Good morning, and welcome to the Q4 2019 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 14, 2020, by dialing 7194-5708 20. The replay passcode is 821-0669. 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 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, we welcome your questions today, but we do ask in fairness to all that you limit yourselves to just a couple of questions at a time before returning to the 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 Q4 conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. For the Q4, our results reflect another period with a slight reduction in revenue that was due in large part to the sluggish domestic economy. Despite these economic conditions, we maintained our relentless focus on revenue quality and cost controls and are pleased with our consistent financial performance.
While our diluted earnings per share decreased as compared to the Q4 of 2018, The decrease in our pre tax income was primarily due to a $30,700,000 increase in fringe benefit cost that was partially driven by changes to our phantom stock plan. Adam will address the phantom stock plan expense in more detail, but the amendments to these plans in December 2019 should prevent fluctuations in our share price from materially impacting our earnings in future periods. The overall operating environment in the 4th quarter felt similar to what we experienced for most of 2019. We once again continued with the decrease in LTL tons although we were pleased to see our volumes perform in line with normal seasonality when compared to the Q3 of 2019. This was the first time this year that we were in line with our normal seasonal trend.
We are encouraged by this volume trend as well as economic forecast for the industrial economy to improve or in 2020, although we are cognizant of increased political risk associated with an election year. Regardless of the economic or political environment, we will continue to focus on managing the things that we can control. This starts with our steadfast commitment to delivering superior service at a fair price while also diligently controlling our cost. Our all time performance was 99% and our cargo claims ratio was 0.2% for the Q4. Providing this level of superior service in periods with reduced operating density generally results in the loss of productivity and increased operating cost.
We operated with great efficiency in the Q4, however, and improved both our P and D shipments per hour and platform shipments per hour by 1.1% and 4.2%, respectively. We have said many times before that long term improvement in our operating ratio is dependent upon consistent improvements in density and yield, both of which require the support of a positive macroeconomic environment. While we didn't get a lot of help from the economy and our volumes were lower than expected for 2019, we improved our yields by maintaining a consistent cost based approach to pricing supported by our superior service. Long term improvement in our yields has allowed us to make significant investments over the years to support our market share goals. Despite the softer volumes in 2019, our capital expenditures totaled $479,000,000 and we maintained our commitment to the ongoing expansion of our service center network.
Although we only increased our operating service center count by 1 in 2019, we finished the construction of several other facilities, but did not officially open them to avoid the increased operating cost. We intend to open 6 to 8 service centers in 2020, including the ones that have already been completed and believe that adding door capacity to our network should ensure that it will not be a limiting factor to our growth. While 2019 was not the year that we expected it to be, our team is proud of our financial results. We finished the year with company records for annual revenue and diluted earnings per share. If it were not for the phantom stock plan expense associated with the 53.7% increase in our share price, we would have also improved our operating ratio.
So I would like to thank our Old Dominion family of employees for their solid execution that produced these results in a challenging environment. As we look forward to 2020, we will continue to focus on managing the fundamental aspects of our business and adhere to the same business model that has served us well through many economic cycles. We firmly believe that if we can continue to execute on this plan, we can deliver even greater value for our customers and shareholders. Thank you for joining us this morning. And now Adam will discuss our Q4 financial results in greater detail.
Thank you, Greg, and good morning. Old Dominion's revenue for the Q4 of 2019 was $1,000,000,000 which was a 1.7% decrease from the prior year. Revenue for the year increased 1.6 percent to a new company record of $4,100,000,000 For the 4th quarter, our earnings per diluted share decreased 7.7 percent to $1.80 due to the combination of the decrease in revenue and 2 60 basis point increase in our operating ratio. Earnings per diluted share for the year increased 3.8 percent to $7.66 which was also a company record. Our revenue results for the quarter reflect the 4.5% reduction in LTL tons that was partially offset by the 2.7% increase in LTL revenue per hundredweight.
Excluding fuel surcharges, LTL revenue per hundredweight increased 4%, which was in line with our expectations. On a sequential basis, LTL tons per day decreased 1.6% as compared to the 3rd quarter, which is in line with normal seasonality. LTL shipments per day were down 3.8% on a sequential basis, which was just slightly below the 10 year average decrease of 3.3%. For January, our revenue per day increased 0.2% as compared to January 2019. Revenue per hundredweight excluding fuel surcharges increased 4.1% to offset the 3 point 6% decrease in LTL tons per day.
The increases in our 4th quarter and annual operating ratio are both attributable to increases in our fringe benefit costs for the periods compared. For the Q4, our fringe benefit costs increased to 39.7% of salaries and wages from 30.7% in the Q4 of 2018 due primarily to changes in phantom stock expense. The Q4 of 2018 included an $8,400,000 reduction in expense that was due to the decrease in our share price for that period. This compares to $17,100,000 of expense in the Q4 of 2019 that resulted from the previously disclosed amendments to these plans as well as the increase in our share price during this quarter. All of our other combined costs improved as a percent of revenue for the quarter.
