Good morning, and welcome to the Q4 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 18 by dialing 719-457 0820. The replay passcode is 6,862,987. The replay may also be accessed through March 8 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. And 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 Q4 conference call. With me on the call today is David Condon, 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 4th 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 percent for the 4th quarter.
This growth rate is the strongest we have had since the 4th 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 2 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 strengths 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. And now here is David Condon to discuss the Q4 in greater detail.
Thanks, Earl, and 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 1640 new full time employees. Of this total, we hired approximately 1400 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 8th 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 for our long term profitable growth. There are, of course, many other ingredients in our formula for success including the consistent and long term investments and 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 4th 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 percent for the 4th quarter which was our first double digit increase in 11 quarters and the pricing environment continued to be favorable. LTL revenue per 100weight 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. 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 4th quarter including more actual revenue growth than we have ever achieved before. We are carrying a lot of momentum into 2018, 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. And now Adam Satterfield will discuss our Q4 financial results in greater detail.
Thank you, David, and good morning. Old Dominion's revenue grew 19.5% in the 4th quarter to $891,100,000 which is the highest quarterly revenue we have ever recorded. 4th quarter included $13,900,000 of non LTL revenue. Our operating ratio improved 90 basis points to 83.9 percent and our income before tax increased 29.2%. Earnings per diluted share increased 188 percent to 2 point couple of items related to the Tax Cuts and Jobs Act impacted these 4th quarter results.
These include a special bonus paid to our non executive employees of $9,800,000 and the revaluation of our net deferred tax liability that resulted in a net tax benefit of $104,900,000 Our revenue growth for the 4th quarter once again included increases in LTL tonnage and yield. LTL tons per day increased 14.4 percent as compared to the Q4 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 Q4. LTL tons per day increased 2.6% when compared to the Q3 of 2017. This was the first time since 2,005 that our 4th quarter tonnage exceeded the Q3 in the same year.
The monthly sequential changes in LTL tons per day during the Q4 were as follows: October decreased 2.5% as compared with September November increased 4.3% versus October and 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 Q4. 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 Q1 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 4th 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 Q4 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 $148,300,000 for the 4th quarter $536,300,000 for 20 17. Capital expenditures were $93,300,000 for the quarter $382,100,000 for the year.
Based on our anticipated growth for 2018 and the execution of our normal replacement cycle, we expect total expenditures of $510,000,000 for 2018. This total includes approximately $200,000,000 for real estate and service center expansion projects, which should increase our service center network to 235 to 240 facilities by the end of the year. We returned $8,200,000 of capital to shareholders during the Q4 and a total of $40,900,000 for the year. Today, we announced that our quarterly dividend will increase 30% to 0 point 1 $3 per share in the Q1. This increase was higher than what we had originally anticipated prior to the passage of the Tax Cuts and Jobs Act, but 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. It concludes our prepared remarks this morning. Operator, we'll be happy to open the floor at this time for questions.
Thank We will go first to Brad Delco with Stephens.
Good morning, David. Good morning, Adam. How are you guys?
Good. Good morning, Brad.
David or Adam, I mean, you guys have historically always given us guidance on incremental margins of 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 Adam, I heard your comments about the employee count kind of increasing at a similar rate to your tonnage and just trying to figure out where we're going to get leverage in 2018 in this great environment?
Yes. I think that if you go back to 2010, our incrementals have averaged about 25% and that's probably the rate that we're most closely tracking towards. And there may be some periods where it's a little bit lower. And so between 20% to 25% is probably more likely range. And it can vary obviously in periods of higher growth becomes a little bit harder to just from the mathematics of the equation.
But certainly, we're always focused on putting as much money to the bottom line as we can. And I think we did a nice job of that as we progress through this past year and as the environment was accelerating for us, I think the last few quarters were pretty nice beginning with really just starting with an incremental margin in the Q1 and then that accelerating. But 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 and I thought that the hiring that we had planned to do in the Q4 to get our employee base where it needed to be might be a bit of a headwind, but we just had such strong revenue growth in the 4th quarter that helped us put more of that revenue growth to the bottom line. So we felt like Q4 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 our revenue and cost structure is a pretty healthy mix, I'd say. And as we've said in the past, 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 showed up very well in the Q4 and we believe that the economy and our ability to win market share in 2018 is there. The pricing environment is good. So we should see adequate incremental margins to continue to be able to improve our operating ratio.
