Q4 2020 Old Dominion Freight Line Inc Earnings Call
[music].
Okay.
Please standby I'll now turn the call over to drew Anderson. Please go ahead.
Thank you good morning, and welcome to the fourth quarter 2020 conference call for old Dominion freight line.
The call is being recorded and will be available for replay beginning today and through February 12, 2021 by dialing 7194 of $5 7082 zero.
The replay pass code is 5798 600.
The replay of the webcast may also be accessed for 30 day at the company's website.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of the 1995, including statements among others regarding old dominions expected financial and operating performance for this purpose any statements made during this call that are not statements of historical for.
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.
Are hereby cautioned that these statements may be affected by the important factors among others that are set forth in old Dominion's filings with the Securities and Exchange Commission and in this mornings news release and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements.
The company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise.
As the final note before we begin we welcome your questions today, but we do ask in fairness to all of that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation.
At this time for opening remarks, I would like to turn the conference call over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead Sir.
Good morning, and welcome to our fourth quarter call from school.
With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions.
Old Dominion had a strong fourth quarter that included an increase in revenue and improvement in our operating ratios of 76 three per cent.
Which was the new fourth quarter company record.
This combination led to the 34, 2% increase in our earnings per diluted share.
For the year, we also produced a company record operating ratio.
77, 4% as well as an 11.4% increase in earnings per diluted share.
Wow I am really proud of these financial results I'm more proud of the <unk> family of employees, who work through tough conditions in 2020 to generate the success.
Despite the operating challenges created by the pandemic and rapid changes in volumes our team of established a new record for our cargo claims ratio.
0.1%.
The long term service continued at 99% these.
These factors contributed to us winning the master of quality award for the 11th straight year.
Our team is committed to delivering superior service.
At a fair price regardless of the circumstances, which is why we have often stated that the investment in our <unk> family is the most important investment we can make.
This includes many things such as strong pay and benefits packages as well as training programs.
And advancement of opportunities.
In addition to our nonexecutive employees and their contributions during the pandemic, we made special bonus payments in March and December 2020.
That together total approximately $20 million the.
These factors as well as the strong family culture have allowed us to consistently attract and retain talented employees to support our growth.
The initiatives.
This is important as we intend to add to our <unk> family in 2021 by hiring additional employees to further increase the capacity of our workforce.
With the demand improvement environment, improving we also intend to add of the capacity of both of our service Center network and our fleet in 2021.
After opening eight new facilities in 2020, and one more in January of this year.
We are currently operating 245 service centers and have approximately 30% of excess capacity within the network to support additional growth.
We plan to open two to three additional locations in the first quarter with several more during the remainder of the year.
We believe these additional service centers as well as the expansion of some existing facilities will.
We will increase the overall average capacity within our network to ensure that it is not a limiting factor to growth over the next few years.
While we acknowledge the certain.
Uncertainties with the domestic economy May continue we believe that old Dominion is uniquely positioned to win additional market share in 2021.
We also believe we can drive our operating ratio even lower than the 77, 4% record that we established in 2020.
We have long maintained that the key components for long term improvement in our operating ratio our improvements in both density and yield.
Both of which generally require a favorable macro environment.
Our current trends indicate that we can improve on both of these measures in 2021.
By remaining fully committed to the core business strategies.
US and our strong competitive position.
Disciplined execution of our long term strategic plan over the course of many years has differentiated us from our competition, while also creating long term record.
Of profitable growth.
We are encouraged for our recent revenue trend and believe that we can take advantage of the momentum in our business to increase our earnings and shareholder value in 2021.
Thanks for joining us this morning, and now Adam will discuss our fourth quarter financial results in greater detail.
Thank you, Greg and good morning.
The old dominions revenue for the fourth quarter of 2020 was $1 1 billion, which was the six 4% increase from the prior year.
Our operating ratio improved 500 basis points to 76, 3% and earnings per diluted share increased to $1 61.
These results include $9 $6 million of expense related to the special bonus paid to nonexecutive employees in December.
We were pleased to see the improvement of our revenue growth, which included increases in both volumes and yield the.
The increase in revenue included a four 9% increase in the <unk> tonnage and a one 1% increase in <unk> revenue per hundredweight.
Excluding fuel surcharges are <unk> revenue per hundredweight increased by four 2%.
The growth in this metric was slightly more consistent with our longer term average than recent quarters as our business mix continued to normalize while underlying pricing trends remained relatively consistent.
On a sequential basis revenue per day for the fourth quarter increased four 7% as compared to the third quarter of 2020, while the <unk> shipments per day increased one 7%.
These are both above our normal sequential trends and reflect the continued recovery from the initial drop in revenue in April that was related to the pandemic.
For January our revenue per day increased 14, 6% as compared to January of 2020.
This reflects an 11, 9% increase in <unk> tons per day, and a two 2% increase in <unk> revenue per hundredweight.
Our fourth quarter operating ratio improved to 76, 3% and once again included improvements in both our direct operating cost and overhead cost as a percentage of revenue.
When compared to the fourth quarter of 2019, we generally improves the efficiency of our operations with increases in our laden load average and paying the shipments per hour.
We did however, lose a little productivity with our platform shipments per hour that was mainly due to the number of new employees hired in the fourth quarter.
As our volume trends continue to improve we intend to add drivers and platform employees during the first quarter we.
We also expect the continued to use purchase transportation the supplement our workforce until the capacity of our team can fully support our anticipated growth.
We improved our overhead cost as a percentage of revenue during the fourth quarter by successfully leveraging our revenue growth and maintaining our discipline with discretionary spending.
We will continue to control of discretionary spending in 2021, as we always do but we anticipate that certain costs that were reduced in 2020, either directly or indirectly due to the pandemic will eventually be restored.
Old dominion's cash flow from operations totaled $246 6 million of $933 million for the fourth quarter and 2020, respectively. While capital expenditures were $58 6 million and $225 1 million for the same periods.
