奧多明尼昂貨運 (ODFL) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 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 6862987.

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 that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release.

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.

(Operator Instructions) At this time, for opening remarks, I'd like to turn the conference over to the company's Executive Chairman, Mr. Earl Congdon.

Please go ahead, sir.

Good morning, and welcome to our Fourth Quarter Conference Call.

With me on the call today is David Congdon, our Vice Chairman and CEO; and Adam Satterfield, our CFO.

After some brief remarks, we'll be glad to take your questions.

Old Dominion had an outstanding fourth quarter to complete a very strong year of profitable growth.

Building on the accelerated growth that began in September, we produced revenue growth of 19.5% for the fourth quarter.

This growth rate is the strongest we have had since the fourth quarter of 2014, and the overall environment feels about as positive as I can remember.

Given the favorable environment, we continue to believe that Old Dominion is uniquely positioned to win market share in 2018.

We can do this by remaining fully committed to the core business strategies that put us in our unique position, which include providing superior service at a fair price, investing in the success of our employees and continuously investing in equipment and service center capacity to support our growth initiatives.

The disciplined execution of these strategies for more than 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 Congdon to discuss the fourth quarter 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 1,640 new full-time employees.

Of this total, we hired approximately 1,400 in the second half of the year as our volumes accelerated.

These additions have increased the capacity of our employee base and has prepared us well for 2018.

I'll also add that I couldn't be more proud of our team's performance this past year.

We operated with great efficiency in handling our growth, but most importantly, we maintained our superior service standards and won the Mastio Quality Award for the eighth straight year.

This may sound like a broken record at times, but we believe that our ability to consistently deliver superior service at a fair but equitable price has been critical 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 in capacity to ensure that our network is not a limiting factor to our growth.

We reported to you about a year ago that we were feeling cautiously optimistic for 2017 based on customer conversations and improving macroeconomic trend.

I don't know, however, that any of us anticipated that our revenue would be growing at a 19.5% rate to close out the year.

Our revenue growth in the fourth quarter included improvements in both density and yield, which generated operating leverage that allowed us to improve our operating ratio by 90 basis points to 83.9%.

LTL tons per day increased to 14.4% for the fourth quarter, which was our first double-digit increase in 11 quarters, and the pricing environment continued to be favorable.

LTL revenue per hundredweight 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.

The 2018 budget for capital expenditures reflects our expectations for continued growth, as well as our ongoing commitment to giving our employees everything they need to succeed, whether it be investment in their continued education and training or in efficiency and productivity-enhancing technology.

In summary, Old Dominion completed 2017 with substantial profitable growth with the fourth quarter including more actual revenue growth than we have ever achieved before.

We're carrying a lot of momentum into 2018.

We feel like domestic economy is in great shape.

We are confident that the company is well positioned to leverage this momentum through disciplined execution of our proven business model, which we expect will produce additional gains in market share, earnings and shareholder value.

Thanks for your time this morning, and now, Adam Satterfield will discuss our fourth quarter financial results in greater detail.

Thank you, David, and good morning.

Old Dominion's revenue grew 19.5% in the fourth quarter to $891.1 million, which is the highest quarterly revenue we have ever recorded.

Fourth quarter included $13.9 million of non-LTL revenue.

Our operating ratio improved 90 basis points to 83.9%, and our income before tax increased 29.2%.

Earnings per diluted share increased 188% to $2.39 for the quarter.

As we noted in our release this morning, a couple of items related to the Tax Cuts and Jobs Act impacted these fourth quarter results.

These include a special bonus paid for our nonexecutive employees of $9.8 million and the revaluation of our net deferred tax liability that resulted in a net tax benefit of $104.9 million.

Our revenue growth for the fourth quarter once again included increases in LTL tonnage and yield.

LTL tons per day increased 14.4% as compared to the fourth quarter of 2016 with LTL shipments per day increasing 11.4% and LTL weight per shipment increasing 2.7%.

Trend for both LTL tons per day and LTL shipments per day were well above normal seasonality for the fourth quarter.