We were able to offset the increases in insurance and depreciation with improvements in operating supplies and expenses and salaries and wages. Our team did a nice job of matching labor to current revenue trends while also improving productivity. Our average headcount was down 5.6% as compared to the 4.1% decrease in LTL shipments. We currently believe that our workforce is appropriately sized for current shipment trends and our fleet is in good shape as well. If shipment levels begin to improve, however, we will likely need to add to our workforce this year.
Old Dominion's cash flow from operations totaled $236,400,000 for the Q4 and $983,900,000 for the year, while capital expenditures were $109,000,000 $479,300,000 for the same respective periods. We returned $49,200,000 of capital to our shareholders during the Q4 and $295,500,000 for the year. For 2019, this total consisted of $241,000,000 in share repurchases and $54,600,000 in cash dividends. We were pleased that our Board of Directors approved a 35.3% increase in the quarterly dividend to $0.23 per share commencing in the Q1 of 2020. This action reflects the Board's confidence in our prospects for continued growth and affirms our commitment of returning capital to our shareholders.
Our effective tax rate for the Q4 of 2019 was 24% as compared to 26.6% in the Q4 of 2018. For the year, our effective tax rate was 25.3%. We currently expect an effective tax rate of 25.5 percent for 2020. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
Thank And we'll go first to Jack Atkins with Stephens.
Good morning, guys. Thanks for taking my questions.
Good morning, Jack.
So Adam, if I could just go back to your comments around January, Greg, I'd love to get your thoughts on this as well. But I appreciate the added color there on the 1st month of the quarter. If you could just sort of expand a bit about sort of how the market's feeling to you guys through the first call it 4 or 5 weeks of the year. Obviously, we got a little bit better than expected PMI print earlier this week. And then but we have some offsets there with this production halt at Boeing and some of these things happening with global trade.
So would just be curious to get your take on the market, how it feels today? And are you continuing to see stabilization in your view relative to normal seasonality?
Thanks, Jack. It does seem to be stabilizing and the commentary from our customers and the communications that I've had with them for the most part seem to be positive. So we're positive on where we are and what we look like going forward. So let's hope that it does improve through the rest of the year.
Okay. That's great. That's great to hear. And then I guess on the cost side for a moment, Adam, could you kind of help us think through the puts and takes when we think about the sequential progression of OR? I know there are a lot of moving pieces in the Q4.
And I guess from a bigger picture perspective, how are you guys thinking about cost inflation on a per shipment basis in 2020?
Sure. Obviously, the biggest item that we dealt with in the Q4 and called out was the that adjustment for the phantom stock expense. So that was a big headwind, if you will, and especially when you consider that Q4 of 2019 or 2018 rather included so many credits that kind of went the opposite way. And we had talked last year about how those helped the operating ratio probably somewhere in the neighborhood of 150 basis points to 200 basis points last year. So I think that we've got that that was in our fringe benefits line.
There are probably a couple of other things that stand out in this quarter that were a little unusual. Obviously, the insurance line for 1 is probably the easiest one to see. We had we go through our annual actuarial assessment and usually make those adjustments in the Q4. So that ticked up to 1.8% of revenue. Typically averages around 1.1%, 1.2% throughout the year and that's our cargo claims ratio, which is 0.2%.
And then typically the balance is our auto exposure, but we had an unfavorable adjustment related to our annual actuarial assessment there. What you don't see is there's some credits that kind of offset that unfavorable that are in some of the other lines. Some of those are in the fringe benefit line. We had a favorable adjustment related to the same actuarial assessment on our workers' comp liabilities, some other credits that are in the operating supplies and expenses line. So all those other things, nothing material to call out one way or the other individually, but kind of had just some puts and takes in those other lines that would most likely normalize as we progress into the Q1 of next year.
Okay. That's helpful. Thanks very much for the time.
We'll go next to Chris Wetherbee with Citi.
Hey, thanks. Good morning.
I wanted to see if
you could elaborate a little bit on the tonnage trends that you saw through the quarter. I apologize if you did go through that, I might have missed it. But particularly December, it looks like it improved a little bit. And I know you like to wait till the Q comes out or the K, I guess, in this case to give us sort of the current month. But any sort of thoughts just directionally on how things are trending here early in 1Q?
Yes. Well, for the Q4 to start with that, we were pleased to see that overall for the quarter, we were in line with what our normal sequential trends typically are. And we did that both on the tonnage side and just revenue in general kind of performed as the 10 year average, I guess, has performed. So that was good to see. And it's really the first time that that's happened this year and really goes back into last year.
