Old Dominion Freight Line Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 1, 2023

Key Takeaways

  • Q4 revenue rose 5.8% year-over-year with LTL revenue per hundredweight up 16.7%, driving a 21.2% increase in earnings per share for the quarter.
  • The operating ratio improved to 71.2% in Q4, marking the 10th consecutive quarter of OR improvement alongside a 99% on-time service rate and a 0.1% cargo claims ratio.
  • LTL tonnage fell 9.1% in Q4 and shipments per day were down 4.6%, reflecting ongoing economic softness and lower-than-expected freight volumes.
  • Capital expenditures reached a record $775.1 million in 2022, and the company plans about $800 million in capex for 2023 to expand fleet and real estate capacity.
  • CEO Greg Gantt will retire at the end of June, with COO Marty Freeman succeeding him, and management expects strategic continuity and a focus on long-term growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Old Dominion Freight Line Q4 2022
00:00 / 00:00

There are 17 speakers on the call.

Operator

Good day, and welcome to the Old Dominion Freight Line 4th Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.

Speaker 1

Thank you. Good morning, Welcome to the Q4 and full year 2022 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 8, 2023, by dialing 1-eight seventy seven 3,447,529, access code 2,673,176. 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.

Speaker 1

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.

Speaker 1

As a final note, before we begin today, we welcome your questions. But we ask in fairness to all 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.

Speaker 2

Good morning and welcome to our Q4 conference call. With me on the call today is Marty Freeman, our COO and Adam Satterfield, our CFO, after some brief remarks, we will be glad to take your questions. The Old Dominion team produced 4th quarter financial results that allowed us to finish the year with We extended our track record of success and delivered the 10th Straight quarter with both an increase in revenue and improvement in our operating ratio. As a result, the Q4 of 2022 Was also the 10th straight quarter where we produced double digit growth in earnings per diluted share. Our team produced these results while facing many challenges during 2022, which were primarily related to the unexpected Slowdown in the domestic economy.

Speaker 2

We entered the year anticipating growth in our volumes that didn't ultimately meet our initial expectations, But we made the necessary adjustments throughout the year that once again showed the flexibility and resiliency of our long term We also maintained a watchful eye on the efficiency of our operations and continued with our disciplined approach To managing discretionary spending. Due to our confidence in our ability to win market share over the long term, the one thing that did not change in 2022 was our commitment to investing for the future. Capital expenditures totaling 775 $100,000 in 2022 were a new company record and we invested 299,500,000 In real estate projects that further expanded the capacity of our service center network, we also continued to invest heavily 401 retirement plan for employees. In dealing with the reality of slower than anticipated business volumes, We also work diligently to protect the significant investment that we made over the past 2 years in our new employees. Speaking of new employees, I'm proud to share that there have been over 1300 new drivers that graduated From our internal truck driving school over the past 2 years.

Speaker 2

In some cases, these driver school graduates that now have their CDLs are temporarily working in non driving roles. While this comes at an increased cost to the company, we believe this bigger pool of licensed drivers will provide us with a strategic advantage once the freight cycle turns and additional volume opportunities become available to us. We said in our Q3 earnings call that we anticipated volumes could start increasing in the spring of this year, and we continue to remain We're cautiously optimistic that this will occur despite ongoing risk with the domestic economy. Regardless of the economic environment, I believe our 2022 results provide yet another example Of why our long term strategic plan will remain our focus for the foreseeable future. Consistent Execution of this plan has helped us create an unmatched value proposition in our industry That led to over $1,000,000,000 of revenue growth for the 2nd straight year in 2022.

Speaker 2

I am confident that this commitment to our strategic plan will also continue after my retirement at the end of June this year. Our long term success is the result of a strong team and their combined commitment to maintaining a strong company After working with Marty for most of my career, I can tell you that he lives and breathes the OD family spirit And will help take the company to new heights. I think the best is yet to come for Old Dominion and I look forward to watching OD extend its Long term record of success. Thank you for joining us this morning. And now here is Marty Freeman to provide Some more details on the Q4.

Speaker 3

Thank you, Greg, and good morning. I would like to start today by thanking Greg and our Board of Directors for providing me the opportunity to lead this great company. It will be an honor to lead our team and I can assure you that we will work Tirelessly to keep producing strong profitable growth. Along those lines, I was pleased with Old Dominion's revenue growth of 5.8% And the improvement in our operating ratio to 71.2% during the Q4. The combination of these items contributed to the 21 point 2% increase in earnings per diluted share.

Speaker 3

These financial results reflected the ongoing strength and demand for our services. As we continue to deliver value to our customers by providing superior service at a fair price, while our long term strategic plan is centered On our ability to provide this value proposition, the real key to our success is our strong family culture and our people. We will continue to invest in our OD family of employees as our employees are the foundation for building strong customer relationships. We are in a relationship business and each employee plays a critical role to help deliver our industry leading service. I am proud to report that our service metrics remained strong during the Q4 as we provided 99% on time service with a cargo claims ratio of 0.1%.

Speaker 3

We believe executing our same long term formula for success will allow us to win market share in the future. And as a result, we will also allow us to constantly invest in new capacity ahead of anticipated growth. Our capital expenditures for 2023 are anticipated to be $800,000,000 which will improve the average age of our fleet and further expand the capacity of our real estate network. We have invested approximately $2,000,000,000 in real estate expansion over the last 10 years And increased our door capacity by approximately 50% as a result. These investments supported our ability to double our market share over this time.

