Good morning, and welcome to the fourth quarter 2015 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 13th by dialing 719-457-0820. The replay passcode is 3433775. The replay may also be accessed through March 4th 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 that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's new 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. Thanks for joining us today for our fourth quarter conference call. Joining me on the line this morning are David Congdon, Old Dominion's Vice Chairman and CEO, and Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions. We are pleased to report that Old Dominion produced solid financial results for the fourth quarter of 2015. Despite a soft economic environment and a significant decline in fuel surcharges, we achieved company records for fourth quarter revenue, operating income, and earnings per diluted share. In addition, our operating ratio was only 10 basis points higher than the fourth quarter of 2014, which was our best fourth quarter ever. We won additional market share during the fourth quarter due to increased demand for our superior on-time, claims-free service that we provide at a fair price.
This value proposition continues to be critical to both our financial success and our ability to consistently outperform the growth and profitability of our industry. As we look forward into 2016, we are well positioned to continue to execute on the fundamental aspects of our business plan and produce further profitable growth. Although the potential for a soft economic environment could present a headwind in 2016, the pricing environment is relatively stable, and we expect to win additional market share. To support our company's expected growth, we're continuing to invest in our business with a substantial capital expenditure program in 2016. We also expect to employ excess cash flow to repurchase company stock. Thank you for your time this morning. Now I'd like to turn the comments portion of our conference over to David Congdon.
Good morning. We were encouraged by our fourth quarter results despite the headwinds that were mentioned by Earl. Our team continued to execute our business plan and win market share by providing on-time service of 99% and maintaining a low claim ratio, which was only 0.3% of revenue for the fourth quarter. Our fourth quarter results also reflect our continued commitment to yield management. Revenue per hundredweight, excluding fuel surcharges, increased 6.1%, driven by our pricing discipline as well as the positive impact on this metric from decreased weight per shipment. In addition, we improved our dock and pickup and delivery productivity during the fourth quarter. The combination of these factors and our continued focus on controlling costs contributed to our profitable growth for the quarter.
We've long maintained that we could produce long-term profitable growth and margin improvement by focusing on density and yield, assuming a steady macroeconomic environment and rational pricing within our industry. Although the macro has not been as robust as we would like, pricing within our industry has remained relatively stable. We are confident in our ability to continue winning market share, and we continue to be very confident about our long-term growth opportunities. Looking forward, we are focused on delivering our proven value proposition, which we expect will continue to fuel three key elements of our business model: yield management, freight density, and productivity. Old Dominion has outpaced the rest of our industry, and we will continue to strengthen this differentiation through our ongoing significant investments in capacity, technology, and employee training and education.
These investments have given our employees the tools and knowledge they need to continue to exceed our customers' expectations and help the world keep promises. As a result, we believe we can continue to drive long-term growth in earnings and shareholder value. Thanks for joining us today. Now Adam will review our financial results for the fourth quarter in greater detail.
Thank you, David, and good morning. Old Dominion's revenue was a company record $734.6 million for the fourth quarter, a 1.9% increase from last year. Earnings per diluted share increased to a company fourth quarter record of $0.85, which was a 4.9% increase from $0.81 earned in the fourth quarter of last year. Our operating ratio was 84.5, a 10 basis point increase over the fourth quarter of 2014. Revenue growth for the fourth quarter reflected a 3% increase in LTL tonnage, which included an 8.2% increase in LTL shipments, offset by a 4.8% decrease in LTL weight per shipment. In addition, LTL revenue per hundredweight decreased 0.2% for the quarter, primarily due to the significant reduction in fuel surcharges.
Price environment was relatively stable during the quarter, as evidenced by our 6.1% increase in revenue per hundredweight, excluding fuel surcharges. On a sequential basis, our LTL tonnage per day for the fourth quarter decreased 4.1% as compared to the third quarter of 2015. This was lower than our 10-year average sequential trend, which is a 2.6% decrease. Largest contributor to this variance was December being below its 10-year average. Tonnage trends were also impacted in the fourth quarter by the continued decrease in weight per shipment, which we expect will continue to be a headwind on a comparative year-over-year basis throughout the first half of 2016. LTL shipments per day in the fourth quarter decreased 5% sequentially as compared to the third quarter.
