Good morning, welcome to the fourth quarter 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 719-457-0820. The replay passcode is 8210669. 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, 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 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 fourth quarter 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 fourth quarter, 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 fourth quarter of 2018, the decrease in our pre-tax income was primarily due to a $30.7 million increase in fringe benefit costs that was partially driven by changes to our phantom stock plans.
Adam will address the phantom stock plan expense in more detail. The amendments to these plans in December 19 should prevent fluctuations in our share price from materially impacting our earnings in future periods. The overall operating environment in the fourth 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 third quarter of 2019. This was the first time this year that we were in line with our normal seasonal trends. We are encouraged by this volume trend as well as economic forecasts for the industrial economy to improve 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 on-time performance was 99%, and our cargo claims ratio was 0.2% for the fourth quarter. Providing this level of superior service in periods with reduced operating density generally results in the loss of productivity and increased operating cost. We operated with great efficiency in the fourth quarter, however, and improved both our P&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 million, and we maintained our commitment to the ongoing expansion of our service center network.
Although we only increased our operating service center count by ONE 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 six to eight 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 it 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.
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. 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 2019 was $1.0 billion, which was a 1.7% decrease from the prior year. Revenue for the year increased 1.6% to a new company record of $4.1 billion. For the fourth quarter, our earnings per diluted share decreased 7.7% to $1.80 due to the combination of the decrease in revenue and 260 basis point increase in our operating ratio. Earnings per diluted share for the year increased 3.8%, $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 hundred weight increased 4%, which was in line with our expectations. On a sequential basis, LTL tons per day decreased 1.6% as compared to the third quarter, which is in line with normal seasonality. LTL shipments per day were down 3.8% on a sequential basis, 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 of 2019. Revenue per hundred weight, excluding fuel surcharges, increased 4.1% to offset the 3.6% decrease in LTL tons per day. The increases in our fourth quarter and annual operating ratio are both attributable to increases in our fringe benefit costs for the periods compared.
For the fourth quarter, our fringe benefit cost increased to 39.7% of salaries and wages from 30.7% in the fourth quarter of 2018, due primarily to changes in phantom stock expense. The fourth quarter of 2018 included an $8.4 million reduction in expense that was due to the decrease in our share price for that period. This compares to $17.1 million of expense in the fourth quarter 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 $236.4 million for the fourth quarter and $983.9 million for the year, while capital expenditures were $109 million and $479.3 million for the same respective periods.
We returned $49.2 million of capital to our shareholders during the fourth quarter and $295.5 million for the year. For 2019, this total consisted of $241 million in share repurchases and $54.6 million 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 first quarter 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 fourth quarter of 2019 was 24% as compared to 26.6% in the fourth quarter of 2018.
For the year, our effective tax rate was 25.3%. We currently expect an effective tax rate of 25.5% for 2020. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one at this time. We'll go first to Jack Atkins with Stephens.
Good morning, guys. Thanks for taking my questions.
Morning, Jack.
Adam, if I could just go back to your comments around January. Greg, I'd love to get your thoughts on this as well. 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, four or five weeks of the year. Obviously we got a little bit better than expected PMI print earlier this week. We have some offsets there with this production halt at Boeing and some of these things happening with global trade.
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, the commentary from our customers and the communications that I've had with them, for the most part seem to be positive. We're positive on where we are and what we look like going forward. Let's hope that it does improve going through the rest of the year.
Okay. That's great. That's great to hear. Then I guess for on the, on the cost side for a moment, you know, Adam, could you kinda help us think through the puts and takes when we think about, you know, the sequential progression of OR? I know there are a lot of moving pieces in the fourth quarter. You know, I guess from a bigger picture perspective, how are you guys thinking about, you know, cost inflation on a per shipment basis in 2020?
Sure. You know, obviously the biggest item that we dealt with in the fourth quarter and called out was that adjustment for the phantom stock expense. That was, you know, a big headwind, if you will. Especially when you consider that fourth quarter of 2009 or 2018 rather, included so many credits that kinda went the opposite way. 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. I think that, you know, we've got that's was in our fringe benefits line.
