奧多明尼昂貨運 (ODFL) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter and 2018 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through February 15, by dialing (719) 457-0820.

The replay passcode is 6987290.

The replay may also be accessed through March 7 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 publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Please go ahead, sir.

Good morning, and welcome to our fourth quarter conference call.

With me on the call today are Greg Gantt, our President and CEO; and Adam Satterfield, our CFO.

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

I am pleased to report the strong financial results for Old Dominion's fourth quarter.

For the third quarter in a row, we exceeded $1 billion in revenue and also produced an operating ratio below 80%.

This performance capped off an extraordinary year for Old Dominion, setting new company records for annual revenue and profitability.

Financial results for the quarter and the year reflect the consistent execution of our growth strategy.

We believe our ongoing ability to win market share is based on a value proposition of providing superior service at a fair price to shippers, while also continuously investing in our service center capacity to support our long-term growth.

We also continue to invest in our OD family of employees, and we are proud that our team provided customers with 99% on-time deliveries and our cargo claim ratio of only 0.3% of revenue for the fourth quarter.

While there has been some recent disruption to the domestic economy associated with political issues, our outlook continues to be positive for 2019 based on feedback from our customers and other macroeconomic indexes.

Pricing environment remains favorable and a strong domestic economy should support our ability to increase volumes and network density.

Even though 2018 marked one of the best operating years in our company's history, we look forward to the opportunities for yet another year of continued growth in revenue and profitability in 2019.

And now here is Greg to provide some more details on the fourth quarter.

Thanks, David, and good morning.

The OD team delivered once again in the fourth quarter, producing an increase in revenue of 15.2% and an increase in pretax income of 51.1%.

The financial results for the quarter and the year demonstrate our team's successful execution of our strategic plan that has been in place now for many years.

The plan is centered on our OD family and the relationships our employees build with our customers.

To maintain and strengthen these customer relationships generally requires the power of a promise, a promise to provide superior service standards, while also providing customers with the capacity, technology and flexibility to help them grow and be successful.

The freight industry has always been about relationships and each member of the OD family understands this concept, as we serve our customers' needs.

Being able to keep the promises made to our customers require significant and ongoing investments in our employees' capacity and technology.

Our yield management philosophy is designed to help support these investments while also offsetting our inflationary cost increases, and understanding of cost is particularly important as we add new customers and expand our service center network.

Our revenue per hundredweight, excluding fuel surcharges, increased 6.9% in 2018 and this was the key component of the overall improvement in our operating ratio during the year.

Having now produced an operating ratio below 80% for 3 straight quarters and a sub-80 OR for the year, we believe we can continue to drive the operating ratio even lower.

We have long maintained that a focus on density and yield, both of which require the support of a favorable macro environment of the key ingredients for long-term improvement in our operating ratio.

Driving additional volumes through the existing service center network improves network density and the resulting operating leverage allows us to improve our existing service center's efficiency, which positively impacts the company's overall operating ratio.

Given our confidence in winning additional market share, we intend to expand our service center operations beyond the existing network of 235 service centers.

Our fleet, we were able to add 7 service centers during 2018, and we plan to open another 10-or-so service centers in 2019 depending on the timing of construction projects.

We believe these additional service centers as well as the expansion of some existing facilities will increase the overall average capacity within our network to ensure that it is not a limiting factor to volume growth for the next few years.

We will focus on all of the previously mentioned initiatives in 2019, and we will also have an opportunity to regain some lost ground relating to the productivity in our operations.

With opportunities to further improve revenue and our cost in 2019, we believe Old Dominion is in a unique position to continue delivering industry-leading profitable growth.

Our outlook for customer demand trends in the economy continue to be favorable, which gives us confidence in our ability to produce further gains in long-term earnings and shareholder value.

Thanks for joining us this morning.

And now, Adam will discuss our fourth quarter financial results in greater detail.

Thank you, Greg, and good morning.

Old Dominion's revenue increased 15.2% to $1 billion for the fourth quarter, and our quarterly operating ratio improved to 78.7%.

As a result of these factors, our net income before tax increased 51.1% to $217.4 million.

Our earnings per diluted share, however, decreased 18.4% to $1.95, due primarily to the $104.9 million net tax benefit included in the fourth quarter of 2017.

I was pleased with our fourth quarter revenue growth, which once again included increases in both LTL volumes and yield.

Slight slowdown in the pace of our revenue growth as compared to the growth that exceeded 20% for the first 3 quarters of 2018 was primarily due to the significant acceleration of revenue that began in the fourth quarter of 2017.

Our LTL tons per day increased 2.9% as compared to the fourth quarter 2017 with a 6.5% increase in LTL shipments per day that was partially offset by the 3.3% decrease in LTL weight per shipment.

As we detailed in our third quarter call, we expected this decrease in weight per shipment and also expect a similar trend through the first half of 2019.

On a sequential basis, the trend for both LTL tons per day and LTL shipments per day was in line with normal seasonality.