This was below our 10-year average sequential decrease of 3.9%, due primarily to December being below its 10-year average. We are pleased with our trends for January, however, which were back above our 10-year average sequential trends. Our LTL tons per day for January 2016 increased 2.2% as compared to December of 2015. This change compares favorably to the 10-year average sequential increase of 1.9%. On a year-over-year basis, LTL tons per day in January 2016 increased 2% as compared with January of 2015. Our LTL shipments in January versus December increased 4.8%. This compares favorably to the 10-year average sequential increase of 3.8%.
On a year-over-year basis, LTL shipments per day in January of 2016 increased 6.4% as compared to January of 2015. Revenue per day, excluding fuel surcharges, increased approximately 5% year-over-year for January of 2016 due to both the LTL tonnage increase and the improved LTL revenue per hundredweight, offset by a reduction in revenue for our non-LTL services. Our total revenue continues to also be impacted by reduced fuel surcharges, however, as the DOE's price per gallon was approximately 29% less January of 2015. The operating side, we had a 10 basis point increase in our operating ratio as compared to the fourth quarter.
This increase was due primarily to an increase in our fringe benefit cost as a percent of payroll and increased depreciation associated with our long-term investments in real estate, equipment, and information technology. The significant decline in fuel surcharges had a deleveraging impact on our expense items, although it also primarily accounted for the 310 basis point reduction in operating supplies and expenses. In addition to the increase in benefits, the increase in our salaries, wages, and benefits expense also reflects the impact of the 9% increase in full-time employees for the year and 3.5% increase in wages that were effective the beginning of September. We also increased the use of company-owned equipment and employees to support both our LTL and non-LTL services.
Dominion's cash flow from operations for 2015 totaled $554 million, a 41.4% increase over 2014. Capital expenditures were $100 million and $462 million for the fourth quarter and full year respectively. In addition, we repurchased $35 million of common stock during the fourth quarter and a total of $114 million for 2015. We completed 2015 with $11.5 million in cash, $134 million in total debt, and a ratio of debt to total capitalization of 7.4%.
2016, we have already repurchased an additional $22 million of our shares, which leaves approximately $58 million available for purchase under our previously authorized $200 million repurchase program, which is scheduled to expire in November of this year. Currently expect to finish this program before the end of the second quarter. We estimate the CapEx for 2016 will total approximately $440 million, including planned expenditures of $180 million for real estate and service center expansion projects, $220 million for tractors and trailers, and $40 million for technology and other assets.
Effective tax rate for the fourth quarter of 2015 was 35.5%, compared with 36.7% for the fourth quarter of 2014. This was lower than originally anticipated due to additional tax credits approved by Congress in December, as well as other favorable discrete tax adjustments. Currently expect an annual effective tax rate of 38.4% for 2016. Concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for any questions at this time.
Thank you. To signal for a question, please press star one on your touchtone telephone. If you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is star one at this time for questions. We'll pause for just a moment. Our first question will come from Scott Group with Wolfe Research.
Hey, thanks. Morning, guys. Wanted to first ask about incremental margins of 12% in the quarter. A pretty meaningful step down from what we've seen. Is this the kind of environment where we need to reset our incremental margin expectations lower for now? Is there anything kind of unusual in this quarter, and we can get back to that 20% + range going forward?
Scott, we're anticipating incremental margins in the 20% range next year, plus or minus, given the environment. In the fourth quarter, as I mentioned, we did have a higher fringe benefit expense rate, that impacted our OR by about 70 basis points if you compared the rate that we had, rate of fringes as a percent of payroll and salaries and wages. That definitely had an impact on the quarter. If we'd used the year-to-date rate, it definitely would have been better. Although with that said, it was, you know, a cost that we incurred in the period and, you know, we don't do adjusted numbers.
Okay. In terms of just the tonnage trends, I think you said worse than normal in December, but maybe just slightly better than normal in January. What's your take on the underlying kind of demand environment out there? Are you starting to see some signs of stabilization or improvement in industrial activity? Hey, it's just one month and really testing out?
Scott, this is David. The, as we all have tracked and watched, the ISM PMI index has been under 50 for about four months. I, you know, my personal gut feel is that we're kind of in, you know, just we've been in a slump, we're in a bottom and I'm more optimistic that we'll see some improvement next year. You know, it is encouraging to see the sequential trend from December into January, you know, pick back up again. December was definitely a headwind for us. It was a unusually soft month on a sequential basis, as Adam pointed out in his comments.
You know, we're, you know, the latest that I read, is, you know, we're looking at, say, 2.5% GDP growth for next year.