In the back half, we started seeing a little bit of unfavorable trend as well. So that was good to see. As we transitioned into January, we gave the number, but the year over year January, the tons were down 3.6%, revenue flat. So that was we're starting to see the progression where we were the revenue was down about 2 point 5% in the Q3 on a per day basis, down a little bit less in the Q4 on a per day basis. And now it's flattish, but we're on the good side of flat being just slightly positive.
So all kind of good trends to see developing.
Okay. That's very helpful. I appreciate that. And then when I think about the Phantom stock, if you were to think about the entire year and what that means as we sort of transition into 2020, In terms of the tailwind, I guess there'll be a tailwind to growth potentially from the cost that you incurred in 2019 that won't be recurring. But can you sort of just sum it up just so we know the total number is for the full year when we look at that clean going into 2020?
Yes. I think we talked about that in the prepared remarks, but the volatility that we've had with that program, it kind of went up and down as we progressed through this year. And frankly, it's been doing that and trending along as we've progressed through the last couple of years as our share prices increased. And it's always nice to be able to go back and say just like Greg did that share price increased 50% or over 50% this year. But that the way the accounting was on that program, it resulted in expense.
So in total, we had about $35,000,000 of phantom stock expense in 2019. And that compared to when you go back to 2018, we only had about $6,000,000 So a big overall headwind, if you will. But that number went into the overall fringe benefit line. I think that we'll see a little bit of improvement there for this year, but I'm still looking at overall that total probably being somewhere in the neighborhood of 34% of salaries and wages as we progress into 2019. We won't have we were north of that 34% bogey for 2019 because of that phantom stock expense, but we'll still face some cost inflation related to our health programs.
Pharmacy costs continue to increase. So I think that we'll see that increased rate of inflation on that program as well as some of the other costs that go into those fringe benefit lines. Okay.
That's really helpful. I appreciate that.
Yes, it's
a high class problem to have, but definitely not to put it in the rearview. Thanks very much for the time. Appreciate it.
We'll go next to Amit Mehrotra with Deutsche Bank.
Thanks, operator. Hi, everybody. Thanks for taking my question. So Adam, just helping us with what productive labor costs were in the quarter as a percentage of revenue? And then I know you talked about headcount going up or trending up as shipments increase and that obviously makes sense.
But if you could just help us think about the increase in headcount relative to shipment growth, is it kind of proportional if you see 2%, 3% increase in shipment growth, that's kind of what we should expect on headcount. I think that would just be helpful. And then last very specific question is D and A took a big step up in 2019 and I just wanted to know what the right way to think about this in 2020? All
right. I'll try to see if I can remember all those questions, but That
was one question, by the way. That was just 3 parts, yes.
That was 10 questions in one. I'll buy 1 gift, I guess. But anyway, the productive labor costs were pretty flat in the 4th quarter compared to last year, 27.9 percent for both of the periods compared, but that's actually a good thing. We look at all of our direct operating costs combined. And when you've got a period where fuel prices are fluctuating and our fuel costs were down, the average price per gallon was down a little over 6% in 4Q 2019 versus 2018.
So typically that impacts obviously your fuel surcharge revenue as well as fuel expenses. So you see revenue going down, your operating supplies and expenses going down as a result of the drop in fuel price, but typically the labor would go up slightly as a percent of revenue. So I think we've got that benefit. And overall, on the salary, wages and benefits line, I think that you can kind of see that trend sort of playing out. One of the things that a couple of things that sort of benefit that line, performance based compensation was lower for the Q4 this year and that frankly just relates to the fact that revenue was down and the operating ratio was lower.
Those are kind of 2 ingredients that go into most of our bonus programs. Our headcount in the 4th quarter, it was down versus the 3rd quarter. Typically, you've got an increase, a sequential increase, if you will, from the 3rd into the 4th. And so like we said in the prepared comments, typically 1st quarter head count on average is kind of flattish with the 4th quarter. And I think that where we see trends right now that we're in pretty good shape on the headcount.
Obviously, these trends continue to play out. If we can see our volumes start to grow, then likely that would mean that we would be adding to our headcount later in the year. And that would be a good thing actually as we hope that we're in that position with the workforce. But the fleet, we kind of addressed that in prepared comments as well. I think that we're in good shape.
We made orders last year anticipating kind of mid single digit growth and on the volume side and we ended up with mid single digit decrease in tons. So we're probably a little bit heavy and there's a lot of carrying costs both in the depreciation line as well as the maintenance and repair cost on that heavier fleet. So those are things that hopefully will grow into the fleet that we have as we progress through 2020.
Yes. So D and A more flattish in 2020? I guess it depends on when the revenue equipment came in, but I guess more flattish in 2020?
