Good morning. Welcome to the fourth quarter of 2017 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 18th by dialing 719-457-0820. The replay passcode is 6862987. The replay may also be accessed through March 8th 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're hereby cautioned 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 update publicly 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 ask in fairness to all that you limit yourself 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'd like to turn the conference over to the company's Executive Chairman, Mr. Earl Congdon. Please go ahead, sir.
Good morning, and welcome to our fourth quarter conference call. With me on the call today is David Congdon, our Vice Chairman and CEO, and Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions. Old Dominion had an outstanding fourth quarter to complete a very strong year of profitable growth. Building on the accelerated growth that began in September, we produced revenue growth of 19.5% for the fourth quarter. This growth rate is the strongest we have had since the fourth quarter of 2014, and the overall environment feels about as positive as I can remember. Given the favorable environment, we continue to believe that Old Dominion is uniquely positioned to win market share in 2018.
We can do this by remaining fully committed to the core business strategies that put us in our unique position, which include providing superior service at a fair price, investing in the success of our employees, and continuously investing in equipment and service center capacity to support our growth initiatives. The disciplined execution of these strategies for more than two decades has created a long-term record of profitable growth, which continues to validate our business approach and differentiates us from our competition. Our success also reflects the strength of the Old Dominion team. We again recognize and thank each team members who has been responsible for continuously improving all aspects of our business. Thanks for being with us this morning. Now here is David Congdon to discuss the fourth quarter in greater detail.
Thanks, Earl. Good morning. I will begin by adding my thanks and recognition to all of our OD family of employees for their contributions to our success in 2017. We grew our team this year by adding 1,640 new full-time employees. Of this total, we hired approximately 1,400 in the second half of the year as our volumes accelerated. These additions have increased the capacity of our employee base and have prepared us well for 2018. I'll also add that I couldn't be more proud of our team's performance this past year. We operated with great efficiency in handling our growth, but most importantly, we maintained our superior service standards and won the Mastio Quality Award for the eighth straight year.
This may sound like a broken record at times, but we believe that our ability to consistently deliver superior service at a fair but equitable price has been critical to our long-term profitable growth. There are, of course, many other ingredients in our formula for success, including the consistent and long-term investments in capacity to ensure that our network is not a limiting factor to our growth. We reported to you about a year ago that we were feeling cautiously optimistic for 2017 based on customer conversations and improving macroeconomic trends. I don't know, however, that any of us anticipated that our revenue would be growing at a 19.5% rate to close out the year.
Our revenue growth in the fourth quarter included improvements in both density and yield, which generated operating leverage that allowed us to improve our operating ratio by 90 basis points to 83.9. LTL tons per day increased 14.4 for the fourth quarter, which was our first double-digit increase in 11 quarters. The pricing environment continued to be favorable. LTL revenue per hundred weight increased 5.1 and increased 3.1 when excluding fuel surcharges. The increase in our yield is consistent with our core pricing philosophy that focuses on obtaining price increases necessary to address individual account profitability and offset the company's cost inflation. We believe that industry conditions will continue to support a favorable pricing environment during 2018, which could support additional market share growth during the year.
Our 2018 budget for capital expenditures reflects our expectations for continued growth as well as our ongoing commitment to giving our employees everything they need to succeed, whether it be investment in their continued education and training or in efficiency and productivity-enhancing technology. In summary, Old Dominion completed 2017 with substantial profitable growth with the fourth quarter, including more actual revenue growth than we have ever achieved before. We are carrying a lot of momentum into 2018. We feel like domestic economy is in great shape. We are confident that the company is well-positioned to leverage this momentum through disciplined execution of our proven business model, which we expect will produce additional gains in market share, earnings, and shareholder value. Thanks for your time this morning.
Now Adam Satterfield will discuss our fourth quarter financial results in greater detail.
Thank you, David, and good morning. Old Dominion's revenue grew 19.5% in the fourth quarter to $891.1 million, which is the highest quarterly revenue we have ever recorded. Fourth quarter included $13.9 million of non-LTL revenue. Our operating ratio improved 90 basis points to 83.9%, and our income before tax increased 29.2%. Earnings per diluted share increased 188% to $2.39 for the quarter. As we noted in our release this morning, a couple of items related to the Tax Cuts and Jobs Act impacted these fourth quarter results.
These include a special bonus paid to our non-executive employees of $9.8 million and the revaluation of our net deferred tax liability that resulted in a net tax benefit of $104.9 million. Our revenue growth for the fourth quarter once again included increases in LTL tonnage and yield. LTL tons per day increased 14.4% as compared to the fourth quarter of 2016, with LTL shipments per day increasing 11.4% and LTL weight per shipment increasing 2.7%. Trend for both LTL tons per day and LTL shipments per day were well above normal seasonality for the fourth quarter. LTL tons per day increased 2.6% when compared to the third quarter of 2017.
This was the first time since 2005 that our fourth quarter tonnage exceeded the third quarter in the same year. The monthly sequential changes in LTL tons per day during the fourth quarter were as follows: October decreased 2.5% as compared with September. November increased 4.3% versus October. December decreased 7.6% as compared to November. The 10-year average change for the respective months are a decrease of 3.6% in October, an increase of 3.2% in November, and a decrease of 9.3% in December. In our last earnings call, we discussed how our year-over-year revenue growth accelerated in September, and we are pleased to report that accelerated pace of growth continued throughout the fourth quarter.
