Good morning, welcome to the fourth quarter 2020 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 12, 2021 by dialing 719-457-0820. The replay passcode is 5798600. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, that are set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. As a final note, before we begin, we welcome your questions today, but we do ask, in fairness to all, that you limit yourselves 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, welcome to our fourth quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions. Old Dominion had a strong fourth quarter that included an increase in revenue and improvement in our operating ratio to 76.3%, which was a 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 of 77.4%, as well as an 11.4% increase in earnings per diluted share. While I am really proud of these financial results, I am more proud of the OD family of employees who worked through tough conditions in 2020 to generate this success.
Despite the operating challenges created by the pandemic and rapid changes in volumes, our team established a new record for our cargo claims ratio at 0.1%, while on-time service continued at 99%. These factors contributed to us winning the Mastio 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 OD 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 opportunities. In addition to our non-executive employees, their contributions during the pandemic, we made special bonus payments in March and December 2020 that together total approximately $20 million.
These factors, as well as a strong family culture, have allowed us to consistently attract and retain talented employees to support our growth initiatives. This is important as we intend to add to our OD family in 2021 by hiring additional employees to further increase the capacity of our workforce. With the demand environment improving, we also intend to add to the capacity of both 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 -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 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 that 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 are 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 that put us in 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 by 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. Old Dominion's revenue for the fourth quarter of 2020 was $1.1 billion, which was a 6.4% 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 non-executive employees in December. We were pleased to see the improvement in our revenue growth, which included increases in both volumes and yield. The increase in revenue included a 4.9% increase in LTL tonnage and a 1.1% increase in LTL revenue per hundredweight. Excluding fuel surcharges, our LTL revenue per hundredweight increased by 4.2%.
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 have remained relatively consistent. On a sequential basis, revenue per day for the fourth quarter increased 4.7% as compared to the third quarter of 2020, while LTL shipments per day increased 1.7%. 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 LTL tons per day and a 2.2% increase in LTL 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 percent of revenue. When compared to the fourth quarter of 2019, we generally improved the efficiency of our operations with increases in our linehaul load average and P&D 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 also expect to continue to use purchased transportation to supplement our workforce until the capacity of our team can fully support our anticipated growth.
We improved our overhead cost as a percent of revenue during the fourth quarter by successfully leveraging our revenue growth and maintaining our discipline with discretionary spending. We will continue to control 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 and $933 million for the fourth quarter in 2020 respectively, while CapEx 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 CapEx are expected to be approximately $605 million in 2021.
This total includes $275 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 a 33.3% increase in the quarterly dividend to $0.20 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 of 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. This 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 electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one to ask a question. We'll take our first question from Todd Fowler with KeyBanc Capital Markets.
Great. Thanks, and good morning. Adam, I wasn't gonna start with this, but you threw me off. Maybe you can provide a little bit more color on the strength that you're seeing in January. The 11.9% increase in tons per day was stronger than what, you know, you looked like you were trending in December. If you had any color, if you have any color on what you think is driving the strength in January, that would be great.
Yeah. I think it's a couple of things, Todd. I mean, we've certainly really gone back to April of 2020. Once we took that initial drop, business has just been accelerating since generally speaking. I, you know, I think it began with customers reopening their businesses in different regions around the country getting healthier. You know, it just sort of accelerated from that point forward. That acceleration continued through the fourth quarter for us and into January as well. You know, I think there's a lot of macro trends that are favorable for our industry, and certainly we're in an enviable position, I think, to take advantage of these changing trends.
You know, 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. Our fleet is in good shape, and we've talked about the fact that we're gonna continue to hire new employees, and we've continued to be successful in that endeavor in January as well. We're also able to use a little purchased transportation to supplement as needed. You know, our customers are getting healthier. Business trends in general are improving, and you're seeing the advantage of our business model just coming through for us.
We're able to take advantage of all of those improving trends and show a little growth, which it's been a long time since we've been able to see growth like this. Certainly, when we start growing, we wanna make sure it's profitable growth. I think that, you know, 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. Then maybe if you can just give a little bit more color. You know, you did a good job of continuing to leverage, you know, shipment count growing faster than headcount growth in the fourth quarter. You know, obviously, in the prepared comments, you're talking about, you know, adding headcounts. You know, can you give us a sense of, you know, kind of the trends, maybe what you're expecting for sequential headcount growth, you know, in the first quarter or the first half, and how long you'd expect to continue to be able to increase the shipment count ahead of the headcount growth? Thanks.
You know, as you know, over the long term, the change in our headcount pretty much matches the change in our shipment counts as well. Certainly, in a short-term period, they're not always in balance. You know, that is something that we've seen over the long term. You know, right now, and really again, kinda going back to the middle part of last year when we made resource adjustments, we pretty much have been trying to play catch up, if you will, and our team has been working incredibly hard in operations to keep up and to continue to service and produce essentially record service metrics for us. We've been really proud of that. The team's been working incredibly hard.