Well, we've still got
a decent sized CapEx program, not as much on the equipment side, but it's still $315,000,000 Some of that will be technology, which has a shorter depreciation period. So you get hit with a little bit more of that. Longer term, I think when you look at kind of the change in average or the annual depreciation rate rather it's somewhere in kind of the 5 percentage range of the overall CapEx budget for the year. But since we've got a continuation of the real estate and the real estate making up the majority of the CapEx plan, then it certainly should be lower than that. But we had certainly expected to be increasing as we progress through the year and continue to execute on that CapEx plan.
Right. And then the share count, last question for me. The share count, is that so the way the Phantom thing works, I guess, now the variability of the stock price will have no impact on the fridge benefit costs and you're just going to add it a little bit to the share count. Is it like a $357,000 increase in the share count? Is that simply how it works?
Yes. The diluted shares will reflect that that will go into that diluted share count, if you will, those shares that are outstanding. And we'll give that detail too that should be in our 10 ks filing. But you can kind of go back and look at last year's 10 ks as well and see kind of the outstanding shares that were there. Not a lot of impact to the Q4 given the timing of when that program or when we made that change, if you will, but certainly that will impact diluted shares going forward.
It. We'll go next to Jason Seidl with Cowen and Company.
Thank you, operator. Could you guys touch a little bit on sort of LTL pricing? It feels like it's still pretty stable out there in the marketplace and sort of how shippers are communicating to you what to expect for 2020?
Yes. I think that it's been stable and certainly was pretty much in line with what we thought it would be in the Q4. And I think what we talked about on the Q3 call for how that trend would play out. So we continue to go through our bid process and continue to have had wins. But obviously with revenue down in the back half of last year, I guess there were more losses than wins overall, if you will.
So as we transition into this year, I think that you've seen some of our competitors' yield numbers compress as they went through the back half of last year and that was just probably as their own bid situations kind of went through. And I think we talked after the Q1 call that we started seeing a little bit of competitive response in kind of the March April timeframe of last year. And that pretty much played out, and I think it played out in the competitive yield numbers that were disclosed for the public carriers as well. So we would expect to continue to try to get our cost based pricing and continue to execute on this type of consistent approach that we've had year in and year out. And so I think Jack asked earlier, but our cost inflation projections kind of underlying costs for this year probably somewhere around 4% on a per shipment basis and that becomes the baseline for the conversations that we have with our contractual customers and we'll go into our thinking when we get to the point of announcing a GRI for our tariff based business as well.
Okay. That's great color.
And the other thing, any reaction from any of your customers?
Can you repeat that?
No, no. Yes. No. Any reactions from your customers about the impacts of the coronavirus at all on their supply chains? Just trying to think how the Q1 might work out.
Jason, not to my knowledge, we haven't heard anything negative related to that so far, thankfully.
Okay.
We'll go next to Ravi Shanker with Morgan Stanley. Thanks.
Good morning, gentlemen. I just wanted to follow-up on the insurance comments and thanks for color in your prepared remarks. I'm really surprised that you guys have such a low historical claims ratio and obviously are such amazing operators are seeing a spike in insurance rates. I mean, if it's this bad for you, what's it like for the rest of the industry? And I think you said you had some kind of actuarial hit.
Was it a particular incident that drove that? I mean, any color there would be helpful.
Not necessarily one particular accident that drove the hit in the Q4. We go through an annual actuaries look at all open claims going back for old years. And some years you have positive development and some years you have unfavorable development. When you go back to last year in Q4, we did have a positive adjustment in that period. I think our expenses were 0.9 percent of revenue where it trended to 1.1%, 1.2% or so for the 1st 3 quarters of the year.
So this year was just several claims that are still open that had some unfavorable accidents that we had this year. And we'd expect that things should get back to normal next year. And a lot of that and the reason that we've got the favorable trend over the long term is the focus that we have on safety, continuing to invest in technology on our units and continuing to invest in training on proper safety protocol for our drivers. And I think that's played out long term and the improvement that we've seen in our accident frequency ratios as well as the general severity of trends. But like many of the other carriers, we will be facing some inflation on the premium side.
We're kind of in the midst of renegotiating that this year. But we have the majority of kind of our auto expense is related to the self insured piece that we fund. So we'll have the increased hit on premiums and then we'll just continue to look to manage and hopefully mitigate any inflation on the self insured piece that we're on the hook for.
Got it.
So do you feel like the inflation would have been worse if you didn't have the deck?
Sure. Obviously, the technology has helped. It's hard to say one for 1, but we certainly we spent a lot of time going through and evaluating the technology over the years as we put it in the trucks. But we feel like we've got good technology, the accident avoidance systems that we have in place now, the forward facing cameras and collision detection systems and so forth. Certainly, we would expect to see that continue to play out with reduced accident severities over the years and hopefully preventing accidents, one, would be the ultimate objective, but certainly lessening the severity is a benefit to us all.