You know, there are probably a couple of other things that stand out in this quarter that were a little unusual. Obviously the insurance line for one is probably the easiest one to see. We go through our annual actuarial assessment and usually make those adjustments in the fourth quarter. That ticked up to 1.8% of revenue. It typically averages, you know, around 1.1%, 1.2% throughout the year. That's our cargo claims ratio, which is 0.2%. Typically the balance is our auto exposure. 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. All those other things, you know, nothing material to call out one way or the other individually. You know, kind of had just some puts and takes in those other lines that would most likely normalize as we progress into the first quarter of next year.
Okay. That's helpful. Thanks very much for the time.
Yeah.
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. 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. Any sort of thoughts just directionally on how things are trending here early in 1Q?
Yeah. For the fourth quarter, to start with that, we were pleased to see that overall for the quarter, we were in line with what our normal sequential trends, you know, typically are. 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. That was good to see. You know, it was really the first time that that's happened this year. Really goes back, you know, into last year. In the back half, we started seeing a little bit of unfavorable trend as well. That was good to see. As we transitioned into January, we gave the number.
The year-over-year, January, the tons were down 3.6%, you know, revenue flat. That was, we're starting to see the progression where we were, the revenue was down about 2.5% in the third quarter on a per day basis. You know, down a little bit less in the fourth quarter on a per day basis. Now, you know, it's flattish, but we're on the good side of flat, being just slightly positive. All kind of good trends to see developing.
Okay. Okay, that's very helpful. I appreciate that. 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. Can you sort of just sum it up just so we know what the total number is, you know, for the full year when we look at that clean going into 2020?
You know, I think we talked about that in the prepared remarks, but the volatility that we've had with that program, you know, it kinda went up and down as we progressed through this year. You know, frankly, it's been doing that and trending along as we've progressed through the last couple years as our share price has increased. You know, it's always nice to be able to go back and say, just like Greg did, that our share price increased 50%, or over 50% this year. That, the way the accounting was on that program, it resulted in expense. In total, we had about $35 million of phantom stock expense in 2019.
That compared to when you go back to 2018, we only had about $6 million. You know, a big overall headwind, if you will. You know, that number went into the overall fringe benefit line. I think that we'll see a little bit of improvement there for this year. You know, 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 were north of that 34% bogey for 2019 because of that phantom stock expense. We'll still face some cost inflation related to our health programs. You know, pharmacy costs continue to increase.
You know, 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 very helpful. I appreciate the time.
Chris, it is nice to have that behind us, for sure.
Yeah. Yeah, it's a high-class problem to have, but definitely nice 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. Adam, just helping us with, you know, what productive labor costs were in the quarter as a percentage of revenue. I know you talked about headcount going up or trending up as shipments increase, and that obviously makes sense. If you could just help us think about, you know, 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. Last very specific question is, D&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 of those questions.
That was one question, by the way. That was just three parts, yeah.
That was 10 questions in one. A buy one, get one, I guess. Anyway, the productive labor costs were pretty flat in the fourth quarter compared to last year, 27.9% for both of the periods compared. That's actually a good thing. You know, we look at all of our direct operating costs combined. When you've got a period where fuel prices are fluctuating, and our fuel costs were down, the average price per gallon was down a little over 6% in 4 Q of 2019 versus 2018. Typically that impacts obviously your fuel surcharge revenue, as well as fuel expenses. You see revenue going down, your operating supplies and expenses going down as a result of the drop in fuel price.
Typically, the labor would go up slightly as a percent of revenue. You know, I think we've got that benefit. Overall on the salary, wages, and benefits line, I think that, you can kinda see that trend sort of playing out. You know, a couple of things that sort of benefit that line, performance-based compensation, was lower for the fourth quarter this year, and that frankly just relates to the fact that revenue was down and the operating ratio was lower. Those are, kinda two ingredients that go into most of our bonus programs. Our headcount in the fourth quarter, it was down versus the third quarter.
You know, typically you've got an increase, a sequential increase, if you will, from the third into the fourth. You know, like we said in the prepared comments, typically first quarter, headcount on average is kinda flattish with the fourth quarter. I think that, you know, where we see trends right now, that we're in pretty good shape on the headcount. You know, obviously, if these trends continue to play out, if we can see our volume start to grow, then, you know, likely that would mean that we would be adding to our headcount later in the year. That would be a good thing, actually. As we hope that we're in that position with the workforce.
