Q4 2022 Old Dominion Freight Line Inc Earnings Call
[music].
Yeah.
Good day and welcome to the Ulta Minion Freightliner fourth quarter 2022 earnings conference call.
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I would now like to turn the conference over to drew Anderson. Please go ahead.
Thank you good morning, and welcome to the fourth quarter and full year 2022 conference call for old Dominion freight line today's call is being recorded and will be available for replay beginning today and through February eight 2023 by dialing 1877344.
475 to nine access code 26731763.
A replay of the webcast may also be accessed for 30 days at the company's website.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding old dominions expected financial and operating performance for this purpose any statements made during this call that are not statements of historical fact.
Maybe deemed to be forward looking statements without limiting the foregoing. The words believes anticipates plans expects and similar expressions are intended to identify forward looking statements.
You are hereby cautioned that these statements may be affected by the important factors among others.
Fourth in old Dominion's filings with the Securities and Exchange Commission and in this morning's news release and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements.
The company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise.
As a final note before we begin today, we welcome your questions, but we ask in fairness to all that you limit yourselves to just one question 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 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 Conference call with me on the call today is Marty Friedman, our studio and Adam Satterfield, our CFO . After some brief remarks, we'd be glad to take your questions.
Old Dominion's team produce fourth quarter financial results that allowed us to finish the year with company records for annual revenue and profitability.
We extended our track record of success and delivered but clear straight quarter with both an increase in revenue and improvement in our operating ratios.
As a result, the fourth quarter of 2022 was also the 10th straight quarter, where we produced double digit growth in earnings per diluted share.
Yeah.
Our team produced these results while facing many challenges during 2022.
Which were primarily related to the unexpected slowdown in the domestic economy.
We entered the year anticipating growth in our volumes that didn't ultimately meet our initial expectations.
We made the necessary adjustments throughout the year that once again shows the flexibility and resiliency of our long term strategic plan.
We also maintain a watchful eye on the efficiency of our operations and continued with our disciplined approach to managing discretionary spending.
Due to our confidence in our ability to win market share over the long term, but one thing that did not change in 2022 with our commitment to investing for the future.
Capital expenditures totaling $775 1 million in 2022, we're a new company record and we invested $295 million and real estate projects that further expanded the capacity of our service Center network.
We also continued to invest heavily in our <unk> family of employees with improvements in pay and benefits as well as a company record contribution to our 401K retirement plan for employees.
And dealing with the reality of a slower than anticipated business volumes. We also work diligently to protect the significant investment that we made over the past two years and our new employees.
Speaking of new employees I'm proud to share that.
There have been over 1300, new drivers graduated from our internal truck driving school over the past two years.
In some cases these driver school graduates that now have their C deals are temporarily working in non driving world.
While this comes at an increased cost to the company. We believe this bigger pool of licensed drivers will provide us with a strategic advantage once the freight cycle turns and additional volume opportunities become available to us.
We said in our third quarter earnings call that we anticipated volumes could start increasing in the spring of this year and we continue to remain cautiously optimistic that this will occur despite ongoing risk with the domestic economy.
Regardless of the economic environment I believe our 2022 results provide yet another example of one.
Our long term strategic plan will remain our focus for the foreseeable future.
Execution of this plan has helped us create an unmatched value proposition in our industry that led to over 1 billion of revenue growth for the second straight year in 2022.
I am confident that this commitment to our strategic plan will also continue after my retirement at the end of June this year.
Our long term success is the result of a strong team and their combined commitment to maintaining a strong company culture.
After working with Marty for most of my career I can tell you that he lives and breathes Vod family Spirit and will help take the company to new Heights.
I think the best is yet to come for old Dominion and I look forward to watching the extended long term record of success. Thank you for joining US. This morning, and now here is Marty Friedman to provide some more details on the fourth quarter.
Thank you, Greg and good morning all.
I would like to start today by thanking Greg and our board of directors for providing me the opportunity to lead this great company.
It will be an honor to lead our team and I can assure you that we will work tirelessly to keep producing strong profitable growth.
Along those lines I was pleased with old dominion's revenue growth of five 8%.
And the improvement in our operating ratio to 71, 2% during the fourth quarter. The combination of these items contributed to the 21, 2% increase in earnings per diluted share.
These financial results reflected the ongoing strength and demand for our services.
As we continue to deliver value to our customers by providing superior service at a fair price.
While our long term strategic plan is centered.
Our ability to provide this value proposition the real key to our success is our strong family culture and our people.
We will continue to invest in our <unk> family of employees as our employees are the foundation for building strong customer relationships. We are in a relationship business and each employee plays a critical role to help deliver our industry leading service I am proud to report that our service metrics remained strong during the fourth quarter as we provide.
99% on time service, where that cargo claims ratio of zero to 1%.
We believe executing our same long term formula for success will allow us to win market share in the future and as a result, we will also allow us to constantly invest in new capacity ahead of anticipated growth.
Our capital expenditures for 2023 are anticipated to be $800 million.
Which will improve the average age of our fleet and further expand the capacity of our real estate network.
We have invested approximately 2 billion in real estate expansion over the last 10 years and increased our door capacity by approximately 50, 50% as a result.
These investments supported our ability to double our market share over the time.
Ever increasing cost of both real estate and equipment. However, we requires to maintain our pricing discipline and long term pricing philosophy is designed to evaluate the profitability of each customer account.
And then obtained the necessary increases to offset our cost inflation, while also supporting our ongoing investments in capacity and technology.
As we have executed on this consistent strategy over the years, the resulting improvement in our cash flows have generally supported our ability to invest between 10 and 15% of our revenue into capital expenditures each year.