You mean this year.
Okay. All right. Thank you, guys.
Moving on, we'll go to Alex Vecchio with Morgan Stanley.
Morning. Thanks for taking the questions. Adam, I just wanted to clarify if I get my math right here. If rev per day ex fuel is up 5% in January and tonnage is up 2%, that implies that rev per hundredweight ex fuel is up about 3%, and that's a pretty big deceleration versus the 6% you had in the fourth quarter. I just wanna make sure I got that math right. If I did, kind of what's contributing to that deceleration in the yields ex fuel?
Well, the revenue per hundredweight excluding fuel was up about 4.5% in January. If you think about the step down, if you're comparing to November and December, we are now lapping the GRI that went into effect in January of 2015.
Okay. Are you seeing any, you guys noted that pricing remains relatively stable. I assume you're not seeing any kind of irrational behavior out there from any competitors. Can you maybe elaborate a little bit on that to the extent? We've, you know, obviously heard from ArcBest that they took a little bit of pricing actions on some part of their book of business. Maybe you can comment a little bit about what you're seeing out there from the competitive pricing standpoint.
The comment I read on what ArcBest said was that they, it sounded to me like they took it on their spot quote type business, that they were being more aggressive on that type business. Maybe I misunderstood it, but nonetheless, we still believe the environment continues to be relatively stable. I mean, over time, you've always had spotty irrationalization of here and there that occurs. You know, our pricing policies and practices remain unchanged. We feel, you know, confident, and good about the pricing environment right now.
Okay, that's helpful. Just lastly, are you guys still getting that, the 3.5%-4% core rate increases on contracts, kinda consistent with what you saw in the third quarter?
Yeah, we're anticipating 3%-4% increases as we move through 2016.
Great. Thanks for the time.
Moving on, we'll go to Chris Wetherbee with Citi.
Hey, thanks. Good morning. I wanted to touch a little bit on sort of the resources side of the business. In the environment where we have a little bit of a slower tonnage dynamic, how do we think about sort of some of the resources like headcount and infrastructure of the business? I guess maybe starting with headcount, how should we think about that for 2016?
We built up our headcount, last fall, you know, due to the volumes of business we had. We've held the line on any growth in headcount through the holiday. We've had some attrition. We will gear our headcount to the volumes that we see as they're building in the first quarter. We're, you know, what is it year-over-year right now, Adam?
The headcount?
Yeah.
It's up 9%. You know, keep in mind, we're still anticipating growth this year. In January, our shipments per day are trending up over 6%. You know, we're still positive on our, on long-term opportunities. We're anticipating growth and we're continuing to invest in our people and, you know, making investments in capacity as well, that we think are necessary for our long-term success.
That's helpful. You mentioned sort of a 2.5% GDP type of environment is what you're sort of looking at. When you think about the potential for continued market share gains, I mean, any way we can kind of tie that back to how you might think sort of volumes could play out? Do we get a little bit better from here, you know, the 2%-ish range? How do you think about that? Just sort of directionally would be helpful.
You know, we think that we've got market share opportunities, and we've long outperformed when you just look at, you know, GDP or industrial production type numbers. It gets back to the quality of service that we provide at a fair price, and we still think that's a winning formula. That's what we continue to execute on. You know, with that, and assuming a rational pricing within the industry, we think that's a winning formula for us and what we're gonna stick to.
Okay. That makes sense. Thanks for the time, guys. Appreciate it.
Moving on, we'll go to Allison Landry with Credit Suisse.
Good morning. Thanks. In terms of the CapEx guidance, you know, down modestly year-over-year in 2016. If we do see macro conditions deteriorate further, how much and where do you think you could scale back spending this year?
The real estate is fairly well fixed because it relates to projects that are pretty much underway and things that we need to do for the future, as well as the IT and other spend. We have some flexibility in the equipment side of the equation. You know, we buy a certain amount of that is for our replacement cycle that we would not change. The equipment that's in there for growth could be adjusted. We have cancellation provisions, roughly 90 days.
Okay, great. As a, you know, just my follow-up question, thinking about your comments on weight per shipment and expecting it to still be a headwind in the first half of the year, how should we think about it for the back half? Would you expect it to be, you know, sort of flattish year-over-year?