Speaker 3

The ever increasing cost of both real estate and equipment, however, will require us to maintain our pricing discipline. Our long term pricing philosophy is designed to evaluate the profitability of each customer account and then obtain the necessary increases to offset our cost inflation, while also Our ongoing investment in capacity and technology. As we have executed on this consistent strategy over the years, The resulting improvement in our cash flows have generally supported our ability to invest between 10% Continuing with each of these priorities demonstrates our team's intention to remain focused on executing the same business strategies That we have created our unique position in this industry. We will continue to focus on our people, servicing our customers and investing for the future. This commitment to the core principles have differentiated us in the marketplace, gives us confidence in our ability to further produce profitable growth while also increasing shareholder value.

Speaker 3

With that, I'll now turn things over to Adam, who will discuss our Q4 financial results in greater detail.

Speaker 4

Thank you, Marty, and good morning. Old Dominion's revenue growth of 5.8% in the 4th quarter resulted from a 16.7% increase in LTL revenue per hundredweight, which more than offset the 9.1% decrease in LTL tons. LTL revenue per hundredweight excluding fuel surcharges increased 8.7% and reflects the continued execution of our long term pricing Our consistent approach to pricing is supported by our ability to provide our customers with superior service and available capacity. We believe this value offering is becoming increasingly important to shippers, which is why we remain absolutely committed to executing on the fundamental elements of our long term strategic plan. On a sequential basis, Revenue per day for the 4th quarter decreased 2.4% when compared to the Q3 of 2022, With LTL tons per day decreasing 4.4% and LTL shipments per day decreasing 4.6%.

Speaker 4

For comparison, the 10 year average sequential change for these metrics includes a decrease of 0.6% in revenue per day, A decrease of 1.3% in tons per day and a decrease of 3.3% in shipments per day. For January, our revenue per day increased approximately 4.2% as compared to January of 2022. This growth included a 13.1% increase in LTL revenue per hundredweight that more than offset 7.8% decrease in LTL tons per day. Our 4th quarter operating ratio improved to 71.2%, which is primarily due to an improvement in our direct operating costs as a percent of revenue. Within our direct operating costs, Productive labor as a percent of revenue improved 170 basis points, while our purchased transportation cost improved 200 basis points.

Speaker 4

These changes more than offset the 260 basis point increase in operating supplies and expenses That primarily resulted from a significant increase in the cost of diesel fuel and other petroleum based products during the quarter. Our overhead cost as a percent of revenue were consistent between the periods compared. Old Dominion's cash flow from operations totaled $1,300,000 $1,700,000,000 for the Q4 2022, respectively, while capital expenditures were $270,400,000 $775,100,000 for the same periods. As Marty mentioned, we currently expect Capital expenditures of $800,000,000 in 2023. We utilized 199 $900,000 $1,300,000,000 of cash for our share repurchase program during the Q4 and 2022, While cash dividends totaled $33,000,000

Speaker 5

$134,500,000

Speaker 4

for the same periods. We were pleased that our Board of Directors approved a 33.3% increase and a quarterly dividend to $0.40 per share for the Q1 of 2023. Our effective tax rate for both the Q4 20 rate to be 25.8 percent for 2023. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Jordan Allinger with Goldman Sachs. Please go ahead.

Speaker 5

Yes. Hi, good morning. Question, so on the salary expense side of the equation for the Q4, I think the dollar amount was Down year over year. Can you maybe talk a little bit to your thoughts around the drivers of that? Is this lower incentive Comp, I think you had mentioned attrition.

Speaker 5

And then how do we think about the salary Line going forward, whether it be on a wage inflation perspective or a growth perspective? Thanks.

Speaker 4

Sure. The overall dollars, obviously, we've been making adjustments as we've gone through the year. And I would say through the back half of the year in particular, we've been letting attrition take place and just consistently adjusting Our headcount and the hours worked by our people in relation to what the volume environment dictates to continue To give service, but continuing to operate efficiently. And so I think overall, that helped drive the decrease in that quarter over quarter Those expenses, if you will. So we continue to be focused, obviously, on managing those costs.

Speaker 4

That's our biggest Cost element of our business is in the salaries, wages and benefits. And so, it's certainly the biggest area of focus as we try to Continue to run our network as efficiently as possible without giving any sacrifice to service. So I do think that Given the environment in the 4th quarter, I think we had, given the circumstances, pretty strong revenue performance. I was Pleased with the way our revenue and volumes trended and that was probably one of the favorable Line items, if you will, in comparison to the guidance that we had originally provided with respect to the operating ratio was how the salary, wages and benefits ended up coming in for us. Thanks.

Speaker 4

And It's ended up coming in for us.

Speaker 5

Thanks. Just as a follow-up, is there a way to I mean, do you expect that type of control at least for the first Half until you get to that inflection in the spring on volumes, I mean, can we continue to see that trend line stay the same for the time being?

Speaker 4

Well, I think we're in a good spot right now with where our headcount is. And typically, we start seeing increases And volume and certainly we're not in a normal environment by any stretch, but our January volumes were slightly positive December, pretty flattish overall really when you look at it from a shipment perspective. But we continue to anticipate That we will see volumes return to us in the spring. And I think we want to make sure that we've got all elements of capacity in place to deal With that environment, whenever it inevitably comes, we're certainly very confident about what our future market share opportunities will be. And so we want to make sure that we're in a position with our people, our equipment and certainly our service and our network to be able to effectively respond When that does happen, typically, the February volumes are a little bit higher than January, and it's March when we Start seeing the increase coming.

Speaker 4

And so I think that what we're trying to do is just, again, measure and manage All elements of capacity to ensure that we're in a good spot when that happens. So again, I think that Certainly, a lot in the first quarter and probably the first half of the year really depends on what the volume environment gives us, but We continue to believe that we are going to see some increase. We've certainly seen it in the past even in down economic environments, Whether you look at something as bad as the environment was in 2,009, I think 2016 is another good example where our 2nd quarter Volumes were higher than the first. And so it will be a little different situation, I think, playing out this year in comparison 2022, when beginning with April, our volumes were either decreasing or flattish on a month over month basis we work our way through the year, certainly, we'd like to see volumes flowing into us as we transition and make our way through 2023 And hopefully start getting a little help from the macroeconomic environment as well.