Got it. And just one last one. The last few years have been probably the most volatile that this entire industry has seen in a long time. Doesn't look like it's going to get much better, especially with changes like e commerce and new entrants and such. What are your views on consolidation in the space and kind of what do you think the LTL space looks like 5 years from now?
Do you think it looks similar to where we are today? Or do you think it looks meaningfully different?
I'm not sure that at this point, Ravi, we see much of any change in the LTL space ahead of us. I think our competition has been relatively stable. We lost a couple of smaller carriers in the last year or so, but I think it's been relatively stable and we don't see anything that would change that in the near future. But certainly, I think to some degree, over the years, we've lost competitors as you know. But I think it's we're in a good spot right now.
I think we're well positioned. I think the things that we've done from an expansion standpoint, from a capacity standpoint puts us in a good spot. But I don't think from a competitive standpoint, we'll see that many changes.
Very good. Thank you.
We'll go next to Jordan Alliger with Goldman Sachs.
Yes. Hi, good morning. I know density is sort of the key over the long run to improving OR. I'm just sort of curious, given the declines that we saw in LTL tonnage in 2019 as you think ahead and hopefully we get to an inflection on industrial production and industrial outlook, what sort of volume growth do you need to start improving OR again on a year over year basis would you say? Is it just something?
Is it a certain order of magnitude to make up for the impact in 2019? Thank you.
There's not necessarily a volume growth number and I think we proved that in the 1st and second quarters this year when we were still seeing some weakness. Certainly, you need some revenue, and you got to have revenue to offset the high fixed costs that are inherent in our network. And so we saw that still in the Q2 of this year when our revenue growth was about 2.5% on a per day basis, and we were still able to produce a little bit of operating ratio improvement. So there's a balance that's required. And over the long run, when you look at our long term revenue growth rates of 12% to 13%, it's kind of been made up of about 8% or so on kind of the shipment volume side and then the balance in yield.
And so the density is certainly important and but staying ahead of the density with the continued investment in service center capacity, that always gives us that ability to grow into the network that we've built. But you've got to have a consistent yield management process in place as well. And when you look over the long run, we've been able to get on a revenue per shipment basis improvement in kind of an average of 4.5% a year. And that's somewhere around 75 to 100 basis points higher than the long term trend on our of the cost on a per shipment basis. And so you got to have that delta in place though to support high dollar investments that we're making in our service center network to support investments in technology and all the things that we want to do to try to keep that per unit cost inflation down as much as we can.
So there's a lot of factors that go into it. And unfortunately, we've had a really nice balance of density and yield over the
years. Thank you.
We'll go next to Scott Group with Wolfe Research.
Hey, thanks. Good morning, guys.
Good morning, Scott.
So when I look at the other LTLs, looks like they are seeing more of a recovery in December, January tonnage trends relative to you guys. I'm wondering your thoughts or any is this a sign to you at all the competitive environment getting maybe a little bit worse?
We haven't seen any signs of things getting worse, if you will. I mean, I can't comment on what the other carriers are doing. We can only comment on what we're seeing and we feel good to see the trends kind of coming back in line, if you will, on the volume side. And as Greg mentioned, there's still a lot of positive comments that we're hearing from customers. I feel like that forecast for industrial production to increase this year.
We've got maybe some clarity now with some trade deals done. And so there's a lot of reasons to be positive as we transition into this year. And I think the other thing that we'd like to see and hope to see, I guess, as well as now that once we get through the Q1 and we've still got a pretty healthy comp with revenue and yield in the Q1. But once we get through that period and we start getting to the 12 month point of where we started seeing some increased discounting by some of our competitors, if truckload rates start increasing, that increases the line haul costs for many of our competitors. Perhaps some of our customers that we might have lost some business on aren't satisfied with the level of service they've received over the past 12 months or the competitor is not satisfied with the operating ratio with the lower price inherent, maybe some of those bids come back and we'll start regaining maybe a little bit more of the business that we lost.
So a lot of things to sort of look forward to as we start progressing into 2020.
Okay. And then, Adam, you mentioned, I think, 4% cost inflation this year. I'm wondering, is that normal? Is that better or worse than normal in terms of a cost inflation year? So when we get hopefully we get back to some revenue growth in a more meaningful revenue growth starting in the Q2, any thoughts on how we should think about incremental margin?
Yes. Obviously, we need the revenue to start having that conversation again. But we've got a lot of things that we should be able to do, do, I think, and can help ourselves growing into the fleet is one of those that should That 4% is kind of in line with what our longer term trends have been. Most of that is based on the wage increase to employees last year, but probably anticipating, like we mentioned, some health cost increases, insurance. There are some other things that are going up that might move that kind of underlying number north of the 3%.