You know, the fleet, we kind of addressed that in prepared comments as well. I think that we're in good shape. You know, we made orders last year anticipating kinda mid-single-digit growth and on the volume side, and we ended up with mid-single-digit decrease in tons. You know, 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 costs on that heavier fleet. Those are things that hopefully will grow into the fleet that we have as we progress through 2020.
Yeah. D&A more flattish in 2020? I guess it depends on when the new revenue equipment came in, I guess more flattish in 2020.
Well, we've still got, you know, a decent sized CapEx program. Not as much on the equipment side, it's still $350 million. You know, some of that will be technology, which has, you know, a shorter depreciation period, you get hit with a little bit more of that. You know, 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% range of the overall CapEx budget for the year. Since we've got a continuation of the real estate and the real estate making up the majority of the CapEx plan, it certainly should be lower than that.
We had certainly expect it to be increasing as we progress through the year and continue to execute on that CapEx plan.
Right. The share count, last question for me, the share count, the way the phantom thing works, I guess now it's the variability of the stock price will have no impact on the fringe benefit costs, and you're just gonna 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 will go into, you know, that diluted share count, if you will, those shares that are outstanding. We'll give that detail too. That should be in our 10-K filing. You can kinda go back and look at last year's 10-K as well and see kind of the outstanding shares that were there. You know, not a lot of impact to the fourth quarter, given the timing of when that program or when we made that change, if you will. Certainly that will impact diluted shares going forward.
Got it. Okay. Very good. Thank you for taking my questions. Appreciate 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, you know, still pretty stable out there in the marketplace and sort of how shippers are communicating to you what to expect for 2020.
Yeah. I think that it's been stable and certainly, you know, was pretty much in line with what we thought it would be in the fourth quarter. You know, I think what we talked about on the third quarter call for how that trend would play out. You know, we continued to go through our bid process and continued to have had wins. You know, obviously with revenue down in the back half of last year, I guess there were more losses than wins overall, if you will.
You know, 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 kinda went through. You know, I think we talked, you know, after the first quarter call that we started seeing a little bit of competitive response, you know, in kind of the March, April timeframe of last year. 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.
You know, 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. You know, I think Jack asked earlier, but our cost inflation projections, kind of underlying costs for this year probably are somewhere around 4% on a per shipment basis. That becomes the baseline for the conversations that we have with our contractual customers and will go into our thinking when we get to the point of announcing a GRI for our tariff-based business as well.
Okay. No, that's great color. The other thing, any reaction from any of your customers?
Can you repeat that?
No, no. Yeah, no. Any reactions from your customers about the impacts of the coronavirus at all on their supply chains? Just trying to think how the first quarter might work out.
Jason, not to my knowledge. We haven't heard anything negative related to that so far, thankfully.
That's me knocking on wood. Gentlemen, thank you for your time.
Good day.
We'll go next to Ravi Shanker with Morgan Stanley.
Thanks, morning, gentlemen. Just wanted to follow up on the insurance comments, and thanks for the 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? I think you said you had some kind of actuarial hit. Was there a particular incident that drove that? I mean, any color there would be helpful.
Not necessarily one particular accident that drove the hits in the fourth quarter. You know, we go through an annual process where the actuaries look at all open claims going back for old years. You know, some years you have positive development, and some years you have unfavorable development. When you go back to last year in the fourth quarter, we did have a positive adjustment in that period. I think our expenses were 0.9% of revenue, where, you know, it had trended to 1.1%, 1.2% or so for the first three quarters of the year. You know, this year was just several claims that are still open that had some unfavorable development to them.
You also look at the expense that was applied for the accidents that we had this year. We'd expect that things should get back to normal next year. 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. I think that's played out long term in the improvement that we've seen in our accident frequency ratios as well as the general severity of trends.
Like many of the other carriers, we will be facing some inflation on the premium side. You know, we're kind of in the midst of renegotiating that this year. We have the majority of kind of our auto expense is related to the self-insured piece that we fund. You know, 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. Do you feel like the inflation would have been much worse if you didn't have the tech?
Sure. Obviously, the technology has helped. You know, it's hard to say one for one, but we certainly, you know, we spend a lot of time going through and evaluating the technology over the years as we put it in the trucks. You know, we feel like we've got good technology. The accident avoidance systems that we have in place now, you know, the forward-facing cameras and collision detection systems and so forth, you know, 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. Certainly lessening the severity is a benefit to us all.