As compared to the third quarter of 2018, LTL tons per day decreased 2.3% and LTL shipments per day decreased 4.1%.

Our fourth quarter operating ratio improved 520 basis points to 78.7% and included improvement in both our direct operating costs and overhead expenses as a percent of revenue.

390 basis points of this change was due to the improvement in our salaries, wages and benefit costs as a percent of revenue.

While we hired significantly through the first 3 quarters of the year, as reflected in the 14.2% increase in average headcount, our full-time headcount at the end of December was slightly lower than that of at the end of September 2018.

Our team will continue to manage workforce capacity with anticipated shipment trends as we always do, and we currently believe that our workforce is appropriately sized.

Old Dominion's cash flow from operations totaled $224.7 million and $900.1 million for the fourth quarter and 2018, respectively.

Capital expenditures were $118.4 million for the fourth quarter and $588.3 million for the year.

Based on anticipated growth and the execution of our equipment replacement cycle, our capital expenditures are expected to be approximately $490 million for 2019.

This total includes $220 million to expand the capacity of our service center network.

We returned $97.2 million of capital to our shareholders during the fourth quarter, including $86.7 million in share repurchases.

The total amount of shares repurchased and dividends paid for the year was $205.8 million.

As noted in this morning's release, we are pleased to announce that our quarterly dividend will increase 30.8% to $0.17 per share in the first quarter 2019.

This allows us to maintain a similar dividend payout ratio as the prior year.

Our effective tax rate for the fourth quarter of 2018 was 26.6% and was 25.7% for the year.

We currently anticipate our annual effective tax rate to be 26.0% for 2019.

For an update on our revenue growth for the first quarter of 2019, January's revenue was impacted by severe winter weather over the last 2 weeks of the month as well as the negative impact on the broad economy related to the government shutdown.

While there is no way to truly quantify the impact of these factors, our revenue on a per day basis increased approximately 8% for the month.

While it's still very early in February and political risk continues, revenue growth for the first few days of this month has averaged approximately 10%.

This concludes our prepared remarks this morning.

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

(Operator Instructions) And we'll take our first question from Chris Wetherbee from Citi.

I wanted to maybe pick up on some of the comments that you made about the improvements you've been able to make in the operating ratio and maybe get a sense of sort of how you're thinking about the potential going forward?

I know you don't like to give guidance around this and so happy to kind of talk about this in more general terms, either on sort of shorter term next couple of quarters or may be bigger picture taking a step back and think where you can go over the next couple of years, but clearly there's been significant progress in pricing, but also efficiency on the operating side seems to be driving it.

Can you give us a sense of maybe what you think the business is now capable as you look forward?

Sure, Chris.

As we mentioned, we don't want to give specific guidance at this point in terms of how low we think the operating ratio can go.

There were definitely some factors in the fourth quarter that helped us from an OR standpoint, especially when you look on a sequential basis versus the normal third quarter to fourth quarter trend.

But I think it's important to point out that for the year, the operating ratio improved 310 basis points.

And really when you go back in time and look, it's pretty incredible what we're able to achieve this year, and it really compares the type of improvement we had coming out of recession.

And I think, it does get at the heart of what we always talk about, from a big picture standpoint, continuing to focus on density through the network and improving yield and those 2 factors combined together helped in this regard.

And I think our costs pretty much came in line with what we expected this year, but from a revenue standpoint, we certainly had more volumes, I think, than we anticipated going into the year as well as the yield performance was really strong as well.

Going forward, obviously we'd like to see the same type of mix continue from a top line standpoint, but the yield performance that we had this year is probably not going to continue long term and it's certainly not in line with what our long-term trends have been either.

We generally have more of a balance and weighted, including from a shipment standpoint than the yield.

But I think that we've certainly got continued opportunities to grow market share and that will continue to drive the business through the existing network.

We'll continue to add capacity, and we'll continue to look at putting as many dollars on the bottom line as we can from the revenue growth that we're achieving.

Okay.

So there's no real sort of view that this should be a stopping point though for you from an OR perspective as we look at the 2019?

Not at all.

And I think that's why we've tried to, in Greg's comments, repeat that when we look out over the system and see that the operating ratio improvement that we're seeing at the individual service center level, the ongoing improvement that we can believe is we're adding capacity to these centers.

That trend can continue and it's generating phenomenal incremental margins for us.

I'll add, this is David, that just the quality of the business that we have and the way it's generally priced and our mixture of variable and fixed cost in our overall financial structure just lends itself to the operating ratio being able to improve.

It's additional density and a rational pricing environment, which we believe we have, with a little help from the economy, which we believe we'll have.

That density across the network should yield some improvement in margins going forward, and we just feel strongly about that.

Okay.

That's very helpful.

This is Greg.

To keep in perspective, that 310 basis point improvement in 2018 was versus a record year in 2017.

It was the best year we'd ever had at that time.

Yes, certainly very impressive.

In terms of -- just a follow-up on sort of the trends that we're seeing now, can you give us tonnage numbers for what you saw in January?