The improvement in the domestic economy contributed to our growth throughout 2017, but we believe our recent growth rates reflect the inherent opportunities of our business model that we have so often discussed. To update you on our first quarter of 2018 trends, our revenue per day increased approximately 19.5% on a year-over-year basis, and LTL tons per day increased 14.4% for January. operating ratio for the fourth quarter improved 90 basis points to 83.9%, with improvement in both our variable operating costs and overhead expenses as a percent of revenue. Salaries, wages, and benefit cost as a percent of revenue improved 190 basis points when compared to the fourth quarter of 2016, despite the impact of the employee special bonus.
We will remain focused on matching our labor capacity with growth in LTL shipments during 2018, and we would expect to see changes in our headcount and volumes trend closer together as they historically have. Old Dominion's cash flow from operations totaled $148.3 million for the fourth quarter and $536.3 million for 2017. Capital expenditures were $93.3 million for the quarter and $382.1 million for the year. Based on our anticipated growth for 2018 and the execution of our normal replacement cycle, we expect total capital expenditures of $510 million for 2018.
This total includes approximately $200 million for real estate and service center expansion projects, which should increase our service center network to 235-240 facilities by the end of the year. We returned $8.2 million of capital to shareholders during the fourth quarter and a total of $40.9 million for the year. Today, we announced that our quarterly dividend will increase 30% to $0.13 per share in the first quarter. This increase was higher than what we had originally anticipated prior to the passage of the Tax Cuts and Jobs Act, allows us to maintain a similar dividend payout ratio. Annual effective tax rate for 2017 was positively impacted by the revaluation of our net deferred tax liability, as well as other favorable discrete tax items.
We currently anticipate an annual effective tax rate of 26.5% for 2018 as a result of the changes under the Tax Cuts and Jobs Act. This rate is subject to change, however, as clarifying guidance becomes available. Concludes our prepared remarks this morning. Operator, we'll be happy to open the floor at this time for questions.
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. Again, please press star one to ask a question. We will go first to Brad Delco with Stephens.
Morning, David. Morning, Adam. How are you guys?
Good.
We're good.
Morning, Brad.
David or Adam, I mean, you guys have historically always given us guidance on incremental margins of, you know, call it 20%. You guys keep moving your OR lower. Any chance you can update us on what you think incremental margins can look like? Because, you know, Adam, I heard your comments about the employee count kind of increasing at a similar rate to your tonnage. Just trying to figure out where we're gonna get leverage in 2018 in this great environment.
Yeah, I think that, you know, if you go back to 2010, our incrementals have averaged about 25%, and that's probably the rate that we're most closely, you know, tracking towards. There may be some periods where it's a little bit lower. You know, between 20%-25% is probably more likely range. It, it can vary obviously in periods of higher growth. It becomes a little bit harder to, you know, just from the mathematics of the equation. Certainly we're always focused on putting as much money to the bottom line as we can. You know, I think we did a nice job of that as we progressed through this past year and, you know, as the environment was accelerating for us.
You know, I think the last few quarters were pretty nice, you know, beginning with really just starting with an incremental margin in the first quarter and then that accelerating. I think we had talked a little bit about in the back half of the year that we were playing catch up a little bit with hiring. You know, I thought that the hiring that we had planned to do in the fourth quarter to get our employee base where it needed to be might be a bit of a headwind. You know, we just had such strong revenue growth in the fourth quarter that helped us put more of that revenue growth to the bottom line.
We felt like fourth quarter was a great quarter in the sense of the growth and what our bottom line performance was as well.
Brad, I'll add to that and say that, you know, our revenue and cost structure is a pretty healthy mix, I'd say. You know, as we've said in the past, when we can put additional density across the network with a good yield environment and a decent economy, that our operating margins can continue to improve. I think that's showed up very well in the fourth quarter, we believe that, you know, that the economy and our ability to win market share in 2018 is there. The pricing environment's good, you know, we should see adequate incremental margins to continue to be able to improve our operating ratio.
Great. Then maybe one quick follow-up. I mean, everyone tends to always think about you guys having latent capacity in your network because of all the investments you make. Can you just quickly give us an update on where you think, you know, your incremental capacity is now with your fleet and with your real estate and with your employee base?
In the, in the network, which that's, you know, probably the most important, our service center network, we try to keep about 25% capacity. You know, given the acceleration in the growth, that's probably, you know, maybe now down closer to 20%. We usually, you know, say 20%-25%. It may be 15%-20%. I think, you know, we executed a lot of good projects last year, and we've got a good plan for this year. As David mentioned, we always wanna make sure that we stay well ahead of our anticipated growth curve so that the network is not a limiting factor to our growth. You know, I think we made good progress with getting our employee base positioned well.