Yeah. Where we're trending right now is, it was pretty consistent. It seems like it's stabilized in the fourth quarter compared to, where we were in the third quarter of 2015. It seems like this weight per shipment now is trending, you know, somewhere around that 1,540 - 1,550 range. Once you get back into the back half of, 2015 on a comparative basis, then it'll be a little more normalized.
Allison, while you're on that subject, I wanna just throw some color on weight per shipment and a little bit more about the headwind that it has been for us and perhaps even affecting the industry. We hadn't really talked about it much, but when you think about it, a lower weight per shipment means a lower revenue per shipment against a cost per shipment that is a bit harder to reduce. And furthermore, you know, fuel surcharges are calculated as a percentage of revenue. You actually lose a little bit on fuel surcharge per shipment too because of a lower weight. You know, it's really similar to the oil industry at the drilling level.
You know, this very low revenue per hundredweight is against a cost per hundredweight to extract that has not really dropped. I mean, it's, it's a similar correlation. We handle shipments across the dock and shipments in P&D. When you think about, you know, putting your forklift under a 1,000 lbs skid and carrying it across the dock versus, say, a skid that only weighs 800 lbs because the shipper shipped a smaller shipment, our time to handle that shipment does not change at all to speak of. We have seen pressure in our pounds per hour in both dock and pickup and delivery. On the other hand, our shipments per hour, this is where we're seeing the improvements in productivity. You know, we're handling the shipments more efficiently.
Again, you know, your cost of going across that dock with a lower revenue shipment is about the same. We've also seen some pressure in our line haul load averages. You know, we load trailers. Most of our freight is skidded these days. You put a skid on the floor, you bring a rack down from the ceiling, you put a skid on top of a rack.
If these skids weigh, you know, 100 lbs less or 200 lbs less, you've got a little bit more air in between those skids. We've seen pressure or downward pressure or a headwind in line haul load averages. The good news is that we have overcome this pressure this year, and we delivered a 100 basis point reduction in our operating ratio for the entire year of 2015. You know, as Adam pointed out, sequentially, we think we've bottomed out on the weight per shipment. Yeah, as we lap the lower weight per shipment later in the year, it won't appear as big of an issue for us. I thought I would add that color.
Does that help?
That helps mentally. Thank you. Especially thinking about the incremental margins. Appreciate it.
Next, we'll go to Brad Delco with Stephens.
Yeah. Good morning, David. Good morning, Adam. How are you?
Morning, Brad.
David, can you maybe rationalize for us what you think played out in December? Adam, I don't know if you gave us what December tonnage was on a year-over-year basis. Can you provide that as well? Then maybe what you think sort of played out into January and why you've seen these trends.
The year-over-year basis, December was up. The tonnage per day was only up 1.1%. You know, it just felt a little softer. I think, you know, when you look through some of the ISM numbers and things like that, you know, it definitely was, you know, it's a tough economy and so forth. You know, again, it gets back to we think that we've got good opportunities for this coming year. We see new account wins every day that are presented by our sales team. We're getting additional business from many of our 3PL customers every day. A lot of it comes back to the quality of service that we're providing.
There are many times where we might lose an account on price, and then not long after, we'll get reports about that, whoever the competitor X was just not providing the level of service, whether it be the on-time service from a pickup standpoint, meeting appointment delivery times or just a damages issue, in many cases, we'll get that back. I think that, you know, we're gonna continue to execute on what we've done, and we think we've got good trends ahead if we can continue to deliver this premium level of service at a fair price.
Okay. Maybe just to follow up there, Adam, I guess there's been this debate as to how LTLs will play a role in sort of this e-commerce trend. Can you talk a little bit about how you think you're prepared or set up for that?
You know, in the e-commerce trend, there, you know, continues to be a demand for LTL service, moving freight into the distribution centers where the e-commerce freight goes back out by parcel. You know, with the just-in-time type inventory trends that we've seen and, you know, everyone wants everything faster and quicker, I think the premium service LTL providers can continue to bring freight into these distribution centers to fill the e-commerce demand.
Okay. Thanks, guys, for the time.
Next, we'll go to Matt Brooklier with Longbow Research.
Thanks. Good morning. I think you talked to it earlier in the call, but your purchased transportation cost dropped a little bit more than we had thought, which is good to see, but I'm trying to figure out how much of that was just a function of fuel as fuel also passes through that line and how much of that was a function of you guys doing things a little bit different in the network and maybe taking more of your moves in-house. Trying to think about that if that was a benefit in 4 Q, thinking about that as we move into 2016.