Based on anticipated growth and the execution of our equipment replacement cycle. Our capital expenditures are expected to be approximately $605 million in 2021.
The total includes 270 $75 million to expand the capacity of our service Center network. Although we would increase this amount further if we identify additional properties that fit into our long term strategic plan.
We returned $74 $8 million of capital to shareholders during the fourth quarter and $435 1 million for the year for 2020. This total included $364 $1 million of share repurchases and $71 million in cash dividends.
We were pleased that our board of directors approved of 33, 3% increase in the quarterly dividend to <unk> 20 per share in the first quarter of 2021.
Since we began this program in 2017 and after giving effect to the company's three for two stock split in March of 2020, we have increased our dividend in excess of 30% each year.
Our effective tax rate for the fourth quarter 2020 was 25, 1% as compared to 24% in the fourth quarter of 2019.
We currently expect our effective tax rate to be 26.0% for 2021.
Concludes our prepared remarks. This morning, operator, we'll be happy to open the floor for questions at this time.
Thank you the question and answer session will be conducted the electronically if you'd like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
The speaker phone please be sure of your mute function is turned off so while your signal to reach of our equipment. Once again press star one to ask a question. We will take our first question from Todd Fowler with Keybanc capital markets.
Great Thanks, and good morning.
Adam I wasn't going to start with this but you threw me off maybe you can provide a little bit more color on the strength that youre seeing in January the.
11, 9% increase in tons per day was stronger than what.
It looks like we're trending in December. So if you had any color would be have any color on what you think is driving the strength of January that would be great.
Yes, I think it's a couple of things Todd I mean, we've certainly.
Really going back to April.
2020, once we took that initial drop.
The business has just been accelerating since generally speaking I think it began with.
Customers reopening their businesses in different regions.
Around the country getting healthier.
And just sort of accelerated from that point forward, an acceleration continued through the fourth quarter for us and into January as well.
I think theres a lot of macro trends that are.
Favorable for our industry and certainly we're in.
In the enviable position I think to take advantage of these changing trends. This is the type of environment I think when our model usually shines the brightest.
We're in a great spot.
With respect to the capacity of our service Center network or.
Our fleet is in good shape and we've talked about the fact that we're going to continue to hire new.
New employees and we've continued to be successful in that endeavor in January as well and we're also able to use the little purchase transportation to the supplement.
As needed but.
Customers are getting healthier business trends in general are improving.
Youre seeing the the advantage of our business model, just coming through for Us and we're able to take advantage of all of those improving trends.
And show a little growth, which it has been a long time since we've been able to see growth like this but certainly when we start growing we want to make sure its profitable growth and I think that yes.
We're in a good spot right now and look forward to seeing this continue to play out in 2021.
Okay, no that sounds good.
And then maybe if you can just give a little bit more color you did a good job of continuing to leverage shipment.
Shipment count growing faster the head count growth in the fourth quarter.
In the prepared comments you were talking about adding head counts.
Can you give us a sense of kind of the trends, maybe what youre expecting for sequential headcount growth in.
In the first quarter of the first half and how long you would expect to continue to be able to increase the shipment kind of ahead of the head count growth. Thanks.
Well as you know over the long term the.
The change in our head count pretty much matches the change in our shipment counts as well and certainly in the short term period. They are not always.
And balance but.
That is something that we've seen over the long term.
Right now and really again kind of going back to the middle part of last year. When we made resource adjustments, we've pretty much of been trying to play catch up if you will and our team has been working incredibly hard and operations to keep up and to continue to service.
In produce.
Essentially record service metrics for us so we've been really proud of that but the teams have been working incredibly hard we have been using increased purchased transportation.
The notice that increased three 1% in the in.
In the fourth quarter and it typically for US is around two 2% because we like to have 100% of our line haul network.
In sourced and using our people and our equipment, but but we had have had the supplement a little bit in.
Until we can can really completely staff up to where we want to be.
Typically head count in the first quarter is kind of flattish on average with the.
The fourth quarter.
Based on what we've been able to achieve thus far in January.
I think that the maximum sequential change we've ever seen was an <unk> of 18, where we had about a 3% increase over <unk>.
I think we can be in that range and probably even higher but effectively we've just got to the catch back up so we can.
<unk> to serve our customers and be able to first reduce our.
Our reliance on purchase transportation and then just try to get ahead of the curve.
If you will.
The face whatever.
The volumes come our way for both 2021 as well as 2022.
Okay got it.
Sense I'll turn it over thanks for the time this morning.
Next we'll go to Jack Atkins with Stephens.
Great. Thank you good morning, good morning, guys. Thanks for taking my questions.
So I guess, Adam when we think about the sequential progression here.
Kind of back out that special bonus payment there ended up in the fourth quarter.
About $75 for O R.
Think about tonnage in January being better than normal seasonality.
Again, it's early in the quarter, how are you thinking about the potential given your head count comments, there to Todd's question, the ability of that sort of leverage that tonnage with.
With sequential or relative to normal seasonal patterns, which I think is typically 100 150 basis point degradation.
From the fourth quarter to the first quarter. So if you think about that base number of $75 for given those head count comments and some of the other other items down the P&L. How are you thinking about sequential change given given what's happening on the on the tonnage front.
You are right. The first quarter is typically 100 to 150 basis points of degradation from the fourth quarter.
The the special bonus that was in the fourth quarter that certainly something that.
I know you all will probably be adjusting but.
That's not the only thing that's one big thing that was called out but you can see some other items.
Like our insurance and claims for example that was a little bit lower than what the normal trend is.
Anticipate that that will increase back to where we normally see at which is around.
One to one 2% of Rev.
Revenue and like many other carriers, we're going to be facing some increased inflationary cost.
And that with our insurance premiums and so forth. This year just like we faced the last couple of years.
So there's going to be some from sort of puts and takes to it general supplies and expenses is another one that the I think we'll be stepping up.
We referenced in our prepared remarks debt.