We have been using increased purchased transportation. If you noticed that increase to 3.1% in the fourth quarter. It typically for us is around 2.2% because we like to have 100% of our line haul network insourced and using our people and our equipment. We have had to supplement a little bit until we can really completely staff up to where we wanna be. Typically, headcount in the first quarter is kind of flattish on average with the fourth quarter.
Yeah.
You know, based on what we've been able to achieve thus far, in January, you know, I think that the maximum sequential change we've ever seen was in 1Q of 2018, where we had about a 3% increase over 4Q. I think we can be in that range and probably even higher. You know, effectively, we've just got to catch back up so we can continue to serve our customers and be able to first reduce our reliance on purchased transportation. Just try to get ahead of the curve, if you will, to face whatever, you know, volumes come our way for both 2021 as well as 2022.
Okay. Got it. That makes 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. You know, I guess, Adam, when we think about, you know, the sequential progression here, you know, if you kinda back out that special bonus payment there in the fourth quarter, you know, about a 75.4 OR, you know, when you, when you think about tonnage in January being better than normal seasonality, again, it's early in the quarter. You know, how are you thinking about the potential, given your headcount comments there to Todd's question, the ability to sort of leverage that tonnage with sequential OR relative to normal seasonal patterns, which I think is typically a 100 - 50 basis point degradation from the fourth quarter to the first quarter.
If you think about that base number of 75.4, given those headcount comments and some of the other items down the P&L, how are you thinking about sequential change given what's happening on the tonnage front?
Sure. Yeah, you're right. The first quarter is typically 100 - 50 basis points of degradation from the fourth quarter. You know, the special bonus that was in the fourth quarter, you know, that's certainly something that I know you all will probably be adjusting. You know, that's not the only thing. That's one big thing that was called out. 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. We anticipate that will increase back to, you know, where we normally see it, which is around 1% to 1.2% of revenue.
Like many other carriers, we're gonna be facing some increased inflationary costs with our insurance premiums and so forth this year, just like we've faced the last couple of years. You know, there's gonna be some sort of puts and takes to it. General supplies and expenses is another one that I think will be stepping up. You know, we referenced in our prepared remarks that, you know, certainly there's gonna be some costs that will be restored this year, and some of those will be some of our marketing and advertising programs. You know, we're not at the point to where our sales team can get out and travel around and do some things.
We still anticipate for the foreseeable future, with some savings related to travel and customer entertainment, but certainly intend to restore some of those expenditures. You know, while they may not go back to where that cost had been, you know, between 3 .5% , certainly anticipate them being higher than where we were in the fourth quarter. There's gonna be some puts and takes. You know, we don't give guidance on the operating ratio, but we always use that normal sequential trend as a benchmark to measure ourselves against.
You know, 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, you know, 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. You know, having nice revenue growth on a sequential basis certainly gives you a lot of cover on some of those other more fixed type expense elements. I think we saw that leverage and us being able to take advantage of that strong revenue performance in the fourth quarter to do just that. We created leverage from it.
We kept the change in salaries, wages, and benefits in line there. I think certainly that will give us leverage when we go from 4Q into 1Q as well, to be able to keep those the salary costs, if you will, in line, even though we will be bringing on and adding new people. There'll be puts and takes in different line items, but that, you know, sort of 100 basis point mark, I think will be a good benchmark, and we'll just see how we perform from there.
Okay. Okay. No, that makes sense. Thank you for all that, all that color. I guess for my follow-up question, maybe kind of a bigger picture question for you, Greg. You know, when you look back over just the broader LTL market over the last, you know, call it 10 - 15 years, you know, there really hasn't been a lot of underlying market growth. Old Dominion's just done a great job taking a lot of market share, you know, as you guys have been investing in your business and investing in service. You know, as you look out over the next, you know, three, five, seven years, Greg, I mean, you know, do you see the market growth accelerating for the LTL industry?
I'm thinking specifically about, you know, e-commerce and the middle mile impact that e-commerce is having, you know, across the transportation sector. I would just be curious to get your thoughts on sort of, you know, where you see the broader industry going. Obviously, OD is gonna expect to continue to take market share, but would appreciate your thoughts there.
Like, I would hope we would see some growth in our, in the LTL, on the LTL side. I think some of the e-commerce trends and whatnot that we've seen are somewhat positive for LTL. The fact that all the Amazons of the world and many others have opened so many distribution facilities all across the country and have actually gotten closer to customers. You know, you hope that some of the suppliers then, you know, are shipping to all these different type facilities and, you know, that lends itself to LTL versus truckload when you're talking about, you know, smaller quantities getting in customers' hands quicker. I think that's a positive trend, you know, from an e-commerce standpoint, certainly.
You know, I think that just the broader macro economy will be the tell-tale. How, how does it do? I don't think we've really had a, you know, a huge boom, and certainly not in the last couple years, maybe back to 2018, but not in the last two. We think the macro certainly will drive, you know, our market as well as truckload and, you know, some of the small packages. Let's hope that there's certainly strength from that standpoint. I think it's positive. I'm not expecting a boom, certainly compared to, you know, over the last 10 years, but I think it will be certainly steady and we do expect some continued growth, certainly.
