much better, especially what changes like E commerce and new entrants in such.
Where are your views on consolidation in the space.
Where do you think the LTL space looks like five years from now do you think it looks similar to have you actually do you think it looks meaningfully different.
Oh.
I'm not sure at this point Ravi we see much if any change in the LTL space ahead of us.
Like our competition, it's been relatively stable, we lost a couple of smaller carriers.
Last year, so but.
It's been relatively stable and we don't.
See any thing that will change that in the near future.
But.
Certainly.
Thanks.
Some degree.
Over the years, we've lost to competitors as you know.
I think it's.
We're in a good spot right now like we're well positioned to things that we've done from a.
An expansion standpoint from a capacity standpoint, but less than a good spot but.
Oh like from a competitive standpoint, we'll see that many changes.
Great. Thank you.
Well go next to Jordan Olinger with Goldman Sachs.
Yeah, Hi, good morning.
I know density is sort of the key over the long run to improving or I'm just sort.
Just curious given the.
Declines that we saw in LTL tonnage in 2019 as you think ahead.
Hopefully, we get to inflection on industrial production and industrial outlook, what sort of volume growth do you need to start improving or again on a year over year basis would you say is it.
Just something is.
Certain order magnitude to make up to the impacting 2019. Thank you.
There is not necessarily a volume growth number and I think we proved that in the first and second quarters. This year. When we were still seeing some weakness you know certainly you need some revenue.
And you Gotta had revenue to offset the high fixed cost that are inherent in our network and and so yeah. We saw that steel in the second quarter of this year, what our revenue growth was about 2.5% on a per day basis, and we were still able to produce a little bit of of operating ratio improvement.
Yeah, there's a balanced it that's required and over the long run yeah. The when you look at our long term revenue growth rates of 12% to 13%. It's kind of been made up of about 8% or so I'm kind of the shipment volume side, and then the balance and yield and so.
The density.
He is certainly important and but staying ahead of the density.
With the continued investment in service center capacity that always gives us that ability to grow into the network that we built.
You got to have a consistent yield management process in place as well and when you look over the long.
Right.
We've been able to get on a revenue per shipment basis improvement and kind of an average beforehand sent a year.
That somewhere around 75 to 100 basis points higher than the long term trend on or.
The cost on a per shipment basis, and so you got to have that that delta in.
So to support.
Hi, dollar investments that we're making in their service center network to support investments in technology and all the things that we want to do to try to keep that per unit cost inflation down as much as we can so there's a lot of factors that go into it and unfortunately, we've had a really.
Balance of density and yields.
Over the years.
Thank you.
Well go next to Scott Group with Wolfe Research.
Hey, Thanks morning, guys.
So when I look at the other.
Ill.
Looks like they were are seeing more of a recovery in December or January tonnage trends relative to you guys.
I'm wondering your thoughts or any is this assigned to it all the competitive environment getting maybe a little bit worse.
We haven't seen any.
Signs of things getting worse or if you will mean I can't comment on what the other carriers are doing we can only comment on what we're seeing in and we feel good to see the trends kind of comes back in line.
Well on the volume side and.
As Greg mentioned, there's still a lot of a positive comp.
Is that we're hearing from customers.
Like that or forecast or for industrial production to increase this year, we've got a maybe some clarity now with some trade deals done and ER and so there's a lot of reasons to be positive as we transition into this year and I think the other thing.
That we'd like to see and hope to see I guess as well as now that.
Once we get through the first quarter and we've still got a pretty healthy Carl.
With revenue and yield in the first quarter.
But once we get through that period, and we start getting to the 12 month point of where we started seeing some.
Increased discounting by.
Some of our competitors.
Truckload rates start increasing that increases the line all costs for many of our competitors, perhaps some of our customers that we might lost some business on aren't satisfied with the level of service they received over the past 12 months or the.
There is not satisfied with the operating ratio with a lower price inherent that.
Maybe some of those bids come back and we will start regaining maybe a little bit more of the business that we lost.
A lot of things the sort of look for twos, we start progressing into.
2020.