Certainly theres going to be some costs that will be restored.
Of this year and some of those will be some of our marketing and advertising programs.
Not at the point, the where our sales team can get out.
And traveled around and do some things.
We anticipate for the foreseeable future with some savings related to travel and customer entertainment, but certainly intend to restore.
Some of those expenditures so while they may not go back to where that cost has been between three to three 5% certainly.
Anticipate them being higher than where we were in the fourth quarter, So theres going to be some puts and takes.
We don't give guidance on the operating ratio, but we always use that normal sequential trend as a benchmark to measure ourselves against.
I think on the salary wages and benefits line.
When we talked about on the last quarter call going from third quarter to fourth quarter.
We wanted to try to keep.
The change in those costs and we felt like we could keep them in line with what our long term trends are based on productivity and the fact that we felt like revenue was improving well have a nice revenue growth on a sequential basis. Certainly gives you a lot of cover on some of those other more fixed type expense Ella.
And I think we saw that that leverage and us being able to take advantage of that strong revenue performance in the fourth quarter to do just that we create leverage from it we kept the change in salaries wages and benefits in line there.
So I think certainly that will give us leverage when we go from <unk> and the <unk> as well.
Be able to keep those the salary cost if you will in line, even though we will be bringing on in adding new people. So.
There'll be puts and takes in the different line items, but that sort of a 100 basis point, Mark I think will be.
Good benchmark and we will just see how we perform from there.
Okay. Okay that makes sense of thank you for all of that all of that color I guess from a follow up question, maybe kind of a bigger picture question for you Greg when you look back over just the broader <unk> market over the last you know call. It 10.
15 years, there really hasn't been a lot of underlying market growth of old Dominion has just done a great job, taking a lot of market share.
As you guys have been investing in your business and investing in service.
As you look out over the next.
357 years Greg.
Do you see the market growth accelerating for the <unk> the industry.
Thinking specifically about E commerce in the middle mile impact that the E Commerce is having.
The transportation sector I would just be curious to get your thoughts on sort of where you see the broader industry going obviously O D is going to expect to continue to take market share, but would appreciate your thoughts there.
I would hope we would see some growth in our in the <unk> on the <unk> side.
I think some of the the E commerce trends and whatnot that we've seen are somewhat positive for LTE all of the fact that.
The.
All of the the Amazons of the World and many others has opened so many distributions facilities all across the country and it actually gotten closer to customers.
You hope debt.
Some of the suppliers than our shipping the all of these different.
Type facilities.
Of that lends itself to <unk> versus truckload, when you're talking about smaller quantities getting in customers hands quicker. So I think thats a positive trend from an ecommerce standpoint.
I think the.
Just the broader macro economy will be the Teo Teo how does it do.
I don't think we've really had.
A huge boom and certainly not in the last couple of years, maybe back to 18, but not in the last two.
We think the macro certainly will drive.
Our market as well as truck loaded.
Some of the small packages.
Let's hope that there is certainly strength from that standpoint, but I think it's positive.
I am not expecting of boom certainly compared to.
Over the last 10 years, but I think it will be certainly steady and.
And we do expect from continued growth.
Okay, great. Thanks for the time.
Okay.
Next we'll go to Jason Seidl with Cowen.
Thanks, Operator, gentlemen, good morning hope everyone is well wanted to just talk a little bit about contract pricing can you could you tell us or give us an idea of how that went in the quarter.
And then sort of what do you expect going forward now that <unk> freight has been purchased by Tsi considering the had been more of a discount of in the marketplace and then I have a follow up.
Got it.
Not necessarily.
Detailed out what our contractual business is done versus.
Our tariff related business, but I think that generally speaking we've had a price in philosophy, that's been cost based in.
We expect each customer to give us.
The pricing that's above those costs to support.
The investments, we make in service and capacity and technology.
It's worked out well for us.
I think we had success.
Last year and it was pretty continuous throughout the year.
And all four quarters of being able to get increases as contracts renewed and certainly would expect to continue that as we transition into 2021.
Any comments on the market with the EPS rate and the purchase of that of those guys or do not run into the too much.
Don't really want to comment on one specific.
The carrier per se, but I certainly think debt.
The industry itself showed a lot of discipline working through last year, especially in the second quarter. When there was a lot of volume pressures.
It's been good to see.
The industry overall performed certainly that's been supportive of our own pricing initiatives, which we.
Maybe have philosophies that are slightly different from the industry generally, but certainly we would expect of very favorable pricing environment in 2021, there's a lot of factors.
That would go into that certainly demand is incredibly strong capacities generally limited.
A lot of feedback that we're getting from customers right now and Thats just across the transportation space.
And then I think that some of the other <unk> carriers that utilize.
From truckload carriers for their line haul services certainly are facing.
It may be more cost inflation than we are.
Typically in that type of environment rates are rising faster as well to offset that cost inflation for those other carriers' businesses. So I think theres a lot of factors that would point to the industry pricing being very favorable for this year and certainly should be supportive of our pricing initiatives.
Yes, I would agree it seems like the background of pretty good for the old TL business wanted to I'll do a quick question Adam.
You mentioned that theres going to be some marketing advertising.
Costs coming back could you give us an idea of the magnitude of those costs.
We've never really split out exactly.
What we spend and where so to speak obviously, we've got some some big national deals in.
And we kind of put some programs on hold last year and so.
I think that would not expect.
Of those cost necessarily to be higher than.
Then where they were.
Last year.
But it is certainly something that we're expecting the cost to be higher.
You will then maybe what we've just seen.
The past couple of quarters, that's really since we.
<unk> started making some changes in trying to address all of our cost initially in the second quarter of 2020, a lot of those.
Items that were directly or indirectly affected by the pandemic.
Some temporary and some may be permanent where in that general supplies and expenses line and generally speaking.
The.
Second quarter third quarter, those cost of more between two 5% of 3%.
I would expect it to kind of go back up where in the past I've been three to three 5%.