But certainly, we're going to do everything we can to help ourselves. And last year, our number was probably a little bit higher than we came into the year thinking 4% to 4.5%. It was a little bit higher than that, but a lot of that was the volume weakness. So you've got overhead cost on a per shipment basis that are going higher than what you would expect. So if we can't get the revenue growth, we should be able to get some leverage there.
On the repair side, like I mentioned earlier, we face some significant cost headwinds there this year where adding all of the power units that we did and not really maximizing the miles and utilization, you're still maintaining all of that fleet. So if we kind of grow into the fleet that we have, should get some leverage on that side as well. So certainly some areas that we should be able to get some leverage on as we progress through the year.
Okay. Thanks. And just last one quickly. The CapEx guidance, I think it's the lowest in 6 or 7 years on tractor trailer down a lot. Should we think about this as sort of a 1 year or so equipment holiday or something longer?
No, I think it's a 1 year kind of deal. And again, we went into last year thinking that we would have somewhere in kind of the mid single digit tonnage growth and it ended up being down. So I think that gives us room to grow into it and we want to be good stewards of capital and trying to evaluate kind of where the fleet is and how we think we can go into it. And obviously, if volumes pick up more than what we might expect, then certainly we can respond and have been able to do that in our past life as well. So we'll make whatever changes that are necessary.
But typically, we spend about 10% to 15% of our revenue on CapEx. And I think when you look at sort of the breakdown, the expenditures for real estate are pretty much in line with as a percent of revenue with what we've spent in the past. This will be probably a 1 year holiday on the fleet side and then we'll just get to the end of this year and sort of evaluate where we are and what we feel like we need going into 2020
1. Okay. Appreciate the time guys. Thank you.
We'll go next to Allison Landry with Credit Suisse.
Thanks. Good morning. So I just wanted to go back to your comments about share gains. Because I think last quarter you talked about recapturing some business from customers that had left earlier in the year to take advantage of lower rates and that maybe contributed to what you started to see in terms of volume stability and more normal seasonal trends. So I was just curious to know if this also played out in Q4.
And to the extent that it did, was there any change in the pace in which you're seeing these customers come back? Basically, just trying to gauge whether this is something that you would normally see happen in advance of a recovery.
We have continued to see some business return that we lost over price prior. Earlier last year, we have continued to see that business come back to us for our service. So I don't think there's a huge change in the trend. We did continue to see our share gain increase slightly over the year, which was good to see because we've seen it in other down economic cycles where our share gain actually slowed or diminished completely. But this year so far, that number has continued to increase slightly.
So I think that's a good thing, but we are still we're winning some bids and we are gaining some business back that we lost. So at what pace, it's kind of hard to gauge. We don't measure those things. So anyway, but we are having some gains still.
Okay, great. That's helpful. And then Adam, could you walk us through the monthly weight per shipment trends in Q4 and January? I'm sorry if I missed that if you said that earlier in the call.
The tonnage or the weight per shipment?
The weight per shipment.
Okay. So on the weight per shipment, just to kind of go back a little bit and this is another one of those points that
give us
a little bit of confidence going into this year. But if you recall, we kind of hit a low point on our weight per shipment back in August of 2019 and we started seeing a little bit of movement north there. So on a year over year basis through the 4th quarter, still down. We were down 1% in October. We were positive 0.4% in November on a year over year basis and then down 0.7% in December.
But the trends when we look at it, we had hit that sort of 15.30 mark in August. It came back to around £1600 by the November December timeframe. So most of those, I would say, kind of moved for the quarter, kind of moved in tandem with sort of what the normal sequential trend might be, but certainly a positive development. Then where we were for January, it's down versus 2019, but it's pretty much in line with down sequentially about like our 10 year average. So we're back to £15.54 in January of this 2020.
The weight per shipment kind of held up a little bit in January of last year before we started seeing some sequential weakness. I feel like we're in a good spot there and hopefully we'll see that trend on the weight per shipment side stay pretty steady and see some steady improvements as we progress through the year.
Perfect. Thank you, guys.
1,000.
We'll go next to Ari Rosa with Bank of America.
Hey, good morning, guys. So first off, nice quarter in a tough environment. But so when I hear your outlook or kind of what you're saying about the operating environment, some of the truckload carriers really kind of diverted attention to a second half recovery, but it sounds like you guys are a little more optimistic there. I just wanted to make sure I'm hearing that correctly. And do you think there's something unique about LTL that's maybe different from truckload
that's causing that dynamic?
Yes, I don't know that there's anything any different. And I guess it's easier to say that the back half of the year should be better than the first half because we're in the first half. And frankly, we're not seeing numbers that are there to write home about when we think about long term growth and how we've been able to generate this revenue improvement and growth in pretax income and so forth. Being flat is not kind of what we aspire to be, if you will. But it just feels like things are starting to turn a little bit and there's just little positive developments here and there.