Operator

Our next question comes from Jack Atkins with Stephens. Please go ahead.

Speaker 6

Okay, great. Thank you. Congratulations on your retirement and I think the $34,000,000,000 of shareholder value you created since you've been CEO. Congrats on that. And Marty, you've got some big shoes to Congratulations to you as well.

Speaker 3

Thank you, Jack. You taught me well. Thanks, Jack. Appreciate the kind words.

Speaker 2

Absolutely. It's been a good run.

Speaker 6

Absolutely has been. So I guess maybe if we could, Adam, if we could maybe expand a bit on the January trends a bit more. You talked about January Up a bit or maybe even flattish versus December, anything you feel comfortable sharing there in terms of January revenue trends and tonnage or shipment Trends, that'd be helpful. And then I guess as you think about the operating ratio of Q1 versus Q4, Anything you can maybe share relative to normal seasonality would be helpful there. So I'll turn it over to you, Adam.

Speaker 4

Yes. I guess from a volume standpoint, on a year over year basis, January, our tons per day were down 7.8%. That compares to December where we were down 12.3% overall. I would point out and obviously we'll We had a little bit easier comparison with the January year over year comp and we had very strong Performance in February of last year, so that comp gets a little bit more difficult there and then they obviously start getting easier. Just, I guess, be aware of that when we give that February update in a month or so.

Speaker 4

But nevertheless, I was pretty pleased with the way really going back through the Q4, December came in a little bit stronger than what our normal sequential change Yes. And that's a month we kind of talked about, I think, on the last call, in the Q4, in particular, and some Slower economic environment is where we've seen a pretty hefty drop off in our business levels and the fact that We stayed pretty steady rather, I think was a positive takeaway for me. I was hoping that we would see Our sequential performance from a volume standpoint be a little bit closer to our 10 year average trends and certainly it was. The 4th quarter volumes were down 4.4% sequentially. The normal change is a 1.3% decrease.

Speaker 4

But If we compare back to where we were in the 2nd and third quarters relative to our 10 year average changes, I think we're starting to trend back in the right direction. Whether or not we get back to the full 10 year average, At least in the first half of the year remains to be seen. I think we probably need a little bit stronger economy, but I do think that we're going to start seeing some increases like we Mentioned, and particularly starting in March and then continuing through the Q2, and we'll see where things go from there. But I think that certainly that volume environment really will dictate What the operating ratio does, typically, just to give a little bit more color on the Q1 operating ratio, We typically have about 100 basis point increase there coming off the 4th quarter. In this particular Q1 2023, we did have a favorable insurance adjustment.

Speaker 4

We talked on the and given the guidance for 4Q Assuming that line held steady, there was improvement there and I think that, that will normalize back to around 1.2% of revenue In 1Q of 'twenty three. So that becomes a 70 basis point or so headwind for us. I think that we're going We continue to see a little bit of a headwind from depreciation as well. We've talked about this as we worked our way through last year that our delivery cycle was a little different Than prior years, and so we're probably going to see a little bit more headwind from there. So on a normalized basis, that probably puts us at about a 200 basis point Increase over where we just finished the 4th quarter, but so that kind of puts us somewhat flattish, if you will, on a year over year basis if we were to hit that, certainly, I think if we get better revenue performance, we've got the opportunity to be able to Form that longer term normalized average, but I think the revenue environment will certainly control a lot of it for us.

Speaker 6

Okay, very helpful. Thanks again.

Speaker 4

Thanks, Jeff.

Operator

Our next question comes from Vasco Majors with Susquehanna. Please go ahead.

Speaker 7

Following up on the labor piece, your headcount was down about 3% sequentially. I think that's The biggest decline besides the COVID 2Q 'twenty job that you had since you began reporting this on a quarterly basis. You talked a little bit earlier in one of the other questions about feeling like you're in a fairly good place.

Speaker 4

Can you elaborate a little more?

Speaker 7

Does that mean headcount flat So up from here or flattish and then trend with volumes from here? And just to help put a finer point on that, any commentary On productivity or the cost of heads, I don't know labor cost per employee or any other guidance you can get to help us

Speaker 2

Thanks, Baskin. This is Greg. But I'll take that and Try to give you as much color on it as possible, but obviously we've made some adjustments where we felt like we needed to in headcount. And As Adam mentioned earlier, he talked about attrition and we've kind of let attrition control some of these adjustments, but we've made some in other places Certainly, we haven't replaced openings like we typically would in a normal cycle where We're growing and whatnot, but and that will continue to be our efforts till things start to turn the other way. We'll see typically, we'll see a little uptick late February, going into March, things really start Pickup.

Speaker 2

So is that going to be the trend this year? We hope so, but just not absolutely certain. But I think we are in a good Because as I mentioned in my comments earlier, we've got an awful lot of qualified drivers that we've got Working the platform and whatnot, they're not driving full time. So I think we'll certainly be ready The increase does happen and hope it's sooner than later. But definitely We will continue to make adjustments as needed.

Speaker 2

We talked about this on some of our prior calls. We've been able to make these Adjustments and downturns in the past, I think we've proved again, we can make adjustments when we need to. We've done it again. Feel good about where we are. We just have to continue to stay on top of it and react as the business dictates.

Speaker 2

Yes. I hope that helps.