You know, we were lagging our shipment growth with the increase in our headcount last year. Now we should be in a more, you know, normalized pace where you see headcount and shipments trending a little bit closer together. Typically you would see headcount actually leading the shipment growth. We've got employees in and trained, you know, before the really the shipments are picking up. I think we're in good shape with our network. I think we're in good shape with our employee capacity. We probably got a little bit tight with our equipment in the fourth quarter as well, and, you know, had to have some rentals in some places in which the cost of those are increasing.
We try to have very little of that, and I think that we've got a good CapEx plan this year that will address any specific needs, and those are usually localized in any particular place. We've got 229 service centers now, and we've got a good CapEx plan at $510 million and, you know, keep adding where we need to to make sure we've got the necessary capacity.
Okay. Well, great, guys. Thanks for the time.
Brad. Thank you.
We'll go next to Amit Mehrotra with Deutsche Bank.
Hey, everyone. Thanks for taking my question. Appreciate it. Adam, can you just talk about the sequential change in tonnage in January, both actual and 10-year average? I think you gave year-over-year. You know, just given the growth and pricing dynamics in the quarter, I would've probably expected incremental margins to have accelerated from where they were in the third quarter. I saw you added 6% year-on-year growth in employees. Is that employee count now reflective of maybe the growth that you're seeing in January as well, and so maybe we can see a re-acceleration in incrementals in the first quarter? Are there other puts and takes in terms of the benefit cost? Just if you can just help us there, that would be helpful.
Thank you.
At the, to start with the first part of that question, the sequential change on the weight going into January. I mentioned that we had a 14.4% year-over-year increase there. It was an increase of 0.8% compared to December. The 10-year average is an increase of 1.9%, so it was somewhat below average, but, you know, it's, you know, not surprising when you only look at that on a one month basis. We've had really performance well above normal sequentials going back to September when, if you recall, our weight in September over August was positive 7% when the 10-year average is a 3%. Then we performed above trend for each month through the fourth quarter.
You know, typically, when you've got one month that's that far ahead of the average, the next month might be under.
Right.
Not a complete surprise. I think our volumes, just they're continuing to be really strong and we had a really nice January. In regards to the incrementals, I mean, just like what I've was discussing with Brad, you know, I think that the fourth quarter was a, you know, we consider a good performance and, you know, we knew that we had some cost headwinds that we were anticipating. You know, frankly, we had such strong revenue growth through the quarter that, you know, we think that offset some of the cost headwinds that were in place.
You know, we typically, going back to David's comment about, you know, our cost structure, there are quarters where the incrementals may be 30 and, you know, in some cases in the history, up to 35%, but we've never said that over the long run, that that's what we're targeting for. You know, I think that the 25% is a good metric. When you break down our operating ratio, you know, 60%-65% of our costs are kinda direct, you know, variable operating costs. You know, in our overhead base, you've got some variable costs there as well. That's how we've been able to get, you know, to that 30%-35% range.
You know, right now, if we can continue to target 25%, you know, I think that's a healthy incremental.
Yeah.
One more point I'll make is that mathematically, the higher our revenue growth is, the incremental looks lower or call it a 10th of a operating point change. It's a mathematical thing, so don't let the percentages fool you. You know, when we had very low revenue growth, we were kicking out some really high incremental margins, and it's just, it's the mathematics of it a little bit more than it is the reality.
Yeah. I guess the law of large numbers. One quick follow-up from me with respect to the market share comment. The tonnage growth that you're seeing, you've talked about kind of a market share. It certainly seems like it's a market share grab relative with what some of the other LTL companies are reporting. The question really is, are you also seeing spillover volumes from heavier truckload shipments, which I guess would benefit you given sort of your disproportionate exposure to sort of the industrial production, industrial economy? Any thoughts there in terms of are you seeing those spillover volumes? Has that started to occur yet and maybe that's driving some of the very, very strong tonnage growth?
We cannot really identify the spillover very well. You know, we have spot quotes and things like that that come in, and a lot of those shipments weigh in the 8,000 and 9,000 pound category. Maybe it's spillover from truckload, but we haven't seen a tremendous increase in those spot quotes. Our overall weight per shipment I think grew up 2.7%. I think that was the number we reported this morning. We think that is more related to the economy improving and buyers ordering larger, you know, quantities in their orders that caused the weight per shipment to increase. I believe the industry is up as well.
The last number I saw there, the industry's up a little bit less than we are on weight per shipment. That's primarily, economically driven, I believe.
Got it. Right. Okay, guys, that's all I have. Thanks a lot. Congrats on the great quarter. Appreciate it.
Thank you.
We'll go next to Allison Landry with Credit Suisse.
Good morning. Thanks for taking my question. You guys talked about the January tonnage, and sequential trends. I apologize if I missed this, but did you speak to the yields in January sequentially from December?
I didn't. I mean, I gave that, you know, overall revenue is about 19.5%, and then, you know, you've got the tonnage number, which is 14.4%. You can kind of back into.
Okay.
It's trending in about the same range, where we've seen it, or at least this most recent quarter.
Okay. Weight per shipment is coming off a little bit sequentially in January. Did I hear that right?