I'm sorry, if I missed them.

And then obviously it sounds like February, at least a couple of first days have improved.

Can you just give us a sense of where volumes are trending Jan-Feb, that would be great.

Yes.

Chris, I intentionally left out the volume number, and the reason for that was I felt like last year as we moved through the year, there was so much focus on the calls in terms of where we were from a short-term perspective and, honestly, had a few investors suggest that, that we shouldn't give the data any longer.

We'll continue to put that detail in the Qs and K, but we felt like let's just talk about things from a broad perspective in terms of revenue and we're seeing revenue now at the double-digit pace, like I mentioned, at about 10%, and it's early in this month and each day continues to be impacted by weather.

January was the same and really it was more of -- every year, we deal with winter in January, it's not a onetime event, but the difference that, I think, impacted us and other carriers this year was the magnitude of the storms that moved through really the last week of the month where your freight volumes are typically building.

But we're starting off the year in a good spot and we feel optimistic and, like we mentioned in our prepared comments, a lot of that optimism is based on macroeconomic trends that we see as well as the customer demand trends that we continue to get reports from our sales team on.

So we feel like we're in a good spot starting the year out with strength.

And we'll take our next question from Allison Landry from Crédit Suisse.

I wanted to ask about the headcounts.

You mentioned the workforce is appropriately sized.

So is the Q4 average headcount a good run rate to use for 2019?

Or do you expect a little bit of variability there in the quarters?

And then could you comment on your driver turnover sites in Q4 versus Q3?

I think where we are today with the headcount, think about going all the way back to '17, we got behind our growth a little bit.

Last year, we were playing catch-up, and I think that's why we saw the headcount growth exceeding that of our shipment volumes.

Over the long term, those 2 generally are fairly close together.

I think where we are, we're continuing to evaluate and we do this on a daily basis at each of our service centers, what the labor force looks like that's managing the freight.

And I think, we're in good shape overall.

We'll probably have some service centers that are making additions and some that are staying flat.

I think the point is, normally by this point and like in the fourth quarter, for example, we're typically increasing the workforce.

It generally averages about a 2.5% increase from the third into the fourth quarter as we're getting everybody on board and ready for the next year's growth.

And then that increases slightly as we go through the first quarter.

I think what we realized was by the fall of last year, and we communicated this on the last call, we felt like we were in good shape then.

So we've kept everybody in place because we're still anticipating growth.

I think that we can hold the headcount fairly steady in the early part of the year, but anticipating growth.

We will have that higher, and we'll see some net additions later in the year.

I just think, by the time that we get to the middle point of the year, hopefully when you look at a longer-term basis, our headcount growth is more in line with what the shipment growth looks like.

And some of that will depend on, are we gained on productivity as well.

From a turnover standpoint...

Okay.

With respect to the...

Go ahead.

No, no, go ahead.

I was going to say, to answer your turnover question, by the end of the year, we were -- the turnover rate was 8% on average for the company, and then about a little less than 1/3 of our drivers actually come through our in-house driver training program and -- for those graduates that was between 5.5% and 6%.

Okay.

Excellent.

And then on the service center side, I know you mentioned the expectations are open about 10 this year, I think you opened 6 in 2018.

How do we think about the headwinds from the startup costs related to the service centers?

Would you expect there to be meaningful headwind going from 6 to 10, or do the productivity benefits and ability to handle more tonnage, does that off -- (inaudible) to 6, will that offset any costs that come from the additional 10?

Allison, I think, our ability to better service our customers and gain market share surely should help meet some of the additional expense.

There are some startup expenses that we can absorb, but in the whole scheme of things, I don't think it's going to be significant.

And we'll take our next question from Amit Mehrotra from Deutsche.

Adam, I guess, everyone is concerned rightfully or wrongfully about when the downturn in volume and yields will come for the general LTL sector.

So I think it would be helpful maybe if you could help us think about how Old Dominion is positioned in that kind of opposite environment to what you're seeing now in terms of the 10% revenue growth in January.

Certainly you showed stellar performance in '16 in the last industrial recession, but where specifically you had the opportunities on the cost side to limit decremental margins that come with negative revenue growth?

Do you guys think you can still be in kind of the low 80s OR environment of a medium and more severe downturn?

I guess, you have to just look back at how we've reacted in the past and what our plan has been in prior slowdowns, and '16 obviously was an industrial slowdown and we had flatness overall with the revenue and then you go all the way back to the recession area environment and that's '07 to '09 period.

But we stick to the same strategic plan that we've always stuck to.

We stay focused on our yield management practices, trying to continue to serve our customers well and keep service metrics high, so we can really give our customers a value proposition that may be more important in a slowdown and a slower time than when things are busy.

If we can take the total cost of transportation down by providing 99% on-time service and 0.2% to 0.3% claims ratio, that can ultimately save cost.

The trade invoice might look a little bit higher, but overall cost of service might be cheaper for customers.