Speaker 7

No, it's very helpful. Just to maybe cap that off, any thoughts on Items that could impact kind of the cost per head this year. I don't know if there's some variables on incentive comp or other things that might that a little wonky versus what we would deem a normal trend based on history.

Speaker 2

Not as I know of I don't think so. I think it should be fairly normal from that standpoint. We've had we certainly had some good experiences In the recent past with our benefit cost and those kind of things. So you just hope that those things continue to be consistent,

Operator

Our next question comes from Tom Wadewitz with UBS. Please go ahead.

Speaker 8

Yes. Good morning and congratulations also to both of you, Greg and Marty. And Greg, yes, just Remarkable run. So congratulations on the great performance over time. Let's see.

Speaker 8

I think if I guess just in terms of the view on tonnage, I know you have a large customer base, so maybe it's tough to parse it out. But What would you say about the, I guess, dynamic in terms of volume from retail customers And volume from industrial customers, it seems like probably there's been a lot of weakness and focus on inventory reduction with retail customers, Maybe a little less clear what's happened with Industrial. So just trying to think about is there potentially some weakness yet to come with Industrial? Have you seen a pretty big difference in the volumes from those two groups? So kind of any thoughts on that topic would be helpful.

Speaker 8

Thank you.

Speaker 4

Yes. Good morning, Tom. I would say during the Q4, we saw pretty consistent revenue performance with both our industrial Customer base and our retail customer base, I would say earlier part of the year, we had seen a little bit stronger performance On the industrial side and those 2 kind of converged, if you will, in the Q4. Obviously, our customer base leans More industrial than retail, we're still 55% to 60% industrial overall and 25% to 30% so on the retail side, longer term that retail business has been growing faster than the industrial and I think that reflects Some of the e commerce trends and the effect of those on our customer supply chains. And We certainly continue to believe that, that will be a longer term tailwind for us.

Speaker 4

And I think that as we start working through 2023, and we believe that we'll start seeing customers' orders for their product picking up and some inventory Rebalancing, if you will. And I think that's why we've seen in some of the prior slow periods that I Spoke of earlier why you start seeing the orders and freight flows kind of leading The other macroeconomic indicators, so we believe that the freight cycle will start turning and we'll start seeing some pickup and It's through these customer interactions and conversations that support our belief that we're going to start seeing freight flowing again As we get into March and into the Q2.

Speaker 8

But it sounds like you haven't seen a big difference Maybe over the past in 4Q or even 3Q in performance from industrial and retail. And I guess looking forward, do you think maybe both of them kind of

Speaker 4

And maybe we start seeing retail outperform again. While ISM and some of the industrial numbers look a little bit weaker. We start getting some of that retail performance as an offset, leading us out. And eventually, we'll start seeing the industrial picking back up again.

Speaker 8

Right. Okay, great. Thanks for the time.

Speaker 2

Thanks, Tom.

Operator

Our next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Speaker 9

Hey, thanks. Good morning. Yes, Congrats absolutely to Greg and Marty. It's been a heck of a run, certainly Greg. When I guess I wanted to talk a little bit about how you guys are planning for the potential improvement in tons that you may See in the spring, you guys have always been very good at being out in front of potential opportunities.

Speaker 9

But do you think that there are Incremental costs that need to come on the network before that happens, are you fairly comfortable being able to sort of let tonnage lead you out of this to drive incremental margins, which obviously guys have performed quite well with over time?

Speaker 4

Yes. I think that, Chris, that Some of the conversation earlier about headcount, probably on paper, we may be a little bit heavy now. If you just look at things Statistically, if you will, but that's kind of the point of what we've said is I think that we're in a good spot With our headcount, with our fleet and certainly with the service center network to be able to let volume start flowing again. And when we talk about increases, just keep in mind that we're talking about sequential increases. And certainly with the year over year comps, Particularly in the first half of the year, we've got some tougher year over year comparisons there Before we get back to just being able to show year over year growth.

Speaker 4

But I think that will be the important thing for us to continue to watch Are we seeing those type of sequential increases? And certainly, we've got a lot of flexibility within our workforce. And I think that Given the team that we have and the current levels, we should be able to respond to growth when it starts coming at us And get some good leverage as it does. But certainly, we're looking at right now in the Q1, Like I mentioned with the January tonnage levels, we've got probably the volumes that We're going to be the toughest comp. And certainly, overall, in the Q4, we were down 9.1%.

Speaker 4

Our yield performance is still looking good, and we certainly expect to continue to push Core yield increases this year to offset our cost inflation as well, but there could become some Converging factors, if you will, that drive the top line depending on what the overall fuel environment looks like and so forth. We're certainly going to continue to look and execute on the same pricing philosophy that we have in the past And look for cost plus increases to offset the cost inflation that we see in the business and to keep supporting These expensive investments that we're making in our real estate network and technologies that can Both improved customer service, but also drive further operating efficiencies for us. So a lot of things to kind of manage through, in particular, the first half of this year, But I think we're in a good spot to be able to handle the volumes if they do, in fact, flow our way.

Speaker 9

Yes. That's very helpful. I appreciate that color. On the point of pricing, just a follow-up, ex fuel yield did accelerate the year over year growth that accelerated in the Q4. And I guess You're guiding the Q1 OR roughly speaking to around flattish, which may coincide with the worst tonnage you're going to see from a year over year standpoint.

Speaker 9

So When you take a step back and think about 2023 more broadly, is OR expansion on the table given those Is pricing good enough to be able to offset inflation as we go and tonnage potentially gets less worse as the year progresses?