LTL tons per day increased 2.6% when compared to the third quarter of 2017.

This was the first time since 2005 that our fourth quarter tonnage exceeded the third quarter in the same year.

The monthly sequential changes in LTL tons per day during the fourth quarter were as follows: October decreased 2.5% as compared with September; November increased 4.3% versus October; 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.

On our last earnings calls, we discussed how our year-over-year revenue growth accelerated in September, and we are pleased to report that accelerated pace of growth continued throughout the fourth quarter.

The improvement in the domestic economy contribute 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.

Update you on our first quarter of 2018 trends, our revenue per day increased approximately 19.5% on a year-over-year basis and LTL tons per day increased 14.4% for January.

Operating ratio for the fourth quarter improved 90 basis points to 83.9% with improvement in both our variable operating cost and overhead expenses as a percent of revenue.

Salaries wages and benefit cost as a percent of revenue improved 190 basis points when compared to the fourth quarter of 2016 despite the impact of the employee special bonus.

We will remain focused on matching our labor capacity with growth in LTL shipments during 2018, and we would expect to see changes in our headcount and volumes trend closer together as they historically have.

Old Dominion's cash flow from operations totaled $148.3 million for the fourth quarter and $536.3 million for 2017.

Capital expenditures were $93.3 million for the quarter and $382.1 million for the year.

Based on our anticipated growth for 2018 and the execution of our normal replacement cycle, we expect total capital expenditures of $510 million for 2018.

This total includes approximately $200 million for real estate and service center expansion projects, which should increase our service center network to 235 to 240 facilities by the end of the year.

We returned $8.2 million of capital to shareholders during the fourth quarter and a total of $40.9 million for the year.

Today, we announced that our quarterly dividend will increase 30% to $0.13 per share in the first quarter.

This increase was higher than what we 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.

This concludes our prepared remarks this morning.

Operator, we'll be happy to open the floor at this time for questions.

(Operator Instructions) We will go first to Brad Delco with Stephens.

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.

I'm just trying to figure out where we're going to get the -- where we're going to get leverage in 2018 in this great environment.

Yes.

Thanks, Brad.

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 the 20%, 20% to 25% is probably more likely range.

And it can vary, obviously.

In periods of higher growth, it 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 does -- 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 first quarter and then that accelerating.

But I think we talked a little bit about in the back half of the year that we're playing catch up a little bit with hiring.

And I thought that the hiring that we had planned to do in the fourth quarter to get our employee base where it needed to be might be a bit of a headwind.

But we just had such strong revenue growth in the fourth quarter that, that helped us put more of that revenue growth to the bottom line.

So we felt like fourth quarter was a great quarter in the sense of the growth and what our bottom line performance was as well.

And Brad, I'll add to that and say that the -- our revenue and cost structure is a pretty healthy mix, I'd say.

And as we've said in the past, when we can put additional density across the network with a good yield environment and a decent economy, that our operating margins can continue to improve.

I think that showed up very well in the fourth quarter, 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 and 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 of 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 the -- 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 fourth quarter as well and had some rentals in some places, in which the cost of those are increasing, but we tried to have very little of that.

And I think that we've got a good CapEx plan this year that will address any specific needs, and those are usually localized in any particular place.

We've got 229 service centers now, and we're going to keep -- we've got a good CapEx plan at $510 million and keep adding where we need to, to make sure we've got the necessary capacity.

We'll go next to Amit Mehrotra with Deutsche Bank.

Adam, could you just talk about the sequential change in tonnage in January, both actual 10-year average?

I think you gave year-over-year.

And then just given the growth and pricing dynamics in the quarter, I would've probably expect that incremental margins to have accelerated from where they were in the third quarter.

You did add -- I saw you added 6% year-on-year growth in employees.

Is that employee count now reflective of maybe the growth that you're seeing in January as well and so maybe we can see a reacceleration in incrementals in the first quarter?

Are there other puts and takes in terms of the benefits costs?

Just if you can just help us out, that would be helpful.