Okay, and then Adam you mentioned I think 4% cost inflation. This year I'm wondering it is that normal is that better or worse than normal in terms of a cost inflation year. So when we get hopefully we get back to some revenue growth.
In a more meaningful revenue growth starting in the second quarter.
Any thoughts on.
And how we should think about incremental margin.
Yeah, obviously, we need to revenue to to start having that conversation again, but yeah. We got a lot of things that we should be able to do.
I think and can help ourselves growing into the fleet.
As one of those that.
Should help you know that 4% is kind of inline with what.
Our longer term trends has been most of that is based on the wage increase to employees last year, but probably anticipating like we mentioned some health cost increases the premiums on the insurance. There's some other things that are going.
That might.
Move that kind of underlying number north of the 3%, but certainly we're going to do everything we can to help ourselves and yeah last year, our number was probably a little bit higher than we came into the year thinking forward afford a half percent it was a little bit higher than that but a lot of that.
It was the volume weakness so you've got overhead cost you on a per ship that bases that are going higher than what you would expect so we can't get the revenue growth, we should be able to get some leverage there you know the repair side like I mentioned earlier, we face some some.
Significant cost headwinds there this year.
Sure, where you know, adding all of the power units that we did and not really maximizing the miles and utilization or you're still maintaining all of that fleet. So if we kind of grow into the fleet that we have should get some leverage on that side as well so.
Certainly some areas that we should be able to get some leverage on is.
We progressed through the year.
Okay. Thanks, So just last one quickly that the Capex guidance I think it's the lowest in six or seven years.
And tractor trailer down a lot should we think about this is sort of a one year, so equipment holiday or something longer.
Oh I think it's a.
One year, you know kind of deal and again, yeah. We went into the last year thinking that we would have somewhere in kind of the mid single digit tonnage growth and it ended up being down so you.
I think that gives us room to grow into it and we want to be good stewards of capital and trying to evaluate kind of where the fleet is.
And how we think we can go into it and obviously if volumes pick up more than than.
What we might expect a than certainly we can respond and had been able to do that are past life as well.
I will make whatever changes that are necessary, but typically we spend about 10 to 15.
Present of our revenue on Capex and I think when you look at sort of the break down the expenditures for real estate or pretty much in line with a as a percent of revenue with what we've spent in the past a you know this will be of probably at one year holiday and on the fleet side and then we'll does get to the end of this.
This year and sort of evaluate what where we are in a and what we feel like we need going into 2021.
Okay. Appreciate the time guys. Thank you.
Well go next to the Allison Landry with credit Suisse.
Thanks, Good morning, I'm so.
I just wanted to go back to your comments about share gains I think last quarter, you talked about recapturing some business from customers that had left early on here to take advantage of lower rates and and not maybe contributed to what you started to see in terms of volume stability in more normal seasonal trends so I.
I was just curious to know if this also played out in Q4 and to the extent that it did was there any change and the pace in what you're seeing these customers come back basically I'm just trying to gauge whether this is something that you would normally see happen in advance of a recovery.
Awesome, we have.
Can you just see some business returns that we lost overpriced. Prior earlier last year, we have continued to see that business come back to us.
For our service.
I don't think there's a huge change in the trend we did continue to see our share gain in.
Free slightly over the year.
Which was good to see because we've seen it in other.
And economic cycles, where our share gain actually slowed or or diminished completely but this year. So far that numbers continue to increase slightly so I think that's a good thing but.
We are still went on some bids and and we are gaining some business back that we lost.
At that pace, that's kind of hard to gauge we don't you don't measure those things.
Anyway and Doug.
We are having some gains deal.
Okay, Great. That's that's helpful and that.
Could you walk us through that the monthly weight per shipment trends in Q4 in January sorry, if I Miss I think that that really on the call.
The tonnage or the weight per shipment the weight per shipment.
Okay. So.
On the weight per shipment or just the kind of.
Go back a little bit and this is another one of those points that are that will give us a little bit of confidence going into this year, but if you recall, we kinda hit a low point on our weight per shipment of back in August of 2019, we started thinking a little bit of movement north there. So.
I want to a year over year basis through the fourth quarter.
Still down we were down a 1%.