It did, compared to December. Our December bumped up. That was the highest. It was at 1,661 lbs. It trended back to 1,644 lbs in January. You know, we initially saw that bump in September where, you know, we had been continuing to see 1,550 lbs weight per shipment, plus or minus for the longest time. Then we got that nice bump in September, and it stayed fairly consistent from there. You know, we're back in the range, you know, really where we kind of saw for most of 2014 and kind of the early part of 2015.
you know, we think that as, you know, just some heavier weighted shipments to David's point on the economy and, you know, and definitely some shippers, you know, we've got some customer feedback that can't necessarily find truckload, and it may have been the multi-stop kind of truckload shipments that should have been in LTL anyways. shippers now with truckload capacity tightening up are moving freight in the mode that where it really should, we think.
Okay. Sounds like, the December trend, which was what you would characterize as maybe, you know, unusual, could have been driven by TL spillover. Is there any, you know, trends that you saw to suggest that, online heavy goods, are moving more in LTL networks? Is that impacting you guys at all?
It may be a little bit early for that still. You know, we're continuing to see, you know, good success with our retail shippers. I think that in the fourth quarter, we probably saw a little bit more revenue growth with retail-related shippers than industrial. You know, keep in mind that 60% about, of our revenue is industrial related, 25%, retail. It's a smaller component today, as it is for many LTL carriers, I think. We're certainly starting to see some success there.
It, it really just goes into the long-term thesis of, we believe as more fulfillment centers are built, it's gonna be more conducive to LTL quantity of freight and as supply chains become more sophisticated and delivery windows are tighter, that plays more to a high service carrier like ourselves. I think that, you know, for many of those reasons, when you start thinking about fines that are charged back to shippers, you know, it changes the conversation from just a discount point on a freight bill from one carrier to the next to what can be the total value proposition. We think that's a big part of why we continue to win market share.
Okay. That's definitely interesting in terms of that long-term trend. Maybe following up on that, do you see, you know, at some point in the future, you know, yourselves, I guess, going into residential at all? I mean, of course, you'd need smaller trucks, but is that something that you guys are looking at, or does that not fit within what you think your core competency is?
We do residential deliveries now. We have multiple lift gate trailers at every service center, and we have some that are short that go into neighborhoods. We do that business, but we are not really focused on trying to grow residential deliveries.
Okay.
We don't, not to say we won't get into it someday in the future, but it's not our priority right now.
Got it. That makes sense. Lastly, I just wanted to ask about how you're thinking about productivity in 2018. Maybe if there's any buckets that you've carved out, and, you know, to the extent that you have, if there's any way to quantify it in either in dollar terms or as a percent of sales.
We believe we've got opportunities for continued gains in productivity. This year, we saw, you know, pretty nice performance with our P&D and line haul operations. In the most recent quarter, our P&D shipments per hour were up about 2%. Our line haul load average was up just a little under 2% as well. Probably the biggest opportunity for us next year is on the dock. In the fourth quarter, our dock shipments per hour were down about 3%. I think that we've got an opportunity there.
You know, some of that dock performance is we hired an awful lot of people this year and, you know, the newer employees that were hired as volumes were really accelerating. You know, most of the employee additions were in the back half of the year, so it was sort of jumping right into the fire, you know, aren't and weren't as productive. We certainly got some opportunity there. We're always focused on, you know, continuous improvement and ways we can get better with running all aspects of our operation.
Okay. Got it. It sounds like at least from the employee productivity standpoint, you know, with another year under their belt, you know, you potentially could see more productivity in the second half of the year. Is that, is that fair in thinking about the cadence?
I think that the employee base that's in place now, you know, we're starting to see in, you know, some of the later months, some improvement there. We certainly would expect to see it. I mean, overall for, you know, cost inflation going into next year, and we mentioned in our release that we may have some increased benefit costs, you know, we believe it's probably gonna be more in the 4% to 4.5% range on a per shipment basis, when you take fuel cost out of it. Obviously fuel right now is trending higher on a year-over-year basis than where we were in the early part of 2017.
If we can keep total cost in check, and we're always focused on, you know, opportunities there and as well as, you know, other costs that we can control, discretionary types of spending, you know, we'll do our best. You know, we were thinking that this year going into the year that cost inflation might be about 4%, and I think we finished just about there, maybe slightly better. On the flip side and consistent with our pricing philosophy, we've got to target increases that will offset that cost inflation for us.
Okay. Excellent. Thank you.
I'll go next to Ari Rosa with Bank of America Merrill Lynch.
Hey, good morning. Just wanted to start with the new hires. Maybe if you could give us a little more color on which divisions you were hiring new employees into and kind of what the breakdown was between, you know, sales versus dock versus drivers. And then, remind me again, what's the usual timeline for those for a new hire to ramp up to full levels of productivity consistent with kind of experienced hires?
I mean, it was mainly productive labor with drivers and, you know, our dock workers that were hired, not as many salaried and clerical type positions. That was just consistent with the growth that we started seeing. You know, remember, in the early part of last year, our revenue was only growing at 6.5% in the first quarter. We saw acceleration in the second, third quarters and then a pickup again in the fourth quarter. We were, like I mentioned before, we were just kinda playing catch up a little bit, and it required us to use a little bit of purchased transportation last year to help take some of the pressure off our line haul operations primarily.
You know, I think that we like to have, our employees in place. You know, the training can take, you know, two months, two to three months it would be perfect, to make sure everybody's delivering that superior service.
