奧多明尼昂貨運 (ODFL) 2021 Q4 法說會逐字稿

Good morning, and welcome to the Old Dominion Freight Line, Inc. Fourth Quarter and Year-End 2021 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.

Thank you. Good morning, and welcome to the fourth quarter and 2021 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay, beginning today and through February 9, 2022 by dialing (877) 344-7529, access code 4631573. The replay of the webcast may also be accessed for 30 days 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 are 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.

As a final note, before we begin, we welcome your questions today, but we do ask in fairness to all that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation.

At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.

Good morning, and welcome to our fourth quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. Old Dominion finished 2021 with outstanding fourth quarter financial performance that resulted in new company records for annual revenue and profitability.

The fourth quarter of 2021 was our fourth straight quarter with double-digit revenue growth and the sixth straight quarter of double-digit growth in earnings per diluted share. We are encouraged by the momentum in our business and believe that we are uniquely positioned to win additional market share in 2022.

We can do this by continuing to execute on the same strategic plan that has driven our history of long-term profitable growth. This strategy is centered on our ability to deliver a value proposition of superior service at a fair price to our customers. The OD family of employees worked through every challenge thrown its way in 2021 and continue to deliver best-in-class service while skillfully managing the 19.4% growth in our LTL shipments per day for the full year.

I can assure you that delivering on-time without damage is a significant accomplishment with this type of volume growth. That is why I'm so proud that in 2021, we once again earned the MASTIO Quality Award, which recognizes us as the national #1 LTL carrier for the 12th straight year.

Providing superior service not only allows us to win market share, it also supports our long-term pricing strategy. We have consistently focused on improving our yields at the individual account level to both offset our cost inflation and support further investment in our business. This approach has helped strengthen our financial position over time and allow us to do something that others in our industry have not, consistently invest in new capacity.

We have historically invested 10% to 15% of our revenue in capital expenditures each year, and we expect to spend approximately $825 million this year. We believe consistent and long-term investments in capacity are valued by customers as an integral component of quality service and these investments are also necessary to support our ongoing market share initiatives.

We simply never want our service center network to be a limiting factor to growth, which is why we have spent over $1.8 billion over the past 10 years to expand our service center capacity across the nation. We currently have approximately 15% to 20% of spare capacity in our network, although our 2022 capital expenditure plan includes another $300 million to further expand our service center capacity to stay ahead of our anticipated growth curve.

There are, of course, 2 other ingredients in the capacity equation, our fleet and our people. We intend to spend $485 million for new tractors and trailers this year. We would frankly like to spend more, but we have been limited by several suppliers that are facing manufacturing challenges.

We are fortunate -- were fortunate to enter the pandemic with one of the youngest fleets in our industry. And as a result, we can continue to use existing equipment that otherwise would have been replaced this year. This strategy may continue to cost us a little more in maintenance and repair costs as it did in 2021, but we believe our current fleet and these additions will be sufficient to accommodate our expected growth. As we have done in recent quarters, we also expect to continue to utilize purchase transportation to supplement the capacity of our people and our equipment.

The final ingredient and the most important piece of our strategic plan is the investment that we continuously make in our people. The OD family of employees grew by 20% in 2021, which including adding over 1,700 drivers in a challenging labor market. We expect that 2022 will be another big recruiting year for OD. While the labor market remains challenging, we are confident in our ability to add to our team due to our outstanding company culture.

In addition, we offer a rewarding pay and benefits package and soon expect to make company record discretionary contribution to our employees' 401(k) Retirement Plan. Our long-term strategic plan is straightforward. Difficult for others to successfully replicate and build on itself year after year.

Our success over the years has proven the flywheel effect of our strategic plan, and we believe it will span even faster in 2022. We are encouraged by the opportunities ahead, and we are confident that the disciplined execution of this strategic plan will produce further profitable growth and increase shareholder value.

Thank you 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 grew 31.4% to $1.4 billion in the fourth quarter of 2021 and our operating ratio improved 270 basis points to 73.6%. The combination of these changes resulted in a 49.7% increase in earnings per diluted share to $2.41 for the quarter.

Our revenue growth included a nice balance of increases in both volume and yields, which were both supported by a favorable domestic economy. We believe we are currently winning a significant amount of market share based on a comparison of our shipment trends with publicly disclosed information for other LTL carriers. Our LTL tons per day increased 14.3%, and our LTL revenue per hundredweight increased 16.1%. Our LTL revenue per hundredweight, excluding fuel surcharges, increased 9.2% due primarily to the success of our long-term pricing strategy as well as changes in the mix of our freight.

On a sequential basis, fourth quarter LTL shipments per day increased 0.1% over the third quarter of 2021, which compares favorably to the 10-year average sequential decrease of 3.5%. LTL tons per day increased 2.4% as compared to a 10-year average sequential decrease of 1.7%. These 10-year average trends exclude our 2020 metrics for a more normalized comparison.