Got it. Just one last one. The last few years have been probably the most volatile that, you know, this entire industry has seen in a long time. Doesn't look like it's gonna get much better, especially with changes like, you know, e-commerce and new entrants and such. What are your views on consolidation in this space and kind of what do you think the LTL space looks like five years from now? Do you think it looks similar to where we are today, or do you think it looks meaningfully different?
Well, 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's been relatively stable. We lost a couple 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. Certainly, I think to some degree, it, you know, over the years, we've lost competitors, as you know. I think 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. 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.
Yeah. Hi, good morning. I know density is sort of the key over the long run to improving OR. I'm just sort of curious, you know, given the, you know, 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, you know, 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 first and second quarters this year when we were still seeing some weakness. You know, certainly you need some revenue, and you gotta have revenue to offset the high fixed costs that are inherent in our network. You know, we saw that still in the second quarter 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. You know, there's a balance that's required.
Over the long run, you know, when you look at our long-term revenue growth rates of 12%-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. You know, the density is certainly important and 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. You've gotta have a consistent yield management process in place as well.
When you look over the long run, you know, we've been able to get on a revenue per shipment basis, improvement in kind of an average of 4.5% a year. That's somewhere around 75-100 basis points higher than the long-term trend on our of the cost on a per shipment basis. You gotta have that 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 wanna do to try to keep that per unit cost inflation down as much as we can.
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. Morning, guys.
Good morning, Scott.
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. Is this a sign to you at all of 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. You know, we feel good to see the trends kinda coming back in line, if you will, on the volume side. As Greg mentioned, there's still a lot of, you know, positive comments that we're hearing from customers. You know, feel like that forecasts are for industrial production to increase this year. We've got maybe some clarity now with some trade deals done. You know, there's a lot of reasons to be positive as we transition into this year.
You know, I think the other thing that we'd like to see and hope to see, I guess, as well, is now that, once we get through the first quarter, and we've still got a pretty healthy comp, with revenue and yield in the first quarter. 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, you know, if truckload rates start increasing, that increases, the line haul cost for many of our competitors.
You know, 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 that, you know, maybe some of those bids come back and we'll start regaining, maybe a little bit more of the business that we lost. A lot of things to sort of look forward to as we start progressing into 2020.
Okay. 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? When we get hopefully, we get back to some revenue growth, any thoughts on how we should think about incremental margin?
Obviously, we need the revenue to start having that conversation again. You know, we've got a lot of things that we should be able to do, you know, I think, and can help ourselves. You know, growing into the fleet is one of those that should help. You know, that 4% is, you know, 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. You know, probably anticipating, like we mentioned, some health cost increases, the premiums on the insurance. There's some other things that are going up that might move that kind of underlying number north of the 3%.
Certainly, we're gonna do everything we can to help ourselves. You know, last year, our number was probably a little bit higher than we came into the year thinking 4%- 4.5%. It was a little bit higher than that, but a lot of that was the volume weakness. You've got overhead cost, you know, on a per shipment basis that are going higher than what you would expect. If we can't get the revenue growth, we should be able to get some leverage there.
You know, on the repair side, like I mentioned earlier, we face some, you know, significant cost headwinds there, this year, where, you know, 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. If we kinda grow into the fleet that we have, should get some leverage on that side as well. Certainly, some areas that we should be able to get some leverage on as we progress through the year.
Okay, thanks. Just last one quickly. The CapEx guidance, I think it's the lowest in six or seven years on tractor trailer, down a lot. Should we think about this as sort of a one year or so equipment holiday or something longer?
No, I think it's a one-year, you know, kinda deal. Again, you know, 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. You know, I think that gives us room to grow into it. We wanna be good stewards of capital and trying to evaluate kinda where the fleet is and how we think we can go into it. Obviously, if, you know, volumes pick up more than, you know, what we might expect, then certainly we can respond and, you know, have been able to do that in our past life as well. We'll make whatever changes that are necessary.
Typically, we spend about 10%-15% of our revenue on CapEx. You know, 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. You know, this will be a probably a one-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 2021.
Okay. Appreciate the time, guys. Thank you.
We'll go next to Allison Landry with Credit Suisse.
Thanks. Good morning. I just wanted to go back to your comments about share gains. 'Cause 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. 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, you know, just trying to gauge whether this is something that you would normally see happen in advance of a recovery.