So that's the big thing and then we'd also look at any potential opportunities from a long-term standpoint for any service centers that might become available as competitors and others might be looking to sale facilities and generate cash flow.

So we look at any opportunities that may present themselves in that regard, but I think that the way we manage cost, the way we manage our labor cost on a day-to-day basis, we've obviously got opportunity from a productivity standpoint.

We lost some productivity across our operations last year, despite the fact that we're very efficient.

We lost a little and I think we can regain that.

So there's multiple things that we can go through and look at and ultimately we'll be trying to protect the bottom line, and I think when you look back in prior downturns, that's what we've got a history of doing.

Right.

Okay, that's helpful.

And just one as a follow-up, trying to understand conceptually how incremental margins evolve as shipping growth continues to eclipse tonnage growth.

I would expect costs to more closely follow shipment growth, clearly that hasn't been the case in 2018.

So if you can just help us think about that and maybe your expectations for how operating expenses or OpEx should trend as a -- relative to shipment growth in 2019 or OpEx relative to shipment in 2019?

Sure.

Yes, I think when we started the year, I gave the -- last year at this time the forecasted, I felt like, cost on a per shipment basis, excluding what yield would do, would be up about 4.5% and essentially that's how we ended up -- granted, when you grow in shipments, you're bringing on new business and each new business levels might have different pickup cost, delivery cost or different element of line-haul costs, but ultimately we're trying to manage all of those things and came in line essentially with where we thought we'd be.

Might expect a similar type of increase as we go into 2019.

I'm expecting somewhere around that same kind of 4.5%, excluding the fuel on a per shipment basis, but ultimately we'll be trying to manage every dollars as best we can.

The biggest component of that inflation is the 3.5% wage increase that we provided to employees in September.

We'll take our next question from Brad Delco from Stephens.

It seemed like you talked a lot about volumes driving additional density, and the question I want to ask is, what does density really mean?

And where I'm going is, I assume your load average is already pretty high in this environment.

And so what benefits does additional density give you?

Is it loading more directs?

Does it cut out dock handling?

Just kind of explain that if you don't mind.

I think there are several different aspects of density.

The one that, I think, first comes to mind is certainly, it'll help us on the pickup and delivery side.

We should have shorter distances to get to our customers.

It certainly improves the service that our customers see, the response times that they see.

So that'll help us.

Load factor, sure, it can help if we grow our business.

We've got an opportunity to improve our load factor and hopefully you can make more directs.

Now there is a downside to open additional facilities also that comes with making directs, if you think about it, because you're spreading out tonnage.

Until you grow back into it, you're spreading out the tonnage over more locations.

So we'll deal with that as we go, but we typically -- you'll see a dip and then we'll get it back over the course of time.

But we've seen nothing but success with opening additional facilities.

So I don't expect anything different.

I think the biggest thing is getting closer to our customers and the response that we can give them versus our competitors and what not, but that's the real advantage.

So there is still room though on terms of your load factor to improve that?

Absolutely.

We'll never get to Utopia from a load factor standpoint.

That will never happen.

And then a quick one for...

I missed that, Brad, excuse me.

Sorry, guys, I think the headset was dying on me.

Are you still there?

Yes.

And then a quick follow-up for, Adam, if you don't mind.

The reduction in the fringe benefits, was that related to the phantom stock?

And can you quantify what that was on a year-over-year basis in dollars?

Sure.

That was a part of it, Brad.

We have and we put this in our 10-Ks, but there's about 356,000 invested shares stock and we remeasure the phantom stock, we remeasure that every quarter, as you know, based on the 50-day moving average of our stock, and so with the drop in our stock price during the third to the fourth quarter, that was about a little over $8 million favorable impact in the quarter.

So that was part of it.

We also have an annual remeasurement of our workers' compensation liabilities.

We get through an actuarial process in the fourth quarter for that and for other claims as well and that was a favorable entry as well.

So we put that number in the release and certainly that was a big part of it.

If you recall, I think, at the beginning of the year, we felt like the fringe rate would be 34% to 34.5%, that's our fringes as a percent of salaries and wages.

Going into next year, I'd expect the same kind of average for the year.

I think that you'll see probably some choppiness in the first quarter that might be a little bit higher, especially if our stock price recovers somewhat from where it was low, closing out the year.

We'll take our next question from Jason Seidl from Cowen and Company.

I want to talk a little bit about looking forward in terms of how OD is going to stay at the top of the market?

One of the things, I think, over time that you've clearly been at the forefront has been technology.

Can you tell us a little bit about any new initiatives that you had planned that are sort of going through the system right now that'll keep you guys up on top?

Jason, I think that technology has been key for our operating efficiency over many years, and we're always looking at implementing new technologies and improvements.

Our foundation for success, a key piece of that is continuous improvement and that applies to all areas of our operations.

So I think we'll continue to look at tweaking our operational technologies, to improve dock efficiencies, our P&D efficiencies and we're looking at ways really to improve a lot of our processes here in the corporate office.