Somewhere not maybe to the full extent of that three 5%. The calls will be continuing to see some of those savings like I mentioned earlier.
Related to travel and so forth, but certainly kind of coming back.
It may be more to that range, but hopefully at the low end of it.
That's very helpful listen gentlemen, I appreciate the time as always please be safe out there.
Thank you for it.
The next we'll go to David Ross with Stifel.
Yes, good morning, gentlemen.
Dave David.
So sometimes less is more or stop doing stupid stuff is good advice.
What is the one thing that you were doing maybe five to 10 years ago, Greg or Adam that Youre not doing now that has made the biggest impact.
Omar.
Oh.
You might have to go back a little hurdles on that David.
I don't know I think we quit doing stupid things maybe.
Further than that.
Now your question kind of.
It took me by surprise, but.
Well, if you go back to kind of over five or six because thats when a lot of the the service improvements started.
Is there anything that you were doing them. It just got in the way that you removed.
So we were we were somewhat like some of our competitors back in the day, we used a lot of purchase transportation.
We were dependent upon those for our line haul modems and whatnot, we eliminate that over the years.
And I think by and large we just gotten better.
I don't want to say that we we did stupid things, maybe thats not exactly the right. The terminology, but I think we just gotten smarter and we've gotten better over the years, we've understood better quarter.
Customer needs are and we figured out how to meet those needs.
What do they really want what do they really need and I think we're just better at it today than we were some years ago certainly.
I think it's indicative of our of our share.
Share growth.
Continuing to win the <unk>, which is the.
Pretty good measuring stick of service flow.
Thanks, maybe not what we did but just what we've done smarter of what we've done better than our competitors have done so maybe that's the best way its David.
Well the Matthew of surveys terrific.
Something else, you've done smarter and better has been on the pricing side, but that also wasn't always the case.
Can you talk a little bit about the process to get to where.
You had your old pricing system model accounts rates and getting it to where you want to go is there a few key things you need to focus on or do along the way because you don't want to just raise rates and have customers leave.
Well, David I think the pricing really goes hand in hand with the service.
When your service is poor, sometimes the only way you're going to put of shipment on the truck.
Give a cheaper rate.
Once we really got to serve as the click 'n' lock it needed to be than we were in a much better position to raise our prices.
I think we've been extremely disciplined over the years and as the years of gone on.
Put in all of the systems the dimensions of the all of them.
The techniques and all of them.
The technology the.
It helps us to better understand exactly what our call Star <unk> line haul movement delivery whatever.
I think we certainly better understand our cost now than we did certainly 15 years ago and we've executed on that understanding so.
I think thats certainly been huge for US no doubt and we will continue to be disciplined we know what our costs are in.
That's certainly one thing that sets us apart.
It helps.
The helps to drive our numbers for sure.
Excellent. Thank you very much.
Sure. Thanks, David.
Next we'll go to Chris Wetherbee with the city.
Hey, Thanks, good morning.
You just think of a look at sort of the outlook for 2021, and I know you guys don't like the guide the or but if I go back to the last time you are of the grow tonnage double digit two weeks 2018 for incremental margins of our sort of in the 35% range. That's looking for a specific number of this time around but when you think about 'twenty one relative to 18 at least from a cost perspective.
Is there anything that we should be thinking about as labor tighter or is the cost generally a little bit more inflationary now and maybe the timing of sort of volume growth versus the resource additions potentially more challenging or is there anything else that we should be thinking about it for trying to use that as a rough rule of thumb of how you guys might perform of the course of 'twenty one.
Well, certainly we're going to.
Face a lot of challenges as we go through this year end.
While certain.
Top line comps.
Might be.
As of year, if you will.
We were pretty proud to produce a lot of growth in profits in 2020.
Despite the fact that that of revenues were down at the <unk>.
End of the day, we generated almost $90 million of the increase in operating <unk>.
The income despite revenues being down about $95 million so.
Certainly.
In some respects, we'll have some some tough comps, but I think the sort of pulling back in and looking at.
Our cost inflation I anticipate that we'll probably see cost per shipment inflation of around 4%.
This year, it's a little bit higher than our longer term average, but I think we've got some factors that will be coming back to us I mentioned some of the general supplies and expense.
Type of inflation, we might see would anticipate a little bit higher healthcare inflation this year.
So we're going to see some some inflationary pressures.
Some of the other categories, we always have kind of of three to three 5%.
Inflationary cost in our salaries wages and benefits as we continue to.
To improve that program for our employees and so all of those factors will kind of go into into that metric and that'll be our target and then that kind of becomes the target for which.
Our long term philosophy of trying to get.
75 to 100 basis points of.
The rate increase above the cost inflation and then we just sort of worked through from there but.
I think debt.
We've talked about the the key ingredients for for long term operating ratio improvement or the improvement in density and yield and I think certainly the the macro setup.
What would lead you to believe that we should be able to produce nice improvements in both.
We've gone through two years of being flat.
Each year I thought debt that.
Debt, we would have had some growth.
I certainly didn't expect the the industrial slowdown in 19.
No that nostradamus could've predict what we saw last year, but the.
But we worked our way through it and I think we're in a good spot as we enter the year and where it is.
Just going to continue to work of plan to try to drive the operating ratio lower we've talked about.
Kind of having a goal per se not necessarily incremental margins because the reality is remains in the business to put as much profit to the bottom line as we can in last year.
The success that we saw sort of proves that out, but certainly should be in a position to create some.
Some strong incrementals this year and we will keep working towards the long term goal that we've talked about of driving the operating ratio to 75. So we'll just.
Keep making progress there month by month and quarter by quarter as we worked through 'twenty one.
Got it Okay. That's very helpful. And then just quick follow up here thinking about the Capex budget, obviously stepping up and understandably. So can you talk a little bit I know, you've given us some breakdown, but can you talk a little bit about sort of the opportunities that you see there in terms of deploying that capital and then relative to that 30% of available capacity coming into 'twenty. One how do you want to sort of of.