At the -- 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 a positive 7% when it's -- the 10-year average is a 3%, and then we performed above trend for each month through the fourth quarter.

So typically, when you got 1 month that far ahead of the average, the next month might be under.

So -- and not complete the price.

But I think our volumes just -- they 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 fourth quarter 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.

But 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 thing I'll point out, Amit, is that mathematically, the higher our revenue growth is, the incremental looks lower for, call it, 1/10 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 from really high incremental margins.

And it's just the mathematics of it, a little bit more than it is the reality.

Yes.

I guess a lot large numbers.

One quick follow-up for me with respect to the market share comment.

The tonnage growth that you're seeing, you talked about kind of a market share, it seems like -- it certainly seems like it's a market share grab relative what it was some of the other LTL companies were 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 the sort of the industrial production, industrial economy?

Any thoughts there in terms of are you seeing those spillover volumes?

Is that -- has that started to occur yet and maybe that's driving some of the very, very strong tonnage growth?

We cannot really identify the spillover very well.

We have spot quotes and things like that, that come in, and those -- a lot of those shipments weigh in the 8,000 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, what, 2.7%.

Is that what it's about?

I think that was the number we reported this morning.

And we think that is more related to the economy improving and buyers ordering larger quantities in their orders because the weight per shipment increased.

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.

We'll go next to Allison Landry with Crédit Suisse.

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 revenues is about 19.5% and then you've got the tonnage number, which was 14.4%.

So you can kind of back into.

But 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?

You did.

Compared to December, our December bumped up, that was the highest.

It was at 1,661 pounds.

It trended back to 1,644 in January.

And so we initially saw that bump in September where we had been continuing to see 1,550 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 '15.

So we think that it's just some heavier weight of shipments, to David's point, on the economy.

And definitely some shippers -- we've got some customer feedback that can't necessarily fine truckload, and it may have been the multi-stock kind of truckload shipments that should've 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 sounds like the December trend, which was what you would characterize as maybe unusual, could've been driven by TL spillover.

Any -- 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 fourth quarter, we probably saw a little bit more revenue growth with retail-related shippers than industrial.

But keep in mind that, 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 the shippers, it changes the conversation from just a discount point on a freight deal from one 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 that go into neighborhoods.

And so we do that business, but we're not really focused on trying to grow residential deliveries.

And we don't -- not to say we won't get into it someday in the future, but it's not our priority right now.

Got it, that makes sense.

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 in either 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&D and line-haul operations.

In the most recent quarter, our P&D shipments (inaudible) were up about 2%.

Our line-haul load average was up just a little under 2% as well.

Probably the biggest opportunity for us next year is on the dock in the fourth quarter.

Our dock shipments per hour were down about 3%.

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 improvement there, and so we certainly would expect to see it.

But I mean, overall, for cost inflation going into next year and that 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%.

And 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 the target increases that will offset that cost inflation for us.

We'll go next to Ari Rosa with Bank of America Merrill Lynch.

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 into and kind of what the breakdown was between sales versus dock versus drivers.

And then remind me again what's the usual time line for those -- for kind of a new hire to ramp up to full levels of productivity consistent with kind of experienced hires.

Yes.

I mean, it was mainly productive labor with drivers and our dockworkers 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 first quarter.

So we saw acceleration in the second, third quarters and then a pickup again in the fourth quarter.

And so we were -- like I mentioned before, we were just kind of playing catch-up a little bit.

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, a 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 drafts and all that stuff, it takes time to learn how to put the puzzle together as you're loading a trailer and to do it in -- and do it quickly like the old-timers can.

It could be 6 months before someone becomes really productive.

And then over the next year, they even become more productive but not quite as the rate -- at the rate that they would have in first 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 bit 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 x 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 team 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 in a way.

We'll go next to Chris Wetherbee with Citi.

Want 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 x 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 or pull the 2 of them apart and think about it more specifically to LTL?

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 addressed.

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 2000, our revenue per hundredweight 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 base.