Great. And 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 your incremental capacity is now with your fleet and with your real estate and with your employee base?
In the network, which that's probably the most important, our service center network, We try to keep about 25% capacity. Given the acceleration in the growth, that's probably maybe now down closer to 20%. We usually say 20% to 25%, it may be 15% to 20%. But I think we executed a lot of good projects last year and we've got a good plan for this year. And as David mentioned, we always want to make sure that we stay well ahead of our anticipated growth curve, so that the network is not a limiting factor to our growth.
And I think we made good progress with getting our employee base positioned well and we were lagging our shipment growth with the increase in our headcount last year. And so now we should be in a more normalized pace where you see headcount and shipments trending a little bit closer together. And typically, you would see headcount actually leading the shipment growth. So we've got employees in and trained before really the shipments are picking up. So 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 Q4 as well and had some rentals in some places in which the cost of those are increasing, but 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 2 29 service centers now and we're going to keep we've got a good CapEx plan at $510,000,000 and keep adding where we need to make sure we've got the necessary capacity.
Okay. Well, great guys. Thanks for the time. 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. And then just given the growth and pricing dynamics in the quarter, I would have probably expected incremental margins to have accelerated from where they were in the Q3.
You did add I saw you added 6 percent 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 reacceleration incrementals in the Q1. Are there other puts and takes in terms of the benefit costs? Just if you can just help us there, that would be helpful.
Thank you.
Yes. To start with the first part of that question, the sequential change on the weight going into January. So 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 it's not surprising when you only look at that on a 1 month basis.
And 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 it's 10 year average is a 3% and then we performed above trend for each month through the Q4. So typically when you got 1 month that that far ahead of the average, the next month might be under. So, I am not a complete surprise, but I think our volumes just continue to be really strong and we had a really nice January. In regards to the incrementals, I mean, just like what I was discussing with Brad, I think that the Q4 was we consider a good performance and we knew that we had some cost headwinds that we were anticipating, but frankly we had such strong revenue growth through the quarter that we think that offsets some of the cost headwinds that were in place. But we typically going back to David's comment about our cost structure, there are quarters where the incrementals may be 30%, and 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.
I think that the 25% is a good metric. When you break down our operating ratio, 60% to 65% of our costs are kind of direct variable operating costs. And then in our overhead base, you've got some variable costs there as well. That's how we've been able to get to that 30%, 35% range. Right now, if we can continue to target 25%, I think that's a healthy incremental.
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 an operating point change. It's a mathematical thing, so don't let the percentages fool you. 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.
Yes, I guess the law of large numbers. One follow quick follow-up for 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 seems like it certainly seems like it's a market share grab relative to what some of the other LTL companies are reporting. But 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? Is 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. We have spot quotes and things like that that come in and those a lot of those shipments weigh in the 8,000 pound or 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 percent. I think that was the number we reported this morning and we think more that is more related to the economy improving and buyers ordering larger quantities in their orders that cause the weight per shipment to increase.
I believe the industry is up as well, but the last number I saw there, the industry is up a little bit less than we are on weight per shipment, but that's primarily economically
driven, I believe.
Got it, right. Okay, guys, that's all I had. 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. So you guys talked about the January tonnage and sequential trends, but 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 overall revenue is about 19.5% and then you've got the tonnage number, which is 14.4%. So you can kind of back into it. It's trending in about the same range where we've seen it or at least this most recent quarter.
Okay. And weight per shipment is coming off a little bit sequentially in January. Did I hear that right?
It did compare to December. Our December bumped up, that was the highest. It was at £1661. It trended back to 16.44 in January. And so we initially saw that bump in September where we had been continuing to see 15.50 pounds weight per shipment plus or minus for the longest time.