For January, our revenue per day increased 25.7% as compared to January of 2021. This growth included a 7.7% increase in LTL tons per day and a 16.8% increase in LTL revenue per hundredweight.

Our fourth quarter operating ratio improved to 73.6% and once again included improvements in both our direct operating costs and overhead cost as a percent of revenue. Within our direct operating costs, productive labor as a percent of revenue improved 320 basis points, which more than offset the increase in expenses for both our operating supplies and purchase transportation.

The increase in our operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel. We continued to use purchased transportation during the quarter to supplement the capacity of our workforce and our fleet, and we expect to use a similar amount of these third-party services in the first quarter.

We are very proud that our annual operating ratio of 73.5% surpassed our previous internal goal of 75%. As we execute on a long-term continuous improvement cycle for our operating ratio, we intend to follow the same successful approach that we have in the past, which is to focus on density and yield. The spare capacity within our ever-growing network allows us to drive additional volumes through our system, which generally creates strong incremental margins at the local service center level.

We are confident in our ability to further improve our operating ratio and have dropped our internal goal another 500 basis points. As a result, we will now be focused on achieving an annual operating ratio in the 6s.

Old Dominion's cash flow from operations totaled $340 million and $1.2 billion for the fourth quarter and 2021, respectively, while capital expenditures were $165.4 million and $550.1 million for the same period. Greg mentioned earlier that we currently expect capital expenditures in 2022 of approximately $825 million. This total includes $300 million to expand the capacity of our service center network, although we would increase this amount further if we identify additional properties that fit into our long-term strategic plan.

We would also increase our expenditures for new equipment if availability improves during the year. We paid $23 million in cash dividends in the fourth quarter. While we did not utilize cash for share repurchases, our $250 million accelerated share repurchase program remained active during the fourth quarter. We utilized $691.4 million of cash for our shareholder return programs during 2021, and that consisted of $599 million for share repurchases and $92.4 million for cash dividends.

We were pleased that our Board of Directors approved a 50% increase for the quarterly dividend to $0.30 per share in the first quarter of 2022.

Our effective tax rate for the fourth quarter of 2021 was 25% as compared to 25.1% in the fourth quarter of 2020. We currently expect an effective tax rate of 26.0% for 2022.

This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

(Operator Instructions) And the first question will come from Jack Atkins from Stephens.

And thanks for the longer-term color on the new operating ratio target. That's exciting. So I guess for my first question, if we could maybe kind of shorter term, kind of focus on what you saw in January. Adam, thanks for the trends from a tonnage perspective and a yield perspective. But anything that you could maybe add was weather in the first couple of weeks in the month, a little bit of a challenge. We've heard that the rise in COVID cases in December and January presented some challenges for carriers. Just sort of curious if you could maybe comment on what you saw there sort of within the month. And I'll follow up after that.

Sure. There were several things impacting January. And certainly, every January, we deal with weather. It's not a onetime event, and it's included in all of our 10-year average trends that we typically compare to similar to the effect of COVID in certain months of last year when you only look on a 1-month period, we did have some effect. We felt like both directly and indirectly with customers that were impacted through labor shortages and so forth. And so we saw a little bit of that impact as well during the month.

And we came off an incredibly strong December. So to talk about December first a little bit just on a weight per day basis, December's tons per day was down 1.1%. Our 10-year average is a decrease of 9.1%. So from a sequential standpoint, we felt like we were going to see that buildup in December coming off November that had a little bit of some of the same effects that we talked about earlier. So we expected that.

But the timing of year-end also had a little bit of effect of both helping December and then starting out that first day of January being a lot softer. We don't typically get into these half-day conventions and so forth like some others do. But I would just say that first day of the month was certainly not a full normal day like what we saw for the remainder of the month.

So with all that said, we still grew revenue at 25%. We're really pleased to see that. We saw a continuation of the strong yield trends continue and solid volume performance given all the factors that we just discussed.

Okay. That's great to hear. I guess maybe a longer-term question. Adam, I don't know if you want to take it or if Greg wants to take it, but I would just be curious to get your sense for the trajectory of the growth rate for the LTL market more broadly, not just in '22, but over the next several years.

I think there's a sense that some folks have a concern maybe that some folks have that LTLs have benefited from all the supply chain disruption, maybe more so than others, but there seems to be increased shipper demand for LTL capacity because of e-commerce and a number of other factors. You guys are investing for growth. I would just be curious if you could maybe walk us through sort of your -- maybe your longer-term perspective for the LTL market, not just in '22, but over the next several years.

Jack, I'll take a shot at that, and I'll let Adam add to this. But you're right. From what we have seen and from talking with our customers, we expect continued growth. It looks like, if anything, this e-commerce is continuing to drive the LTL market. And the industrial economy has been strong and everything that we see on the horizon is we expect continued growth.

Hey, I want to roll back to the COVID question that you asked prior. Just for everyone's information, and I'm sure somebody else intends to ask this, but we have seen our numbers go in the right direction over the last several weeks. I think it's important to note. I think we've heard the same thing on the news as to what's happening around the country. But our trend has been really positive over the last few weeks. Our cases are really down. And it looks like from our perspective, this thing could be dying out.