Okay, great. Thanks for the time.
Yeah.
Next, we'll go to Jason Seidl with Cowen.
Thanks, operator. Gentlemen, good morning. Hope everyone is well. Wanted to talk a little bit about contract pricing. Could you tell us or give us an idea of how that went in the quarter? What do you expect going forward, now that UPS Freight has been purchased by TFI, considering they've been more of a discounter in the marketplace? I have a one follow-up.
You know, we don't necessarily detail out what our contractual business has done versus, you know, our tariff-related business. I think that, you know, generally speaking, we've had a pricing philosophy that's been cost-based, and we expect each customer to give us pricing that's above those costs to support, you know, the investments we make in service and capacity and technology. That's worked out well for us. We, you know, I think we had success last year, and it was pretty continuous throughout the year, in 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 UPS Freight and the purchase of those guys, or do you not run into them too much?
Don't really wanna comment on one specific carrier per se, but, you know, I certainly think that, you know, the industry itself showed a lot of discipline working through last year, especially in the second quarter when there was a lot of volume pressure. You know, it's been good to see the industry overall perform. Certainly, that's been supportive of our own pricing initiatives, which we, you know, maybe have philosophies that are slightly different from the industry generally. You know, certainly would expect a very favorable pricing environment in 2021. There's a lot of factors that would go into that. Certainly, demand is incredibly strong. Capacity is generally limited.
That's a lot of feedback that we're getting from customers right now, and that's just across the transportation space. I think that, you know, some of the other LTL carriers that utilize some truckload carriers for their linehaul services, certainly are facing, you know, maybe 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. I think there's a lot of factors that would point to industry pricing being very favorable for this year and certainly should be supportive of our pricing initiatives.
Yeah, I would agree. It seems like the backdrop's pretty good for the LTL business. Wanted to do a quick question. Adam, you mentioned that there's gonna be some marketing advertising costs coming back. Give us an idea of the magnitude of those costs?
You know, we've never really split out exactly, you know, what we spend and where, you know, so to speak. You know, obviously, we've got some big national deals and we kinda put some programs on hold last year. You know, I think that would not expect those costs necessarily to be higher than where they were last year. It's certainly something that we're expecting the cost to be higher, if you will, than maybe what we've just seen, you know, in the past couple of quarters. You know, that's really since we, you know, started making some changes and trying to address all of our costs initially in the second quarter of 2020.
A lot of those items that were directly or indirectly affected by the pandemic, that, you know, some temporary and some may be permanent, were in that general supplies and expenses line. Generally speaking, you know, in the second quarter, third quarter, you know, those costs are more between 2.5%-3%. Would expect it to kinda go back up where in the past they've been 3%-3.5%, you know, somewhere not maybe to the full extent of that 3.5%, because we'll be continuing to see some of those savings, like I mentioned earlier, related to travel and so forth.
Certainly kind of coming back, you know, maybe more to that range, but hopefully at the low end of it.
Well, that's very helpful. Well, listen, gentlemen, I appreciate the time as always. Please be safe out there.
Thanks, Jason.
Next we'll go to David Ross with Stifel.
Yes. Good morning, gentlemen.
Dave.
Dave.
Sometimes less is more or stop doing stupid stuff is good advice. What is the one thing that you were doing maybe 5 -1 0 years ago, Greg or Adam, that you're not doing now that has made the biggest impact?
Oh my. Oh. I might have to go back a little further than that, David. I don't know. I think we quit doing stupid things maybe further than that. I don't know. Your question kind of, it took me by surprise.
If you go back to kind of 2005, 2006, because I know that's when a lot of the service improvements started. You know, is there anything that you were doing then that just got in the way that you removed?
Well, you know, we were somewhat like some of our competitors back in the day. We used a lot of purchased transportation. We were dependent upon, you know, those for our linehaul moves and whatnot. We eliminated that over the years. I think by and large, we've just gotten better. I don't wanna say that we did stupid things. Maybe that's not exactly the right terminology, but I think we've just gotten smarter, and we've gotten better over the years. We've understood better what our customer needs are and we've figured out how to meet those needs. You know, what do they really want? What do they really need? I think we're just better at it today than we were some years ago, certainly.
You know, I think it's indicative of our share growth, you know, continuing to win the Mastio, which is a, you know, a pretty good measuring stick of service. I think it's maybe not what we did stupid, but just what we've done smarter and what we've done better than our competitors have done. Maybe that's the best way to state it.
Yeah. Well, the Mastio survey is terrific. That also wasn't always the case. Can you talk a little bit about the process to get to where, you know, you had your, you know, 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? You don't want to just raise rates and have customers leave.
Well, David, you know, I think the pricing really goes hand in hand with the service. You know, when your service is poor, sometimes the only way you're going to put a shipment on the truck is, you know, is give a cheaper rate. You know, once we really got the service clicking like it needed to be, then we were in a much better position to raise our prices. I think we've been extremely disciplined over the years. As the years have gone on, we've, you know, put in all the systems, the dimensioners and all the techniques and all the technology that helps us to better understand exactly what our costs are, be it P&D, be it line haul, be it movement, delivery, whatever.