Yeah. If, if a guy's never worked freight before and never packed a trailer before, there are an awful lot of things that they learn over a long period of time before they become totally productive. The way that we, you know, handle freight and pack trailers and use our dunnage and our racks and straps and all that stuff, it takes time to learn how to put the puzzle together as you're, as you're loading a trailer and to do it in the, you know, do it quickly like the old-timers can.
Okay, great. That's. I'm sorry. Go ahead.
It could be six months before someone becomes really productive. You know, over the next year, they even become more productive, but not quite at the rate that they would over the first six months.
Sure. That makes a lot of sense. Then just wanted to switch gears a little bit. On the pricing side, you obviously talked about market share wins in 2018 or expected market share wins. Should I read into that maybe the pricing strategy is going to be a little bit less aggressive in terms of relative to the market overall, with the objective of gaining some share and then getting to, you know, that double-digit type of market share target that you guys have held?
We do not plan to be less aggressive in order to gain more market share. We expect to continue our fair and equitable pricing strategy, looking at each individual account on its own merit and being fair with our customers and not overly aggressive on raising prices, but not overly aggressive trying to give the store away just for the sake of gaining share.
Let me just maybe be a little more specific. I think in the past, you guys have spoken about, I think, a 3.5%-4% price or rate increase target on an annualized basis ex fuel. Is that still consistent?
Yes, sir.
Okay, great. Then just last question from me. There's been a lot of talk on the truckload side about risks of the benefits from the Tax Cuts maybe being competed away as people add capacity. Just wanted to get your thoughts on whether you think that's a risk in the LTL space and Or if maybe that's less of a risk than it would be on the truckload side.
Yeah. I think it's less of a risk. You know, same conversations we were having back in 2016. When you look at, you know, the profit margins in the LTL space and the fact that our industry is so consolidated with 80% of the revenue in the top 10 carriers, you know, I'm guessing that the other carriers are gonna let that tax change fall to the bottom line and potentially start, you know, being able to invest if they're earning their cost of capital. We certainly don't intend to compete it away.
That's terrific. Thanks for the time, guys.
We'll go next to Chris Wetherbee with Citi.
Hey. Thanks for taking the question. Wanted to come back to pricing a little bit, I think a lot of us kinda have questions of trying to relate what's going on in LTL to what's happening in the truckload market. Obviously, there's tightness there, and we're seeing rate increases coming in higher than typical sort of normal rate increases would see. As we think about that relationship, could you kinda help us a little bit, maybe frame it up with the 3.5%-4% annual price increases ex fuel? Is this the kind of year where you can get sort of the high end of that because of what's going on in the truckload market, or should we maybe sort of pull the two of them apart and think about it more specifically to LTL?
Just trying to get some sense around that would be helpful.
Yeah. I think looking at it separately is better. You know, if you go back, our long-term pricing philosophy and conversations we have with customers is we want to obtain the increases that are necessary to offset our cost inflation. There are other specific account profitability issues that we address, but, you know, our pricing is that we look at account-by-account profitability and that's how we'll continue to look at it. If you go back, you know, as far back as 2,000, our revenue per hundred weight is increasing, you know, between 3% and 3.5%.
We don't have to necessarily play the roller coaster game with our customers when times are tight, trying to increase rates at well above something that's more inflationary based, and then when they're loose, trying to go in with discounts. Feedback from customers has been that they appreciate that, and that's why we've had long-term market share success. We'll continue to have those same types of conversations, and it may be higher than the 4%, this year, again, because we're thinking inflation may be our own cost inflation may be between 4% to 4.5%. We'll have to target that.
Then, you know, again, we'll address on account-by-account basis any that are underperforming where we think they'll be or where they should be rather. You know, that We're gonna continue to, you know, keep the same philosophy and not really make any drastic changes. We think that that's been key to our long-term profitable growth in the past and will help us for the future.
Okay. No, that's helpful. That's actually very clear. Appreciate it. wanted to ask just a question on that sort of cost inflation. You know, you mentioned in the release about some employee benefits inflationary expense. I don't know if you can help us kinda parse that out when you think about that 4.5 % inflation on a shipment basis or sort of maybe some numbers around what you're actually seeing on that employee inflation side. Just trying to get a sense of maybe how that kind of plays in. Obviously, we're thinking about it in the context of incremental margins, which you've talked about. Just wanna get a sense if there's some specifics behind that comment.
Yeah. I mean, the biggest thing was I wanted people to see that, you know, this tax cut thing, that this wasn't just a one-time, the bonus that we paid in the fourth quarter. We will have ongoing expense, and that's related to You can take the change in our net income, related to our old effective tax rate, that it's been around 38.5%, to what our new effective tax rate is, and we think that'll be around 26.5%. We've historically provided 10% of net income back to employees in their 401 plan. There will be ongoing cost related to that.
I mean, obviously, on a net-net basis, the tax change will benefit significantly our bottom line, and we think was a great thing not only for us, but for the economy as a whole. You know, breaking down our cost inflation, the biggest element is the wage increase that we provided to employees last year, and that was about 3% in September. We will have that. You know, we had really good performance on the benefit side this year, and that was primarily some good trends that we had with health and dental costs. You know, there may be some other costs, as I just mentioned on the benefit side, that will increase slightly.