So hopefully, that's happening everywhere. And I think if it is, that will sure be a boost to everything related to the economy and certainly to conducting business more as normal, been a long time since normal, but hopefully, we can get back to that.

And I'll let Adam add to that longer-term growth question.

Jack, I would just repeat what Greg said and certainly feel like there continue to be tailwinds to the industry. And we feel like the industry has already been growing above GDP and believe really that the industry as a whole could have grown more, but we -- the industry continues to be capacity constrained. And that's why we talk about the service advantages that we have in the marketplace as well as the capacity advantages that have driven much of our growth.

And we probably could have grown even faster this year, but it's something that we've certainly taken advantage of all the investments that we've made over time. We've invested a lot in our network, over $1.8 billion in the last 10 years, growing our door count over 50%, while our shipment count has grown over the last 10 years, about 70% or so. When you look at the other group of public carriers, there's been a decrease in the number of service centers in the industry. So -- and then for that reason, the other carriers, the total shipments managed by the group is pretty flat as well.

So we'll see how that continues to trend. But there's service value that we add. And I think our customers are starting to appreciate that more when they look through their supply chain in total in leveraging an LTL carriers network. It's why it's so important that we continue with our yield improvement initiatives to continue to have the financial strength to invest further in our system to allow us to continue to grow with our customers because that's a big piece of the overall quality equation and that service value that we deliver. They can call on us, and they certainly are doing so. When you look at our volume performance this year, customers are increasingly calling on us to deliver for them because of capacity shortfalls that they're experiencing through either other carriers or other modes.

The next question will be from Jason Seidl from Cowen.

I wanted to focus a little bit on the yield side first. The numbers you gave imply probably the largest sequential 1Q increase we've seen in a little bit of time. I wondered if you could talk about contractual rate renewals and how they trended in 4Q and how they're looking early on? And then I want to chat a little bit about your length of haul growing again in 4Q. Is that the type of business that you're winning out there in the marketplace? Or is there something structurally going on in the marketplace to lengthen that LOH which you're seeing?

Yes. I think that on the length of haul just to address that piece of your question first, it was a little bit longer. We were at 944 miles in the fourth quarter, but we've been around 935 to 945 miles. When you look longer term, we've seen length of hauls decrease. We've certainly seen this regionalization of kind of going back to the longer-term question. We believe this regionalization of the industry will continue, and we're seeing good growth in our next day and second day lanes, but the last couple of years, there's been pockets of growth in different places. We've had tremendous growth off the West Coast, which typically has a little bit longer length of haul with it.

So there's just been some different growth and in different areas with certain customers, that's moved it up a little bit, but it's pretty much staying within a fairly consistent band and wasn't really expecting material change from where we are other than eventually getting back to seeing it decreasing a little bit.

And with regards to the yield performance, for us, we have a long-term consistent strategy that focuses on trying to achieve yield improvement to offset our cost inflation each year. And we need cost plus because, again, it gets back to supporting the investments that customers are demanding from us in additional real estate capacity as well as into our technologies as well.

From a revenue per shipment standpoint, just getting away from the per hundred because certainly, some of those metrics, the change in weight per shipment, the change in the length of haul, both had the effect of increasing the revenue per hundredweight. But our revenue per shipment, excluding the fuel, was up 6%, and that was a good performance, but overall, we had to see some higher renewals kind of in the back half of the year.

Our cost inflation on a per shipment basis in the back half of the year was a little bit higher than what we had anticipated the average cost per shipment for the full year would be. And we'll see that trend a little bit higher in the first half of next year and then kind of normalize. But certainly, we're continuing to get increases to offset that cost inflation. So those renewals in the back half of this year, it's probably been a little bit higher than those in the first half of 2021 that is.

And so it's always just a continuous improvement cycle that we have. We look at each account on its own operating merits. The freight that we get and ways that we can improve yield, and that's not always through price either. So I think we've been successful. Certainly, when you look at that revenue per shipment and cost per shipment delta in the fourth quarter and really for the full year as well, just reinforces that long-term consistent approach that we've strived for.

And the next question will be from Scott Group from Wolfe Research.

Adam, can you share the yield trends ex-fuel in January? And then any thoughts on just that 1Q OR seasonality and how you're thinking about that?

Sure. So the per hundredweight with the fuel, as we said earlier, was between 16.5% to 16.8% and without the fuel, right at 11%. So we're still seeing increasing rates really on the average price per gallon. And as that increased through the year, it's -- the average in January was up about 39% versus January of last year, just for the national average there.

So that fuel price component is certainly picking up and going into both the -- that revenue component, but also getting into the cost as well. And certainly, there's more than just the direct cost of diesel fuel that we use in our operations. As fuel prices go higher, that certainly works its way into tires and other components that we have to deal with. So anything that's sort of fuel related, we'll see that same type of inflation on.