I think we certainly better understand our costs now than we did certainly 15 years ago. We've, you know, we've executed on that understanding. you know, I think that's certainly been huge for us, no doubt, and will continue to be. We're disciplined. We know what our costs are, and I think that's certainly one thing that sets us apart and, you know, helps to drive our numbers for sure.
Excellent. Thank you very much.
Sure. Thanks, David.
Okay, next we'll go to Chris Wetherbee with Citi.
Hey, thanks. Good morning. Did you take a look at sort of the outlook for 2021? I know you guys don't like to guide the OR, but if I go back to the last time you were able to grow tonnage double digits, it was 2018. Your incremental margins were sort of in the 35% range. Not looking for a specific number this time around, but when you think about 2021 relative to 20 18, at least from a cost perspective, is there anything that we should be thinking about? Is labor tighter? Is the cost generally a little bit more inflationary now and maybe the timing of sort of volume growth versus resource additions potentially more challenging?
Is there anything else that we should be thinking about if we're trying to use that as a, you know, rough rule of thumb of how you guys might perform over the course of 2021?
Well, certainly we're gonna face a lot of challenges as we go through this year. You know, while certain top line comps, you know, might be easier, if you will, you know, we were pretty proud to produce a lot of growth in profits in 2020, despite the fact that our revenues were down. At the end of the day, we generated almost $90 million of increase in operating income despite our revenues being down about $95 million. You know, certainly, in some respects, we'll have some tough comps.
You know, I think that just sort of pulling back and looking at, you know, our cost inflation, I anticipate that we'll probably see cost per shipment inflation around 4% this year. You know, it's a little bit higher than our longer term average, but, you know, I think we've got some factors that will be coming back to us. You know, I mentioned some of the general supplies and expense type inflation we might see. Would anticipate a little bit higher healthcare inflation this year. You know, we're gonna see some inflationary pressures in some of the other categories.
You know, we always have, kind of a 3% - 3.5% inflationary cost in our salaries, wages, and benefits as we continue to improve that program for our employees. You know, all those factors will kind of go into that metric, and that'll be our target. That kind of becomes the target for which, you know, our long-term philosophy of trying to get 75 -1 00 basis points of rate increase above the cost inflation. We just sort of, you know, work through from there. You know, I think that we've talked about the key ingredients for long-term operating ratio improvement are the improvement in density and yield.
I think certainly the macro setup would lead you to believe that we should be able to produce nice improvements in both. You know, we've gone through two years of being flat and, you know, each year I thought that we would have had some growth and certainly didn't expect the industrial slowdown in 2019. I don't know that Nostradamus could have predict what we saw last year. You know, we worked our way through it and I think we're in a good spot as we enter the year, and we're just gonna continue to work a plan to try to drive the operating ratio lower.
You know, we've talked about kinda having a goal per se, not necessarily incremental margins because the reality is we're managing the business to put as much profit to the bottom line as we can. Last year, you know, the success that we saw sort of proves that out. You know, certainly should be in a position to create some strong incrementals.
This year, we'll keep working towards, you know, the long-term goal that we've talked about of driving the operating ratio to a 75. We'll just keep making progress there month by month and quarter by quarter as we work through 2021.
Got it. Okay. That's, that's very helpful. 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 gave 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? You know, relative to that 30% available capacity coming into 2021, you know, how do you wanna sort of maintain that? Is that roughly the right amount of available capacity you'd like to have as you move forward?
We generally talk about, you know, sort of 25% kind of plus or minus of excess capacity. You know, I think that continuing our CapEx programs through 2019 and 2020, and continuing to build out the service center network certainly is gonna pay dividends for us this year, with the increase in volumes that we're seeing now and would expect, and probably for 2022 as well. You know, we maintained our CapEx spending on real estate. Really last year was more just cutting back on the equipment and, you know, that was a plan we had in effect when we started the year and before seeing, you know, the pandemic effect on our business.
You know, we were fortunate 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, you know, that was a big benefit there. You know, I think we're in a good spot. We're gonna continue to look for opportunities. We've got a good plan on the real estate side. The 275, you know, is a good starting point. You know, we maintain our long-term plan trying to look multiple years out and still sort of have a target list of 30-40 properties.
You know, we'll keep our eyes peeled, and as some things become available, you know, certainly we've got the strength to be able to pull the trigger on that and would look to just continue to make those expansions to really prepare the network for growth that's multiple years down the road.
Okay. Got it. Thanks for the time. I appreciate it.
Next we'll go to Scott Group with Wolfe Research.
Hey, thanks. Morning, guys. Just a couple follows first. How many service centers are you adding this year? Within the January update, can you just talk about weight per shipment trends?
Scott, on the additional service centers, we have three that we're very close to opening that may open in the first quarter, if not first, early second. We have another half dozen or so that we're working on. Just depends if we, if we get them completed or not. You know, it's not always easy to sit here nine months out and say exactly what we're gonna finish. Hopefully another half dozen or so on top of the three that we are really, really close to opening now.