There were two major factors on that. Last fall, before the fourth quarter even ended, we had shifted from a rail operation to an over-the-road operation across from Chicago up to the Pacific Northwest. We reduced a lot of purchased transportation that we had in that lane and put it on company trucks. The second piece was has been a shift in strategy with our ocean container division to move toward a company truck model. We don't have that purchased transportation line haul. I guess there's a third one.
We had the purchased transportation that had to do with our ocean forwarding operations that we have chosen to take a different path on that.
A lot of that decrease, though, as David mentioned, has shifted into salary, wages, and benefits, where we're using our own employees, particularly on the drayage side. Operating supplies and expenses.
That's right.
Okay. I guess the question is the net benefit is potentially advantageous as you're not going out into the market, and you're using your own equipment to move, I guess, more of some of the associate stuff that you do?
Correct. It's all has to do with improving and maintaining and improving our best-in-class position as a best-in-class LTL service provider.
Okay. You talked to the amount of stock you repurchased in first quarter, and there are some remaining. Just to clarify, you expect to be through the current repurchase authorization by the end of this year or by the end of 2 Q?
By the end of the second quarter of this year. It'll be about six months early on the program.
Okay. When does the board meet again to discuss potential uses of capital moving forward?
You know, we'll continue to evaluate those and discuss with our board, you know, at the appropriate time. We feel like shareholder returns are, you know, have been a good way and will continue to be a good way to improve total shareholder returns. You know, that is in third place on our capital allocation strategy. We're going to continue to invest in the business. Number one, which you continue to see, we've got a healthy CapEx program. We'll continue to look at any type of acquisition opportunities that may present themselves and some type of shareholder return to again support shares and stockholders.
Okay. Appreciate the time.
Next, we'll go to David Ross with Stifel.
Yes, good morning, gentlemen.
Good morning.
Adam, you talked about the fringe benefit expense coming in in the quarter because I noticed the salary, wages, and benefits line was at the highest level, at least as a percentage of revenue, in about six years. You know, can you just talk a little bit more about that? I think that was, you know, $5 million in the quarter, and then anything else that's going on there besides just, you know, the wage increase and headcount increase with the absence of revenue increase.
Right. Yeah. you know, obviously, that was a big driver, the 3.5% wage increase and just the general increase in number of employees. Then part of that was, again, this flip of where we're doing some of this business with our own employees and equipment, now, particularly on the drayage side. With the fringes, we just had some unfavorable experience within group health and with our workers' comp in the fourth quarter. As a percent of salary and wages, the fringe rate was at 33.8%. It's been trending more in the 32%-32.5% earlier in the year. That's not something that we necessarily see and think will be a trend going forward.
It's something obviously that we pay close attention to, but it was, you know, somewhat out of line with what we had seen earlier in the year.
You talked about, you know, seeing lower revenue to start the year from your non-LTL services.
Right.
Can you, I guess, comment a little bit about the non-LTL services and, you know, how you see them, you know, growing organically or via acquisition over the next year or two?
I think that, you know, again, as David just talked about, on the drayage side, we closed a few locations where business levels just weren't up to our expectations. We're continuing to focus on the existing locations that we're serving. We're trying to improve the level of service that we're giving, you know, in that market and trying to differentiate ourselves against, you know, others that they're serving. We're gonna continue to look at that. We think that our value-add services are good for our business. You know, they add value to our customer base, and we think we can do well with them. We'll continue to support them. On a same-store basis, we're continuing to see growth, but we'll have a little headwind there.
The international freight forwarding, we're just not doing that business direct anymore and, you know, starting in the fourth quarter of last year. We think overall, we're gonna continue to support the services that remain and look to continue to enhance those.
Excellent. Thank you.
Next from Deutsche Bank, we'll go to Rob Salmon.
Hey, good morning. I guess, David, going back to the question related to e-commerce, if I'm thinking about the composition of those shipments, are those at all different from what you see with your traditional retail shipments in terms of the size and weight profile?
You know, we don't really segment that out to give you a definite answer, but the gut feel is the answer is no. They're roughly the same.
Okay. That's helpful. I guess if I go back to the discussion, I think in the prepared remarks, you talked a little bit to productivity. Could you walk us through some of the year-over-year changes in pounds per hour, line haul load average, et cetera?