And so if we can continue to drive process level improvement, it may save us costs, but ultimately what we're trying to do is improve customer service and that may be anything related to just getting better information from a billing process out to our customers and improved shipment visibility as well.

So we're going to continue to invest.

I think we spend generally about $20 million to $25 million every year in technology, and a lot of that was all designed to try to improve our operating efficiencies.

Okay.

I guess, the next question, it was brought up before.

People talk about a slowdown.

Have any of your customers indicated to you that there was a pull forward for some of their business due to the tariffs that are set to take place on March 1?

We hadn't heard that at all.

We started getting that question last year quite a bit and polled our sales team and we got no such response.

It's more deer in the headlights kind of look.

We'll take our next question from Ariel Rosa from Merrill Lynch.

So first, I want to touch on seasonality.

Typically, I think, over the last couple of years, you guys have seen about a 200 basis point deterioration from third quarter to fourth quarter in terms of the operating ratio.

Just wanted to get your thoughts on, has something changed in terms of shipping patterns or customer behavior that maybe changes that dynamic going forward?

Or was there something unique this year that or for 2018 that caused it to be so much smaller than the historical trend?

A big part of it, we were essentially flat, just up 30 basis points, but that discussion we just had on that fringe benefit rate, that was probably about 1.5 points, maybe slightly more when you look at where our fringe rate was in the third quarter going into the fourth.

So that gets us close to that sort of 200 basis point mark, but the last few years has actually been higher.

We've been about 240 basis points or so the last 3, 4 -- 4 out of the last 5 years.

So we're certainly pleased.

And I think that just like we've seen all year, we just continue to have quality revenue growth coming in throughout the year and strong yield performance and so that's just allowed us to continue to improve cost across the board really.

Got it.

That makes sense.

And then historically, I guess, if we go back a couple of years, you guys have talked about a long-term goal of achieving double-digit market share.

You've obviously gotten to that point.

Looking forward, I'm wondering is there a limit to the growth potential in terms of -- obviously, the way you guys price your product, it is done at -- looking for a premium in terms of the quality of the service that you provide.

Do you think there's a limit in terms of how -- customer willingness to pay that?

Or how big market share could get?

Do you bump up against a constraint in that regard at some point?

I think so.

We certainly don't see or feel any limits, and part of that is we don't want our prices, it all kind of comes back full circle.

You go back to the technology discussion we were just having and driving efficiency in our operations.

We can continue to drive efficiency and keep our costs lower.

The price to market is not always is big of a gap between us and our competitors as what might have seen when you compare our operating ratio.

So we're doing everything we can to keep our cost in check, but certainly we feel like we're investing heavily and servicing our capacity to be able to continue to grow and that's a key part of it.

If we don't keep adding the capacity, that could become a limiting factor to our growth.

But when we look out, the #1 carrier in terms of size in the industry is about close to 20% in the market.

So I think that, that creates a bogey that you can say certainly we can sort of keep setting our sights out further ahead from where we are today.

Great, that's really helpful.

And just a quick follow-up on that point.

In terms of the service center footprint, hypothetically if you were to get to that 20% market share target, could this current service center network handle that capacity?

Or where would you have to get to in terms of investments or expansion to meet that target?

We couldn't handle what we have today, not by any stretch.

So we would have to continue to increase capacity.

That took us a lot of years to get to where we are today.

So I'm sure it's going to take a while to get to double our market share, but we would absolutely have to continue to add capacity.

I think we're doing that today.

We're adding it at a pace that doesn't cripple us.

From an operating standpoint, we're adding it at a pace that we can handle that makes sense and continue to meet our customer needs.

So...

We've got to be methodical and do it selectively.

It will take more service centers and larger service centers, and we keep a good gauge on the door pressure at every service center and look at it continuously and try to look at it over a long range so that we can get ahead of need and try to acquire land and build and so forth before we run out of capacity.

That's been our practice and will continue to be our practice going forward.

We'll take our next question from Matt Brooklier from Buckingham Research.

So a pricing question.

If you could maybe provide a little bit of color in terms of your expectations for contract rate increases?

I think in a relatively healthy economy, you look for something in a 3% to 4% range, but was just curious to get your thoughts on what increases could look like this year?

Generally, we try to -- our long-term practice has been to go out and seek increases that cover our cost inflation.

So I just mentioned that we think that cost inflation may be in the 4.5% range.

So that will be the starting point typically too, that will sort of get all tied into whatever the general rate increase might be for the year and so that'll be sort of the basis point, if you will, and starting some of those conversations.

But some of it just depends on what the environment's like.

We made this past year the revenue per hundredweight.

The yield improvement was stronger.

A lot of that was in addition to core increases and consistent increases, which the consistency is very important to our customers, but we brought on a lot of new accounts and took on new business with accounts and in some cases, it had higher cost to handle.

And so that was part of that overall increase in the yield this year, that 6.9% increase was more than just core price increases, if you will.

Okay, that's helpful.