Speaker 4

Well, I think that, Again, the revenue environment will have a lot to say about that. More broadly We've talked and kind of pointed everyone to our performance in 2016 and 2019 when we've been in A flatter revenue environment. Certainly, given the planned investment of about $800,000,000 in capital expenditures this year And with some pressures that we'll see on depreciation starting earlier in the year than normal, We will have some pressures, if you will, on those overhead costs, and we saw a little bit of that in the Q4 already, where overhead Costs as a percent of revenue were flat in 4Q 'twenty two versus 4Q 'twenty one. But like we did In 2016 and in 2019, the focus when we're in a flat to a down revenue environment will be managing our variable cost Flat and we'd love to see improvement, but trying to hold all those costs flat and then any Deterioration, if there is anything, would be in those overhead costs, in particular, on the depreciation side. And Yes.

Speaker 4

I think that in 'sixteen, we certainly saw a little bit of a decrease in the operating ratio or an increase rather, Depending on how you look at it, but I think our operating ratio deteriorated 60 basis points that year and that was something that It was right in line with the change in the depreciation line item and then 2019 was the same thing Where we had a 30 basis point deterioration there. So we'll take it quarter by quarter certainly, and we'll talk as we get to the end of next quarter's call about what we think we may be able to do in 2Q, but certainly feel like we're probably going to have a little bit more pressure on the overhead This year, if we are in fact in a flat to slightly down revenue environment, but there's still a lot up in the air When it comes to the top line for this year.

Speaker 9

Okay. That's very helpful. Thanks for the time, guys. Appreciate it.

Operator

Our next question comes from Scott Group with Wolfe Research. Please go ahead.

Speaker 10

Hey, thanks. Good morning, guys. And again, congrats Greg and Marty. I was wondering, can you give us so the yields ex Fuel accelerated in Q4. Is any color?

Speaker 10

Is underlying pricing accelerating here? And then Adam, I think you talked about 13% total yield growth in January. Any way you can just help us on the Gross on the net of fuel, I just want to understand if that net of fuel is continuing to accelerate? Thank you.

Speaker 4

Yes. Net of fuel in January was about 8.5 Percent. So fairly consistent with what we just did in the Q4 overall. And we are starting to see A decrease in fuel, and we'll see how that continues to trend This year, and so perhaps the yield with and without the fuel, those two numbers will maybe be a little bit more consistent. I think that if you hold steady with where we are right now, it certainly becomes a headwind as we get into the later quarters of the year.

Speaker 4

But nonetheless, I think that certainly there's always mix changes that can drive that number higher or lower, but I think It's pretty consistent with what our long term philosophy has been. We certainly dealt with higher cost inflation on a per basis in 2022 than what at least I initially expected. I thought we would see some cost moderation As we got into the back half of the year, which obviously did not happen. So we just continued to execute on Same consistent philosophy that we always have, and I think that's why we saw the yield performance that we did. But I believe that calls should be a little bit more favorable versus the last couple of years In 2023, certainly that's our hope and we'll continue to build our cost model around what that cost inflation The expectation is and then continue to try to achieve 100 basis points to 150 basis points of positive spread above that inflation to again support The investments that we're going to make.

Speaker 4

So I think overall, if you just sort of roll out typically the Q1, our yield metrics We're up about 0.5% over the 4th quarter. We'd expect to continue to see if mix is constant, those numbers increase Sequentially quarter after quarter, but certainly that some of that growth, if you will, May start to moderate a bit, but again, you're going to see that same type of moderation or should with the cost. But Nonetheless, the overall philosophy stays the same and we'll continue to look for cost plus pricing.

Speaker 10

Very helpful. And just because you mentioned the fuel and maybe the surcharge revenue in Flex negative, how does that impact your thoughts on the question earlier about Operating ratio improvement this year?

Speaker 4

Well, again, it's just it's one of the drivers on the top line that is a change that We will deal with and I think overall, it would be a positive for the economy and something that would be good to see. I don't know anybody that would like showing up at the pump and seeing that bigger number. And certainly, that's been a big cost driver for what we've I think it's better too for just cost inflation and other line items. I think the increased cost of Fuel is driving inflation in about anything, whether it's a product or a service that we're buying. So I think a decrease there certainly helps.

Speaker 4

But as we look back, 2015, 2016 were the time frames that we last Went through a bigger decrease in average fuel prices and I think we continue to try to manage just like we did in those And continuing to manage the different components that go into building out our rates with customers, whether it's base rates, Fuel surcharge or accessorials, managing all the revenue inputs with the cost inputs and trying to account for Whether or not fuel goes up or down, so it's just something that our pricing and cost in teams and our sales teams I've got the work through as we're working through renewals with our customers every day and just looking and seeing where we are and what we feel like we need To keep driving improvement in our customer specific pricing and profitability.

Speaker 2

Thanks, Scott.

Operator

Our next question comes from Allison Polak with Wells Fargo. Please go ahead.

Speaker 11

Hi, good morning. I just want to ask about potential customer attrition, just given some of the freight challenges out there and Certainly, your customer focus on cost. Are you seeing any sort of attrition as customers try to trade down, obviously, quality, but price as well? Or are the dynamics maybe a little different this cycle? Just any thoughts there.

Speaker 3

Yes. Good morning. This is Marty. I'll take that one. We aren't seeing anything like we saw back in 2008 or 2009.

Speaker 3

We have customers in here every week And our larger customers, contract customers come in and it's business as usual. They're coming in and asking for contract renewals, additional services So we're not seeing anything out of the ordinary for the economic circumstances, There's no major price cutting or anything like that. So I feel pretty confident that the end is probably near

Operator

Our next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Speaker 9

Thank you. Good morning. Marty, since we have you, you're entering you're already there, but You're entering the head seat in the best mousetrap in the industry probably on the precipice of breaking the 70 OR basis. You've already laid out your CapEx for this year, but as you think strategically over the next few years, anything you're thinking about differently as it relates to growth, As it relates to the labor, etcetera, or is it just kind of ride the cycles of what you've had and continue to Get incremental productivity out of that mousetrap.