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 may be -- our own cost inflation may be between 4% to 4.5%.

So we'll have to target that.

And then again, we'll address on account-by-account basis any that are underperforming where we think they'll be or where they should be rather.

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.

No, that's helpful.

That's actually very clear.

I appreciate it.

Wanted to ask just a question on that sort of cost inflation.

You've mentioned in the release about some employee benefit 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 maybe some numbers around what you're actually seeing on that, 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 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 onetime bonus that we paid in the fourth quarter.

We will have ongoing expense, and that's related to -- you can take the change in our net income related to our old effective tax rate, that it's been around 38.5%, to the what our new effective tax rate is, and we think that'll be around 26.5%.

And so we've historically provided 10% of net income back to employees in their 401(k) plans.

So there will be ongoing costs related to that.

I mean, obviously, on a net-net basis, the tax change will benefit significantly our bottom line.

And we think it 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.

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 and infrastructure.

That could come through in the form of fuel taxes that -- we still have some uncertainty that's hanging out there in terms of some taxes that we may get hit with.

We'll go next to the Ravi Shanker with Morgan Stanley.

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 smaller carriers?

I believe some of them -- some of the regional players were having some difficulties about 6 months ago.

Have you seen that accelerate?

And is that the source of the share gains?

Ravi, I -- there's -- 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 gotten strong growth happening everywhere.

So I'd say it's really across-the-board.

There's no one particular carrier or one particular region.

Okay.

And then in terms of that growth -- sorry if I missed this.

But did you -- do 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 tax 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/ (inaudible) up to speed on what are you 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 are honestly more questions than there are answers with electrification and with hydroelectric and with tuning.

And there's more questions and answers, and we're not jumping into anything at this point.

We'll go next to Todd Fowler with KeyBanc Capital Markets.

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.

Adam, I know that you gave the sequential trends between January and December.

But I'm just curious, your experience here during the year in January, were there any unusual trends from a weather standpoint or from a holiday standpoint?

Or has freight seemed pretty consistent here for the first 4 or 5 weeks?

Freight'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 -- and when you look at our 10-year average sequential trends, the bad Januaries are in there as well as Februaries.

And 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 to 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, that felt like.

Okay.

Good, that helps.

And then just as far as commentary around purchased transportation and the increased rentals.

And I noticed a percentage of your cost base sits lower than your peer group.

Would you expect that to normalize in the first half of '18?

Or is that something in the second half of '18?

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 1,400 people we have added in the second half of the year.

We've -- we saw freight strong in December, and it was an unusual time because we were actually hiring in December.

And that's -- 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 had the foresight to add the people.

Okay.

And David -- go ahead, Adam, I'm sorry.

I was just going to add that while we increased the purchased transportation a little bit last year to supplement, as necessary, it was really only about a 10 to 20 basis point kind of increase from the year before.

It was -- most of our purchased 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 the stuff I wanted to ask David was that 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 our 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.

We'll go next to Matt Brooklier with Buckingham Research.

Adam, could you talk to where the service center account ended the year and then maybe also talk to your expectations for opening new service centers in '18?

Yes.

We finished the year with 229 facilities, and I mentioned in my comments, with the CapEx plan for this year for real estate, it's about $200 million.

And we think that we'll get -- maybe finish the year with somewhere around 235 to 240 facilities in place, and a lot of that's just subject to timing, completing projects and so forth.

Okay.

So that would be an increased pace, I guess, in terms of service center openings when compared to '17.

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 a pretty significant amount.

Obviously, you guys are growing.

Could you talk to maybe roughly how much of that incremental CapEx is being put forth to grow your fleet versus replenishments?

So 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 having, and this is across like broader trucking, adding a lot of trucks for 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 '18?

And if you look, we kind of average replacement cycle as maybe $150 million or so on the tractors and trailers side, and that varies each year based on what we did 10 years ago.

But that can get larger because the fleet's 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's 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 million 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.

We'll go next to Jason Seidl with Cowen.

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 that pushed freight towards the LTL sector.