And then some of your competitors have already announced the GRI.

Just curious to hear if GRI could be in the cards for you guys?

It will be, but we have not made any decisions on it as to when -- as to what or when.

Okay.

And then just last question.

If I look at your targeted CapEx for this year of $490 million, it's down about $100 million, it's a pretty big swing.

Wanted to hear your thoughts on, if that $490 million number could look a little bit different depending upon the environment, let's just say, you grow at a faster-than-expected rate.

What could that number look like?

And then I'm assuming it's not going to be above $100 million.

But the message here is you probably have incremental free cash flow, right, in '19 to potentially deploy, I think the dividend increase ate up about $10 million of that, but what are your thoughts on deploying cash in '19?

So the CapEx question, we typically are spending 10% to 15% of our revenue into our CapEx every year, and it's a little bit lower than last year and it's primarily in terms of the tractor and trailer piece of the [truckload].

That fluctuates every year replacement -- the replacement need fluctuates every year and then, obviously, we've got a growth component that kind of gets all baked into that number as well.

And I think from where we've been on our replacement cycle the last couple of years, we probably don't have as many replacement units in the tractor pull, if you will, this year.

The average age of our equipments improved.

It's about 3.5 years now.

So we've had nice improvement in the age of the fleet over the last couple of years.

And I think we're in a good shape there.

So -- but we have flexibility to your point and we've done this in years past.

The volumes come in stronger than what we anticipate.

We typically, with the relationships we have with our OEMs, we can go back to them and increase orders, and we don't have a major history of [this] but if, for some reason, if they weren't as strong, we certainly can cancel some orders as well.

And we can flex with our trade equipment, taking some of the replacement trucks and holding onto them longer, should we see a surge in business in the fall, for example, greater than what we anticipate.

Okay.

And then just following up on the potential for incremental free cash flow generation this year, again you announced the dividend increase, but maybe talk about what's left in the share repurchase authorization.

And just your general thoughts on kind of preferences there.

Well, as you know, the repurchases have been the priority for us in terms of returning capital.

We stepped up our repurchases in the fourth quarter compared to what we had been spending in the early part of the year and a lot of that was just based on our share price being depressed, we felt like.

So certainly we've got that opportunity to step those up even further.

The share price continues to stay low and we're always buying on a daily basis with our 10b5 program that works and buys a consistent amount.

We were pleased with approximately 31% increase in the dividend.

And typically the way we've looked at that is what are the earnings from the prior year have been and what the payout for the next year might be and that increase just kind of keeps that overall dividend level pretty much in check from a percentage standpoint as where we've been in the past.

We'll take our next question from Todd Fowler from KeyBanc Capital Markets.

I think maybe David made a comment earlier about the quality of the freight in the network at this point.

And I guess, I'm just curious, do you still have opportunity to trade up freights?

And if you saw any freight that was kind of nontraditional, maybe truckload freight coming into the network last year when the market was relatively tight, has a lot of that gone back?

And I'm just curious on kind of your pricing opportunities and the ability to continue trade up freight going into 2019.

Todd, I don't know trading up is the term that we use a lot.

We'll certainly try to improve pricing.

If it's poor, we'll certainly try to improve it.

Don't know that we try to trade up a lot, but we have a challenging account, an account that's challenging that if the costs are high, then we'll certainly try to take increases on that business more aggressively than on account that otherwise operates efficient and all those things.

But anyway, I think there's always some opportunity there.

I mean, with the amount of shipments we handle on a daily basis, you're always going to run across something.

So I think there's always some opportunity.

I do think we probably harvest some of that low-hanging fruit, if you will.

There is not nearly as much as it was at one time.

But there should be something in there possibly to improve this year, but I don't think -- it's not going to be a big boom for us in any way.

Okay.

Great.

I'll take credit for the term trading up, but I appreciate your perspective on it.

And then just for my follow-up, Adam, can you speak a little bit to the insurance and claims line item here this quarter?

It looks like it was favorable on an absolute basis and then also as a percent of revenue, was there anything unusual in there?

Or are you getting some benefit from some of the investments that you've made in the fleet?

And how would you expect that to trend going forward?

Yes, the fourth quarter every year also includes an annual actuarial adjustment and process that we go through, which can be favorable or unfavorable.

And if you look during the year, we averaged about 1.2%.

We had a favorable adjustment in there that drove it down to the 0.9%.

And then when you look in last year's fourth quarter, it was an unfavorable adjustment.

So that was up to 1.4% in the quarter.

So I think that'll go back.

The 2 components that are in there are auto liability, exposure, including the premiums and then our cargo claims ratio.

So the claims ratio is in that between 0.2%, 0.3% type of range and the auto has been in that kind of 0.9% to 1% range as I knock on wood here.

So we'd expect, based on all the investments we've made in safety tools and so forth and claims prevention tools, to keep that number trending, I would think in somewhere in that same type of range as we work our way through the first 3 quarters of the year.

We'll take our next question from David Ross from Stifel.