Tober were positive 0.4% in November.
On a year over year basis and then.
Down 0.7%.
Ciber, but the trend when we look at.
Got it.
We had hit that sort of 1500 30.
Mark and in August it came back to around 1600 pounds bye.
The November and December timeframe.
So most of those I would say kind of moved.
For the quarter kinda mood.
Tandem with what sort of what the normal sequential trend might be but but certainly a positive development.
Then the where we work for.
January.
Dale.
Versus 29 team but.
Pretty much in.
Align with down sequentially about like our 10 year average so we're back to 1500 50.
Four pounds in January of this 2020.
The weight per shipment kind of held up a little bit in January of last year before we started seeing some sequential weakness.
I feel like we're in a good spot there and hopefully we'll see.
That trend on the wafer shipments die size stay pretty steady and see some steady improvement as we progress through the year.
Perfect. Thank you guys.
South.
Well go next to Ari Rosa with Bank of America.
Hey, good morning, guys. So first off another nice quarter in a tough environment, but it's so when I hear your outlook or kind of what you're saying about the operating environment.
Some of the truckload carriers really.
Diverted attention to a second half recovery, but it sounds like you guys are a little more optimistic there.
I just wanted to make sure I'm hearing that correctly and do you think there's something unique about LTL, that's maybe different from truckload, that's that's causing that dynamic.
Yeah, I don't know that there was anything any different and you know I guess, it's easier to say that the back half a year.
Should be better than that.
First half goes where in the first half been frankly, we're we're not seeing Ah numbers that are there to write home about when you know when we think about long term growth and how we've been able to generate as revenue improvement and growth in pre tax income and so forth being flat is.
It is not kind of what we.
Aspire to be if you will but ah, but it just feels like things are starting to turn a little bit and there's just a little positive developments here and there yeah, we'll see kind of has it takes hold.
I think that we still have to be cognizant of the fact that there are.
Political risk and we're in an election year and historically speaking.
Volume says that kind of underperform seasonality, a slightly and election years. So you know what kind of keep all that in mind, but we finally saw I asked him.
Go back above 50, and a and just.
I need to have conversations with our customers that Oh are probably it's not like its robust growth expectations or anything like that from our customers, but you know there more positive than and there are negative conversation. So.
Yeah, we're cautiously optimistic as as we go through.
The first part of the year and ER and that's probably the best way to describe it is cautious optimism.
Okay. That's helpful.
And then second you mentioned a couple of times just weakness in the industrial economy, specifically, maybe you could talk about the split in terms of what you're seeing between industrial versus some of.
For more consumer oriented customers and then just a bit of a strategic question do you think theres opportunity or is it something that.
You know as a compelling idea to maybe look to build a book of business more in the consumer space or is that not something thats really.
<unk> being entertained too much for various reasons.
Yeah, our the book of business really didn't change a whole lot. This past year, our numbers were pretty consistent in terms of the breakout of retail and industrial so it's about.
Between 55% to 60% industrial closer to the 60% range.
And then you know kind of the 25% to 30% or on the retail side closer to the 30 Percents and then hodgepodge of things from an MSA C code base is that Oh that kind of go from there yeah. We've seen over the last couple of years, maybe more growth in our retail.
Business and I think that you know that kind of gets to some of the longer term E commerce trends and the importance that some of the retailers.
Vendors that are supplying product to retailers are placing on service and that fits right in our wheel house.
As we can help our customers.
Avoid.
Cost like charge backs and finds and so forth by delivering on time, and then fall into some of these distribution centers.
You know weekend in charge of a fair price, but it's one that was consistent with the level of service that we're providing and.
I think it benefits from a total cost of transportation standpoint, our customers that want to use us.
Well they end up avoiding some of those a secondary calls a that may come from the retailer so that creates win win scenarios.
It is definitely a good avenue for growth, but you know other things that may be getting more.
More attention.
Space of do when last mile deliveries and a cross the threshold is just something that we're really not interested in from a you know a corporate strategy standpoint it.
As it exists right now.
No. That's that's entirely understandable, but I I guess my.