Maintaining that at that roughly the right amount of available capacity you'd like to have as you move forward.
We generally talk about sort of 25% kind of plus or minus of excess capacity and.
Think that continuing our capex programs through 19 and 20 <unk>.
Continuing to build out of the service Center network, certainly is going to pay dividends for us this year with the increase in volumes that we're seeing now and would expect in and probably for 'twenty two as well so.
We maintained our capex spending on real estate really last year was more of just cutting back on the equipment and that was the plan. We had in effect when we started the year and before seeing.
The pandemic.
Effect on our business, but we were fortunate.
And of that that was part of the plan and certainly helped and we didn't see the type of inflation and depreciation cost that we normally would see and that was a big benefit there but the.
I think we're in a good spot.
To continue to look for opportunities we've got a good plan.
The real estate side of the $2 75.
As a good starting point, but we've.
We maintain our long term.
Plan and trying to look multiple years out and steal sort of half of target list of $30 to 40 properties and we will keep our eyes peeled and of some things become available.
Certainly we've got the strength to be able to pull the trigger on that and with the.
We would look to.
We continue to make those expansions to really prepare the network for growth, it's multiple years down the road.
Okay got it thanks for the time I appreciate it.
The next we'll go to Scott group with Wolfe Research.
Hey, Thanks, Good morning, guys, just a couple of follow ups first.
How many service centers are you, adding this year and then within the January update can you just talk about weight per shipment trends.
Not only.
Additional service centers, we have three that were very close to opening that that may open in the first quarter. If not first early second and then we have another half dozen or so that were working on so just depends if we if we get them completed or not.
It's not always easy to sit here.
Nine months out of say exactly what we're going to finish but.
Hopefully hopefully another half dozen or so on top of the three that we are really really close to opening now.
And then on the the weight per shipment it.
It was 625 pounds in January which was four 6% increase there so continuing to see.
The strong weight per shipments our business is still leaning a little heavier if you will on our larger national accounts that have a higher weight per shipment on average.
But.
Think that the strength in that number as some of our smaller customers get healthier and are making up.
Coming back to normal if you will in terms of the percent of our business.
Just a reflection on the strength in the economy, right now and probably seen a little bit of some spillover type freight.
Thats coming into the network as well.
Okay, and then Adam how quickly do you expect the PT spend to normalize with.
The higher than normal head count and growth in <unk>.
Do you think you can get back to normal pte by <unk> or is it more back half do you think.
It's hard to say because it is going to be dependent upon the the top line performance and certainly we had.
Really strong sequential performance in <unk> it was.
Going through the sequential as last year's an unprecedented drop in like everyone else experience from <unk> and then the reverse happened going into the <unk>, but then incredibly strong performance going into the <unk> and <unk>.
We're starting out with some strength here in January as well. So we're going to continue to make use of it really until.
The capacity of our team sort of catches up with with the volume growth that we're seeing.
So I don't Wouldnt expect that the necessarily go any higher because of the things we're doing a great job of Onboarding people right now and keeping pace.
Certainly in the the first quarter would expect it to stay pretty consistent with where we were in <unk>.
I would hope that we can start seeing that reduce a little bit.
And the second but could be more of a second half of the year, but again I think is just going to be top line driven more than anything.
Okay. Thank you guys.
Scott.
Okay.
And as a reminder of the Star one if you of a question next we'll go to Ravi Shanker with Morgan Stanley.
Thanks, Good morning, everyone.
I wanted to follow up to a response to one of the earlier questions.
Alright, It was pointed out that you have.
Significantly outgrown the industry and a lot of that has been driven by share gain over the years and you said that you expected the industry to be good but not gangbusters the growth in the next five years. So just wanted to get a sense of kind of in your analysis of the industry structure right. Now do you feel like you can keep up that outsized share.
In kind of trend over the next several years do you think of that potential exists.
I think it certainly does Ravi.
Our entire strategy.
Is to continue to grow our capacity.
The increase of our service Center network, and which is what we've as you know we've worked extremely hard to do that over the past 10, 15 years and I think we've done it the extremely well.
Think we're positioning to take advantage of whatever growth is out there and I would certainly expect that we would outgrow our competitors for the most part we have not seen that from them. So we'll see where that goes but I think we're well positioned and certainly in a good spot.
To continue to take share.
And you have said in the past that kind of you.
The tend to gain accelerated share of when the markets kind of starting to turn up rather than the market is going down or are you seeing that already in the fourth quarter and in January so far.
We are yes.
We are seeing that we're seeing.
Of the response from our customers.
Numerous situations, where our competitors couldn't or didn't respond for whatever the reason and we were able to take advantage of that so again, that's why we're doing what we're doing.
From a capacity standpoint, so we can be there when the need arises.
Got it and then just the follow up can you can you give us a little more color on your thoughts on this UBS DSI of deal because the thing that's a pretty big deal for the industry structure going forward.
Were you surprised by that transaction at all and do you think this kicks off of a domino effect, that's M&A or consolidation of the industry, especially some of the among some of the non union players.
And like I said earlier, we'd rather just not not comment on.
Any specific competitors in transactions.
Or whatnot, but.
I think regardless of who our competitors are and I think we've kind of proven what Greg just said, we keep focused on executing our plan.
Making the investments we have a service advantage in the marketplace and we have.
The capacity advantage as well and we're just going to keep doing our thing and staying focused on our employee staying focused on our customers.
And then just letting the financials.
Kind of fallout in the end and that's included a lot of profitable growth over the years.
Certainly expect the continued to do that regardless of the.
Of the landscape.
Okay. Thank you.
The next we'll go to Tom <unk> with U B S.
Hi, yes, good morning.
Wanted to ask.
I know you've had a few on the topic and you don't youre not being granular about it but the.
<unk> you could argue that there might be some freight spilled into the market and.
The the need to price up a lot of and I think EFI has certainly shown that they are disciplined in their approach to not.