On the weight per shipment, it was 1,625 pounds in January, which was a 4.6% increase there. Continuing to see strong weight per shipments. You know, our business is still, you know, leaning a little heavier, if you will, on our larger national accounts that have a higher weight per shipment on average.
You know, I think that the strength in that number as some of our smaller customers get healthier and are making up a, you know, coming back to normal, if you will, in terms of a percent of our business, is just a reflection on the strength in the economy right now and probably seeing a little bit of some spillover type freight, that's coming into the network as well.
Okay. Adam, how quickly do you expect the PT spend to normalize? As with, you know, higher than normal headcount and growth in 1Q, do you think you get back to normal PT by 2Q, or is it more back half, you think?
You know, it's hard to say because it's gonna be dependent upon the top line performance. You know, certainly we had a really strong sequential performance in 4Q. You know, it was going through the sequentials last year is an unprecedented drop like everyone else experienced from 1Q - 2Q. The reverse happened going into the 3Q. You know, incredibly strong performance going into the 4Q. You know, I think we're starting out with some strength here in January as well. We're gonna continue to make use of it really until, you know, the capacity of our team sort of catches up with the volume growth that we're seeing.
You know, I wouldn't expect it to necessarily go any higher because I think we're doing a great job of onboarding people, right now and keeping pace. You know, it certainly in the, you know, the first quarter would expect it to stay pretty consistent with where we were in 4Q. You know, would hope that we can start seeing it reduce a little bit in the second. You know, it could be more of a second half of the year. Again, I think it's just gonna be top line driven more than anything.
Okay. Thank you, guys.
Yeah.
Okay. As a reminder, it's star one if you have a question. Next we'll go to Ravi Shanker with Morgan Stanley.
Thanks. Morning, everyone. Gentlemen, I want to follow up to a response to one of the earlier questions. You know, it was pointed out that you've 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 gangbuster growth in the next five years. 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 gain, kind of trend over the next several years? Do you think kind of that potential exists?
I think it certainly does, Ravi. You know, our entire strategy is, you know, to continue to grow our capacity and increase our service center network, which is what as you know, we've worked extremely hard to do that over the past 10, 15 years, and I think we've done it extremely well. I 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. You know, we'll see where that goes, but I think we're well-positioned and certainly in a good spot to continue to take share.
You have said in the past that kind of you tend to gain accelerated share when the market's kind of starting to turn up rather than the market's going down. Are you seeing that already, like in the fourth quarter and in January so far?
We are. Yes. We are seeing that. We're seeing, you know, the response from our customers. We've had numerous situations where competitors couldn't or didn't respond for whatever the reason, and we were able to take advantage of that. You know, again, that's why we're doing what we're doing, you know, from a capacity standpoint, so we can be there when the need arises.
Got it. Just to follow up, can you give us a little more color on your thoughts on this UPS TFI deal? I think it's a pretty big deal for the industry structure going forward. Were you surprised by that transaction at all? Do you think this kicks off a domino effect of M&A or consolidation in the industry, especially among some of the kind of non-union players?
Yeah, like I said earlier, we'd rather just not comment on, you know, any specific competitors and transactions or whatnot. You know, I think regardless of who our competitors are, you know, 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 a capacity advantage as well. We're just gonna keep doing our thing and staying focused on our employees, staying focused on our customers and then just letting the financials kind of fall out in the end. That's included a lot of profitable growth over the years, and certainly expect to continue to do that regardless of the landscape.
Okay, thank you.
Okay. Next, we'll go to Tom Wadewitz with UBS.
Yeah, good morning. wanted to ask you, I know you've had a few on this topic, and you're not being granular about it, but, you know, TFI UPS, you could argue that there might be some freight spilled into the market and, you know, the need to price up a lot. I think TFI has certainly shown that they're disciplined in their approach. They're not, you know, focused on volume. They're focused on making money. I don't know if you have a thought on whether they have good quality freight or not. If you don't wanna be that granular, perhaps you could offer a thought on, you know, is there bad freight that you don't want when there's tight capacity?
Is it simply a function of, you know, all freight's good as long as you price it right?
I think that the latter comment probably is the most appropriate. There probably is such a thing as bad freight, not a ton of it, but there's a lot of bad pricing out there. Priced appropriately, there's very little bad freight. You just have to price based on what that particular commodity costs you to move it. Anyway, I think, Tom, we've done that better than most. You know, we understand, you know, if there's something that's expensive to haul and handle, then we're gonna price it accordingly. What does that mean from the UPS or TransForce acquisition? Who knows? We'll just have to wait and see.
I'm not sure what their strategy has been up in the Canadian market or down on this side at all, you know, we'll have to wait and see. Certainly, if they execute on the raising prices and whatnot, I think that'll be good for our industry. I don't see it, certainly not from this standpoint now, it's not a negative. I think that'd be good for all of us.