Continuing with each of these priorities demonstrates our team's intention to remain focused on executing the same business strategy that we have carried it created a unique position in this industry. We will continue to focus on our people servicing our customers and investing for the future.
This commitment to the core principles have differentiated us in the marketplace.
Gives us confidence in our ability to further produce profitable growth, while also increasing shareholder value.
With that I'll now I'll now turn things over to Adam who will discuss our fourth quarter financial results in greater detail.
Thank you Marty and good morning.
Old Dominion's revenue growth of five 8% in the fourth quarter resulted from a 16, 7% increase in <unk> revenue per hundred weight, which more than offset the nine 1% decrease in the MTO plants.
<unk> revenue per hundred weight, excluding fuel surcharges increased eight 7% and reflects the continued execution of our long term pricing initiatives.
Our consistent approach to pricing as supported by our ability to provide our customers with superior service and available capacity.
We believe this value offering is becoming increasingly important to shippers, which is why we remain absolutely committed to executing on the fundamental elements of our long term strategic plan.
On a sequential basis revenue per day for the fourth quarter decreased two 4% when compared to the third quarter of 2022 with <unk> tons per day, decreasing four 4% and <unk> shipments per day decreased four 6%.
For comparison, the 10 year average sequential change for these metrics includes a decrease of <unk>, 6% and revenue per day.
A decrease of one 3% and tons per day, and a decrease of three 3% and shipments per day.
For January our revenue per day increased approximately four 2% as compared to January of 2022.
This growth included a 13, 1% increase in <unk> revenue per hundredweight that more than offset the seven 8% decrease in <unk> tons per day.
Our fourth quarter operating ratio improved to 71, 2%, which was primarily due to an improvement in direct operating cost as a percent of revenue.
Within our direct operating cost productive labor as a percent of revenue improved 170 basis points, while our purchase transportation costs improved 200 basis points.
These changes more than offset the 260 basis point increase in operating supplies and expenses.
Primarily resulted from the significant increase in the cost of diesel fuel and other petroleum based products during the quarter.
Our overhead cost as a percentage of revenue were consistent between the periods compared.
Old dominion's cash flow from operations totaled $361 $3 million and $1 7 billion for the fourth quarter and 2022, respectively. While capital expenditures were $274 million and $775 1 million for the same periods.
As Marty mentioned, we currently expect capital expenditures of $800 million in 2023.
We utilized the $199 $9 million and $1 3 billion of cash for our share repurchase program during the fourth quarter and 2022, respectively.
Cash dividends totaled $33.01 million and $134 5 million for the same periods.
We were pleased that our board of directors approved a 33, 3% increase in the quarterly dividend to <unk> 40 per share for the first quarter of 2023.
Our effective tax rate for both the fourth quarter of 2022, and 2021 was 25.0%.
We currently anticipate our effective tax rate to be 25, 8% for 2023.
This concludes our prepared remarks. This morning, operator, we'll be happy to open the floor for questions at this time.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your touch tone.
If youre using a speakerphone please pick up the handset question Ricky.
To withdraw your question. Please press Star then two.
At this time, we will pause.
No materially to central Iraq.
Okay.
Our first question comes from Jordan <unk> with Goldman Sachs. Please go ahead.
Yes, hi, good morning.
Question. So on the salary expense side of the equation for the fourth quarter I think the dollar amount was actually down year over year can you maybe talk a little bit too.
Bots around the drivers of that.
It's just lower incentive comp I think you had mentioned attrition.
And then how do we think about the salary.
Wind going forward, whether it be on a wage inflation perspective or a growth perspective.
Sure.
The overall dollars, obviously, we've been making adjustments as we've gone through the year and I would say through the back half of the year in particular, we've been letting attrition to take place in.
Just consistently adjusting our head count in the hours worked by our people in relation to what the volume environment dictate to continue.
Give service, but continuing to operate efficiently and so I think overall that helped.
Help drive the decrease in that quarter over quarter.
Those expenses if you will so we continue to be focused obviously on managing those costs. That's our biggest cost element of our business is in the salaries.
Wages and benefits and so it is certainly the biggest area of focus as we chartered continue to run our network as efficiently as possible without given any sacrifice to service. So I do think that.
Given the environment in the fourth quarter.
We had given the circumstances pretty strong.
Our revenue performance I was pleased with the way our revenue and volumes trended and that was it.
Probably one that favorable.
Line items, if you will in comparison to the guidance that we had originally provided with respect to the operating ratio.
That was how the salaries wages and benefits ended up coming in for us.
Thanks, So just as a follow up is there a way to.
Do you expect that type of control at least in the first half until you get to that inflection you know in the spring on volumes I mean can we continue to see that.
Trend line stay the same for the time being.
Well I think we're in a good spot right now with where our head count is and typically we start seeing increases.
And volume and certainly we're not in a normal environment by any stretch but.
Our January volumes were slightly positive versus December .
Flattish overall really when you look at it from a shipment perspective, but we continue to anticipate that we will see volumes returned to us in the spring I think we want to make sure that we've got all element with capacity in place to deal.
With that environment whenever it inevitably comes we're certainly very confident about what our future market share opportunities will be.
So we want to make sure that we're positioned with our people our equipment and certainly our service center network to be able to effectively respond.
When that does happen typically the February volumes are a little bit higher than in January and it's March when we.
Start seeing the increase coming and so I think that what we're trying to do is just again measure and manage all elements of capacity to ensure that we're in a good spot where that happens. So again I think that's certainly a lot in the first quarter and probably the first half of the year really depend.
On what the volume environment gives us, but we continue to believe that we are going to see some increase we've certainly seen it in the past even in down economic environment, whether you look at something as bad as the environment was in 2009.