Speaker 3

Well, one of the reasons we've been able To grow like we have over the last years is because we continue to build capacity even during slow times and I don't see us moving away from that Focus. So we'll continue to do that. We'll continue to buy new equipment And hire employees as needed. So I don't see any change from what we've been doing that's made us successful in the past.

Speaker 9

Thanks, Mary.

Operator

Our next Question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 12

Thanks. Good morning, everyone. Congrats, Greg and Marty. And Marty, yes, please don't change a thing, Just

Speaker 3

to

Speaker 12

lie in that seat and don't do anything. A couple of follow ups here. Do you feel like you have a better ability to capture that Spring inflection and growth if it comes versus peers, given how much free capacity you have, do you have a sense of your ability To grow into that volume relative to peers?

Speaker 4

I don't know about relative to peers, but certainly we feel confident about Our ability to grow and I think you look at things in the past, we've certainly have been outgrowing the market Relative over the last 10 years, in particular, year in and year out, when we're in up cycles, That's when our business shines the brightest. And certainly, our service is what wins us share and having available To respond to customers when they need us the most, that's kind of our hallmark. And so we're sitting in a very good spot right now to be able to respond That growth when the phone calls come, we're going

Speaker 2

to be picking them up.

Speaker 12

Got it. Sounds good. Maybe as a follow-up kind of on the fuel topic. I mean, there's a lot Speculation in the investment community about like fuel and kind of how much is driven earnings. And I think a lot of you I mean, you and a lot of your peers have been saying that, Hey, there's a new algorithm when it comes to fuel pricing and it's stickier than you think, etcetera, etcetera.

Speaker 12

So how do we think about How fuel becomes a headwind in the back of the year? Kind of, does anybody quantify that? And also, kind of how much of that fuel Can be sticky and kind of convert the base rate over time, do you think?

Speaker 4

It's something that's we've certainly faced this question before when fuel changes. I think that we got in A pretty long period where we were at low fuel prices, kind of going back to when that final decrease happened in 2016. And I'd say we had pretty good results between 2016 2020 when we were in a lower fuel environment. And Again, I think that it's something that maybe people on the street, it's hard to understand if you're not negotiating With some of these types of contracts, but for us, it's all about having a good cost model, understanding our cost And knowing what the revenue and the cost inputs are going to be, whether fuels $5 a gallon or $3 a gallon, it's just something that we've got to manage through. In some environments, Some customers may want more or less of an increase coming through a base rate type of change.

Speaker 4

Some may want more exposure to that variable component of pricing that would be the fuel surcharge and There's ways to increase yields by driving productivity with customers as well where we can obtain the same objective by just looking at the Factors underneath and having all of our systems tied into our cost model allows us to have those types of conversations with our customers as well. Ultimately, it's just about driving customer specific profitability improvement and working our continuous improvement cycle So that we can continue to purchase real estate and expand our network, so customers have got that To leverage within their own supply chains, we're effectively buying capacity on behalf of our customers. So I think we got to just continue to execute on that front. And I think that we've shown in terms of going through prior cycles that we'll be able to do so.

Speaker 12

Understood. Thanks guys.

Operator

Our next question comes from Ken Stuewe, Bank of America. Please go ahead.

Speaker 13

Great. Good morning and again congrats Greg on your tenure and Marty on the new role. Just a quick clarification, I guess, on that spring pickup, you've talked a bit about it. Is that just comp based or is there commentary that you're hearing from customer comments or Just a guess on chewing up inventory. I just want to understand why the I guess the confidence in that given the market.

Speaker 13

And then my question is on depreciation. You noted depreciation is going to be higher. Year you targeted, I think it was $485,000,000 on equipment at the beginning of this year. This year you're doing $400,000,000 on Is that because the delivery schedule was slower? What's your view on getting that equipment?

Speaker 13

And does that still allow you to stay at that 20%, 25% excess capacity that you typically target? Thanks.

Speaker 2

Yes. Ken, this is Greg. I think I think so. I'll take your revenue question first, but we typically always pick up in the spring. So Certainly, we're hopeful that we get back into a more normal cycle than what we've certainly been in really since COVID.

Speaker 2

We've kind of been off cycle, if you will, if that makes sense. And the normal Numbers at sequentials that we compare with all over the years, they've just been different in the last couple of years. So certainly Back to a normal cycle would be one reason we are somewhat hopeful. Some of the things that we've seen, heard and read, Inventories are starting to get low compared to where they were back, say, a year or 6 months ago. So I think there's some things that lead us to believe that we could be coming out of this thing.

Speaker 2

Plus, we've been through Many, many cycles over the years and typically they're a year, 16 months and we kind of think that that's what we've been And this one, so yes, we're hopeful, got our fingers crossed that We will come out of this thing as we get into the spring and later on in the Q2. As far as the equipment, yes, it's been kind of funky, the deliveries that we Cycle that we've been on this time, we certainly didn't get everything back last year like we typically would. Typically, we would have all of our orders In the early fall, we had everything in place that wasn't the case this year. We're We've still taken some equipment that we should have gotten back last year. So it's been a little different.

Speaker 2

So we'll just have to see how the business develops and I think that's going to determine where that $400,000,000 that we talked about number, where that goes this year. So we'll just have to see and it will certainly be based Our business conditions and the numbers that we see as we get all into 2023 as to how that 400

Operator

Our next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.

Speaker 14

Thanks, operator. Hi, everyone. Greg, hearty congratulations on the retirement and Marty looking forward to working with you as well. I guess I wanted to ask about pricing. I know pricing discipline is good, so it's not really about that.