I've 2 quick questions.

One, can you talk about any regional strength, any parts of the network feeling tighter or looser than others, anywhere you see business particularly good?

And then the second question is just on the $95 million of IT spend for '19.

Is that focused on any specific areas?

Yes, well, let me address that one first.

That $95 million is IT and other assets basically, and the other assets component in that forecast is about $50 million.

That's our forklifts, switchers, all sorts of other things that go in there.

It's generally somewhere about $35 million.

Other things that we put scales and dimensions and so forth into the service center, so with the plan for 10 service centers this year, that piece of that net total is a bit higher.

And then the IT is higher this year and that number includes costs that we're planning to replace, our logging devices so that hardware in each of our 9,000-plus units will replace this -- will be replaced this year.

And so that's why that IT piece is a little bit higher than our normal $20 million, $25 million.

And the first part of the question on just regional strength or weakness through the network?

It's been pretty balanced as it generally has been for us, fortunately, and that's what we'd like to see to be able to keep the line-haul network somewhat in check.

But I would say, this year, we continue to have really strong growth through the Midwestern region of the U.S., I think that, that kind of fits with just industrial activity in general and the fact that we've added a lot of capacity in that region over the last couple of years.

We've also had quite a bit of growth out on the West Coast as well.

We're seeing pretty strong growth there.

And so I think the CapEx plan this year will be hitting -- continuing to hit really all regions, but Midwest, Gulf Coast where we've seen a nice growth and out in the West and South East as well.

So it's just sort of across the board with the door additions that we're planning to make this year.

We'll take our next question from Willard Milby from Seaport Global.

I was hoping to tackle the -- I guess, the headcount efficiency question from a different angle.

If I look back at 2016, I think year-over-year ending headcount was about flat or maybe slightly down with flatter, flattish volumes.

In 2018, headcount up 10%, volumes up 10%-ish.

What has changed from a workforce efficiency point of view?

And kind of what's that excess capacity or efficiency that's already in this workforce that you have right now that you feel comfortable maintaining levels for 2019 when we assume if the economy helps out some more volume growth for 2019?

Yes, I think going all the way back to 2016, that I think you referenced, '16, as I mentioned earlier, was a flat year from a revenue standpoint.

And look, it's not easy across the network today of 235 service centers to get the workforce exactly right.

And so when we went through a flat year of 2016, we leave the hiring decisions up to our service center managers, likely a little hesitant and careful with making additional hires as we started progressing through '17.

And '17, the volumes and revenue really stepped up as we progressed through the year, and we were a little bit stronger than what we were initially anticipating.

So we're playing catch-up for quite a bit of the year.

And that's why we've lost some productivity, but we also had to increase our use of purchase transportation as we progress through '17, and it didn't slow down.

I mean, that was when that material acceleration happened as we finished out September '17 and as we got up to about 19.5% revenue growth in the fourth quarter and that continued at plus 20% as we progressed through '18.

So we were hiring same kind of reverse of '16 as volumes were continuing to come to us at a very rapid pace.

People are adding capacity for an employee account standpoint to make sure that we could keep up with what was coming at us and what we anticipated coming at us this year.

And so we may have got a little bit heavy as we progressed through the year, and that was why we made the decision in the fall that on an overall basis that we felt like things were in good shape and we could keep it fairly steady.

But that's to say that we've got some normal attrition that may be happening in some locations and then you got other locations that are still growing at significant rates and they are hiring people as they should be.

Okay.

So as you look at it from an efficiency point of view and I don't know if you'll get it maybe from a capacity point of view.

You've kind of kept [dock] towards your terminal capacity above, for example, maybe 15% to 20%.

What would you say that is when you look at your workforce?

I mean, how much more volumes do you think you can put through before maybe that has to get addressed again?

We probably are on the higher side of the capacity right now with just opening those excess service centers starting out the first of the year, which is typically our slower months.

But we've got, like I mentioned earlier, 10 service centers planned to open this year.

So as we open those, that capacity will continue to grow unless we get unexpected surges in volume.

So we'll have to see how that works out, but right now the capacity is good.

I think it's on the higher side of what we've talked about being in the 15% or 20%, but it's a moving target.

You got less in some, more on others.

And so we just have to keep addressing the locations where we're tied, which is what we're doing with those facilities that we've got plan for this year, and we're focused in the areas where we're struggling and that's where we're adding.

We'll take our next question from Scott Group from Wolfe Research.

So, Adam, that 8% and 10% for Jan and Feb, do you think you can give us that ex fuel?

I imagine a good amount of the deceleration in the revenue growth is just fuel.

So if you have those 2 numbers, it'd be helpful.

And then just on the fuel, like, do you think it had much of an impact in 4Q?

And do we need to think about it as a potential maybe small headwind in 1Q since it's lower year-over-year?

At this point, it's pretty comparable, the average rate to where fuel prices were last year.

So I would say, it's -- from a revenue per hundredweight standpoint, it's -- those 2 numbers with and without fuel had pretty much come back in alignment.