Yeah. Right. Okay. That makes sense. How do you think about mix in terms of industrial versus consumer? I think, you know, the kind of surprisingly strong swing back in freight in, you know, June, July, August, even in the fall was more on the consumer side. I think that, you know, the story in 2021 would seem to be that, you know, industrial catches up or at least that, you know, there's a 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 there's more industrial freight and not as much of a step up in consumer?
One, we are more exposed to the industrial market as is the industry. Our percentages stayed pretty consistent in 2020 with 2019. We're still, you know, 55% - 60% of our revenues industrial related and close to 30%, 25% - 30% is retail located. Over the balance of the year, they came in about the same that they were the year prior. Fourth quarter revenue performance was pretty consistent with our industrial customers and retail-related customers as well. They were both in about the same range. We look to certainly see the improvement in the industrial economy, though, create freight opportunities for us.
As Greg mentioned earlier, you know, I think that there's gonna be ongoing opportunity on the retail side and, you know, kind of leading up to 2020, we'd probably seen a little bit more growth in that retail area than on the industrial side. I'm gonna expect that we'd see a little bit stronger performance there. You know, I think with respect to margins, you know, we talked a lot about this throughout 2020 on our calls that, you know, 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.
You know, whether it's a large national account or a smaller account or retail or industrial, they all should contribute in their own ways. That's how we try to manage the business and then look at each individual customer and try to drive, continuous improvement, with their operating ratio by keeping the business intact and just continuing to make improvements year in and year out with them.
You know, the balance and the mix shift from one category to the next, you know, in that industrial versus retail categories or the national shipper versus the smaller one, I think we kinda proved out last year with our operating performance that we're true to our word in that regard and that each do kind of operate, you know, close to one another. You know, either way, we get the growth going into 2021, certainly would expect that it can continue to drive and help us drive improvement in the operating ratio.
Great. That's 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 macro, Greg, on kind of on the last question as well. I think there's a consensus view that the industrial economy is gonna catch up to the consumer this year, at least that's the hope. That number that you put up on tons in January is obviously a pretty big number. Is that indicative of the industrial economy starting to show signs of really building momentum in your opinion? Is that really kind of just a catch up from the depths of the pandemic in the middle part of last year?
I think it's maybe an effect of both to be honest with you. I know there's catch up and resupply for sure. No doubt about that. You know, we'll see where it goes as the year develops. You know, hopefully the industrials do start to catch up. I think that'd be certainly a good thing for us as well as our industry.
Okay. Are your customers generally optimistic, just from tone?
For the most part, yes.
Great. The follow-up is, you mentioned right at the beginning of your comments about your spare capacity. It certainly seems like you're lined up if this industrial economy does catch up. Are there any issues that may restrict your ability to take on new business, whether that's labor, restrictions, you know, just hiring, whether it's drivers or at 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, we're having success. Adam mentioned it in his comments before, our service centers are responding to their needs, and we are having success of adding employees, drivers, platform, whatever the need. Wherever the needs are, we are having that success. That's a good thing. I wish it was a little bit faster. We could respond a little bit quicker, it is what it is. I think we're getting there. You know, sometimes your growth numbers changes your challenges, if you know what I mean. It's one thing if it's, you know, some moderate type growth.
If the growth really starts to accelerate, the challenge becomes a little bit greater. I think, you know, in a controlled type growth environment, we're in great, perfect shape. If we get a huge acceleration, that challenge is gonna accelerate along with it. You know, we'll see where it goes, nothing right now standing in our way, certainly.
Great
we're expecting a great year.
Certainly seems like you're responding quicker than most. Thanks for the thoughts, Greg.
Okay. Next, we'll go to Allison Landry with Credit Suisse.
Thanks. Good morning. Just in terms of the January revenue per hundredweight up 2.2, is that inclusive of fuel? If so, could you give us the ex-fuel number? Then, you know, just thinking about the 4.2% yield growth ex-fuel in Q4. Maybe if you could give us a sense of what that looked like if you excluded the mix impacts from weight per shipment and length of haul. You know, just trying to get a sense of the underlying core pricing trend.
Yeah, Allison, that January number did include the fuel and excluding the fuel is pretty consistent. The growth rate was pretty consistent with the fourth quarter. You know, just over 4%, if you will. You know, we'll continue to see until about April, really, I think that, you know, that delta and some pressure on, you know, the fuel surcharge revenue and showing up in those metrics. I think that, you know, fuel was pretty consistently higher until about April of last year. You know, if fuel trends hold current, that'll start becoming a little bit of a tailwind finally for us on a top-line basis.
You know, I think that, you know, certainly, when you look through last year and kind of, you know, how that yield number excluding fuel is up 4.2% in the fourth quarter, there's not a perfect analysis, if you will. There's not a linear way, purely linear way to evaluate the change in weight per shipment and length of haul. You know, we had more pressure from the increase in weight per shipment, you know, in the middle part of the year in the second and third quarters. Certainly, you know, that 2.5% increase on weight per shipment has got a negative effect, but then you've got a 1.3% increase in the length of haul.