I think 2016 is another good example, where second quarter volumes were higher than the first and so it would be a little different situation I think playing out this year in comparison to 2022, when beginning with April .
Volumes were.
Either decreasing or flattish on a month over month basis, as we work our way through the year.
Certainly we'd like to see volume slow went into us as we transition and make our way through 2023, and hopefully start getting a little.
Help from the macro economic environment as well.
Great. Thank you.
Our next question comes from Jack Atkins with Stifel. Please go ahead.
Great. Thank you Greg Congratulations on your retirement and I think the $34 billion of.
Shareholder value you create it since you've been CEO congrats on that and then Marty you've got some big shoes to fill but congratulations to you as well.
Thank you Jackie taught me whale.
I appreciate the kind words.
Good Rob.
Absolutely has been so I guess, maybe if we could Adam if we could if we could maybe expand a bit on the January trends a bit more you talked about January being up a bit.
Or maybe even flattish versus December .
You feel comfortable sharing there in terms of January revenue trends in tonnage or shipment trends that'd be helpful. And then I guess as you think about the operating ratio first quarter versus fourth quarter.
Anything you can maybe share relative to normal seasonality.
Would be helpful. There, so I'll turn it over to you Adam.
Yes, I guess from a volume standpoint.
On a year over year basis January our tons per day were down seven 8%.
That compares to December where we were down 12, 3% overall.
Good point out and obviously, we'll continue to give our mid quarter update.
A little bit easier comparison.
With the January year over year comp.
We had very strong performance in February of last year, so that comp gets a little bit more difficult.
There and then they obviously start getting easier so.
Just I guess be aware of that when we give that.
February update.
So, but but nevertheless.
I was pretty pleased with the way really going back through the fourth quarter December came in a little bit stronger than what our normal sequential change is.
That's a month, we kind of talked about I think on the last call in the fourth quarter in particular, and some slower economic environments is where we've seen.
A pretty hefty drop off in our business levels and the fact that we say stayed pretty steady rather.
<unk> was a positive takeaway for me I was hoping that we would see our sequential performance from a volume standpoint be a little bit closer to our 10 year average trends and certainly it was.
The fourth quarter volumes were down.
Four 4% sequentially the normal changes of one 3% decrease but if we compare back to where we were in the second and third quarters relative to our 10 year average changes.
I think we are starting to trend back in the right direction.
Whether or not we'd get back to the full 10 year average.
At least in the first half of the year remains to be seen I think we probably need a little bit stronger economy, but I do think that we're going to start seeing some increases like we mentioned.
Particularly starting in March and continuing through the.
In the second quarter, and we'll see where things go from there but.
But I think that certainly that that volume environment.
Really will dictate.
And what the operating ratio does typically.
To give a little bit more color on the first quarter operating ratio.
We have about 100 basis point.
Increase they are coming off the fourth quarter.
And this particular first quarter of 2023, and we did have a favorable insurance adjustment.
<unk> talked on the and given the guidance for <unk> of <unk>.
Assuming that line held steady there.
There was improvement there and I think that that will normalize back to around one 2% of revenue.
<unk> 23, so that becomes a 70 basis point.
So headwind for us I think that we're going to continue to see a little bit of a headwind from depreciation as well.
We've talked about this as we worked our way through last year that our delivery cycle was a little different.
Than prior years, and so we're probably going to see a little bit more headwind from me or so on a normalized basis that probably puts us at about a 200 basis points.
Increase over where we just finished the fourth quarter, but.
So that kind of puts us somewhat flattish if you will want to year over year basis. If we were to hit that certainly I think if we get better revenue performance.
We've got the.
The opportunity to be able to outperform that longer term.
<unk> average but.
I think the revenue environment will certainly control a lot of it for us.
Very helpful. Thanks again.
Thanks, Jeff.
Our next question comes from <unk> majors with Susquehanna. Please go ahead.
Following up on the labor piece.
Our head count was down about 3% sequentially I think that's the biggest decline besides the COVID-19 <unk> 20 drop that you've had since you began reporting this.
On a quarterly basis, you talked a little bit earlier in one of the earlier questions about feeling like youre in a fairly good place.
Can you elaborate a little more is that mean head count flat to up from here or flat.
Flattish and then trend with volumes from here.
Just to help put a finer point on that I mean any commentary.
On productivity or the cost of heads I don't know labor cost per employee or any other guidance you can get to help us kind of frame the cost piece of that and the expectation. Thank you.
Thanks Bascom this is Greg.
I'll take that and try to give you as much color on it as possible, but obviously, we made some adjustments where we felt like we needed to in head count and as Adam mentioned earlier, you talked about attrition.
Attrition control some of these adjustments, but we've made some in other places where we need it.
Certainly we haven't replaced openings likely typically would.
In a normal cycle, where we're growing and whatnot.
And that will continue to be.
Our efforts until things start to turn the other way. So we will see typically we will see a little uptick late February .
Going into March things really start to pick up so is that is that.
Going to be the trend this year, we hope so but just.
Just not absolutely certain.
We are in a good spot because as I mentioned in my comments earlier, we've got an awful lot of qualified drivers that we've got work in the platform and whatnot, they're not driving full time so.
I think we'll certainly be ready when the increase does happen.
And hope it's sooner than later, but.
Yeah, definitely we will continue to make adjustments as needed.
<unk> talked about this on.
Some of our prior calls that we've been able to make these adjustments and downturns in the past.
We proved again that we can make adjustments when we need to we've done it again.
Feel real good about where we are we just have to continue to stay on top of it and react as the business dictates.
Hope that helps.
No it's very helpful.