So I think what we might see, depending on your forecast for fuel, if prices stay where they are right now, it was last year more so in the second quarter that we started seeing the average price of diesel increasing.

Maybe on par in the first part -- or in first quarter rather and then -- and we'll see how the price changes and then the comparison with the prior year, but it's more in the second quarter where we started seeing that sequential increase in prices.

Okay.

And then just on the competitive dynamic, just kind of maybe 2 questions.

The YRC obviously had some labor uncertainty.

Are you hearing anything from customers that suggest that there is a share opportunity there?

And then just how do you think about truckload versus LTL pricing historically correlated?

Do you think they're correlated anymore?

I think we talked a lot about that in 2016, and I believe then as I do now that the way the LTL industry has changed and the consolidated nature with about 80% of the revenue being in the top 10 carriers, that you won't necessarily see those same type of patterns with LTL pricing following truckload.

And I think that when you look at the health of the industry, there's a lot of other carriers that need to continue to push for increases.

And part of the reason why there's been a lack of capacity additions and I still feel like the industry as a whole is capacity constrained is margins probably haven't been there to support any kind of material increases in capacity.

So it certainly created an opportunity for us.

And when you look at how the market's changed over the last 5, 10 years or so, I think over the last 10 years, we captured a little over 1/3 of what the market has grown and we've seen that in our market share numbers.

So we're going to continue to focus on making those additions in capacity and continuing to take advantage of the market share opportunities that we have, and we think we've got a selling advantage when you go up and down the board against each of our competitors.

And so we believe our service value is better.

That's come through as we've won this Mastio Quality Award for the past 9 years and we're proud of that and it takes service, given the service at a fair price and then you've got to have that final piece of capacity and that's what we tried to stay so far ahead of our growth curve to be able to grow with our customers.

Did you -- I missed it if you said anything sort of about like the labor uncertainty, if that maybe accelerated some of that share?

Yes.

We haven't seen anything at this point any material way that, that I'm aware of.

Certainly shippers always have conversations with us around any kind of contract period as they go through it to discuss any kind of contingency planning and so forth.

And so we'd handle that just like we have in the past.

No need to chase freight in any way.

We'll take our next question from Ben Hartford from Baird.

Adam, just coming back to that CapEx question, a couple of quarters ago, you talked about 12% to 15% CapEx as a percent of revenue, that's been the historical range.

Obviously, the guidance is a little bit below that.

It's at the bottom end of the recent relevant range.

From the context of all the discussion today about capacity and staying ahead of future anticipated growth, has that historical range of 12% to 15% CapEx as a percent of revenue has that -- is that no longer a guide post?

Should we be thinking about the lower end of that going forward given the 2019 guide?

Or should we revert back to some sort of medium between that range?

I don't know that anything has changed necessarily with that range.

I mean, certainly we've got another healthy year with respect to real estate and some of what we'd spend in that regard is dependent upon what's available and how many projects our internal team can complete, but a lot of the real estate in the area that we're continuing to expand into, metro type of areas, the cost of land continues to accelerate and some of the costs of these facilities are measured in the tens of millions of dollars.

So we still want to continue to own the real estate that we have in the network and that's our #1 priority.

But I think that the biggest change, as I mentioned earlier, and why it might be a little bit lower as a percent of revenue this year is just we've got a little bit less need on the equipment side, but that kind of goes in cycles.

We've got generally about $150 million on average from a replacement standpoint on the equipment and, I would say, we're replacing less than that this year based on the patterns of the prior 2.

And we'll take our final question from Lee Klaskow from Bloomberg Intelligence.

I just had a quick question about when you guys are opening up new service centers, how do you resource those?

Are you reshuffling assets?

Are you going out and buying new trucks and trailers to source those?

And also how do you approach the headcount?

Are you moving employees around?

And roughly about how many employees do you need to have to have one of those new facilities fully staffed?

We certainly reshuffle employees typically at the service centers that we've been opening.

Of late, our spinoffs in the cities that we already service, we just find a piece of property in a different part of town and do a spinoff.

So we relocate employees or they relocated.

In lot of the cases, they just got in closer to where they live, and you know what we're saying.

But we move not only closer to our customers, but closer to our employees.

So we shuffle equipment, we shuffle employees.

What typically has happened, we've been able to grow faster in those new locations and the old ones tend to fill back up.

So like I mentioned before, we're able to get closer to our customers, give better service and we experience better growth in those situations than we do in our old standalone existing facilities.

So it's more a reshuffle of assets and depends -- the question about how many, it just depends on the size of the market.

It could be anywhere from 15, 20 drivers to 50.

That concludes our question-and-answer session.

I'd like to turn the conference back over to David Congdon for any additional or closing remarks.

We want to thank all of you today for your participation and your questions.

Feel free to call us if you have any further questions.

Thanks, and have a great day.

And that concludes today's conference.

Thank you for your participation.

You may now disconnect.