And then we got that nice bump in September and it stayed fairly consistent from there. So we're back in the range really where we kind of saw for most of 2014 and kind of the early part of 2015. So we think that just some heavier weighted shipments to David's point on the economy and definitely some shippers, 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 and so shippers now with truckload capacity tightening up or moving freight in the mode that where it really should we think.
Okay. So it sounds like the December trend, which was what you would characterize as maybe unusual, could have been driven by TL spillover. Is there any 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, but we're continuing to see good success with our retail shippers. And I think that in the Q4, we probably saw a little bit more revenue growth retail related shippers than industrial. But keep in mind that 60% about of our revenue is industrial related, 25% retail. So, it's a smaller component today as it is for many LTL carriers, I think. But we're certainly starting to see some success there.
And it really just goes into the long term thesis of we believe is more fulfillment centers are built, it's going to be more conducive to LTL quantity of freight and supply chains become more sophisticated and delivery windows are tighter, that plays more to a high service carrier like ourselves. And so I think that for many of those reasons, when you start thinking about fines that are charged back to shippers, it changes the conversation from just a discount point on a freight bill from 1 carrier to the next to what can be the total value proposition and 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. And maybe following up on that, do you see at some point in the future 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 with multiple we have multiple liftgate trailers at every service center and we have some that are short to go into neighborhoods and we do that business, but we're not really focused on trying to grow residential deliveries.
Okay.
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. And then 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 to the extent that you have, if there's any way to quantify it 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 pretty nice performance with our P and D and line haul operations. In the most recent quarter, our P and 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 Q4, our dock shipments per hour were down about 3%. So I think that we've got an opportunity there. But some of that dock performances, we hired an awful lot of people this year and the newer employees that were hired as volumes were really accelerating, most of the employee additions were in the back half of the year. So it was sort of jumping right into the fire, aren't and weren't as productive. So we certainly got some opportunity there and we're always focused on continuous improvement in ways we can get better with running all aspects of our operation.
Okay, got it. So it sounds like at least from the employee productivity standpoint with another year under their belts, you potentially could see more productivity in the second half of the year. Is that fair in thinking about the cadence?
I think that the employee base is in place now. We're starting to see in some of the later months some improvements there and so we certainly would expect to see it. But I mean overall for cost inflation going into next year and we mentioned in our release that we may have some increased benefit cost, we believe it's probably going to be more in the 4% to 4.5% range on a per shipment basis when you take fuel cost out of it. And obviously, fuel right now is trending higher on a year over year basis than where we were in the early part of 2017. So if we can keep total cost in check and we're always focused on opportunities there and as well as other costs that we can control discretionary types of spending.
We'll do our best. And we were thinking that this year going into the year that cost inflation might be about 4%. I think we finished just about there, maybe slightly better. And then 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.
We'll go next to Ari Rosa with Bank of America Merrill Lynch.
Hey, good morning. So 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 in and kind of what the breakdown was between sales versus dock versus drivers? And then remind me again what's the usual timeline for those for kind of 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 our dock workers that were hired, not as many salaried and clerical type positions and that was just consistent with the growth that we started seeing. And remember, in the early part of last year, our revenue was only growing at 6.5% in the Q1. So we saw acceleration in the second, third quarters and then a pickup again in the 4th quarter. And so we were like I mentioned before, we were just kind of playing catch up a little bit and it required us to use a little bit of purchase transportation last year to help take some of the pressure off our line haul operations primarily. So, I think that we like to have our employees in place and the training can take a couple of months, couple of 3 months, it would be perfect to make sure everybody is delivering that superior service.
Yes. And if a guy has never worked freight before and never packed a trailer before, there are awful lot of things that they learn over a long period of time before they become totally productive. And the way that we 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 loading the trailer and to do it quickly like the old timers can.
Okay, great. That's I'm sorry, go ahead.
It could be 6 months before someone becomes really productive and then over the next year they even become more productive, but not quite at the rate that they would over the 1st 6 months.
Sure. That makes a lot of sense. And 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 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 maybe gaining some share and then getting to 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.
So let me just maybe be a little more specific. I think in the past, you guys have spoken about I think a 3.5% to 4% price or rate increase target on an annualized basis ex fuel. Is that still consistent?
Yes, sir.