Focused on volume, they're focused on making money.
So I don't know if you would have a thought on whether they have good quality freight or not but if you don't want to be that granular, perhaps you could offer of thought on.
Is there bad freight that you don't want when there is tight capacity.
Or is it simply a function of all freight is good as long as the price it right.
I think that the latter comment probably is the most appropriate.
<unk>.
There probably is such a thing as bad freight not a ton of it but there is a lot of bad pricing out there. So.
The appropriately.
There is very little bad freight.
You just have the price based on what that particular commodity cost you to move it in any.
Anyway, I think Tom we've done that better than most.
We understand if there's something that's expensive.
All of handle and we're going to price it accordingly.
So what does that mean from the EPS or.
Trans force.
Acquisition.
Those will just have to wait and see.
I'm not sure what their strategy is being up in the Canadian market or debt on this side of it all but.
We'll have to wait certainly if they execute all of the raising prices and whatnot I think that'll be good for our industry. So I.
I don't see it as certainly not from the standpoint now it's not a negative so I think that'll be good for all of them.
Yeah right Okay.
That makes sense, how do you think about mix.
In terms of industrial versus consumer I think the.
Kind of surprisingly strong swing back in freight in.
June July August even in the fall was that more on the consumer side.
And I think that you know the story in 'twenty, one would seem to be that industrial catches up or at least the.
The stronger swing in industrial is that something which could be meaningful in terms of your mix.
And helpful. In terms of the operating ratio performance, how do you think about that potential impact if theres more industrial freight and not as much of a step up in consumer.
Uh huh.
One are we are more exposed to the industrial markets as the industry.
Our percentages stayed pretty consistent in 'twenty with 19, we're still.
The 55% to 60% of our revenues industrial related and close to 35% to 30%.
David then.
Over the balance of the year. They came in about the same that they were of the year. Prior in fourth quarter revenue performance was pretty consistent with our industrial customers in retail related customers.
Well they were both at about the same range.
So we'd look the certainly see the.
The improvement in the industrial economy, the create freight opportunities for us and then as Greg mentioned earlier.
I think that theres going to be ongoing the opportunity on the retail side and.
Kind of leading up to.
2020, we've probably seen a little bit more growth in that retail.
Area than on the industrial side.
I'd expect that we'd see a little bit stronger performance there but.
With respect to margins and we talked a lot about this throughout 2020 on our calls that our operating philosophy is we want each customer to stand on its own we measure the profitability of each customer and we look at each customer's operating ratio and whether it's the large national accounts or smaller.
Count or retail or industrial they all should should contribute in their own ways and that's how we try to manage the business and then look at each individual customer and try to drive <unk>.
Continuous improvement with their operating ratio by keeping the business intact, and just continuing to make improvements year ending the year out with them. So.
The balance of the mix shift from one category to the next.
And that industrial versus retail categories or the national.
Shipper versus the smaller one I think we kind of proved out last year with our operating performance debt.
That were true to our word in that regard and that each do kind of operate.
Close to one another so either way, we get the growth going into 'twenty one.
Certainly we would expect that it can continue to drive and help us drive improvement in the operating ratio.
Great.
Very clear and helpful. Thank you.
Next we'll go to Jon Chappell with Evercore ISI.
Thank you. Good morning, first one kind of bigger picture of macro Greg on the kind of on the last question as well I think there's a consensus view that the industrial economy is going to catch up to the consumer this year at least that's the hope.
The number that you put up on tons in January is obviously, a pretty big number is that indicative of the industrial economy is starting to show signs of of really building momentum in your opinion or is that really kind of just the catch up from the depths of the pandemic in the middle part of last year.
I think it's maybe.
The both the.
Honest with you I know, there's a catch up of resupply for sure.
Oh.
No doubt about that.
So.
We'll see where it goes as the year develops but.
Hopefully the <unk>.
<unk> do start to catch up I think that would be.
Certainly the good thing for us as well as our industry.
Okay any of your customers generally optimistic.
Just from total.
For the most part yes.
Great.
And then the follow up is you mentioned right at the beginning of your comments about your spare capacity. So it certainly seems like youre lined up.
The industrial economy does catch up are there any issues that may restrict your ability to take on new business, whether that's labor restrictions.
Just hiring of whether it's drivers or of terminals or any other issues beyond the obvious kind of equipment capacity.
I don't think so not beyond the obvious I mean labor is a challenge it's a little tougher than it used to be for sure, but we're having success out of mentioned in his comments before but.
Our our service centers of responding to their needs and we are having success of adding.
Employees drivers the platform whatever the needs wherever the needs are we are having that success. So that's the good thing.
Wish it was a little bit faster, we could respond a little bit quicker, but it is what it is but I think we're getting there.
Sometimes your growth numbers changes your challenges if you know what I mean, it's one thing if it's some moderate growth is the growth really starts to accelerate then the.
The challenge becomes a little bit greater so I think.
The control type growth environment, we're in great perfect shape.
If we get a huge acceleration the net challenge is going to accelerate along with it so.
We'll see where it goes but.
Nothing right now and then.
Our way certainly.
Okay.
Great year.
Certainly it seems like Youre responding quicker than most thanks for the thoughts Greg.
Next we'll go to Allison Landry with credit Suisse.
Thanks, Good morning.
So just in terms of the January revenue per hundredweight up Q2 is that inclusive of fuel and if so could you give back the the.
The ex fuel number.
And then just thinking about that the for.
2% growth ex fuel in Q4.
Maybe if you could give us a sense of what that looks like if you excluded the Mexican tax weighted average.
Length of haul.
I'm, just trying to get a sense of the underlying core pricing pricing.
Yes, the Allison.
Net January number did.
Include the fuel.
Excluding the fuel is pretty consistent the growth rate was pretty consistent with with the for.
Fourth quarter, so just over.
4%, if you will and we will continue to see it.
Until about April really I think that that delta and some pressure on.