So maybe cap that off any thoughts on items that could impact kind of the cost per head to share I don't know if theres some variables on incentive comp or other things that might make that a little wonky versus what we would deem a normal trend based on history. Thank you.
Not as onno of basketball I don't think so.
It should be fairly normal from that standpoint.
We've had we certainly had some good experiences in the recent past with our benefit cost and those kind of things. So you just hope that those things continue to be consistent adult turn the other way for for some unknown reason.
Thank you Greg.
Sure thing.
Our next question comes from Tom <unk> with UBS. Please go ahead.
Yes, good morning, and congratulations also to both Greg and Marty and Greg Yes, just.
Remarkable run so congratulations to the great performance over time.
Let's see.
I think if I guess just in terms of the view on tonnage I know you have a large customer base. So maybe it's tough to parse it out but.
What would you say about the.
I guess dynamic in terms of volume from retail customers and.
And volume from industrial customers. It seems like probably theres been a lot of weakness and focus on inventory reduction with retail customers.
Maybe a little less clear what's happened with industrial so just trying to think about it.
Is there potentially some weakness yet to come with industrial.
Have you seen a pretty big difference in the volumes from those two groups.
So kind of any thoughts on that topic would be helpful. Thank you.
Yes, good morning, Tom.
I would say during the fourth quarter, we saw pretty consistent revenue performance with both our industrial customer base and our retail customer base.
I would say earlier part of the year.
<unk> had seen a little bit stronger performance on the industrial side and those two kind of converged if.
If you will in the fourth quarter, obviously, our customer base has leaned more industrial than retail, we're still 55% to 60% industrial overall and 25% to 30%.
So on the retail side longer term that retail.
Business has been growing faster than the industrial and I think that reflects.
Some of the e-commerce trends.
The effect of those on our customer supply chains.
We certainly continue to believe that that will be a longer term tailwind for us and I think that as we start working through 2023 and <unk>.
We believe that we will start seeing customers' orders for their product picking up and some inventory.
Rebalancing, if you will and I think that's why we've seen in some of the prior year.
Slow periods.
I spoke of earlier why you start seeing that.
Orders in freight flows kind of leading.
The other macroeconomic indicators. So we believe the freight cycle will start turning and we'll start seeing some pickup in.
Through these customer interactions and conversations that support our belief that we're going to start seeing freight flow and again.
As we get into March and into the second quarter.
But it sounds like you haven't seen a big difference maybe over the past in <unk> or even <unk> in performance from industrial and retail and I guess looking forward do you think maybe both of them kind of bottom and improve at the same time.
And maybe we start seeing retail outperform again.
While I assume in some of the industrial numbers look a little bit weaker we start getting some of that retail performance as an offset leaving.
Leading this out.
And eventually we will start seeing the industrial picking back up again.
Right, Okay, great. Thanks for the time.
Thanks, Tom.
Our next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hey, Thanks, good morning.
Congrats absolutely Greg and Marty.
It's been a heck of a run certainly Greg.
When I guess.
I wanted to talk a little bit about how you guys are planning for the potential improvement in <unk>.
Tonnage that you may see in the spring you guys have always been very good at being out in front of potential opportunities, but do you think that there are incremental costs that need to come on the network before that happens are you fairly comfortable being able to sort of let tonnage lead you out of this to drive incremental margins, which obviously you guys have performed quite well with over time.
Jim.
Yes, I think that.
Chris.
Some of the conversation earlier about head count.
Probably on paper, we may be a little bit heavy now if you just look at the things statistically if you will but that's kind of the point of what we've said is I think that we're in a good spot.
With our head count with our fleet and certainly with the service Center network to be able to let volume start flowing again and when we talk about increases just keep in mind that we're talking about sequential increases in.
Certainly with the year over year comps, particularly in the first half of the year.
We've got some some tougher year over year comparisons there.
Before we get back to you.
It is being able to show year over year growth.
But I think that'll be the important thing for for US to continue to watch is are we seeing those type of sequential increases and certainly we've got a lot of flexibility within our workforce and I think that given the team that we have and in the current levels.
We should be able to respond to growth when it starts coming at us.
And get some good leverage as it does but.
Certainly we're looking at.
Right now in the first quarter like I mentioned with.
The January tonnage levels, we've got.
Probably the the volumes that we're going to be the toughest comp and certainly overall in the fourth quarter, we were down nine 1%.
Our yield performance.
Still looking good and we certainly expect.
So to continue to push for core yield increases this year to offset our cost inflation as.
As well, but there could become.
Converging factors, if you will that drive the top line, depending on what the overall fuel environment looks like and so forth, but we're certainly going to continue to to look and execute on the same pricing philosophy that we have in the past.
We look for cost plus increases to offset the cost inflation that we see in the business and to keep supporting.
These expensive investments that we're making.
Our real estate network and technologies that can both improve customer service, but also drive further operating efficiencies for us.
A lot of things to kind of manage through in particular, the first half of this year, but but I think we're in a good spot to be able to handle the volumes that they do back flow our way.
Yes, no. That's very helpful. I appreciate that color on the point of pricing just to follow up.
Ex fuel yield did accelerate the year over year growth to accelerate in the fourth quarter and I guess, you're guiding the first quarter or roughly speaking to around flattish, which may coincide with the worst tonnage youre going to see from a year over year standpoint. So when you take a step back and think about 2023 more broadly.
Our expansion on the table given those circumstances pricing good enough to be able to offset inflation as we go and tonnage potentially gets less worse as the year progresses.
Well I think that again.
Again, the revenue environment.
We will have a lot to say about that.
More broadly speaking, we've talked in and kind of pointed everyone to our performance in 2016 and 2019, when we've been in a flat revenue environment certainly.