With that said and in regards to our costs, typically, the fourth quarter to first quarter sequential is about 100 basis point deterioration. Now one thing to say before I get into a little bit more detail about that is typically, that includes kind of a flattish when you look at the insurance and claims line kind of flat performance from 4Q to 1Q. We had a benefit in the fourth quarter, as you could see on that insurance and claims line.

And that mainly comes from the actuarial assessment that we do each year. That was only [0.7%] where we averaged 1.1% to 1.2% in the first 3 quarters of '21. We expect that number to go back up to about 1.2% in the first quarter, give or take. So we've got a little natural drag, if you will, versus the -- our normal sequential performance, if you will.

With that said, however, we're still targeting about 100 basis points of change there, and plus or minus certainly, that's just 1 specific number. But I think that given the strong revenue performance, I think that we can offset much of that. So maybe 80 to 120 basis points to give us a little range there will be what we're trying to target achieving in 1Q.

Certainly, the 1Q performance when you look at the average, a lot goes into that. The revenue effect, like we mentioned earlier, can be a little different from one period to the next. And certainly, there's the costs that come in. There's not as consistent performance from 4Q to 1Q like there is in maybe some of the other quarters just given the natural disruption that happens in those periods. But that natural disruption goes into that 10-year average.

Very helpful. And then just last one. If I look over the last 5 years, your operating ratio has improved about 200 basis points a year on average. Do you think that's a realistic way to think about either '22 or the next several years? I'm just trying to think about when realistically you can get to that sub-70 OR?

Yes, we didn't put a time line per se because really, we're looking for profitable growth each year. And some years, we get a little bit more revenue contribution. Some years, we get a little bit more margin contribution. They all go into that profitable growth line, and we pretty much played 2021 like a piano and got a little bit of both revenue and margins. So we are pleased to see that, and that followed a very successful 2020.

So the 5-year of 200 bps is probably a little bit stronger given the performance in '18 as well. When you look over a longer term, it's been more in the 100 to 150 basis points. And we talk about 10-year sequentials from quarter-to-quarter, and that's probably been more in that long term. But right now, demand continues to be incredibly strong.

So we certainly are expecting another very solid revenue performance year this year. And we're going to be investing dollars, investing significantly for headcount growth, as Greg mentioned, so we can continue to give the same service that our customers expect, and we're going to be adding to our fleet and into our network. So there's a lot of investment that goes into continuing to take advantage of the market share opportunities that we feel are out there. So it's not -- we're not going to give a specific goal for what we think we can do in '22. But certainly, the focus will be to produce as much profitable growth as we can.

The next question is from Jordan Alliger from Goldman Sachs.

I was just very curious. Obviously, demand is very strong for LTL. You do start to face some pretty tough comparables as you get into the second quarter, particularly around volumes. So if industrial production grows 3.5%, 4% this year, I mean how do you think about high level sort of ability to grow tonnage? I assume on a full year basis, but looking past the first quarter, the second, how you may be thinking about those more challenging comps?

Jordan, you broke up a little bit. So I don't know if I missed anything at the start, but just in regards to the volume environment, again, it just gets back to the underlying strength of demand. And certainly, that's all the customer feedback that we've been hearing, coupled with capacity issues in other places of our customers' supply chain. When we look at the economic trends, we feel like that we would expect continued strength with our industrial-related customers as well as the ongoing strength with our retail-related customers as well.

So we're used to tough comps, if you will, given our long-term revenue performance over the last 10 years. That's pretty much -- we've produced about 11% average growth in revenues. And even though we'll follow up what would have been a record growth year of $1.2 billion of new revenue produced last year, we certainly have got big expectations for '22 just given all those factors. So we'll see how the comparisons work out. And I think that if you just assumed normal sequential trends, that would still put us at kind of the high single-digit, low double-digit type range.

And the next question will be from Tom Wadewitz from UBS.

Yes, I wanted to ask you about, I guess, price, and I don't know if you want to refer to like contract renewals. But I think you saw some acceleration in price through the year in'21. Maybe you see that stay elevated in the first half and kind of ease in second half. But I wanted to see if you could offer some kind of high-level thoughts on where -- maybe where contract renewals were in fourth quarter. And what you think the profile looks like on price in 2022? And then I had a follow-up on cycle question.

Yes. Tom, we've kind of just stopped talking about contractual renewals because I somewhat feel like, that's obviously a very big piece of the overall revenue equation, about 25% of our business is on our tariff business and certainly the majority being on contract, but it seems like it's a talking point from the others in the industry that doesn't always reconcile with necessarily what you see out of the yield performance. But it all just sort of goes into it, whether it's price increases, other operational changes that drive yield and so forth and the things that we look for.

And I will say that, like I mentioned earlier, we expect our -- we saw higher cost per shipment in the back half of last year. We expect our cost per shipment this year to probably be on a net basis, maybe in the 4.5% to 5% range, and that's excluding all the effects of fuel. But it's going to be weighted heavier. We're going to see higher cost per shipment inflation in the first half of the year and then think that some of those expenses normalize when we get into the back half and start lapping over where we've recently been seeing inflation in our business.