Speaker 14

But I We've seen a lot of LTL companies in recent months announce general rate increases. I guess what's surprising to me is Some of the ones that have even a little bit weaker service, that may be more tempted to lean into price have also announced Big price increases. And I want to understand like the reaction from the customers because in a typical cycle, A customer would maybe trade down to regional lanes with high quality carriers. Maybe you'd lose 20%, 30% of your lanes or 2 or 3 lanes or whatever it is. That doesn't seem to be occurring right now where Shippers are not moving to other high quality but regional lanes.

Speaker 14

And I want to understand, 1, why you think that might be like what's The psychology of your customers in terms of

Speaker 12

how they think this cycle is going

Speaker 14

to play out. And then second, how does that impact your ability to bounce back? Because I would assume there's a big seasonal pull in March April, May. You don't have to win back lanes. You don't have to win back customers.

Speaker 14

So you can kind of See it first in terms of that upswing. So sorry for the long winded question, but hopefully that was clear.

Speaker 4

I don't know if I can explain the psychology of our customers, but I did take a psych class in college once, so I'll give it a shot.

Speaker 2

But I think that we've talked

Speaker 4

a lot about this that since going through COVID, There's been so much disruption to customer supply chains and missed revenue opportunities, incremental cost added to production lines, Just because of all the supply chain challenges that many of our customers have been dealing with over the last couple of years. I think for that reason, we've seen a little bit of change in customer behavior. I think customers have been sticking with us. And certainly, Over the last year, as Marty mentioned earlier, despite the weakness that we've seen in the economy, we've seen good customer trends. We get periodic reporting from our national account sales teams and we just we've not been losing customer accounts.

Speaker 4

I think customers have been keeping us in place because they inevitably know that, one, there are many are still dealing with challenges. A lot of the conversations that we continue to have More around challenges within the supply chain, and I think, too, is that they know that we're probably closer to things turning And orders picking back up for our customers' products and they want to make sure that they've got capacity that's available as needed. There were a lot of Competitors that had embargoes in places and communication to customers saying, I'm picking you up today, but I can't pick you up tomorrow. And we were able to respond, in particular in 2021, to a lot of those customers that called on us needing capacity. And I think that, that strengthened the relationships that we have with our customers, and we've got a lot of continuity within our customer base Anyway, so I think those everything that's happened over the last couple of years has really strengthened those customer Relationships.

Speaker 4

So I think that one of the things you said as part of your question though gives us a little confidence In terms of when those orders for our customer products start picking up again in a sense that In prior cycles like 2016 or 2019, where we may have lost a few lanes or lost Customer account, we were always confident that the business would return to us in many cases because the customer told us that they wanted to bring us back And when they could, but we had to wait until the next bid cycle before we got that opportunity. Customers are keeping us in place. They're Keeping their contracts current, pricing terms updated. And so I feel like that whenever those orders start picking up, We may be getting 3 shipments instead of 2 at every pickup and volumes should return to us quicker than perhaps They have in prior down cycles.

Operator

Next question comes from Ari Rosa with Credit Suisse. Please go ahead.

Speaker 15

Great. Thanks. Good morning, everyone, and congrats, Greg. It's certainly been an impressive run that you've had and congrats also to Marty On some big shoes to fill here. So I wanted to ask about, you guys have talked about for some time, the ability to get the OR into the 60s.

Speaker 15

I understand obviously there are different puts and takes on kind of economic uncertainty, maybe some cost inflation, but also talking about this That's expected for Q2. It seems like there's some optimism there around the ability to perhaps improve OR year over year, which would certainly suggest that you're kind of bumping up against that ability to get the OR into the 60s. Just wanted to get your updated thoughts on kind of given the progression of OR improvement that we've seen over the last couple of years. Do you think that OR in the 60s is achievable, Whether it's 2023 or into 2024?

Speaker 4

Well, again, I think like we were saying earlier, certainly 2023, Just given the environment, it's certainly going to be a little bit more challenging. And we're continuing to keep our eye for the future. We're investing or plan to invest $800,000,000 in capital expenditures this year when the economy is certainly soft right We may end up being in a flattish type of revenue environment. So revenue will certainly dictate a lot, But I think that just given the comparison to the 2 years that we've talked about, and you can make your own assessments as to what you think revenue may end up being for us for this year, but if we're in a flattish revenue environment, then certainly, We've seen the operating ratio increase slightly in those years, but the positioning that we're going through is To make sure that we're in a great position to be able to respond when that inflection does happen and we get back to a revenue growth environment. We've averaged 11% to 12% revenue growth per year over the last 10 years, and we think of ourselves as a growth company, We're certainly going to be disciplined in periods where the economy is softer and we've seen flattish Type of revenue in those environments in the past when the economy has been slower.

Speaker 4

So I think certainly a lot depends on that, but If we had any type of OR degradation in the short run, meaning just for this year, the positioning and the recovery year is usually pretty doggone Strong. And so we continue to stand behind our goal of wanting to get to a sub-seventy percent operating ratio. We didn't put a timeframe behind that when we laid it out last year at this time, for this sole reason, we don't want to be beholden to something that's In the short run, that may jeopardize our opportunity for producing strong profitable growth in 2024, 2025 and beyond. And I'm confident that we'll certainly be able to get the sub-seventy percent for the year. We certainly did it for 2 quarters this year in the second and third quarters.

Speaker 4

And so I think we've shown that it can be done. And just to be clear, we continue to say that, that is our next goal, But it will not be the final goal. We think that we can continue to go further from there, but we're going to keep that goal in sight for now. Once we achieve it, then we'll lay out where the next site might be in this long term OR journey.