Question, what is there an opportunity kind of given the growth in E. Commerce, obviously, staying within the LTL space not you know.
Going out into final mile or something of that start but is there an opportunity to grow our retail business, particularly in E commerce or is that or should we expect that that's split a 55% to 60% industrial 20.
30% retail to continue.
That's a hard question to answer but.
We.
Got a huge salesforce, that's working the entire economy be at retail or industrial whatever.
And as those opportunities present themselves will.
Certainly try to to participate.
We've had some competitors that have been far more aggressive we have on the retail side. So that's probably while the percentages like it is but.
Certainly as those opportunities present themselves will be there and.
Hopefully will be a solution for our.
Our competitors.
Our slot customers.
Yes, those if they if they have the need and if they're looking for better service will be there.
Terrific that makes a lot of sense. Thanks, So type.
Well go next to Todd Fowler with Keybanc capital markets.
Great.
Thanks, and good morning.
Adam maybe just to put a bow on the conversation around margins, particularly into the first quarter.
Way to think about the sequential margin change once you have or for Q is to adjust fourth quarter for dot 150 basis points or whatever the impact was from the Phantom stock and normalize hold it for incentive.
Comp or excuse me for insurance expense and then think about typical hundred basis point change off of dad is there something else, we need to think about sequentially into one Q.
I think yes on most of your points you know I would really only look at.
This Phantom stock.
Really is the only thing to sort of adjusted normalize for them.
Because as I mentioned the insurance line you see the increase there and that's the one thing that stands out but you know there some offsetting credits.
In some of the other line items that I think will normalize as we progress into the one Q as well.
And so some of that being you know kind of within the the fringe benefit line some being in the operating supplies and expenses as well. So you get a normalization or kind of in those categories and it really just becomes kind of the offset.
Of that Phantom stock expense you know.
Sort of 150 170 basis points.
And then you sort of look as you mentioned about 150.
Basis points is kind of the average a sequential change for the fourth quarter into the first the only thing I would say you know with that as well.
Though is yes, we did a lot of good things in the fourth quarter and often times. If you kind of look it at what the change from Threeq you into the Q was.
You often times when we've had periods like that where we really.
Well, if we do have to start hiring it will be it a different.
Pace and so there could be some some higher cost that that may be you end up.
Kind of as you're below maybe a trend one quarter, you might be a little bit higher.
The next so that wasn't necessarily be a surprise if we're on a normalized basis, a little bit higher than than what that normal sequential trend might be if.
That makes it.
Yeah. It does I think so you're saying is if we think about how one Q head count trends versus for Q, We may not see that normal change because fourq. He was a little bit better but it also sounds like from earlier in the call. If you're hiring that's probably an indication that the tonnage is picking up.
Correct.
Okay, and then just for my follow up.
You know can you talk about the available capacity in the network right now in and typically I think about your model, you'll being built to have that available capacity and when you do see tonnage come back that you can really drive high incremental margins. Because you know you can handle that that additional freight coming into maybe some of your competitors can't.
So can you give us just a sense of where.
Or you know you think the network isn't and how much more tonnage you can handle and just the thought process around you know the de leverage you'd see tonnage coming back end with the available capacity in the network.
I believe we definitely built some capacity, particularly in 2019.
Thank you know.
Our capital expenditures were they were significant last year.
So we definitely believe some capacity, having such a flat year.
As we go into this year, we continue to be flat and we're continuing to build out the network and and deal where we know will have needs in the future. So at this point.
And time, we're in really good shape from a capacity standpoint.
Exactly quantity as it's hard to say, but probably 25.
Maybe even better than 25%, but we didn't have some capacity and I.
I like where we are today, we've addressed the needs that we had back a couple.
Two years ago, when we were really really busy we've addressed those and we've been able to accomplish some of them needs that we had.
I think we're all well set for the future.
Sounds good thanks, a lot for the time this morning.
Well go next to Ben Hartford with Baird.
[noise].
Yeah. Thanks forgive me in the Adam just stood up at a higher levels you're thinking about.
Cash flow in the balance sheet over the next several years I mean any changes to your appetite security leverage and if so or if not I mean, how do you think about this.