So with that said, certainly, the contracts that mature in the first half of the year, they didn't have as much of an increase last year. So they will probably get a little bit more. And then those in the back half that maybe got a little bit higher increase, reflecting what the actual cost trends were in the back half of '21 may not see as much. But overall, the focus continues. We've got to look at how our cost inflation is trending and then try to target 100, 150 basis points above that.

We did -- the January numbers, I didn't miss this earlier, but we did take our general rate increase, which is on our tariff business. That was effective at the beginning of January. So that was a part of that yield performance that we've already seen to start off the year.

So you think you moved back in the second half of the year towards kind of more normal annual LTL pricing, call it mid-single digits? Is that a reasonable expectation if you look towards kind of second half of the year?

Well, again, I think that we've got to look at how our cost inflation at that time is trending. And if we're seeing some normalization in that point, then the expectation comes back. But at the end of the day, we've got to look at each customer's account, the revenue inputs and the cost inputs in terms of what we're actually seeing and how the account is operating and look at ways to drive improvement in that customer's operating ratio.

If we can do that by price, that's one way to look at it. There may be other operational changes, new pieces of business that we may get different factors that can overall drive an improvement. For us, we're looking at driving a continuous improvement cycle in each customer account and that a customer account builds up to each individual service center and those built to the company. So certainly, we're looking to improve the operating ratio, and that's how you got to go about tackling it.

Okay. That makes sense. If I can ask 1 more, I guess, for Greg, how do you think about the cycle and with respect to -- it seems like historically, you probably have some give back in a cycle where you've had strength in LTL in the site truckload market and truckload loosens that there might be some impact in the cycle historically. Do you think that it's reasonable to expect that this time? I mean it does seem like LTL has been the 1 mode that could add capacity. And it would be natural to think some LTL freight in the market, maybe not for OD but in the market goes back to truckload later this year or next year. Do you think that's right? Or is that -- is it going to be different maybe this time?

Tom, I can tell you, we don't have any volumes at this point in time to go back to truckload. I think if you look at what we've done and what we've been able to take out over the course of time due to capacity restraints and whatnot, most of those type volumes are out of our network at this point in time. So I don't -- I think the environment for us from that standpoint is extremely positive as far as we can see through 2022.

Certainly, things change as you go through the year. But right now, I don't see any volume going over the truckload at all, not from our standpoint. And as Adam has mentioned numerous times, we're continuing to add capacity. I would expect that we'll be on a strong trajectory all year long.

And the next question will come from Amit Mehrotra from Deutsche Bank.

I just wanted to clarify 1 question, I guess, from Jordan earlier. You talked about high single digit, low double digits, maybe I didn't catch it. Was that first quarter, full year? Was it tonnage with the shipment? What are you exactly referring to on high single digit, low double digits?

I wasn't giving any specific guidance there. I was just basically saying that if you assume normal sequential trends in our tons that would about be if you just roll them out quarter-by-quarter what the year might look like. But certainly, at this point, we feel like, just like what we saw last year, that the demand is so strong out there, and we'll see how the year progresses.

In the past, we've typically had probably about 6 quarters or so. When you look through past growth cycles, we typically have had 6 or so quarters where we significantly exceed our 10-year trends and then it kind of reverts back to the average. And the average sequential performance for us includes a lot of market share wins.

Going back to my previous comment, we've grown our shipments over the past 10 years around 70%. So those 10-year trends include a lot of market share. And we certainly think that given the comparison of our volumes that we've seen to the industry for the third quarter, that's kind of the way things have trended. We have the spare capacity that's out there that we try to invest ahead of the curve so that the network is not a limiting factor and we can help our customers grow when we get into the strong demand period.

So we'll see how the quarter by quarters trend trended as we work our way through '22. But the one thing we'll say is that the underlying demand has not changed. It was consistently strong through '21 and the customer conversations that we have today indicated that, that strength is going to continue for the foreseeable future.

Yes. So that was just more of a tonnage commentary by extrapolating current trends and kind of where the year shakes out. Okay. So I get that. So the other question I had is incremental door capacity in 2022. Obviously, all this new capacity that you're putting online doesn't come on, on January 1. And so any help around what the kind of incremental store capacities from these investments pro rata for when they actually come online in '22 and even '23, if you could talk about that?

Yes. We -- I think we've said before that we intend to add somewhere in the neighborhood of 8 to 10 service centers this coming year. We don't necessarily always share the door detail, for example. But when we look -- we don't give it year-by-year more for strategic reasons, but if you look over the last 10 years, we've expanded the door count by about 50% in total.

So as Greg mentioned before, we've got about 15% to 20% spare capacity in the network. We were fortunate that we started out the '21 in a really good spot. So despite the 19.4% growth that we had in shipments during the year, we were still able to keep a fair measure of spare capacity out there. So we'll continue to build on that level. We've got a few other things that will happen earlier in the year. Those were projects that already have been in the works and some that we thought we might have been able to finish by the end of the year. But -- so we'll get some new capacity out there on the service center side pretty early, and we'll be adding to it pretty consistently throughout the year.