Speaker 15

Got it. Understood. And then, I wanted to ask also, as I think about the conditions that you've kind of been Driving for 2022 where volumes have been a little bit softer than what you would have hoped for. Obviously, we've seen headcount come down. And yet your earnings growth was obviously very strong this year at 35% plus.

Speaker 15

To what extent when you're going out and talking to customers Who maybe were a little bit squeezed on capacity during COVID conditions. As Supply chains normalized, does that put a little bit of a headwind on your ability to go to customers and kind of ask for rate increases? Or conversely, do they kind of push back and say, look, we gave you rate increases when capacity was really tight, but now the Supply chain is kind of normalized a little bit. Are they pushing back any more on some of the rate increases Relative to what they were over the past kind of 12 to 18 months?

Speaker 2

I think the answer to that is yes. They Push harder when they know they are in a position to do so and certainly with conditions being soft like they've been, yes, they're pushing us for Not as big of an increase and that kind of thing, but you got to remember, we don't necessarily go into a customer and start talking about Price, we talk about the value that we provide that customer and that's what we will continue to sell them. We sell them value And many times value and price are pretty darn close, if you know what I mean, because if you're not getting value, what does the price So that's what we'll continue to sell. And thankfully, I think our customers have seen that and what OD has delivered Over the years and that's a huge reason for the success that we've had. So we'll continue to focus on selling value and And not price and honestly try not to have those conversations.

Speaker 3

One of the things our sales team does The job of is sharing our costing with our customers, especially our large customers. We're an open book. We actually You know what we're paying for equipment, how much it costs to cross dock their freight, pick it up, sort and seg it, whatever the cost may be. And once you Explain to them what our costs are. It's a lot easier to swallow a general rate increase.

Speaker 3

So I think most of our customers understand what our costs Understand what our costs are and we try to explain that to the best of our ability.

Speaker 15

Okay. Makes a lot of sense. Thanks for the time and the thoughtful answers and congrats again Greg and Marty.

Speaker 4

Thanks.

Operator

Our next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Speaker 16

Thank you very much. And I'll also echo congratulations Greg and congratulations Marty.

Speaker 2

A lot of my questions have

Speaker 16

been answered at this point. Just Kind of a real quick one on fuel and the potential headwind that you're talking a little bit about for 2023. If I just look at This quarter, fuel surcharge revenue up $97,000,000 incrementally, fuel expense up $48,000,000 incrementally, So or $49,000,000 So the net of that was a positive $48,000,000 Total operating income was a positive $58,000,000 So I guess part 1 is, is the math that simple that of the $58,000,000 operating income improvement $48,000,000 was the fuel differential. And then I guess if so, As I look at 'twenty three given where fuel is right now, can you put or quantify what the magnitude of that headwind would be, say The fuel surcharge component coming down, which you alluded to in the January data versus fuel expense?

Speaker 4

Yes. The short answer is that the math is really not that simple. Going back to prior comments, Fuel is just one of many elements that get negotiated as part of a customer's rate Each year, so it could be that we get more fuel surcharge in one particular year, more base rate And another, and so trying to look out and measure what the surcharge revenue Piece is versus what the potential expense might be, it's not really a one for one comparison in that regard. The surcharge, If a customer has decided to take on more variable exposure to that fluctuation in fuel, it's covering many more cost settlements And just the cost of fuel and other petroleum based products, certainly that's what it's designed to cover, but that's not Everything that is covered by that variable component of pricing. So again, I think the if you want to look back into a declining Fuel environment, I would point people to look at 20152016.

Speaker 4

In 'fifteen, the average Price of fuel was down 30% that year. Of course, we had volume growth in a little different macro environment. And so as a result, we were able to Improved the operating ratio that year. In 2016, the average price of fuel decreased further, decreased about 15% that year, And that was one of the years, as I mentioned earlier, that we had a 60 basis point increase in the operating ratio. The overall macro was a little softer, Volumes were certainly flattish that year and so a little bit different top line makeup, if you will.

Speaker 4

But Yes, that's probably a little bit more relative comparison, is looking back at how some of those revenue changes quarter to quarter And cost changes progressed in that year. But we're certainly managing through it, and we're looking at we've got contracts Turnover every day and they progress through the year. So if fuel stays where it is today, Then we're looking at a contract with a base rate of fuel at 4 58 a gallon versus last year we were looking at it and it would have been 5 something per gallon. So you just always got to look at What the current environment looks like and then try to risk adjust for do you think fuel prices may go up? If they do, again, how does the top line for Each individual customer account change and what do the cost inputs change.

Speaker 4

If fuel goes down, you do the same thing and try to make sure that Those fuel scales, as they work on each customer account that we're still effectively getting paid for the service Providing and like Greg said, the value that we are offering. And so that's what we stay focused on and it's why it's so important for us to look at

Speaker 2

All right.

Speaker 16

Thank you for the clarification. But the math for the Q4 would be Fair at face value, but there's more uncertainty to your point looking to 'twenty three. Is that the right way to think about it?

Speaker 4

Well, certainly there's Uncertainty with respect to what fuel may end up averaging. We had seen it declining a little bit more and then it Kind of reverted back and had a little bit of an increase over the last couple of weeks as well. But certainly, if it holds steady from here, Maybe we see fuel prices that are down 10% or so this year, but I think it's better for the U. S. Economy if we get back to a lower fuel And certainly, we will deal with that from a company standpoint.

Speaker 4

It's not going to change our long term objectives, and we're not changing our operating Joe, goals, just because fuel may ultimately decline, those are certainly built into what our longer We think that it should decline overall, and hopefully, we get back to a lower fuel environment.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.

Speaker 2

Well, thank you for all of 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.

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