How should 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 third quarter?

That's a real crystal ball question.

What do you think is going to happen?

Well, I -- look, I think it's kind of a little funky there with the 2 storms, but we'll have to see.

I mean, you -- obviously, you guys did a great job in handling the freight in the business, and clearly, the pricing environment looks pretty favorable for you guys.

The other question I had, could you remind us about your working days in the quarter on a quarterly basis throughout 2018?

Yes.

Hang on one second now.

That we -- so we'll have 64 days in the first quarter, 64 days in the second quarter, 63 days in the third quarter and 63 days in the fourth quarter.

So the first 3 quarters line up to last year.

The fourth quarter will include 1 extra work day.

We'll go next to Willard Milby with Seaport Global Securities.

Wanted to kind of look at some expense lines.

I guess insurance and claims stepped up here Q3 to -- Q4 to -- 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 of Q1?

So in the fourth quarter each year, we conduct an annual actuarial study, and there occasionally will be adjustments that we make to the valuation on prior year claims.

And so I think what we had this year in the fourth quarter was maybe a slight unfavorable adjustment, and then the fourth quarter of '16 was probably a slight favorable.

This year was slightly unfavorable versus last year being slightly favorable, if I said that correctly.

But yes, 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.

And those -- the 2 costs that are in that line item are auto liability claims on highway incidents and in 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 fourth quarter, and it's been in that 0.2%, 0.3% range for most of 2017.

All right.

And I guess 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 onetime or nonrecurring stuff that shouldn't happen again in Q1?

And what kind of went on here in Q4?

So it stepped up a little bit this year and not necessarily onetime, but that item does include multiple things or probably some increased consulting expenditures that were in there.

Any types of gains or losses are reported in that line item as well, and I think we had some losses as we disposed of some older equipment in the fourth quarter that added a little bit of expense.

Okay.

And I guess kind of going back to the terminal additions here in '18.

I know historically, we kind of looked at 2 to 4 a year and kind of stepped 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 under your current footprint and maybe this year is just a bit of a different strategy?

It was across-the-board.

We have facilities that we have land that we can expand, and we have some where we have no land and we have no choice but to go and buy land and build a new one.

Some of our large markets, like Chicago and L.A. 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 peddle 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 these service centers, is -- are you adding kind of, I guess in the bigger markets, adding a third to a second?

Or are you kind of seeing more of the smaller cities getting a second terminal just 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, in states where we're running long peddle runs to deliver into and serve a particular market.

So some are new and some are within existing markets.

We'll go next to Scott Group with Wolfe Research.

So I know YRC's out with a GRI, I think, takes us back to next week or 2. Do you guys have plans to do a similar kind of February, March GRI?

We have not made any decision on that as of yet.

Do this 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 nobody else has followed yet.

But it's -- 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 that aren't fast and now YRC with the GRI by itself, do you think that -- can you tell us 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 ORC because of labor negotiations, and we're certainly not trying to go out and target them because of it either.

So -- 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 first quarter?

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 that -- 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 fourth quarter.

And on a year-over-year basis, that's about where we're trending right now in the first quarter when it's bringing it 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 a earnings tailwind for you anymore.

I think that -- yes, I think that's a good way to say it, the way you did.

But we try to address up and down the spectrum on the surcharge tape on it.

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 its increasing now, but fairly steady range.

We'll go next to Ben Hartford with Baird.

This is actually Zach Rosenberg on for Ben.

So I just have one.

Thinking through the dividend increase, maybe it being a little bit higher because of the Tax Act, just trying to think through and 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 use of the cash.

Yes.

We -- 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 a tax change, we felt like it was necessary to maybe increase it a little bit more and evaluate it just like we were putting the program in place this year, 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've initially thought it was going to be for the year.

But -- so that'll just be one of the many elements that we continue to evaluate.

And the buyback program, we bought back less shares last year.

And we primarily buy on 10b5 basis and the valuation, and we've got a grid that works.

We felt like the stock price was baking in some element 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.

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 and 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.