The allocation of the returns to shareholders going forward it looks like the other day.
But a payout ratio has been stepping up but has has a lot of room to continue to move higher so maybe you could address that as well. Thanks.
Sure Yeah that that certainly is something that we continued to look at and evaluate and yeah. We were pleased to be able to produce another 30 plus percent.
Increases as we're going into 2020 or so the payout ratio. When we first started the dividend program kind of our target was we looked at the prior year and you know sort of wanted to have a basis of about 10% of kind of the prior year earnings.
And we.
Charted out you know.
On the conservative side to make sure that.
Yeah, we had room to continue to increase it and so forth and and we really had not because our earnings growth that had been so strong since we implemented that program had not really reach that threshold that we wanted to be said.
Yes. This year I think of was a good you know sort of increase the kind of address that and.
I think that we've moved that payout ratio north a little bit to try to at least achieved that goal and we'll continue to look at.
Increasing the dividend as we move forward is.
And then on the.
The other side would be the share buyback program and Oh, we kind of step that up a little bit.
Last year as well and we'll continue to execute on that plan and I think we've just got a balance you know from an overall cash.
Flow standpoint, looking at the cash coming in from.
Since what we spend dollars on capital expenditures that are planned Oh also taken advantage of opportunities that may present themselves strategically on the real estate side, and we did a little bit of that in 2019, we ended up spending.
More than we had originally planned.
I'm in a few opportunities kind of became available to us.
And we'll continue to look at those and then I think we just got a balance overall, you know kind of where we are from an overall positioning standpoint, or cash balances and kind of cash projections and.
And just sort of stayed true to to trying to return excess capital to our shareholders as it makes sense.
One final one any specific out two projects on the rise in either and 20 year or be on better of note.
We've got several projects going on.
On a we're converting to a new human capital management system.
This year, we're working on an implementation of that which will be a good thing for us.
And so we're excited to try to get that behind this and you know we're always looking at it incrementally how we can continue to improve the systems that we haven't.
Yeah, I think when.
You look at our operating systems those have all been created in house and or in some places may have plug in square.
Weve got off the shelf products that kind of interface with and assist but one of the reasons. We operate so efficiently is the.
Systems that we've invested in over the years and trying to stay ahead of our competitors in that regard. So we're always going to be looking to make any incremental improvements to those programs and evaluating any other a system that we think will help us, but you know any return or any investment.
Rather that we make in a system. It is an investment and their risk that go along with that and we think that that's something that.
It should be accounted for in expenses, we incurred expense and we should assume a return oney on any project as well so.
But that's kind of the baseline of when we make that.
Decision to to pull the trigger on a project and so yeah, we're going to continue the to look at it making investments and hopefully getting returns on those investments.
Appreciate the time.
Well go next Gen, David Ross with Stifel.
Thank you.
Real quick to talk a little bit about the transition that you all made from the A.O. VR since you are grandfathered in antibodies.
Is that fully behind you now I'm, assuming and was there any.
Permanent impact to the business and network the costs.
From from doing that.
David It is behind US, we we completed that project back in the fall, but a completely behind us no material impact at all.
Obviously, it took a lot of hard work in a big effort from our folks to accomplish it and the time that they.
But glad to have it behind us.
Nothing material I'll like to talk about.
And then last question.
Adam I guess, how much volume have to grow this year to exceed your current.
Tractor capex expectations.
[laughter].
Hey, good I'll say, a fair amount we've got some capacity we looked at that recently, we've got some equipment capacity right now without a doubt we're nowhere near peak I mean, obviously to slow this time of year, but nowhere near our peak levels and we've got a.
Got the equipment to accomplish our absolute peak level right now so we're we think we're sitting.
Good position, maybe if anything still a little bit a heavy all equipments or.
Tractor, certainly and and trailing equipment as well.
We're in good shape.
There.
Good thank you.
And they're currently no further questions in queue I'd like to turn it back over to today's speakers for any additional or closing remarks.
Thank you all for your participation today, we have.
I appreciate your questions and please feel free to give us a coffee have anything further thanks have a great day.
And that concludes today's conference. Thank you for your participation you may now.
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