You know, we'll have other things that are increasing through the year, and there are some unknowns that we don't know right now as well. I mean, there's other states that are talking about changing payroll taxes. There could be cost inflation that we're not aware of yet that may come from the overall investment in infrastructure that could come through in the form of fuel taxes. We still have some uncertainty that's hanging out there in terms of, you know, some taxes that we may get hit with.
Okay. That's, that's really helpful to lay it out. Thanks for the time. Just appreciate it.
Chris.
We'll go next to Ravi Shanker with Morgan Stanley.
Thanks. Morning, everyone. Just a couple of follow-ups here target for growing share. Can you tell who you're gaining that share from? Is it some of the larger consolidated players out there, or is it from some of the more the smaller carriers? I believe some of them, some of the regional players were having some difficulties about six months ago. Have you seen that accelerate? Is that the source of your gains?
Ravi Shanker, you know, you can't put your finger on exactly where it's coming from. I mean, our growth rates across the whole network and our, we break our company into 10 regions. We're strong, have got strong growth happening everywhere. I'd say it's really across the board. It's no one particular carrier or one particular region.
Okay. In terms of that growth, I'm sorry if I missed this, but did you say kind of which end markets and which regions are showing the most growth, or is that mostly broad based?
It's just, it's broad based. We don't report our regional, you know, patterns and things like that, specifically.
Okay. Just lastly, on the tech side, we kind of briefly spoke right after Tesla kind of showed us their truck last year. I'm wondering if you've had any more time to kind of assess the capabilities of that vehicle, and, you know, maybe that or kind of other EV/platooning capabilities. Can you just bring us up to speed on what you're seeing out there on the tech front?
We are keeping our eyes on all the new technologies out there. We've had meetings with several of the new tractor manufacturers. Our position is to kind of wait and see. There's honestly more questions than there are answers with electrification and with hydrogen electric and platooning. There's more questions than answers, and we're not, we're not jumping into anything at this point.
Got it. Thank you.
We'll go next to Todd Fowler with KeyBanc Capital Markets.
Great. Thanks. Good morning. I don't wanna get too granular, but some of your competitors have talked about, you know, the year starting off maybe a little bit softer because of the timing of holidays and weather. Adam, I know that you gave the sequential trends between January and December, but I'm just curious, your experience here during the year in January, were there any unusual trends from a weather standpoint or from a holiday standpoint, or has freight seemed pretty consistent here for the first, you know, four or five weeks?
Freight's been pretty consistent. Certainly, there was weather events in January that we dealt with this year. I mean, the reality is we deal with weather events every January. You know, when you look at our ten-year average sequential trends, you know, the bad Januarys are in there as well as Februarys. You know, I think that I can look at certain days in kind of the middle of the month where we had some impact, you know, particularly some of the storms that moved through the Midwest and Northeast. You know, you recover some of that freight. Some other freight may move to a different mode. But certainly the way we finished out the month of January was pretty strong.
I think that was, you know, probably recapturing some of that freight. Overall, you know, the growth that we had in January was, you know, pretty strong, I felt like.
Okay, good. That helps. Just as far as, you know, the commentary around purchase transportation and the increased rentals, I know as a percent of your cost base, it's lower than your peer group. Would you expect that to normalize, you know, in the first half of 2018, or is that something in the second half of 2018? Just from a capacity standpoint, I understand that you're bringing in equipment, but as far as your driver availability and probably, you know, moving people from the docks into the trucks, you know, do you have the labor availability to also handle the incremental freight, you know, with your own equipment?
Yeah. We have the capacity to handle the freight with our own equipment. We have no intentions of increasing purchase transportation. It's not a big part of our. You know, it may be end of the month, end of the quarter, we might have to, you know, use a little bit of it. For the most part, we feel like we're geared up appropriately. As we mentioned earlier, the 1,400 people we've added in the second half of the year, you know, we've, we saw freight strong in December. It was an unusual time because we were actually hiring in December.
That hasn't happened in a long, long time. You know, looking at our tonnage growth for December, tonnage growth for January and how things are trending this year, I'm glad as hell our operating people had the foresight to add the people.
Okay. David.
Oh, go ahead, Adam. I'm sorry.
I was just gonna add that while we increased the purchase transportation a little bit last year, to supplement as necessary, it was really only about a 10-20 basis point kinda increase from the year before. You know, most of our purchase transportation relates to our Canadian services and our truckload brokerage and some other things. It was really just, you know, a minor increase that we dealt with. You know, it wouldn't be a material swing back if we can eliminate those few runs that we had to make use of.
That makes sense. Just a follow-up I wanted to ask David was the pipeline for the drivers, most of that would be internal candidates that are kind of progressing up either from the docks to the trucks or something like that?
We're continuing that and we're hiring drivers, you know, just experienced drivers as well. The driver shortage is for real out there. It's tough to find good drivers and, you know, more and more we're, you know, trying to beef up our internal schools and our focus on people that want to become truck drivers and be promoted from within.
Okay. Understood. Thanks for the time today.
Bye.