Allison, 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. 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. This year so far, that number's continued to increase slightly. I think that's a good thing. We are still, you know, we're winning some bids and we are gaining some business back that we lost. At what pace, that's kinda hard to gauge. We don't measure those things. Anyway.
Okay.
Anecdotally, we are having some gains still.
Okay. Great. That's helpful. 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. On the weight per shipment, just to kind of go back a little bit and, you know, this is another one of those points that, you know, give us a little bit of confidence going into this year. If you recall, we kind of hit a low point on our weight per shipment back in August of 2019, and then we started seeing a little bit of movement north there. You know, on a year-over-year basis through the fourth quarter, it was 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.
The trends when we look at it, we had hit that sort of 1,530 mark in August. It came back to around 1,600 lbs by the November and December timeframe. You know, most of those, I would say, kinda moved for the quarter, kinda moved in tandem with the sort of what the normal sequential trend might be, but, you know, certainly a positive development. The 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. We're back to 1,554 lbs in January of this 2020.
You know, the weight per shipment kinda 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, you know, 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.
Thanks, Allison.
We'll go next to Ariel Rosa with Bank of America.
Hey, good morning, guys. First off, nice quarter in a tough environment. 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. It sounds like you guys are a little more optimistic there. I just wanted to make sure I'm hearing that correctly. Do you think there's something unique about LTL that's maybe different from truckload that's causing that dynamic?
Yeah, I don't know that there's anything any different. You know, I guess it's easier to say that the back half of the year should be better than the first half 'cause we're in the first half. You know, frankly, we're not seeing numbers that are there to write home about when, you know, when we think about long-term growth and how we've been able to generate this revenue improvement and growth in pre-tax income and so forth. You know, being flat is not kinda what we aspire to be, if you will. It just, you know, it feels like things are starting to turn a little bit, and there's just little positive developments here and there. You know, we'll see kinda as it takes hold.
You know, 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, you know, volumes have kinda underperformed seasonality slightly in election years. You know, we kinda keep all of that in mind, but we finally saw ISM, you know, go back above 50 and just continue to have conversations with our customers that, you know, It's not like it's robust growth expectations or anything like that from our customers, but, you know, they're more positive than there are negative conversations. You know, we're cautiously optimistic as we go through the first part of the year and that's probably the best way to describe it, is cautious optimism.
Okay, that's helpful. 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. Just a bit of a strategic question. Do you think there's an opportunity or is it something that, you know, 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?
Yeah, our 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. It's about, you know, between 55%-60% industrial, closer to the 60% range, kind of the 25%-30% on the retail side, closer to the 30%. You know, hodgepodge of things from an SIC code basis that kind of go from there. You know, we've seen over the last couple of years, you know, maybe more growth in our retail-related business.
I think that, you know, that kinda 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. 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. You know, we can charge a fair price, but it's one that, you know, is consistent with the level of service that we're providing.
I think it benefits from a total cost of transportation standpoint, our customers that wanna use us, ‘cause they end up avoiding some of those secondary costs that may come from the retailer. It creates win-win scenarios, and is definitely a good avenue for growth. You know, other things that maybe get more attention in that space of, you know, doing last mile deliveries and across the threshold is just something that we're really not interested in from a, you know, a corporate strategy standpoint, as it exists right now.
No, that's entirely understandable. I guess my question was, you know, is there an opportunity, kind of given the growth in e-commerce, you know, obviously staying within the LTL space, not, you know, going out into final mile or something of that sort. Is there an opportunity to grow retail business particularly in e-commerce, or is that or should we expect that split of 55%-60% industrial, 25%-30% retail to kind of continue?
That's a hard question to answer. You know, we've got a huge sales force that's working the entire economy, be it retail or industrial, whatever. 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, that's probably why the percentage is like it is. Certainly as those opportunities present themselves, we'll be there and, you know, hopefully we'll be a solution for our competitors, or for our customers, if they have the need. If they're looking for better service, you know, 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 first quarter. You know, is the right way to think about the sequential margin change 1Q over 4Q is to adjust fourth quarter for the, you know, 150 basis points or whatever the impact was from the phantom stock and normalize a little bit for incentive comp, or excuse me, for insurance expense, and then think about, you know, that typical 100 basis point change off of that? Is there something else we need to think about sequentially into 1Q?