Given the planned investment of about $800 million in capital expenditures this year with some pressures that we'll see on depreciation.
Starting earlier in the year than normal.
We'll have some some pressures if you will in those overhead costs and we saw a little bit of that in the fourth quarter already where overhead costs as a percent of revenue were flat and <unk> 22 versus <unk> 21, but.
Like we did in <unk>.
2016 and 19.
The focus when we're in a flat to a down revenue environment will be managing our variable cost flat and we'd love to see improvement.
But trying to hold all of those costs flat.
And then any deterioration if there is anything would be in those overhead costs in particular on the depreciation side and so.
<unk> and <unk>.
<unk>, we certainly saw a little bit above.
The decrease in the operating ratio or an increase rather.
It depends on how you look at it.
But I think our operating ratio deteriorated 60 basis points at year end.
And that was something that.
Was right in line with the change in the depreciation line item and then 19 was the same thing where we had a 30 basis point deterioration there. So we'll take it quarter by quarter, certainly and we will talk.
We get to the end of the next quarters call about what we think we may be able to do in <unk>.
Certainly feel like we're probably going to have.
A little bit more pressure on the overhead side. This.
This year.
If we are in fact in a flat to slightly down revenue environment, but there's still a lot up in the year when it comes to the top line for this year.
Okay. That's very helpful. Thanks for the time guys appreciate it.
Yeah.
Our next question comes from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, Good morning, guys and again, congrats Greg and Marty.
I was wondering can you give us the yields ex fuel accelerated in Q4.
Is any color is underlying pricing accelerating here and then Adam I think you talked about 13%.
Total yield growth in January any any way you can just help us on the <unk>.
Gross and net of fuel I, just want to understand if that net of fuels continuing to accelerate.
Net of fuel and January was about eight 5%.
So fairly consistent with what we just did.
Fourth quarter overall.
We are starting to see.
Decrease in fuel.
We'll see how that continues to trend this.
This year and so perhaps the.
The yield with and without fuel.
These two numbers.
Maybe be a little bit more consistent I think.
Fuel hold steady with where we are right now it certainly becomes a headwind.
As we get into the later quarters of the year, but.
But nonetheless, I think that certainly there is always mix changes that can drive that number higher or lower but I think it's pretty consistent with what our long term philosophy has been and we certainly dealt with higher cost inflation on a per shipment basis. In 2022, then what at least initially.
Expected I thought we would see some some cost moderation.
As we got into the back half of the year, which obviously did not happen. So we just continue to execute on that same consistent philosophy that we always have and I think thats why we saw the yield performance that we did but.
I believe that.
On the call should be a little bit more favorable versus the last couple of years and 2023 or certainly that's our hope and we will continue to build our cost model around what that cost inflation expectation is and then continue to try to achieve a 100 to 150 basis points.
A positive spread above that inflation to again support the investments that we're going to make so I think overall, if you just sort of roll out typically.
The first quarter our yield metrics.
Up about half a percent over the fourth quarter.
We'd expect to continue to see if mix is constant those numbers increase sequentially quarter after quarter.
Certainly that.
Some of that growth. If you will may start to moderate a bit, but again youre going to see that same type of moderation.
Should the cost, but nonetheless, the overall philosophy stays the same and we will continue to look for cost plus pricing.
Very helpful and just because you mentioned the fuel and maybe the surcharge revenue in flex negative how does that impact your thoughts on the question earlier about operating ratio improvement this year.
Well again, it's just it's one of the drivers on the top line that is a change that we will deal with and I think overall it would be a positive for the economy and something that would.
Would be good to see.
I don't know anybody that would.
Like showing up at the pump and seeing that bigger number.
And certainly that's been a big cost driver for what we've seen I.
I think it's better to for cost inflation in the other line items.
I think the increased cost of fuel is driving inflation and about anything whether it's a product or service.
We're buying them so.
A decrease there certainly helps but.
As we look back.
2015, 2016, where the Timeframes that we last went through a bigger decrease in.
In average fuel prices.
I think we continue to try to manage just like we did in those periods and continuing to manage the different components that go into it.
Building out our rates with customers, whether it's base rates fueled.
Fuel surcharge or accessorial.
Managing all of the revenue inputs with the cost inputs.
And trying to account for whether or not fuel goes up or down. So it was just something that are.
Pricing and cost in teams and our sales teams have got to work through as we're working through renewals with our customers.
Every day, and just looking and seeing where we are and what we feel like we need to keep driving improvement in our customer specific pricing and profitability.
Very helpful. Thank you guys.
Thanks Scott.
Our next question comes from Allison.
<unk> from Wells Fargo. Please go ahead.
Hi, Good morning, just wanted to ask about a potential customer attrition just given some of the freight challenges out there.
Your customer focus on cross on costs are you seeing any sort of attrition as customers try to trade down obviously quality, but prices well.
There are other dynamics, maybe a little different this cycle just any thoughts there.
Yes. Good morning. This is Marty I'll take that one.
We arent seeing anything like we saw back in <unk> nine.
We have customers in here every week.
Our larger customers contract customers coming in and it's business as usual theyre coming in and asking for where our contract renewals additional services and so forth. So.
We're not seeing anything.
Out of the ordinary for the economic circumstances, no major price cutting or anything like that.
I feel pretty confident that.
Is it the.
Ian This is probably near what we're going through.
Perfect. Thank you.
Our next question comes from.
John Chaparral.
Evercore ISI. Please go ahead.
Thank you good morning.
Marty since we have you.
And youre entering and where you're already there, but youre entering the head seed and the best in Australia in the industry, probably on the precipice of breaking the 70 or basis, you've already laid out your capex for this year, but as you think strategically over the next few years anything youre thinking about differently as it relates to growth as it relates to.