We'll go next to Matt Brooklier with Buckingham Research.
Hey, thanks and good morning. Adam, could you talk to where the service center count ended the year? Then maybe also talk to your expectations for opening new service centers in 2018.
Yeah, we finished the year with 229 facilities. I mentioned in my comments with the CapEx plan for this year for real estate's about $200 million. We think that we'll get, you know, maybe finish the year with somewhere around 235 to 240 facilities in place. A lot of that's just subject to timing of, you know, completing projects and so forth.
Okay. That would be an increased pace, I guess, in terms of service center openings when compared to 2017.
It would be, yes.
Okay. You talked also just the CapEx plan. I think the expectations for tractor purchases, that's also up a pretty significant amount. Obviously, you guys are growing. Could you talk to maybe roughly how much of that incremental CapEx is being put forth to grow your fleet versus replenishment? Is there any change there in terms of, you know, how you're looking at maybe fleet replenishment? I think that there's the thought process that the market's adding, this is across like broader trucking, adding a lot of trucks to the market, and there's a concern that, you know, obviously potentially more supply would work against the ability to raise price.
I guess my question comes down to, are you spending more to replenish more trucks this year? Maybe talk to how, you know, what are your expectations for the net, you know, growth of the fleet in 2018?
You know, if you look, we kinda average a replacement cycle is, you know, maybe $150 million or so on the tractors and trailers side, and that varies each year based on what we did 10 years ago because.
That's gonna get larger because the fleet's larger, so the replenishment will always be a growing number.
Right. Remember that last year, what we had designated for some replacement equipment, because of our growth, we kept in the fleet. There probably is a little bit more replacement, but our fleet's in very good shape. We finished the year, the average age of our tractors is right at four years, and it was four and half at the end of 2016. I think we're in really good shape and, you know, by the execution of this $265 million spend this year, we should be where we need to be, we think.
We'll continue to evaluate as we progress through the year as well and look at and see, you know, how we're trending when it comes to our tractor and trailer counts. You know, we look at certain efficiency metrics there with our fleet and we'll make changes as necessary.
Okay. Appreciate the time.
We'll go next to Jason Seidl with Cowen.
Yeah. Thank you, operator. Hey, guys. Just a couple quick ones for me. Looking at the rest of 2018, clearly, 4Q was exceptional for you guys, and there was some weather in there and probably some ELD-related stuff that pushed freight towards the LTL sector. How should we view 4Q of this year? Should we think that that's gonna revert to a more normalized seasonal pattern where there's a negative sequential increase in tonnage from the third quarter?
That's a real crystal ball question. What do you think is gonna happen?
Well, you know, Well, look, I think it got a little funky there with the two storms, but we'll have to see. I mean, obviously, you guys did a great job in handling the freight and the business. Clearly the pricing environment looks pretty favorable for you guys. The other question I had, could you remind us about your working days in the quarter on a quarterly basis throughout 2018?
Yes. Hang on one second. We'll have, Jesus Christ. 64 days in the first quarter, 64 days in the second quarter, 63 days in the third quarter, and 63 days in the fourth quarter. The first three quarters line up to last year. The fourth quarter will include one extra workday.
Okay. All right. That's, that's good. That's all I had, gentlemen. Thank you very much for the time.
We'll go next to Willard Milby with Seaport Global Securities.
Hey, good morning, everybody. Thanks for taking my questions. Wanted to kinda look at some expense lines. I guess, insurance and claims stepped up here Q4 from Q3. Was that kinda one event or a couple of little things, and has any of that kinda lingered into the first half of Q1?
In the fourth quarter each year, we conduct an annual actuarial study, and there occasionally will be adjustments that we make to the valuation on prior year claims. I think what we had this year in the fourth quarter was maybe a slight unfavorable adjustment. The fourth quarter of 2016 was probably a slight favorable. This year was slightly unfavorable versus last year being slightly favorable, if I said that correctly. That 1.4%, we tend to be somewhere between 1.2% and 1.4%, or at least that was the trend that we went through last year.
You know, those the two costs that are in that line item are auto liability claims on highway incidents and then our cargo claims ratio as well, which, you know, continues to be what we believe is best-in-class. It was less than 0.3% here in the fourth quarter and has been in that 0.2%-0.3% range for most of 2017.
All right. I guess a similar question for the miscellaneous expenses. I mean, seeing a step up from Q3 there, and I know in the past there's been IT related expenses and real estate related charges in that line. Was there any kinda one-time or non-recurring stuff that shouldn't happen again in Q1, and what kinda went on here in Q4?
It stepped up a little bit this year, and not necessarily one time, but that item does include, you know, multiple things or probably some increased consulting expenditures that were in there. Any types of gains or losses are recorded in that line item as well. I think we had some losses as we disposed of some older equipment in the fourth quarter that added a little bit of expense.
Okay.
I guess kinda going back to the terminal additions here in 2018. I know historically we kinda look at two to four a year and kinda stepping up to maybe five to 10. Should we kinda read into that maybe your current land usage or footprint is maybe maxed out and you're having to go out and find new locations for terminals? Or is there still ample capacity to add dock doors onto your current footprint and maybe this year is just a bit of a different strategy?