We'll see kind of as it takes hold. I think that we still have to be cognizant of the fact that there are political risk and we're in an election year. And historically speaking, volumes have kind of underperformed seasonality slightly in election year. So we kind of keep all of that in mind, but we finally saw ISM go back above 50 and just continue to have conversations with our customers that are probably it's not like it's robust growth expectations or anything like that from our customers, but they're more positive than there are negative conversations. So we're cautiously optimistic as we go through the 1st part of the year, that's probably the best way to describe it is cautious optimism.
Okay. That's helpful. And then second, you mentioned a couple of times just weakness in the industrial economy specifically. Maybe you could talk about the split in terms of what you're seeing between industrial versus some of your more consumer oriented customers? And then just a bit of a strategic question.
Do you think there's an opportunity or is it something that is a compelling idea to maybe look to build a book of business more in the consumer space or is that not something that's really being entertained too much for various reasons?
Yes. Our the book of business really didn't change a whole lot this past year. Our numbers were pretty consistent in terms of the breakout of retail and industrial. So it's about between 55% to 60% industrial, closer to the 60% range and then kind of 25% to 30% on the retail side closer to the 30% and then hodgepodge of things from an SIC code basis that kind of go from there. We've seen over the last couple of years maybe more growth in our retail related business.
And I think that that kind of gets to some of the longer term e commerce trends and the importance that some of the retailers and vendors that are supplying product to retailers are placing on service. And that fits right in our wheelhouse as we can help our customers avoid costs like chargebacks and fines and so forth by delivering on time and in full into some of these distribution centers, we can charge a fair price, but it's one that was consistent with the level of service that we're providing. And I think it benefits from a total cost transportation standpoint, our customers that want to use us because they end up avoiding some of those secondary costs that may come from the retailer. So that creates win win scenarios and is definitely a good avenue for growth. But other things that maybe get more attention in that space of doing last mile deliveries and across the threshold is just something that we're really not interested in from a corporate strategy standpoint as it exists right now.
No, that's entirely understandable. But I guess my question was, is there an opportunity kind of given the growth in e commerce, obviously staying within the LTL space, not going out into a final mile or something of that sort. But is there an opportunity to grow retail business, particularly in e commerce or is that or should we expect that split of 55% to 60% industrial, 25%, 30% retail to kind of continue?
That's a hard question to answer, but we've got a huge sales force that's working the entire economy be it retail or industrial, whatever. And as those opportunities present themselves, we'll certainly try to participate. I think we've had some competitors that have been far more aggressive than we have on the retail side. So that's probably why the percentage is like it is. But certainly as those opportunities present themselves, we'll be there and hopefully will be a solution for our competitors or for our customers if they have the need.
And if they're looking for better service, we'll be there.
Terrific. That makes a lot of sense. Thanks for the time.
We'll go next to Todd Fowler with KeyBanc Capital Markets.
Great. Thanks and good morning. Adam, maybe just to put a bow on the conversation around margins, particularly into the Q1. Is the right way to think about the sequential margin change 1Q over 4Q is to adjust 4th quarter for the 150 basis points or whatever the impact was from the Phantom stock and normalized a little bit for incentive comp or excuse me, for insurance expense and then think about that typical 100 basis point change off of that? Is there something else we need to think sequentially into 1Q?
I think, yes, on most of your points. I would really only look at this Phantom stock really as the only thing to sort of adjust and normalize for. Because as I mentioned, the insurance line, you see the increase there and that's the one thing that stands out. But there are some offsetting credits in some of the other line items that I think will normalize as we progress into 1Q as well. And so some of that being kind of within the fringe benefit line, some being in the operating supplies and expenses as well.
So you get a normalization kind of in those categories and it really just becomes kind of the offset of that phantom stock expense, sort of 150, 170 basis points. And then you sort of look, as you mentioned, about 150 basis points is kind of the average sequential change from the Q4 into the first. The only thing I would say with that as well though is we did a lot of good things in the Q4. And oftentimes, if you kind of look at what the change from 3Q into 4Q was, oftentimes when we've had periods like that where we really do well, if we do have to start hiring, it will be at a different pace. And so there could be some higher costs that maybe end up kind as you're below maybe a trend 1 quarter, you might be a little bit higher the next.
So that wouldn't necessarily be a surprise if we're on a normalized basis a little bit higher than what that normal sequential trend might be, if that makes sense.
Yes, it does. I think so what you're saying is if we think about how 1Q headcount trends versus 4Q, we may not see that normal change because 4Q is a little bit better. But it also sounds like from earlier in the call, if you're hiring, that's probably an indication that the tonnage is picking
up? Correct.