Two.
Labor et cetera.
Or is it just kind of ride the cycle with what you have had and continue to.
Incremental productivity out of that mouse trap.
Well one of the reasons, we've been able to grow like we have over the last years is because we continue to build capacity even during slow times and I don't see us moving away from that focus.
So we will continue to do that we will continue to.
To buy new equipment and.
And hiring employees as needed so I don't see any change from what we've been doing that's made us successful in the past.
Yeah.
Thanks Marty.
Our next question comes from Ravi Shanker.
Stanley. Please go ahead.
Thanks, again, everyone, Congrats Greg and Marty Marty yesterday's don't change a thing.
Yes.
Yes.
And don't do anything.
Just a couple of follow ups here do you feel like you have a better ability to capture that spring inflection in growth. If it comes in versus peers, given how much capacity do you have a sense of I know you.
Our ability to grow into that volume relative to peers.
I don't know about relative to peers, but certainly we feel confident about our ability to grow in.
You look at.
Things in the past we've certainly.
Have been outgrowing the market.
<unk>.
Relative over the last 10 years in particular year in and year out when we're in up cycles, that's when our business shines the brightest and.
Certainly our service is what Windsor share and have an available capacity to respond to customers when they need us the most.
Our hallmark and so we're sitting in a very good spot right now to be able to respond to that growth.
When the phone calls come we're going to be picking them up.
Got it sounds good and then maybe as a follow up on the topic I mean, theres not a lot of speculation in the investment community like feel and kind of how much is driven earnings and I think a lot of you I mean.
As I've been saying that hey, Theres, a new algorithm when it comes to fuel pricing and its particular than you think et cetera et cetera, how do we think about how fuel becomes a headwind in the back half of the year.
Way to quantify that also and how much of that fuel Chem.
Can be sticky and going to convert the base rate over time do you think.
It's something it's.
We certainly faced this question before when fuel changes I think that we got.
A pretty long period, where we were at low fuel prices kind of going back to when that final decrease happened in 2016.
Say, we had pretty good results.
2016 and 2020.
When we were in a lower fuel environment.
Again, I think that it's something that maybe people on the street, it's hard to understand if you're not negotiating.
With some of these.
Types of contracts, but for us, it's all about having a good cost model understanding their cost.
And knowing what the revenue and the cost inputs are going to be whether fuels at $5, a gallon or $3. A gallon. It's just something that we've got to manage through in some environments.
Some customers may want more or less.
An increase coming through a base rate type of change.
Some may want more exposure to that variable component of pricing that would be the fuel surcharge and there's ways to increase yields by driving productivity with customers as well, where we can obtain obtained the.
The same objective.
By just looking at the operational factors underneath them and having all of our systems tied into our cost model allows us to have those types of conversations with our customers as well.
Ultimately assist about driving customer specific profitability improvement and working our continuous improvement cycle. So that we can continue to purchase real estate and expand our network. So customers have got that.
The leverage within their own supply chain, we're effectively buying capacity on behalf of our customers. So I think we got to just continue to execute on that front.
<unk>.
I think that we've shown in terms of going through prior cycles.
We'll be able to do so.
Understood. Thanks, guys.
Our next question comes from Ken <unk> with bank of.
Please go ahead.
Great Good morning, and again, congrats Greg on your tenure and Marty on the new role.
Just a quick clarification I guess on that spring pickup you've talked a bit about is that just comp based or does their commentary.
So you are hearing from customer comments or just I guess on showing up inventory I just want understand why the I guess the confidence in that given the market and then my question is on depreciation you noted depreciation is going to be higher last year, you've targeted I think it was $485 million on equipment at the beginning of this year at the beginning of the year. This year Youre doing 400 million on equipment is that because the.
Delivery schedule was slower.
Whats your view on getting that equipment and does that still allow you to stay at that 2025% excess capacity that you typically target. Thanks.
Yeah, Ken this is Greg.
I think so I'll kind of take care.
Your revenue question first, but we typically always pick up in the spring. So certainly we're hopeful that we get back into a more normal cycle than what we've certainly been in really since COVID-19.
We've kind of been.
Off cycle, if you will if that makes sense.
The normal.
Numbers that sequential that we compare with all of them over the years, they're just they've just been different in the last couple of years. So.
Certainly getting back to a normal cycle would be one reason we are somewhat hopeful some of the things that we've seen and heard and read.
Inventories are starting to get low.
Compared to where they were back say a year six months ago.
So I think there's some things that.
That lead us to believe that we could be coming out of this thing plus we've been through many many cycles over the years and typically they're near 16 months ago, when we kind of think that.
That's what we've been in this one so yeah we are.
Helpful.
<unk> got our fingers crossed that we.
We will come out of this thing.
As we get into the spring and later on in the second quarter.
As far as the equipment yet.
It's been kind of a kind.
<unk> deliveries that we cycle that we've been all this time, we certainly didn't get everything.
Back last year like we typically will typically we would have all of our orders.
In the early fall, we had everything in place that wasn't the case this year, we're actually still taken some equipment.
<unk> gotten back last year, so it's been a little different.
So we'll just have to see how the business develops and I think thats going to determine where that.
$400 million that we talked about number where that goes this year. So.
We'll just have to see and it'll certainly be.
Based on our business conditions and the numbers that we see as we get out into 2023 as to how that 400 million develops this year compared to last year.
Great. Thanks, Greg I appreciate the time.
Yes.
Our next question comes from Amit <unk>.
<unk> Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everyone, Greg hearty, congratulations on the retirement and Marty looking forward too.
To working with you as well.
I guess I wanted to ask about pricing.