Okay. I wanted to come back, I think, to Scott's question on long-term margin improvement. I want to kind of approach it a little bit different way, if I could. I mean, Adam, you've talked about direct and indirect costs as a way to kind of articulate the inherent operating leverage in the business. I think it was like 25% previously. You've obviously made -- the cost structure looks different now given the progress that you've made and the pricing initiatives to a certain degree. But wondering, it seems like the new baseline operating leverage is kind of 30% plus versus that 25%. I don't know if you would agree with that or if that's the right baseline to use that can maybe help infer our pace of margin improvement going forward?

Sure. Yes, we've talked about the cost structure in previous quarters. And effectively, our total direct costs for last year were about 55% of revenue and our overhead was around 19% of revenue. And so some of that overhead, maybe 5% is also variable in nature. So when you look at the total variable cost and that structure, that revenue growth can give us the incremental margins in the 35% to 40% range in a short period of time. And certainly, we did, I think, 39% for all of last year. So really strong operating leverage year for us.

But our story, like I said, it's not just all margin improvement. We want to continue to build up the network to take advantage of the market share opportunities we feel are out there, and we want to keep growing the top line, which takes investment. And so we know that we need to continue to invest to keep taking advantage of that revenue growth opportunity. And so that, that may cause some quarters that the incremental margin might not be in that 35% to 40% range, and that's okay. That's why we don't manage the business to an incremental margin per se. We're going to do the right things right that we feel like build out the network to allow us to keep achieving the top line growth and have the ultimate effect of also driving long-term margin improvement for us.

And the next question will come from Jon Chappell from Evercore ISI.

I'm just going to combine a couple into 1 because they're kind of all related. Adam, trying to talk about market share on this call and in the press release, is there any way to quantify how your market share, how much you've taken effectively from the LTL pie over the last, call it, 5 years? And as you look at your service center growth for this year, and I'm sure you're not completely in tune with what everyone is doing, but you probably have a pretty good sense for the market, how much do you think that you're set up to take this year?

And the second part of it is, as you think about these market share gains that you've won, especially in the last 12 months, have these been kind of just traditional contract duration, traditional customers, but given the tightness in capacity across the entire logistics here, are you winning kind of longer-term contracts, new types of customers as you've taken share recently?

Yes. I think our biggest wins have come from our ability to service the customers as they see the need. I mean, a lot of our competitors just haven't been able to provide the capacity that we have. And that's, in my opinion, as to why we've taken the share that we have.

Just to get back to that share growth over the last 5 years. Adam, you may need to help me here, but I was pretty -- say it's pretty fair to say we've been growing about -- that share about 1% a year. It's kind of a creep, if you will. It's not really a leap by any stretch, but it is -- has been very consistent, and we continue to see that as we go.

As far as the service center network and whatnot, Adam mentioned, we're looking at 8% to 10% this year. We've got quite a few in the process now. The good thing is some of those are fairly large. There's a couple of big ones in there that will give us quite a few additional doors. So I think we're going to be in a good spot. As I've mentioned over the last several years on all of our calls, I think we talk about the places where we're challenged, and we still got places that are a challenge to expand and whatnot. But we do have some [guidings] working, and I think we're going to be better off as the year progresses. So we see how the growth trends and whatnot. But I think we're in a really good spot, and I would expect that, that work is going to pay off for us.

And the question will come from Todd Fowler from KeyBanc Capital Markets.

I was wondering if you could comment a little bit, headcount has been growing faster than shipment count for the past couple of quarters, and I understand there's probably some catch-up there. What's your expectation for headcount growth into '22 and also relative to shipment count? And then just any general comments on labor availability.

Todd, certainly, we're trying to add labor as we speak. There -- it has been a challenge, as I mentioned before, but we have been able to successfully add folks. And right now, we have needs. Certainly, as we get into the stronger parts of our season later in the spring and certainly through the summer and into the fall, we need to continue to add folks without a doubt. So I would expect that those trends would pretty much mirror our shipment growth and tonnage growth. So I don't expect that to be a whole lot different. But yes, we need to add and those efforts are certainly underway at this point.

But Greg or Adam, could you -- I mean, you care to kind of put like a finer point, I mean, should the spread between headcount growth and shipment count start to narrow? Or do you expect to continue to try and add in front of the shipment growth for the next kind of foreseeable future?

Yes, I think that we finally just sort of caught back up with it at the tail end of '21. I mean, we would expect to see probably the headcount a little bit stronger than the shipment count, certainly probably for the first half of this year. But even when you look over the longer term, those 2 numbers kind of work in concert with one another, they're pretty matched evenly.

And I think that really, the top line is what dictates it, Todd. And certainly, last year, really going back to 2020. Once the recovery began, which for us was in May, we were pretty much playing catch up. We've had this tremendous volume performance really unlike anything we've ever seen with the fourth quarter being higher than the third. I mean, just really tremendous recovery since that drop in April of 2020.