Okay. And then just for my follow-up, can you talk about the available capacity in the network right now? And typically, I think about your model being built to have that available capacity and when you do see tonnage come back that you can really drive high incremental margins because you can handle that additional freight coming in that maybe some of your competitors can't. So can you give us just a sense of where you think the network is and how much more tonnage you can handle and just the thought process around the leverage you'd see with tonnage coming back in with the available capacity in the network?
Capital expenditures were, they were significant last year. So we definitely built some capacity having such a flat year. As we go into this year, we continue to be flat and we're continuing to build out the network and build where we know we'll have needs in the future. So at this point in time, we're in really good shape from a capacity standpoint. Exactly what it is, it's hard to say, but probably 25%, maybe even better than 25%.
But we do have some capacity and I like where we are today. We've addressed the needs that we had back a couple of years ago when we were really, really busy. We've addressed those and we've been able to accomplish some of the needs that we had and I think we're well set for the future.
Sounds good. Thanks a lot for the time this morning.
We'll go next to Ben Hartford with Baird.
Thanks. Forgive me. And Adam, just at a higher level as you think about cash flow and the balance sheet over the next several years, any changes to your appetite to carry leverage? And if so or if not, I mean, how do you think about this, the allocation of returns to shareholders going forward. It looks like the dividend payout ratio has been stepping up, but has a lot of room to continue to move higher.
So maybe you could address that as well. Thanks.
Sure. That certainly is something that we continue to look at and evaluate and we were pleased to be able to produce another 30 plus percent increase as we're going into 2020. So the payout ratio, when we first started the dividend program, kind of our target was we looked at the prior year and sort of wanted to have a basis of about 10% of kind of the prior year earnings. And we started out on the conservative side to make sure that we had room to continue to increase it and so forth. And we really had not because our earnings growth had been so strong since we implemented that program, had not really reached that threshold that we wanted to be.
So this year, I think, was a good sort of increase to kind of address that. And I think that we've moved that payout ratio north a little bit to try to at least achieve that goal. And we'll continue to look at increasing the dividend as we move forward. And then on the other side will be the share buyback program, and we kind of step that up a little bit last year as well and we'll continue to execute on that plan. And I think we've just got a balance from an overall cash flow standpoint, looking at the cash coming in from operations, what we spend on capital expenditures that are planned, also taking advantage of opportunities that may present themselves strategically on the real estate side.
And we did a little bit of that in 2019. We ended up spending more than we had originally planned, and a few opportunities kind of became available to us. And we'll continue to look at those. And then I think we just got to balance overall kind of where we are from an overall positioning standpoint or cash balances and kind of cash projections and just sort of stay true to trying to return excess capital to our shareholders as it makes sense.
One final one. Any specific IT projects on the horizon either in 2020 or beyond that are of note?
We've got several projects going on. We're converting to a new human capital management system. This year, we're working on an implementation of that, which will be a good thing for us. And so we're excited to try to get that behind us. And we're always looking at incrementally how we can continue to improve the systems that we have.
And I think when you look at our operating systems, those have all been created in house and in some places may have plug ins where we've got off the shelf products that kind of interface with and assist. But one of the reasons we that regard. So we're always going to be looking at making incremental improvements to those programs and evaluating any other system that we think will help us. But any return or any investment rather that we make in a system, it is an investment. And there's risks that go along with that and we think that that's something that should be accounted for in expenses.
We incurred expense and we should assume return on any project as well. So that's kind of the baseline of when we make that decision to pull the trigger on the project. And so we're going to continue to look at making investments and hopefully getting returns on those investments. Appreciate the time.
We'll go next to David Ross with Stifel.
Yes. Thank you. Real quick, I wanted to talk a little bit about the transition that you all made from the AOBRs since you were grandfathered in to ELDs. Is that fully behind you now, I'm assuming? And was there any permanent impact to the business, the network, the costs from doing that?
David, it is behind us. We completed that project back in the fall, but it's completely behind us, no material impact at all. Obviously, it took a lot of hard work and a big effort from our folks to accomplish it in the time that they did, but glad to have it behind us, but nothing material I don't think to talk about.
And then last question for Adam, I guess how much would volume have to grow this year to exceed your current tractor CapEx expectations?
David, I'll say a fair amount. We've got some capacity. We've looked at that recently. We've got some equipment capacity right now without a doubt. We're nowhere near peak.
I mean, obviously, it's a slow this time of year, but we're nowhere near our peak levels and we've got the equipment to accomplish our absolute peak level right now. So we think we're sitting in a good position, maybe if anything, still a little bit heavy on equipment or tractor certainly and trailing equipment as well. We're in good shape there.
And there are currently no further questions in queue. I'd like to turn it back over to today's speakers for any additional or closing remarks.
Thank you all for your participation today. We appreciate your questions and please feel free to give us a call if you have anything further. Thanks and have a great day.
And that concludes today's conference. Thank you for your participation. You may now disconnect.