Pricing discipline is good so it's not really about that but I guess, we've seen a lot of <unk> companies in recent months announced general rate increases I guess, what's surprising to me is some of the ones that have even a little bit weaker service.
It may be more tempted to lean into price have also announced big price increases.
And I wanted to understand like the reaction from the customers because the.
The typical cycle.
Our customer would maybe trade down to <unk>.
Regional lanes with high quality.
High quality carriers.
Maybe you'd lose 20%, 30% of your lanes or two or three range or whatever it is that doesn't seem to be occurring right now where shippers are not.
Moving to other high quality, but regional lanes.
And I wanted to understand one why do you think that might be like what's the psychology of your customers in terms of how they think the cycle is going to play out and then second how does that impact your ability to bounce back because I would assume is theres a big seasonal pull in March and April may.
You don't have to win back lanes, you don't have to win back customers. So you can kind of.
See it first in terms of that upswing, so sorry for the long winded question, but hopefully that was clear.
So I don't know if I can explain the psychology of our customers, but I did take a site class in college, one so I'll give it a shot.
I think that we've talked a lot about this.
Since going through Covid.
There's been so much disruption to customer supply chains.
Missed revenue opportunities incremental costs added to production lines.
Just because of all the supply chain challenges that many of our customers have been dealing with over the last couple of years. So I think for that reason, we've seen a little bit of change in customer behavior, I think customers have been sticking with us.
Certainly over the last year as Marty mentioned earlier, despite the weakness that we've seen in the economy, we have seen good customer trends.
We get periodic reporting from our National account sales teams and we just we have not been losing customer accounts.
I think customers have been keeping us in place with clothing inevitably know that Warner many are still dealing with challenges a lot of the conversations that we continue to have.
More around challenges within the supply chain and I think to us that they know that we're probably closer to things turn in orders picking back up for our customers' products and they want to make sure that they've got capacity that's available as needed.
There were a lot of <unk>.
Competitors that had embargoes in places and communication to customers, saying I'm picking up today, but I can't pick you up tomorrow.
And we were able to respond in particular in 2021 to a lot of those customers that called on us needing capacity and so I think that that strength in the relationships that we have with our customers and we've got a lot of continuity within our customer base.
Way, so I think those.
Everything that's happened over the last couple of years has really strengthened.
Those customer relationships so.
I think that one of the things you said as part of your question, though.
Gives us a little confidence in terms of when those orders for our customer products start picking up again in a sense that in prior cycles like a 2016 or 2019, where we may have lost a few lanes.
Our lost a customer account, we were always confident that the business would return to us.
Any cases, because the customer told us that they wanted to bring this back in when they could.
We had to wait until the next bid cycle before we got that opportunity customers are keeping us in place they're keeping their contracts current.
Pricing terms updated and so I feel like that whenever those orders start picking up.
May be getting three shipments instead of two at every pickup in volumes.
<unk> returned to us quicker than perhaps they have in prior down cycles.
Alright, Okay very good thank you.
Next question comes from Irene <unk> with Credit Suisse. Please go ahead.
Great. Thanks, Good morning, everyone and congrats Greg it's certainly been an impressive run that you've had and congrats also to Tim Marty.
On some big shoes to fill here so.
So I wanted to ask about you guys have talked about for some time.
The ability to get DLR into the sixties I understand obviously, there are different puts and takes on kind of economic uncertainty.
Maybe some cost inflation, but also talking about this inflection that's expected for second quarter. It seems like theres. Some optimism there around the ability to perhaps improve our year over year, which would certainly suggest that you're kind of bumping up against that that ability to get the LR into the sixties I just wanted to get your updated thoughts on kind of given.
The progression of or improvement that we've seen over the last couple of years do you think that or in the sixties are achievable.
Whether it's 2023 year into 2024.
Well again, I think like we were seeing earlier.
Certainly 2023.
Just given the environment.
Certainly going to be a little bit more challenging and we're continuing to keep our eye for the future, we're investing or plan to invest $800 million in capital expenditures this year.
When the economy is certainly soft right now.
We may end up being in a flattish type of revenue environment. So revenue will certainly dictate a lot.
But I think that just given the comparison to the two years that we've talked about.
You can make your own assessments as to what you think revenue may end up being for us for this year, but if we're in a flattish.
Revenue environment and certainly.
We've seen the operating ratio increased slightly in those years, but.
The positioning that we're going through is to make sure that we're in a great position to be able to respond.
That inflection does happen and we get back to a revenue growth environment, and we've averaged 11% to 12% revenue growth per year over the last 10 years, and we think of ourselves as a growth company, but we're certainly going to be disciplined and.
In periods, where the economy is softer than we've seen.
Flattish type of revenue in those environments in the past when the economy has been slower. So I think certainly a lot depends on that but.
We have any type of or degradation in the short run meaning just for this year.
The positioning and the recovery year is usually pretty doggone strong and so we continue to stand behind our goal of wanting to get to a sub 70 operating ratio, we didn't put a timeframe behind that when we laid out last year at this time.
For this reason, we don't want to be beholden to something that's in the short run that may jeopardize our opportunity for producing strong profitable growth in $2024 25, and beyond and I am confident that we will certainly be able to get the sub 70 for the year, we certainly did it for two quarters.
This year in the second and third quarters, and so I think we've shown that it can be done in and just to be clear. We continue to say that that is our next goal, but it will not be the final go we think that we can continue to go further from there.
But we're going to keep that goal in sight for now and once we achieve it and we will lay out where.
Where the next stop might be in this long term or journey.
Got it understood and then I wanted to ask also.
As I think about the conditions that you've kind of been describing for 2022, where volumes have been a little bit softer than what you would have hoped for obviously, we've seen head count head count come down.