I think, yes, on most of your points. You know, I would really only look at this phantom stock really as the only thing to sort of adjust and normalize for. 'Cause as I mentioned, you know, the insurance line, you see the increase there, and that's the one thing that stands out. You know, there are some offsetting credits in some of the other line items that I think will normalize as we progress into 1Q as well. You know, some of that being, you know, kind of within the fringe benefit line, some being in the operating supplies and expenses as well.
You get a normalization, kind of in those categories, and it really just becomes, you know, kind of the offset of that phantom stock expense, you know, sort of 150, 170 basis points. You sort of look, as you mentioned, about 150 basis points is kind of the average sequential change from the fourth quarter into the first. The only thing I would say, you know, with that as well, though, is, we did a lot of good things in the fourth quarter.
Oftentimes, you know, if you kind of look at what the change from 3Q into the 4Q was, you know, 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. There could be some higher costs that that maybe end up kind of as you're below maybe a trend one quarter, you might be a little bit higher the next. 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.
Yeah, it does. I think 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. It also sounds like from earlier in the call, if you're hiring, that's probably an indication that the tonnage is picking up.
Correct.
Okay. And then just for my follow-up, you know, can you talk about the available capacity in the network right now? Typically, I think about your model, you know, being built to have that available capacity, and when you do see tonnage come back that you can really drive high incremental margins because, you know, you can handle that additional freight coming in that maybe some of your competitors can't. Can you give us just a sense of where, you know, you think the network is and how much more tonnage you can handle and just the thought process around, you know, the leverage you'd see, you know, with tonnage coming back in with the available capacity in the network.
Todd, we've definitely built some capacity, particularly in 2019. I think you know what our capital expenditures were. They were significant last year. We definitely built some capacity having a, you know, 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. 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%. We do have some capacity and you know, I like where we are today. We've addressed the needs that we had back a couple years ago when we were 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.
Hey, thanks for getting me in. Adam, just at a higher level, as you think about cash flow on the balance sheet over the next several years, any changes to your appetite to carry leverage? If so or if not, I mean, how do you think about this, the allocation, the 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. Maybe you could address that as well. Thanks.
Sure. You know, that certainly is something that we continue to look at and evaluate. You know, we were pleased to be able to produce another, you know, 30%+ increase as we're going into 2020. The payout ratio, you know, when we first started the dividend program, kind of our target was we looked at the prior year and, you know, sort of wanted to have a basis of about 10% of kind of the prior year earnings. We started out, you know, on the conservative side to make sure that, you know, we had room to continue to increase it and so forth.
We really had not because our earnings growth had had been so strong since we implemented that program had not really reached that threshold that we wanted to be. You know, this year, I think, was a good, you know, sort of increase to kind of address that. You know, I think that we've moved that payout ratio north a little bit to try to at least achieve that goal. We'll continue to look at increasing the dividend as we move forward. On the other side would be the share buyback program. You know, we kind of stepped that up a little bit last year as well, and we'll continue to execute on that plan.
I think we've just got to 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. 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. We'll continue to look at those.
I think we just got to balance overall, you know, kind of where we are from an overall positioning standpoint, our cash balances and kind of cash projections and, you know, 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. We're excited to try to get that behind us. You know, we're always looking at incrementally how we can continue to improve the systems that we have. You know, I think when you look at our operating systems, you know, those have all been created in-house and, you know, in some places may have plugins where we've got off-the-shelf products that kind of interface with and assist.
You know, one of the reasons we operate so efficiently is the systems that we've invested in over the years, in trying to stay ahead of our competitors in that regard. You know, we're always gonna be looking at making incremental improvements to those programs and evaluating any other system that we think will help us. You know, 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 incur the expense, and we should assume return on any project as well.
you know, that's kind of the baseline of when we make that decision to pull the trigger on a project. you know, we're gonna 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. I wanted to talk a little bit about the transition that you all made from the AOBRs that you were grandfathered in, you know, to ELDs. Is that fully behind you now, I'm assuming? 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. 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. Glad to have it behind us. Nothing material, I don't think, to talk about.
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 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 slow this time of year, but we're nowhere near our peak levels. We've got the equipment to accomplish our absolute peak level right now. We think we're sitting in a good position. Maybe if anything, still a little bit heavy on equipment. Or tractors certainly and trailing equipment as well. We're in good shape there.
Good. Thank you.
Bring it on.
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