So we've continued to add people really at levels above what the normal sequential trends in headcount would be. I think that will continue in the first quarter and until we get back to the levels where we can support the freight that we're seeing. But we've got to match it too with the equipment base that we have. And so it's just something that we've got to manage through as we work our way through the year. But as long as we keep seeing that top line performance and strength coming at us, we're going to continue to try to hire and have the right people in the right place that is efficiently operating, keeping our service metrics best-in-class and taking care of our customer.

And the lever that we'll continue to pull, and we think that we'll have to keep using this in '22, will be the purchase transportation. And we've had to utilize that. I think probably every quarter, as we worked our way through last year, we talked about trying to get away from it. And ultimately, we do. We want that number to revert back to that old 2% to 2.5% that was there for our Canadian operation in our truckload brokerage business, where we've got 100% of our line-haul network in-sourced, and we're using our people and our equipment to service our freight. But until then, we've got some good partners and they're continuing to deliver within our service expectations and keep our service metrics best-in-class and really just helping us to be able to grow the top line. So we'll continue to pull that lever while we have to.

Well, Adam, my follow-up was on purchase transportation and kind of the expectations and the service. So you covered that one for me. I'll pass it along.

And the next question will come from Bascome Majors with Susquehanna.

On the real estate expansion, as some of your peers become more eager to invest in growth like you've been doing for quite a time here, are you starting to see more competition locations that you'd like to expand in? Or is it really just you versus broader industrial real estate?

Yes. It's certainly the latter, Bascome. Just -- I don't know that it's the competition for real estate. Generally speaking, it's just being able to find the real estate that we need and being able to get it owned and get the building done. Sometimes you can find the land and perhaps, you've got to jump through to get it zoned and meet all the building requirements and all those different things. But trust me, there's a lot of challenges out there from a real estate standpoint. It's not easy. As we've grown and as we require bigger and bigger facilities to meet our needs and to plan for years down the road, it's just gotten more and more difficult.

But certainly, there is some competition in certain locations, and I've talked about that numerous times before, but the competition in certain markets is definitely tougher than others. Some places, it's still relatively easy. We can find and meet our needs, but there are some that, again, they're rather challenging, if you will.

And to that point, you mentioned a couple of locations would be particularly large adds this year. Can you talk to the geography or timing of those?

Yes. One of those is in the Northeast that we've owned for several years now. It's been -- it was occupied with -- tied up with the lease. We should get that late this year sometime. It's up in Northern Pennsylvania. We own it today, but it's not available for the time being. But we will get, I think, about midyear. We'll probably have a little work to do to get it up and running, but that should come on late this year.

We've got another fairly large facility in Southern Minneapolis, the southern part of Minneapolis, to help us better serve that area. We're up on the north side now. And certainly, with the growth that we've had in that market, we need to have another facility in the South. It's getting close. I think we're just a couple of months away from opening that.

We're working on a big one that's well underway in Kansas City that will give us another additional fair amount of doors. So we've got a lot of irons in the fire around the country and a lot of good things working. So again, I think we're pretty well positioned from that standpoint. Got a few others that I'll probably rather not talk about at this point, but a lot of work going on in the real estate department. That's for sure.

And the next question will be from Ken Hoexter from Bank of America.

Greg and Adam, thanks for getting me in here. Just a real quick, Adam, to clarify the -- your target. You said moving from 75 to 500 basis point improvement to 70 and then you talked about sub-70. Can you just kind of clarify what the target is and outlook there?

Sure. It's -- I mean, 70 is the target, but we want to see something start with the 6. So it will be a 69% or whatever we get to when we cross that line. We obviously blew through the 75 this year, pretty strong and have got a good jump on making our way towards that 70 goal. But nevertheless, that's the goal, if you will, at a raw 70, but seeing an OR start with a 6.

And I think it's still fairly balanced between pricing cost just as you've been doing. But you mentioned in the opening comments, some maybe seeing some scale of maintenance cost increases as you kind of extend the life of the fleet. Can you talk about the impact of that we should see in the near term or this year?

Well, I mean, there's some trade-offs there. And when you look at the depreciation expense, for example, we're seeing some improvement there. That was at 4.7% of revenue and that typically runs quite a bit higher. So we're seeing some increased maintenance costs, if you will, to maintain our fleet.

Our average fleet age is up to 5 years. Now for our power equipment, it's been as low as 3.5 years when you look over the last 5, 7 years or so. And so it's certainly a bit higher than what we would like to see. And -- but there's also a little bit of a drag just in total operating supplies and expenses on the fuel element. The older equipment is not as fuel efficient as the newer equipment. So that's just something that we've got to keep balanced.

We'll probably see -- once we can start replenishing the fleet at the levels that we would like to, we'll see some incremental depreciation costs that will come online that will somewhat offset the costs that we're seeing in operating supplies and expenses, but it will offset some of the purchased transportation costs that we're seeing. And certainly, I'm sure you're familiar with the truckload rate environment is pretty strong right now. So those loads that we are moving with third-parties, we're paying a pretty fair price for.