Okay, great. And then just last question for 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?
Yes, I think it's less of a risk. Same conversations we were having back in 2016, when you look at 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, I'm guessing that the other carriers are going to let that tax change fall to the bottom line and potentially start 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 and I think a lot of us kind of have questions of trying to relate what's going on in LTL to what's happening in the truckload market. And obviously, there's tightness there and we're seeing rate increases coming in higher than typical sort of normal rate increases would see. So as we think about that relationship, could you kind of help us a little bit maybe frame it up with the 3.5% to 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 2 of them apart and think about it more specifically to LPL?
Just trying to
get some sense around that would be helpful. Yes, I think looking at it separately is better. And 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. And there are other specific account profitability issues that we address, but 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 as far back as 2,000, our revenue per 100 weight is increasing between 3% and 3.5%.
So 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 and feedback from customers has been that they appreciate that and that's why we've had long term market share success. So 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 maybe our own cost inflation maybe between 4% to 4 point 5%. So we'll have to target that. And then again, we'll address on an account by account basis any that are underperforming where we think they'll be, where they should be rather. But we're going to continue to keep the same philosophy and not really make any drastic changes and we think that that's been key to our long term profitable growth in the past and will help us for the future.
Okay. Okay. That's helpful. That's actually very clear. Appreciate it.
Wanted to ask just a question on that sort of cost inflation. You mentioned in the release about some employee benefits inflationary expense. I don't know if you can help us kind of parse that out when you think about that 4%, 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, but you want to get a sense that there's some specifics behind that comment?
Yes. I mean, the biggest thing was I wanted people to see that this tax cut thing that this wasn't just a one time, the bonus that we paid in the 4th 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 will be around 26 0.5%. And so, we've historically provided 10% of net income back to employees in their 401 plan. So, 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. But 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. So, we will have that. 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. But there may be some other costs as I just mentioned on the benefit side that will increase slightly.
And then 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 change in 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. So, we still have some uncertainty that's hanging out there in terms of some taxes that we may get hit with.
Okay. That's really helpful to lay it out. Thanks for the time. I appreciate it.
We'll go next to Ravi Shanker with Morgan Stanley.
Thanks. Good morning, everyone. Just a couple of follow ups here. On your target for growing share, can you tell who you're gaining the 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, on them the regional players were having some difficulties about 6 months ago. Have you seen that accelerate? And is that the source of issue again?
Avi, you can't put your finger on exactly where it's coming from. I mean our growth rates across the whole network and we break our company into 10 regions. We're strong, have got strong growth happening everywhere. So, I'd say it's really across the board. It's no one particular carrier or one particular region.
Okay. And 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 patterns and things like that specifically.
Okay. And 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 maybe that or kind of other EV slash split during 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 and our position is to kind of wait and see and there's honestly more questions than there are answers with electrification and with hydroelectric and platooning and there's more questions than answers and 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 and good morning. I don't want to get too granular, but some of your competitors have talked about you're starting off maybe a little bit softer because of the timing of holidays and weather. And Adam, I know that you gave the sequential trends between January 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 1st 4 or 5 weeks?
It's been pretty consistent. Certainly, there was weather events in January that we dealt with this year. But I mean the reality is we deal with weather events every January. So when you look at our 10 year average sequential trends, the bad January's are in there, as well as February's. I think that I can look at certain days and kind of the middle of the month where we had some impact, particularly some of the storms that moved through the Midwest and Northeast.
But you recover some of that freight, some other freight may move a different mode. But certainly the way we finished out the month of January was pretty strong. And I think that was probably recapturing some of that freight. But overall, the growth that we had in January was pretty strong, I felt like.
Okay, good. That helps. And then just as far as your peer group. Would you expect that to normalize in the first half of twenty eighteen or is that something in the second half of twenty eighteen? And then just from a capacity standpoint, I understand that you're bringing in equipment, but as far as driver availability and probably moving people from the docks into the trucks, Do you have the labor availability to also handle the incremental freight with your own equipment?