Yeah. From a pounds per hour standpoint, you know, it's continued to be pressured just by the decrease in the weight per shipment. On the dock, our shipments per hour were actually up 5% in the fourth quarter on a quarter-over-quarter basis. The pounds per hour, though, was actually up 0.6%. Looking at P&D, our P&D shipments per hour were up about 0.5%. Our load average in line haul was down about 2.5%. You know, again, that gets into the detail that David was speaking of with the weight per shipment being down and h ow that can impact your line haul operations.
Got it. With the basically, the expectation for weight per shipment to flatten out in the back half of the year, it'll remain a headwind first half, and then we should see underlying improved productivity in the back half, assuming the shipment growth continues.
Yes.
Is that correct?
Yeah. There's one other factor about this, about productivity is if you turn the clock back a year ago, you know, we had some fairly strong growth in the latter half of 2014, and we were adding a lot of people. You know, for a dock worker to get into our company and get up to speed and learn our systems and learn our, the way that we load freight, to, you know, minimize damage and maximize load average, et cetera, et cetera, it takes at least six months to nine months for somebody to get up to speed.
You know, you know, we've Now that we're kind of in a, I'd say, call it a soft spot in the economy, a good thing about that is that our that we're not having to add more new people right now, and the people that we have are reaching that, you know, they're getting in a stride now, where their productivity is improving. You know, if there is a benefit of a slower growth economy, that might be one of them.
Got it. Appreciate the time.
Next, we'll go to Ari Rosa with Bank of America.
Hey, good morning, David, Earl, Adam. I just wanted to ask first about the competitive landscape. Obviously, there have been some competitive changes kind of over the last few months. Wanted to see what you're hearing in terms of customer turnover. Do you think that there have kind of been created some additional opportunities to build share more aggressively, particularly in the slow growth environment? Have you guys not really noticed anything along that front?
You know, frankly, we've seen some opportunities with, you know, some of the competitive changes in the marketplace. You know, we do business with about a third of our business, roughly maybe 30% with 3PLs. You know, we're in a really unique position as an asset-based LTL service provider with no conflicts of interest at all with our 3PL customers. That does offer us an opportunity to serve that segment of the market, and serve it well and build levels of trust with 3PLs to grow our business with those 3PLs. We've had a few opportunities in that arena.
Okay, that's helpful. Thank you. Just my second question. You know, looking to 2016, and obviously you guys are dealing with slightly slower volume growth here, does that change at all your ability to focus on service, or does that, you know, change kind of what your productivity initiatives are for 2016? How are you guys thinking about operations in the year ahead, given kind of the slower volume growth?
You know, just embedded in the culture of this business, and the way that we run our business is continuous improvement. I don't see us changing our focus on continuously looking for better ways of doing things and improving efficiency. There's really no change there. Does that answer the question or?
That's helpful. I don't know if you can be, like, more specific in terms of kind of what you're looking at. You know, obviously, the margins, seeing the margins, not maybe moving at the same rate. You know, can you continue to drive margins in the slower growth environment? I guess that's kind of what I'm asking.
It's a little harder. A lot of that will depend on, to some degree, the competitive landscape out there and, you know, what the competitors do with pricing. You know, I want to point something out that, and turn the clock back on something that we pointed out going back into 2006, 2007, 2008, 2009. We had done an analysis, and we said that for every 1 percentage point price reduction, it required 4%-5% increase in volume to offset that price reduction from an EPS standpoint. That's earnings, you know, earnings per share or earnings after tax. With that said, you know, you're doing more volume at a lower price, so therefore your margin suffers.
It might take, you know, twice that much more volume to keep the margin where your margins are. That's just for a mere 1% reduction. I remember distinctly some competitors back in the days chopping prices 15% to as much as 30%. If you go back and look at the history, remember what happened to the operating ratios of some of the players in our industry, look at where they are today, frankly, they haven't gotten it back. You know, it requires a tremendous investment in this business, and strong margins to afford to play and to afford to provide the best service. I just hope that, you know, we don't get into some kind of a bad pricing environment.
As we have stated here today, we still believe the market is relatively stable, you know, and things are good in the pricing environment.
So far you haven't seen competitors really trying to undercut you in price so far, it sounds like.
No, it's, you know, that happened has always happened, from time to time, from place to place. You know, especially so where, you know, a competitor is not doing business with a particular account, and they don't understand the cost of that account. They don't understand what the freight's all about, and they just, go in and put in a price to try to get the business. Then they later discover, whoops, the price was too low, and now we need to raise the price up. That's when the customers turn around and come back, to us, for our strong service product.