I mean, they're somewhat offsetting. I think that just underlying performance, you know, we review the, you know, our growth in renewals and so forth, consistent with our long-term average. You know, we've been around, whether you look over the past 10, 15 years, we've been able to average about a 4.5% increase in our revenue per shipment. You know, I think that we're pretty much in that category somewhere around that ballpark for last year. Certainly, like I mentioned earlier, you know, the strategy is always to try to target 75 - 100 basis points above, you know, our cost. I think that that's been a good, consistent approach.
You know, we're not trying to necessarily always follow the market with more of a rollercoaster type approach. We like it to be consistent. Customers generally appreciate that, and it's easier conversation to have when you're just talking about pure cost or customers' operating ratio to talk about the need for an increase. You know, we'll continue to sort of target that type of range and certainly expect next year to be supportive of our ability to do so.
Okay. Thank you for that. Then just, I mean, it seems like you should be able to generate pretty 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 buybacks in 2021 and if that might accelerate from the repo in 2020. Thank you.
Yeah. You know, certainly, when we've talked about priorities for capital allocation in the past, you know, obviously the $605 million of CapEx is the number one position. I think while we're been able to create such strong returns on invested capital and wanna keep investing there. You know, the excess capital that we've been generating in the business, we've been increasingly returning to our shareholders. We stepped up the pace of our buybacks last year and, you know, spent a little over $360 million on the buyback program in 2020. That was a nice step up.
We'll just continue to look at, you know, stepping those dollars up most likely, 'cause it's certainly, you know, not something that we wanna continue to have, you know, a significant balance of cash hanging around on the balance sheet. We also wanna be mindful of the fact that there may continue to be some opportunities out there from a real estate standpoint. Some of those in areas like on the West Coast and in the Northeast have got some really expensive price tags. You know, we'll continue to look for some opportunities there and would rather spend our dollars on something that's more strategic, like a long-term investment in a service center.
Absent those opportunities, we'll continue to return capital to our shareholders.
Okay. Thank you, guys.
Yeah.
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 for me, Adam. If you can just help us how shipments trended sequentially from December to January versus maybe, you know, how they've done over the last 10 years, what the actual number was. I know they were up 7% year-over-year, but just trying to gauge the sequential strength in shipments relative to seasonality from December to January.
Sure. I'll just go for the benefit of everyone. I'll go through the fourth quarter, and these will be our shipments per day. October versus September was down 3.3%. November was 3% higher than October. December was 4.2% lower than November. January was 1.4% higher than December. The 10-year average on those going back to October was a 3.3% decrease. November is a 1.8% increase in December is a 9.8% decrease.
January is normally a 3% increase, I think that, you know, given the strength of the performance that we had in both November and December, is why that January number's, you know, a little bit lower than the 10-year average, given the outperformance of those two months prior. You know, it's been really strong performance, like we said. You know, really just throughout the year, we took a little bit of a breather, you know, in October, if you will, as we were continuing to play catch up and we're starting to get a lot of heavy shipments in into the mix. You know, that was just really very temporary.
You can see kinda once we lifted any of those restrictions, just the volumes continued to accelerate through the rest of the year and now into the first month of the new year. You know, a lot of good favorable trends.
So-
-on the volume side.
Yeah. I just wanted to dig into that a little bit more. It looks like December was, you know, double better than seasonality or half of the seasonal decline. May explain a little bit of the January lag relative to seasonality. You know, there's three reasons why volumes could be inflecting. One is underlying growth in the industrial economy, two is spillover from truckload, and three is just simple market share gains. What I wanna just be clear on is that you guys are clearly gaining market share. You're clearly in the best position to drive spillover from truckload. I just I'm trying to understand, like, the January strength on a year-over-year basis. Is that more indicative of OD-specific factors, or is it a read-through to the overall industrial economy?
U.S. industrial production is still negative on a year-over-year basis. Everybody expects it to inflect as we move through this year, we're right up there as well as expecting that. I'm just trying to understand, like, you know, decipher between those three attributions in terms of the strong strength, the strength of volumes.
You left out the quality of our sales team. You know, that's point number one. You know, I think that, you know, we've kinda talked about, you know, these points, you know, 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 a capacity advantage, and we're starting to see, and this has 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 customers that support that. Then you've got other factors. The industrial economy is improving. You know, there was a lot of uncertainty, and there always is in an election year.
Now, you know, that's behind everyone, so you kinda have a better feel for what the regulatory environment and so forth is gonna be. So hopefully, you know, that's gonna continue to support an improving economy as well as just the country sort of reopening, you know, throughout. So all those factors, the demand improvement, inventories being low and the need for restocking, you know, it's all just a matter of those are all favorable trends. I think that we're uniquely positioned to take advantage of that with market share wins for customers that, you know, we strengthened relationships throughout last year as we worked with them and we're flexible.
I think that we've got improvements there that should pay dividends for the long run. Those customers are gonna increasingly give us business, we think. Some that historically had been more price sensitive now have seen, you know, our ability to respond with them and give them capacity in a challenged time and to give them service. Maybe it's proved to many customers that you may pay a little bit more upfront, but the total cost of transportation service when selecting Old Dominion can save a company money in the long run.