Yes, we have the capacity to handle the freight with our own equipment and we have no intentions of increasing purchase transportation. It's not a big part of our it may be end of the month, end of the quarter, we might have to use a little bit of it, but for the most part, we feel like we're geared up appropriately. As we mentioned earlier, the 1400 people we've added in the second half of the year, we saw freight strong in December and it was an unusual time because we were actually hiring in December and that hasn't happened in a long, long time. But 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 have the foresight to add the people.
Okay. And indeed, the pipe go ahead, Adam, I'm sorry.
I was just going
to add that while we increased the purchase transportation a little bit last year to supplement as necessary, it was really only about a 10 basis point to 20 basis point kind of increase from the year before. Most of our purchase transportation relates to our Canadian services and our truckload brokerage and some other things. So it was really just it was a minor increase that we dealt with. But so it wouldn't be a material swing back if we can eliminate those few runs that we had to make use of.
Okay. That makes sense. And 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, just experienced drivers as well. But the driver shortage is for real out there. It's tough to find good drivers and more and more we're 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.
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 and then maybe also talk to your expectations for opening new service centers in 2018?
We finished the year with 229 facilities. And I mentioned in my comments with the CapEx plan for this year for real estate is about $200,000,000 and we think that we'll get maybe finish the year with somewhere around 235 to 240 facilities in place. A lot of that's just subject to timing of 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. And then you talked also just the CapEx plan. I think the expectations for tractor purchases that that's also up a pretty significant amount. Obviously, you guys are growing. You talk to maybe roughly how much of that incremental CapEx is being put forth to grow your fleet versus replenishments?
Or is there any change there in terms of how you're looking at maybe fleet replenishment? I think that there's the thought process that the market's adding and this is across like broader trucking, adding a lot of trucks to the market and there's a concern that obviously potentially more supply would work against the ability to raise price. But I guess my question comes down to are you spending more to replenish more trucks this year and maybe talk to what are your expectations for the net growth of the fleet in 2018?
If you look, we kind of average replacement cycle is maybe $150,000,000 or so on the tractors and trailers side and that varies each year based on what we did 10 years ago.
But that's going to get larger because the fleet is larger, so the replenishment will always be
a growing number. Right. And remember that last year, what we had designated for some replacement equipment because of our growth we kept in the fleet. So there probably is a little bit more replacement, but our fleet is in very good shape. We finished the year, the average age of our tractors is right at 4 years and it was 4.5 at the end of 2016.
So I think we're in really good shape and by the execution of this $265,000,000 spend this year, we should be where we need to be we think. But we'll continue to evaluate as we progress through the year as well and look at and see how we're trending when it comes to our tractor and trailer counts and 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.
Thank you, operator. Hey, guys. Just a couple of 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 to push freight towards the LTL sector.
How should we view 4Q of this year?
Should we think that that's going to revert to a more normalized seasonal pattern where there's a negative sequential increase in tonnage from the Q3?
That's a real crystal ball question. What do you think is going to happen? Well,
look, I think it got a little funky there with the 2 storms, but we'll have to see. I mean, guys. The other question I had, could you remind me that you're
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, no. That we we'll have 64 days in the Q1, 64 days in the 2nd quarter, 63 days in the 3rd quarter and 63 days in the 4th quarter. So, the first three quarters line up to last year, the Q4 will include one extra workday.
Okay. All right.
That's good. That's all
I had gentlemen. Thank you very much for the time.
We'll go next to Willard Nobile with Seaport Global Securities.
Hey, good morning everybody. Thanks for taking my questions. Wanted to kind of look at some expense lines, I guess insurance and claims stepped up here Q3, Q4 from Q3. Was that kind of one event or a couple of little things and has any of that kind of lingered into the first half Q1?
So, in the Q4 each year, we conduct an annual actuarial study and there occasionally will be adjustments that we make to the valuation on prior year claims. And so, I think what we had this year in the Q4 was maybe a slight unfavorable adjustment. And then the Q4 of 'sixteen was probably a slight favorable. This year was slightly unfavorable versus last year being slightly favorable, if I said that correctly. But 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.
The 2 costs that are in that line item are auto liability claims, on highway incidents and then our cargo claims ratio as well, which continues to be what we believe is best in class. It was less than 0.3% here in the Q4 and has been in that 0.2%, 0.3% range for most 2017.