Okay, that's a helpful explanation. Thank you.
Next from BB&T, we'll go to Tom Albrecht.
Hey, guys. I was wondering a couple of different things. You know, when you try to manage labor, I was wondering if part of the challenge in the fourth quarter was the natural inclination is to expect the last four or five weeks before Christmas to be a bit busier. I'm sure some of your customers probably insinuated that. You probably staffed a little bit higher in anticipation of that. Was that also a factor, besides what you've already described?
You know, we pretty much reached peak staffing by the end of September. You know, historically, you know, you see a little fall off in October per day, it comes back up a little bit in November, it falls off a certain amount in December. We, you know, held the line on hiring any more people during this fall season and actually had a little bit of attrition going in all the way into December, maybe from the level we were at in September. Not much, but we manage our labor, you know, day in and day out and by the hour. You know, I'm not. Our productivity in the fourth quarter in terms of shipments per hour, we're still very strong.
I don't think we were squeezed too bad on the, on the labor, because we had too many people.
Okay. That's fair. You know, when you talk about spot quotes and transactional business and that, and I know overwhelmingly that's not what you do, but I'm just curious what percentage of your business when it gets softer, kinda, you know, is oriented towards that end of the market versus maybe a year or so ago when it was really tight.
Probably less than 5%. I mean, we try to be more strategic and have it on a relationship basis. You know, the business that we do with our third-party logistic partners is more strategic in nature, and we try to avoid the transactional type of business, so we're forming long-term relationships with people that we can continue to drive growth with.
Okay. My last question would be, it seems like in September, October, maybe early November, there had started to be some pretty aggressive pricing within the 3PL community, but it maybe feels like that has steadied out a little bit. What's your read of maybe back then versus right now and whether it has steadied out?
Honestly, I'm not sure we saw that trend that you're referring to. You know, our relationships with 3PLs are on a individual account-by-account basis within a 3PL's stable of customers. You know, we price each account accordingly, and we just didn't see I don't think we've seen any trend anywhere, any, you know, resembling what you just referred to.
Okay. That's helpful. All right. Thank you very much, guys.
Moving on, we'll go to David Campbell with Thompson, Davis & Company.
David Congdon, I think you talked a lot about the weight per shipment and the trends there. I didn't hear, maybe I missed it, but did you say anything about differences between industries or mix of businesses? The mix of business contributing to the decrease in weight per shipment? Is it just that every shipment, every customer is doing less?
It's a good question. You know, the feedback we get and from the data we have, we think it's a general trend across all the customers. Another point that I'm not sure we as a company or industry even have talked much about is this whole energy industry. You know, that is probably affecting our economy all across the board with what's going on with the price of oil. You would think that the price of oil being down would stimulate more consumer demand than it has. There are some economists who believe that the consumer is gonna pull us out of this slump next year, and perhaps that will be the case.
The industrial economy that supports the energy industry, you know, has a lot of tentacles. We haul What's our percentage of industrial?
About 40%.
About 40% of our freight is industrial. Embedded in that piece are industrial customers that are tied with the energy industry. You know, that's probably where we're seeing some of the business softness.
It's not just industrial that you're down weight per shipment, you're down in other types of business as well.
Correct.
Yeah. Second question would be with the trends in the fourth quarter in tonnage. I don't think I heard you. I heard December was up 2%, I didn't hear October, November. Do you have those numbers?
The year-over-year trends in weight per day were, it was + 4.4% in October, + 3.1% in November, and + 1.1% in December. Those are all year-over-year.
Okay, great. Thank you for answering the question.
We'll go to Todd Fowler with KeyBanc Capital Markets.
Great, thanks. Good morning. Adam, I just wanted to clarify, I mean, the comment on expectations for 20% incremental margins. I think in the past it had been 15%-20%, maybe you've been speaking more recently to 20%, I just haven't picked up on it. Are 20% incrementals what we should be thinking about? If so, is there structurally something different that gives you more confidence with that number versus the 15%-20% prior?
No. I mean, that's just what we're thinking about, that we think we can achieve this year. Obviously that can go up or down depending on, you know, all the variables that go into it. I think we're just trying to be a little bit more targeted with what we think, and we've achieved, rates greater than 20% in the past.
We feel good about what our opportunities are for this coming year.