The fuel surcharge revenue in and showing up in those metrics I think the few.
It was pretty consistently higher until about April of last year and then.
Fueled trans hold current now to start becoming a little bit of a.
Tailwind finally for us on the top line basis, but.
But I think that certainly.
When you look through last year, and kind of how that yield number of excluding fuel was up four 2%.
In the fourth quarter, there is not a perfect.
Analysis, if you will there is not a linear way purely linear way to evaluate the change in weight per shipment and length of haul, but we had more pressure from the increase in weight per shipment.
In the middle part of the year in the second and third quarters.
So certainly.
The two 5% increase on the weight per shipment has got a negative effect, but then you've got a one 3% increase in the length of haul. So I mean, there are somewhat offsetting.
I think the just underlying performance.
Review the.
Our growth in renewals and so forth.
Consistent with our long term average we've been around whether you look over the past 10 15 years, we've been able to average about four 5% Inc.
The increase in our revenue per shipment.
I think that we're pretty much in that category of somewhere around that ballpark for last year and certainly like I mentioned earlier the.
The strategy is always to try to target 75 to 100 basis points above.
Our cost and I think that thats been a good consistent approach, we're not trying to necessarily always follow the market with more of a rollercoaster type of approach, we like it to be consistent.
Customers generally appreciate that and it's <unk>.
As of your conversation to have when you're just talking about pure coster customers operating ratio.
To talk about the the need for an increase but we will continue to sort of target that type of range and certainly expect next year to be supportive of our of our ability to do so.
Okay. Thank.
Thank you for that and then just.
So it seems like you should be able to generate pretty.
The strong free cash flow this year, even with elevated Capex I know you raised the dividend maybe if you could.
Share any thoughts you have on.
On buyback from 'twenty to 'twenty one.
Might accelerate from there.
The re pilot in 2020, thank you.
Certainly when we've talked about priorities for capital allocation in the past.
Obviously, the $605 million of Capex Capex is the number one position and I think while we're been able to create such strong returns on invested capital and we want to keep investing there, but the excess capital that we've been generating in the business, we've been increasingly returning to our <unk>.
Shareholders.
We stepped up the pace of our buybacks.
Last year in <unk>.
Spent a little over $360 million on the buyback program in 2000, and so that was a nice step up and we will just continue to look at.
Stepping those dollars up most likely because it certainly.
Not something that we want to continue to have a significant balance of cash hanging around on the balance sheet.
But we also want to be mindful of the fact that there may continue to be some opportunities out there from a real estate standpoint and.
And some of those in areas like on the West coast and in the northeast.
Got some really expensive price tags.
We will continue to look for some opportunities there and would rather spend our dollars.
Something thats more strategic like a long term investment in the service center, but but absent those opportunities will continue to return capital to our shareholders.
Okay. Thank you guys.
Sales.
Next we'll go to Amit Mehrotra with Deutsche Bank.
Thanks, guys I'll make it quick I know, we're coming up on the hour here just one quick one from me Adam.
If you can just help us how shipments trended sequentially from December to January.
Versus maybe.
How would they have done over the last 10 years, what's what the actual number was I know they were up 7% year over year, but just trying to gauge the sequential.
Inked in shipments relative to seasonality from December to January.
Sure and I'll just go for the benefit of everyone. I'll go through the fourth quarter and these will be our shipments per day. So October versus September was down three 3%.
November was three.
3% higher than October and then December was for 2%.
Lower than the of Denver.
January was one 4% higher.
In December the.
The 10 year average on those going back to October of three 3% decrease.
<unk> of one 8% Inc.
Increase in December as of nine 8% decrease January is normally of 3% increase but I think that given the strength of the performance that we had in both November and December.
As why that January numbers in a little bit lower than the 10 year average given the outperformance of those two months prior so.
Been really.
<unk> performance like we've said.
Really just throughout the year, we took a little bit of a breather in October if you will and as we were continuing to play catch up and were starting to get a lot of heavy shipments in.
Into the mix.
That was just really very temporary.
You can see kind of once we.
We lifted any of those restrictions just the the volumes continue to accelerate.
Through the rest of the year and now into the first month of the new year. So.
A lot of a lot of good favorable trend volume side.
Yes, so I just wanted to dig into that a little bit more so it looks like December was.
Double better than seasonality or half of the seasonal decline may explain a little bit of the January lag relative to seasonality, but there's three reasons why volumes could be reflecting one is underlying growth in the industrial economy two of spillover from truckload in three of just simple market share gains and what I want to just be clear on is that.
You guys are clearly gaining market share you are clearly in the best position to drive spillover from truckload.
What im trying not to I'm trying to understand like the January strength on the year over year basis is that more indicative of old specific factors or is it a read through to the overall industrial economy, because the U S. Industrial production still negative on a year over year basis, everybody expects it to inflect.
Moves through the share and we're right up there as well as expecting that but I'm just trying to understand like decipher between those three attributions in terms of strong strength the strength of volumes.
The left out of the quality of our sales team so.
That's point number one but.
I think that we've kind of talked about.
These points.
Earlier that we've got a service advantage that's unique in our industry and we're giving better service than anyone else, we've got of capacity advantage.
And we're starting to see and this is played out in years before.
But we're starting to see this capacity advantage play out for us as well and we're getting feedback from from customers that support that.
And then you've got other factors the industrial economy is improving.
There was a lot of uncertainty and there always is in an election year and now that's behind everyone. So you kind of have a better feel for for.
For what the regulatory environment and so forth is it going to be in and so hopefully that's going to continue to support the.
Improving the economy as well as just the country sort of reopening.
Throughout and so all of those factors the demand improvement.
Inventories being low and the need for restocking.
It's all just a matter of those are all favorable trends, but I think that we're uniquely positioned to take advantage of that with market share wins for.
For customers that.
We strengthened relationships throughout last year, as we work with them and we're flexible and.
I think that we've got improvements there that should pay dividends for for the long run in the.