Lastly for me, just -- Adam, I know you said that the peers hadn't been growing kind of looking back, but I guess somewhat backward as we've heard a lot from the carriers, they're starting to talk about growing real estate, even ArcBest, XPO talking door and service center ads that we hadn't heard in a while. Does that give you or Greg, any thoughts on potential pricing pressure that we haven't seen in the past?

I wouldn't -- I don't think so. I don't think so. We just got to keep doing our thing and providing value to our customers. And I don't see that as a negative certainly.

And generally speaking, I think that I can't speak for everyone, and we don't really know other than what we hear from customers. But we anticipated that we would see capacity issues with the industry this year just based on some internal computations that we go through. And we started hearing that before we got to midyear before the real rush began. And so I think that there's probably some needs out there. Like I mentioned, we still feel like the industry is growing and when you look over the last 10 years, there's been a couple of other carriers that have also increased their market share.

I think that the industry revenue is continuing to consolidate with the larger national non-union providers, and we think that, that trend will continue in the future. But certainly, we've got service advantages as well. And it all comes back to the service value you deliver for your customer, and we think we've got an unmatched value proposition that wins market share for us, and we're going to continue to execute and keep giving the very best service to our customers. And we think that, that will drive the market share and fill in the real estate capacity that we continue to expect to add.

And the next question is from Chris Wetherbee from Citigroup.

Maybe just a follow-up on that last point about the market and competitive dynamics. I guess I'm just trying to make sure I understand how you guys might respond to the extent that there is maybe a larger push by some of your competitors into the market. You guys have always been extraordinarily disciplined with the way you approach the market. I'm guessing in a scenario where maybe some of your competitors get a bit more aggressive to expand. And obviously, there's a lot of demand out there. So I don't know what necessarily has it -- an impact on the pricing dynamic. But I guess, I think I know the answer to this, but I'm kind of curious of your take on how you would adapt to a market which might actually see more sort of push for market share from some of your competitors than we've historically seen over the last several years?

Well, I think what we'd expect, Chris, is that the industry has been very price disciplined, really going back to the last slowdown in 2016. And so I think that we've seen some margin improvement by some of those other carriers. If they don't have capacity, maybe they'll continue to follow our lead in terms of continuing to consistently try to increase price.

When you look at the current environment, much of the revenue growth is coming by yield from other carriers. I go back to the third quarter performance. We grew our shipments 19%. On average, the public carrier group was up 1%. So that wide delta in volume growth, we want to have that volume contribution, and we've got the capacity to grow both volumes and yields, whereas we've seen in prior growth periods like 2017, 2018, what we've seen this year or 2021 rather, the other carriers that don't have barely any capacity to grow throughout the entire system, just take advantage of the strong demand and increase yields, which if they're increasing fast for us because, again, our pricing approach is one that's long term and consistent.

Customers know what to expect if other carriers are increasing the rates faster than us and closing some of that price gap, that service value looks better and better. And so I think that's what we've seen in the past. It's what we would continue to expect to see, to see that wide outperformance, if you will, against the other public carrier group data that we see on average.

And the next question is from Bruce Chan from Stifel.

Thanks for squeezing me in here. I know you mentioned that there's no truckload for to give back the cycle, and that's good to hear. But as we think about some of your comments earlier, Adam, around regionalization and secular growth in e-commerce, how are you thinking about your freight mix characteristics? And then do you think you can kind of keep those as they are? Or do you think there may be some pressures on length of haul and shipment density as you start to grow your share and expand your network over time?

Yes. I mean, it's certainly -- we constantly communicate with our customers, including third-party logistics companies to try to navigate through and foresee the types of changes that are coming down the line. That goes into some of our thinking in terms of how we expand our service center network and where we're building facilities. So we certainly foresee some of those changes that have been happening over the last 5, 10 years continue. I think they've all been favorable trends for the LTL industry. And I think we're certainly maybe benefiting more than anyone.

And the reason for that, and some of how we think some of this market share growth we've seen recently will be very sticky is that, there's an increased premium that's being placed on service quality. And when you think about especially as low as inventory balances are right now, shippers have got to get their product on the shelves. And so they're increasingly relying on a carrier that can give 99% on-time service performance and not have damages. And if you're delivering into one of the big retailers that have these chargeback programs in place, then it puts some even more importance, if you will, on that service value.

So that's how we're winning share in that retail segment of the market. Certainly, we've still got our healthy mix of industrial freight and think that, that will continue to grow as well. But we're really winning across all segments, if you will, with direct industrial and retail-related customers and seeing tremendous growth with our third-party logistics customers as well. So -- but we think that those trends are going to continue and the importance on total service value will continue to rise.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.

Well, thank you all for your participation today. We appreciate your questions, and please feel free to give us a call if you have anything further. Thanks, and have a great day.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.