Okay, that helps. Then maybe just one last follow-up. You know, David, I know there's been a lot of comments or a lot of questions on the weight per shipment, and you've always provided some very helpful color. Is your view primarily that the decline in weight per shipment is something that's been cyclical versus something that's secular? Once we kind of move through, you know, to your point, the softer patch, we will see that weight per shipment start to trend up, then you start to get back some of the margin benefits of the higher weight per shipment versus the what you're seeing in the network right now.
Historically, when LTL weight per shipment goes down, it has been tied to an economic, you know, the economy slowing down.
When the economy picks back up, the weight per shipment, the orders that people order get larger. I do believe part of the weight per shipment decline is due to the soft patch we're in in the economy. Therefore, you know, if we get some economic improvement, you would think the weight per shipment would come back up, and those headwinds that we, that I've mentioned about, would turn around and be a positive benefit for us.
Okay. All that makes sense. Congratulations on the results for the year. I know it was a challenging year, kind of from where we started at this point last year.
Thank you very much.
Thanks, guys.
Next from Baird, we'll go to Ben Hartford.
Thanks, Adam, quick follow-up or just a small item here. The number of working days per quarter in 2016 and 2017, could you provide those?
In 2016, it's 64 in the first quarter, which is one extra [audio distortion] for in the second quarter, 64 in the third quarter, 62 in the fourth quarter. That compares to 63 fourth quarter of 2015. I don't have 2017 in front of me by quarter.
Okay, that's great. Thank you.
Next, we'll go to Darren Hicks with Evercore ISI.
Hi, good morning. Just was curious, in what ways do you believe that your market share gains could benefit any kind of pricing advantage? Like, is that gonna give you more intelligence? I'm not sure if you can kind of muscle your way into better pricing, but just curious if you expect that your market share gains to help pricing in addition to obviously volume.
That's a I'm not sure we've ever seen a correlation between market share gains and what kind of pricing we can get. You know, we're winning market share by winning new customers on board and by winning additional lanes and states and shipping locations and so forth from existing customers. The pricing or program that we have is individual to each customer. You know, kind of when you look at revenue per hundredweight, it's all the result of looking at the whole operating ratio of an account. It's hard to say. You know, you could gain new short-haul lanes from a customer, and the revenue per hundredweight be less than your average, and you can drag down your revenue per hundredweight.
It looks bad from a pricing standpoint, the way that y'all look at pricing. Hell, we might be operating the account at a 75 or 80, you know, on that lower revenue per hundredweight. It's all about pricing to the operating ratio of each individual account. The revenue per hundredweight is merely a result of that, of that type of approach to pricing.
Thanks, good.
I'm not sure if I understood your question correctly, but we don't try to go into a new account by means of pricing, whereas we try to, you know, put a lowball offer in and then anticipate we can get our pricing up later. We try to treat any new account just like an existing account and go through our costing process to ensure that each account is contributing to the overall operating ratio.
Okay. I guess.
We arrive at a fair and equitable price for us and for the customer.
I guess I was just thinking that maybe as you take on more, more volume, that you could have better intelligence on what the best pricing is for any particular account, but you answered it quite clearly. The other question has to do with your employee count. It seems like, you know, the market is pretty healthy, meaning you're expected to grow your employee number 9% or that's what you did in the fourth quarter, with wages up 3.5%. Just trying to look forward, the economy is kinda flat or in a flat year, what would you expect kind of the wages to be?
You don't have to give a particular number, but is there a certain baked in inflation that you expect, for your employees, or is that mostly contingent upon, you know, productivity, results, that are within the company?
We just gave the 3.5% wage increase the first of September. You know, obviously, that'll be an inflationary factor as we go through next year. You know, we've long maintained that a key to our success has been taking care of our employees. Our employees are what drives the results of the company. That's given as best in class service, 99% on time, cargo claims at 0.3%. That is something that is near and dear to our hearts and we believe strongly in. You know, we will always look at and historically have said, so goes the success of the company, so goes our employees' success as well. That's something we look at and evaluate every year.
Typically, it's something that goes into effect in the first of September.
Okay. Thank you very much.
Gentlemen, there are no further questions. I'll turn it back to you for any additional or closing comments.
Well, guys, as always, thank you very much for your participation today. We continue to appreciate your questions and your support of Old Dominion. Please feel free to give us a call if you have any further questions. Thank you and good day.
That does conclude today's conference. We'd like to thank everyone.