That's, you know, it's across the board. We have facilities that we have land that we can expand, and we have some where we have no land, and we have no choice but to go and buy land and build a new one. Some of our large markets, you know, like Chicago, and L.A. and Atlanta and places like that, you know, we're adding additional service centers in those large markets, because of the traffic situation and all the windshield time you have with drivers trying to run long peddle runs. You know, if we can expand a facility, we always try to do that. You know, if we cannot expand and we need more capacity, we'll either do a spin-off in that city or we'll go buy land and build something bigger.
All right. As I kinda think about adding those service centers, are you kinda, I guess, in the bigger markets, adding a third to a second? Are you kinda seeing more of the smaller cities getting a second terminal this go around? I'm just trying to think of where you're trying to get more density.
It's both. You know, we've been talking for the last several years that we expected our network to grow, you know, out to the 250, 260 service centers, and part of that is expanding within the large metro markets, and part of that is filling in in states where we're running long pedal runs to deliver into and serve a particular market. Those, you know, some are new and some are within existing markets.
All right. Thanks for the time, guys.
We'll go next to Scott Group with Wolfe Research.
Hey, thanks. Morning, guys.
Scott, good morning.
Morning. I know YRC is out with a GRI, I think takes effect next week or two. Do you guys have plans to do a similar kinda February, March GRI?
Not made any decision on that as of yet.
Does it seem a little odd to you that nobody else has followed yet?
Well, a little bit. As you say that, it is kind of odd no one else has followed yet. You know, we'll just have to wait and see.
Do you I think you were asked this earlier, but I'll try a little bit more directly. You know, given some of the, you know, labor negotiations at ArcBest and now YRC with the GRI by itself, do you think if more of your shares is coming from them? I mean, just based on their tonnage in January, it seems like it is. Do you think there's an opportunity for that to accelerate?
That's hard to say, Scott. It's, you know, we can't identify that we have taken business from ArcBest or YRC because of labor negotiations. You know, we're certainly not trying to go out and target them because of it either, so.
Okay.
It may be the case. Maybe, that's, you know, we're certainly not focused on it.
Okay. Just on fuel, is there any way to sort of quantify the benefit from a margin or dollar standpoint from fuel in the quarter? Would you think you'd see a bigger benefit in first quarter?
I think that's always a dangerous thing to try to say what if fuel was X or Y. You know, the way our surcharge program works is it should be a net neutral. You know, that it may change as we go up and down the spectrum. Certainly we've had some periods where when there's rapid changes, it can be, you know, more of an immediate impact. You know, the fuel cost, you know, price per gallon was up 16% in the fourth quarter. You know, on a year-over-year basis, that's about where we're trending right now in the first quarter, when it's trending at around $3 a gallon right now.
Maybe given some of the change in the slope of your surcharge curve that you made a few years ago, we shouldn't think about fuel necessarily as a rising fuel as an earnings tailwind for you anymore.
I think that, you know, yeah, I think that's a good way to say it the way you did. We tried to address up and down the spectrum on the surcharge table. If you remember, as it was falling, we had to go in and address some of the low end. I think we accomplished that because the, you know, fuel has stayed in it's increasing now, but, you know, fairly steady range.
Okay. All right. Thank you, guys. Appreciate it.
We'll go next to Benjamin Hartford with Baird.
Hey, guys. This is actually Zach Rosenberg on for Ben. Thanks for sneaking me in here. I just have one. You know, thinking through the dividend increase maybe being a little bit higher because of the Tax Act, just trying to think through and if you could refresh us on, you know, maybe your dividend strategy going forward and maybe how you think about increases in the coming years. Along with that, in the context of the higher CapEx about share repurchase and other uses of cash.
Yeah, we, you know, when we started the dividend last year, we kind of looked at what we thought the annual payout would be and what sort of the prior year's net income was. You know, that was some of the thinking that went in. Obviously, with the impact of the tax change, we felt like it was necessary to maybe increase it a little bit more and evaluate it just like we were putting the program in place this year. That was, you know, the 30% increase. You know, we'll evaluate that as we go and don't wanna indicate, you know, what the increase might be going forward.
You know, I think like what we said earlier, it was the 30% was probably higher than what we would have initially thought it was gonna be for the year. That'll just be one of the many elements that we continuous evaluate. You know, on the buyback program, we bought back less shares last year. You know, we primarily buy on a 10b5-1 basis and, you know, the valuation and we've got a grid that works. You know, we felt like the stock price was baking in some elements of the tax reform as we went through last year. The price was higher than, you know, than where we were buying as a company on our grid.
You know, we'll reevaluate that program, and are evaluating that program, now. You know, obviously when we put the buyback program in place in 2014, we felt like that was the best method to return capital to shareholders. We would anticipate that we would return more capital to shareholders through the buyback program on a long-term basis than we would through the dividend.
Got you. Perfect. Thanks for for the detailed answer.
This does conclude the question and answer session. I would like to turn the call back over to Earl Congdon for any closing remarks.
Well, we'd like to thank all of you for your participation today, and we sure appreciate your questions. Some great ones came through. Please feel free to give us a call if you have any further questions. Thanks. Have a great day.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.