And yet your earnings growth was obviously very strong this year, it's 35% plus.
Yeah.
To what extent, when youre going out and talking to customers.
Hi.
Who maybe were a little bit squeezed on capacity.
During COVID-19 conditions as supply chains normalize does that put a little bit of a headwind on your ability to go to customers and kind of ask for rate increases or Conversely, do they kind of push back and say look we gave you rate increases when capacity was really tight but now the supply chain is kind of normalized.
A little bit.
Are they are they pushing back any any more on on some of the rate increases relative to what they were over the past kind of 12 to 18 months.
I think the answer to that is yes site push harder when they know that.
They are in a position to do so and certainly with conditions.
<unk> been yes, they're pushing us for not as big of an increase of that kind of thing, but you got to remember we don't necessarily go into a customer and start talking about price here, we talk about the value that we provide that customer and thats, what we will continue to sale them lease.
<unk>.
Many times value and price are pretty darn close if you know what I mean, because if youre not getting value what is the price matter.
So that's what we'll continue to sale.
Fully I think our customers have seen that and what <unk> has delivered over the years.
That's a huge reason for the <unk>.
Access that we've had so we'll continue to focus on selling value.
Price.
<unk>.
Honestly try not to have those conversations.
One of the things our sales team does a fantastic job of sharing our costing with our customers, especially our large customers.
<unk>.
We're an open book, we actually show them, what we are.
Paying for a Clinton how much it costs.
Cross dock.
Pick it up sort of segue at whatever the cost may be and once you explain to them what our costs are.
It's a lot easier to swallow a general rate increase.
I think most of our customers understand what our costs are and we.
We tried to explain that to best viability.
Okay.
Okay makes a lot of sense. Thanks for the time and the thoughtful answers and congrats again, Greg and Marty.
Thanks.
Our next question comes from Jeff Kauffman with vertical Research partners. Please go ahead. Thank you very much and I'll also echo congratulations Greg and congratulations Marty.
Again, a lot of my questions have been answered at this point just kind of a real quick one on fuel and the potential headwind that youre talking a little bit about for 'twenty three.
I just look at this quarter.
Fuel surcharge revenue up $97 million incrementally fuel expense up $48 million incrementally so or $49. So the net of that was a positive $48 million total operating income was a positive $58 million. So I guess part one is is the math that simple that of the $58 million operating income improvement $48 million was the fuel deferring.
Sure.
And then I guess if so.
As I look at 'twenty, three given where fuel is right now can you quantify what the magnitude of that headwind would be say the fuel surcharge component coming down which you alluded to in the January data.
<unk> fuel expense.
Yeah. The short answer is the math is really not that simple.
Going back to prior comments.
Fuel is just one of many elements that get negotiated as part of our customers right.
Each year, so it could be that we get more.
The fuel surcharge in one particular year more base rate.
And another and so trying to.
Look out in <unk>.
Measure what the surcharge revenue.
Pes is versus what the potential expense might be there is not really a one for one comparison in that regard the surcharge.
If a customer has decided to take on more variable exposure to that fluctuation in fuel is covering many more call settlements than just.
The cost of fuel and other petroleum based products certainly that's what it's designed to cover.
But thats not everything that is covered by <unk>.
That variable component of pricing, so again I think the if.
If you want to look back into a declining fuel environment I would point people to look at 2015 and 2016.
In <unk> the average price of fuel was down 30% that year.
We had volume growth is a little different macro environment.
So as a result, we were able to improve the operating ratio that year and 16. The average price of fuel decreased further decreased about 15% at year end and that was one of the years as I mentioned earlier that we had a 60 basis point increase in the operating ratio.
<unk>.
Overall macro was a little softer.
Volumes were certainly flattish that year, and so a little bit different topline makeup if you will but but so that's probably a little bit more relative comparison.
Looking back at how some of those.
Revenue changes quarter to quarter and cost changes.
Progressed in that year, but were certainly managing through it.
We're looking at we've got contracts that turned over every day.
And they progressed through the year, so if fuel stays where it is today.
Then we're looking at a contract with a base rate of.
A few words.
For 58, a gallon versus last year, we were looking at it.
It would've been five something per gallon. So you.
It just always got to look at what the current environment looks like and then tried to risk adjust for do you think fuel prices may go up if they do again, how does the top line for each individual customer account change and what the cost inputs change.
If fuel goes down you do the same thing and try to make sure that those fuel scales.
They work on each customer account that were still effectively getting paid for the service that we're providing and like Gregg said the value that we're offering.
And so thats, what we stay focused on and it's why it's so important for us to look at the profitability of each customer account.
Alright, Thank you for the clarification, but the math for the fourth quarter would be fair at face value, but theres more uncertainty to your point looking to 'twenty three is that the right way to think about it.
Well certainly there is uncertainty.
With respect to what fuel may end up <unk>.
Averaging we had we had seen that declining a little bit more and then it kind of reverted back and had a little bit of an increase over the.
The last couple of weeks as well, but certainly if it holds steady from here.
Maybe we see fuel prices that are down 10% or so this year, but I think it's better for the U S economy, if we get back to a lower fuel environment.
Certainly we will deal with that.
A company standpoint is not going to change our long term objectives, and we're not changing our operating ratio goals just because fuel may ultimately decline those are certainly built into what our longer term forecast are we.
I think that it should decline overall and hopefully we get back to a lower fuel environment.
This concludes our question and answer session.
I'd like to turn the conference back over to Greg <unk> for any closing remarks.
Well. Thank you for your all of your participation today. We appreciate your questions and please feel free to give us a call. If you have anything further thanks and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.