All right. And I guess a similar question for the miscellaneous expenses. I mean, seen 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 kind of one time or non recurring stuff that shouldn't happen again in Q1 and what kind of went on here in Q4?
It stepped up a little bit this year and not necessarily one time, but that item does include 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. And I think we had some losses as we disposed of some older equipment in the 4th quarter that added a little bit of expense.
Okay. And I guess kind of going back to the terminal additions here in 2018, I know historically we kind of look at 2 to 4 year and kind of stepping up to maybe 5 to 10. Should we kind of read into that 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? It's across the board. We have facilities that we have land that we can expand and we have some that 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 like Chicago and LA and Atlanta and places like that. 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 along pedal runs.
But if we can expand the facility, we always try to do that and 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. And as I kind of think about adding those service centers, are you adding kind of I guess in the bigger markets adding a third to a second or you kind of seeing more of the smaller cities getting a second terminal this go around and I'm just trying to think of where you're trying to get more density?
It's both. We've been talking for the last several years that we expected our network to grow 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 states where we're running long pedal runs to deliver into and serve a particular market. So, 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. Good morning, guys.
Hi, Scott. Good morning.
Good morning. So I know YRC is out with a GRI, I think takes effect next week or 2. Do you guys have plans to do a similar kind of 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. But 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. Given some of the labor negotiations at ArcBest and now YRC with the GRI by itself, do you think that can you tell if more of your shares is coming from them? I mean, just based on their tonnage in January, it seems like it is, but do you think there's an opportunity for that to accelerate?
That's hard to say, Scott. It's we can't identify that we have taken business from our best oil YRC because of labor negotiations and we're certainly not trying to go out and target them because of it either.
Okay.
It may be the case, maybe that's but we're certainly not focused on it.
Okay. And then just on fuel, is there any way to sort of quantify the benefit from a margin or dollar standpoint from fuel in the quarter? And would you think you'd see a bigger benefit in Q1?
I think that's always a dangerous thing to try to do, to try to say what if fuel was X or Y. The way our surcharge program works is it should be a net neutral and it may change as we go up and down the spectrum and certainly we've had some periods where when there's rapid changes, it can be more of an immediate impact. But the fuel cost was up or price per gallon was up 16% in the Q4 and on a year over year basis that's about where we're trending right now in the Q1 when it's trending at around $3 a gallon right now.
So 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?
Yes, I think that's a good way to say it the way you did. But we tried to address up and down the spectrum on the surcharge table. And if you remember, as it was falling, we had to go in and address some of the low end. And I think we accomplished that because the fuel has stayed and it's increasing now, but fairly steady range.
Okay.
All
right. Thank you, guys. Appreciate it.
We'll go next to Ben Hartford with Baird.
Hey, guys. This is actually Zach Rosenberg on for Ben. Thanks for sneaking me in here. So I just have one. Thinking through the dividend increase maybe being a little bit higher because of the Tax Act, just trying to think through if you could refresh us on maybe your dividend strategy going forward and maybe how you think about increases in the coming years and along with that in the context of the higher CapEx about share repurchase and other uses of cash?
Yes. 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 and that was some of the thinking that went in. So obviously, with the impact of the tax change, we felt like it was necessary to maybe increase a little bit more and evaluate it just like we were putting the program in place this year. And so that was the 30% increase and we'll evaluate that as we go and don't want to indicate what the increase might be going forward. But I think like what we said earlier, it was the 30% was probably higher than what we would have initially thought it was going to be for the year.
But so that will just be one of the many elements that we continue to evaluate. And on the buyback program, we bought back less shares last year and we primarily buy on a 10b5 basis and the valuation and we've got a grid that works and we felt like the stock price was baking in some elements of the tax reform as we went through last year and so the price was higher than where we were buying as a company on our grid. So we'll reevaluate that program and are evaluating that program now. But obviously when we put the buyback program in place in 2014, we felt like that was the best method to return capital to shareholders and we would anticipate that we will 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 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 and please feel free to give us a call if you have any further questions. Thanks and have a great day.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.