There's multiple factors, but, at the end of the day, it goes back to the fact that we have a service advantage and a 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.
Just the 76.3 OR in the quarter. Can you just, you know, deconstruct that between direct and indirect? I guess the bonus payments would obviously be the part of the direct cost, I would imagine. If you can just deconstruct that for us.
It's about 56% on the direct side. You know, our overhead costs, you know, We've talked about those costs over the long run have been sort of between 20%-25% of revenue. You know, again, kind of getting back to the quality of that revenue performance, we were able to move that number back down to the lower end of that range. You know, something we'll just continue to build on. You know, those bonuses are kind of split, obviously more heavily on the direct side. You know, for management and non-productive labor, you know, meaning drivers, dock workers and our mechanics, those costs we put more on the overhead side.
There's an element of that bonus that, you know, would therefore be split into overhead as well. The majority of it's gonna be in on the direct side.
Okay. Thank you very much.
Next, we'll go to Jordan Alliger with Goldman Sachs.
Yeah. Hi. Morning. I'm just curious, you know, the expansion that you're talking about with the service centers, just sort of wondering, how long does it typically take to, if you will, get the density needed to fully season one of these facilities so that it gets, you know, closer to the margins that you want? Is it a situation where the density is such in the area that it could come in pretty quickly close to an OD type of, you know, margin level? Thanks.
It typically does not take long in our system. We won't open an additional facility till the need is there for the most part. We may certainly have excess capacity in there. You know, we don't fully utilize it from day one, so we're not absorbing necessarily all those costs, you know, from the outset. Typically, we will, you know, put a lot of business in that service center from the get-go. There's not usually a long climb to our typical normal type returns in a service center.
Okay, great. That was it for me. Thank you.
Okay. Next, we'll go to Ariel Rosa with Bank of America.
Hey, good morning, guys, and congrats on a nice quarter. I had kinda two questions. First, I wanted to ask about just the weight per shipment trends, and I know Scott touched on this earlier. You know, seeing more supply seemingly entering the truckload market and some elevated you know, order numbers on the Class 8 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.
Yeah, like I mentioned, we're at 1,625 pounds. I think when we've been in strong environments from, you know, strong demand backdrops, we've been around a 1,600 pound average in the past. You know, certainly, you can go back and look at 2018 and, you know, that was around the range we were in then. You know, I think it can stay in this, you know, 1,600-1,650 kind of range as we progress through the year and certainly would see some ups and downs. You know, I think 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'll bring it down.
Just the overall demand environment, I think is keeping all shipments, you know, a little bit stronger from a weight perspective. You know, I don't think we're really getting flooded, if you will, with spillover type freight. When I look through at, you know, the business we have with Third-Party Logistics companies, a lot of time with their capacity constraints in the market, you know, they're able to go out and find and help their customers who are also our customers, find capacity. Certainly, we've seen, you know, a little bit higher weight per shipment growth with business that's controlled by the 3PLs than the rest of our book of business, if you will.
would expect it to stay in that sort of elevated range, just given all the favorable economic backdrop numbers and then just, the fact that we still believe capacity is generally constrained in the industry.
Got it. Got it. That's, that's very helpful. You know, for my second question, I know a number of people have obviously asked about the, you know, TFI deal with UPS Freight. You know, stepping back and not necessarily addressing them specifically, 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 risk kind of a part of your competitive advantage if peers start to improve service levels and start to kind of emulate OD more in terms of the structures of their network and the service levels that they're able to provide?
Do you see that as a competitive threat at all, or do you think kind of margins can remain best in class and kind of you guys can continue doing what you're doing regardless of what competitors are doing on the service side?
I think it's obviously a threat. No doubt. I mean, you know, if you got a bad team, you improve the players, and it's a threat to all the other teams, no doubt. You know, I think they've gotta do it. They've gotta pull it off. You know, there's an awful lot of that goes into service, and we've worked awfully hard on it over the years. You know, not only A to B on time, but all the other things that go into a true service product. I think we do it better than others. You know, hey, it's out there. It's not rocket science, but they've got to do it. You know, we'll see how they do.
Just add, though, to that the fact that, you know, it is a unionized company, and the non-union carriers generally have got more flexibility within their workforce and a better service product. You've seen more market share movement to the non-union players as links of haul shrinking, and there's more of a premium within supply chains to look at carriers that can respond to next day and second day needs. I think that we've got more flexibility as a group of non-union carriers. I think we've got an advantage within that group, as we talked about earlier, to be able to continue to win shares.
You know, that's something that's been playing out over the long run, and we'd expect to continue to see share movement from unionized to non-unionized players.
Got it. Got it. That's a terrific answer, and thank you for the time. You guys clearly have a strong track record in that regard. Thanks for the time.
All right.
Okay. 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 today. We appreciate the questions, and please feel free to call us if you have anything further. Thanks, and have a great day.
That does conclude today's conference. We thank you for your participation. You may now disconnect.