Those customers are going to increasingly give us business, we think in and some that historically had been more price sensitive now have have seen.
Our ability to respond with them and give them capacity in the challenge time and to give them service and maybe it's proved to many customers that.
They pay a little bit more upfront, but the total cost of transportation.
Service when selecting old Dominion can save the company money in the long run so there's multiple factors but.
At the end of the day. It goes back to the fact that we have of service advantage in of capacity advantage and those two factors are unique.
And have been the basis for why we've been able to grow market share more than anyone else in our industry over the past 10 years.
And then just of the 76 three or in the quarter can you just tell us.
Deconstruct that between direct and indirect and I guess the bonus payments would obviously be.
The.
Part of part of the direct the direct costs I would imagine, but if you could just deconstruct that for us.
It's about <unk>.
56% on the direct side.
And so our overhead cost.
Now, we're kind of we've talked about those costs over the long run of being sort of between 20% to 25% of revenue.
And so again kind of getting back to the quality of that revenue performance we were at.
Well to move that number of back down to the.
Lower end of that range.
It's something we will just continue to build on those.
Of those bonuses are kind of split obviously more heavily to on the direct side, but for.
For management.
And nonproductive labor, meaning drivers dock workers and our mechanics.
Those costs, we put more on the overhead side and so there is an element of that bonus that.
Therefore, the split into overhead as well, but the majority of it is going to be.
And on the direct side.
Okay. Thank you very much.
Next we'll go to Jordan Oliger with Goldman Sachs.
Yes, hi, good morning, I'm just curious.
The expansion that you're talking about the service centers.
Sort of wondering how long does it typically take to if you will get the density needed to fully season one of these.
So that it gets closer to the margins that you want or is.
And then the situation where the density of searching the area that it could come in pretty quickly close to in or the type of the.
Yeah.
The margin level.
For it typically does not take long in our system.
We will open an additional facility until the need is there for the most part.
We may certainly have excess capacity in there, but we don't fully utilize it from day, one so we're not absorbing necessarily all of those costs.
From the from the asset.
Typically we will.
Put a lot of business all of that in that service center from the from.
Of the get go so there is not.
Usually of long climb too.
Our typical normal.
The returns and the service center.
Okay, Great that was it for me thank you.
Yeah.
Okay next we'll go to Ari Rosa with Bank of America.
Hey, good morning, guys and congrats on the nice quarter.
So kind of two questions. So first I wanted to ask about just the weight per shipment trends and I know Scott touched on this earlier, but.
Seeing more supply seemingly entering the truckload market and some elevated.
Order numbers.
The class eight trucks.
Maybe you could talk about what your expectation is for kind of the weight per shipment trend over the course of the year and if we see that maybe return to kind of normal levels or more normalized levels as we move towards kind of the second half.
Yes.
Like I mentioned, we're at 625 pounds.
When we've been in strong environments from strong demand backdrop, we've been around the <unk> hundred pound.
Average in the past certainly you can go back and look at 2018 and.
Of that was around the range, we were in there and so I think it can stay.
This 600 of maybe $16 50 kind of range as we progress through the year and certainly we'd see some ups and downs, but.
Think of that like I mentioned, we're continuing to see good performance with our smaller customers and they're naturally going to have a little bit lower weight per shipment.
So that will bring it down but just the overall demand environment I think is keeping all shipments.
Little bit stronger from a weight perspective, I don't think we are really getting.
Love It if you will with the spillover type freight when I look through it the.
Business, we have with third party logistics companies a lot of time with our capacity constraints in the market. They are able to go out and find and help their customers who are also our customers.
Find capacity and certainly we've seen a little bit higher weight per shipment growth with business that's controlled by the <unk>.
Then the rest of our book of business. If you will so I wouldn't expect it to stay in that sort of elevated range just given all of the favorable economic backdrop numbers and then just the fact that we still believe capacities generally constrained in the industry.
Got it got it that's very helpful.
Then just for my second question and I know number of people of obviously asked about the tsi deal with UBS freight but.
Stepping back and not not necessarily addressing them, specifically, but thinking about.
The idea of having a more focused competitive set.
You guys have obviously benefited tremendously from.
Delivering exceptional service levels.
Does it perhaps the risk kind of.
Part of your competitive advantage, if peers start to improve service levels and start to kind of emulate <unk> more in terms of the structures of their network and the service levels that they are able to provide you see that as a competitive threat at all or do you think kind of margins can.
Kind of remained best in class kind of you guys can continue doing what youre doing regardless of what our competitors are doing on the service side.
Thank you, it's obviously a threat.
No doubt I mean, if you got.
The bad team improved the players and as the threat.
Of the other teams so no doubt.
But.
I think they've got to do it they've got to pull it off and Theres, an awful lot of that goes into service.
<unk> worked awfully hard on all of the over the years.
In the not only able to be on time, but all of the other things that go into the.
The true service product.
I think we do it better than others.
It's out there, it's not rocket science, but they've got to do it so well.
We'll see how they do.
Does add though to that that the fact that.
As a unionized company and the non union.
The carriers generally have got more flexibility within their workforce and a better service product.
And <unk> seen more market share movement to the nonunion players is.
Length of haul is shrinking and there is more of a premium within supply chains to look at carriers that can respond to the next day and second day needs.
Think that we've got more flexibility as.
The group of Nonunion carriers, and I think we've got an advantage within that group as we've talked about earlier to be able to continue to win share. So.
That's something that's been playing out over the long run and we'd expect the continued to see share.
Share movement from unionized the Nonunionized players.
Got it got it.
That's a terrific answer and thank you for the time and you guys clearly of a strong track record in that regard. So thanks for the time.
Alright.
And that does conclude today's question and answer session I'll turn the call back over to management for any additional or closing remarks.
Well. Thank you all for your participation of the day. We appreciate the questions and please feel free to call us. If you have anything further thanks and have a great day.
And that does conclude today's conference. We thank you for your participation you may now disconnect.
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