Old Dominion Freight Line Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• Drew Andersen, Investor Relations
• Kevin Freeman, President and Chief Executive Officer
• Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary

Analysts

• Matt, Stifel Nicolaus
• Ravi Shanker, Morgan Stanley
• Chris Wetherbee, Smith Barney Citigroup
• Ken Hoexter, Bank of America Co.
• Amit Mehrotra, Deutsche Bank Aktiengesellschaft
• Jon Chappell, Evercore ISI
• Tom Wadewitz, UBS Group AG
• Bascome Majors, Susquehanna Bancshares, Inc.
• Jason Seidl, TD Cowen
• Jack Atkins, Stephens
• Eric Morgan, Barclays PLC
• Stephanie Moore, Jefferies Financial Group Inc.
• Scott Group, Wolfe Research
• James Monigan, Wells Fargo & Company

Presentation

[Operator]

Hello and welcome to the Old Dominion Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions]

I would now like to hand the call over to Drew Andersen. Please go ahead.

[Drew Andersen, Investor Relations at Old Dominion Freight Line]

Thank you. Good morning and welcome to the fourth quarter and full year 2023 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 7, 2024 by dialing 1-877-344-7529, access code 2607922. 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 facts 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 ask, in fairness to all, that you limit yourself to just one question 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. Marty Freeman. Please go ahead, sir.

[Kevin Freeman, President and Chief Executive Officer at Old Dominion Freight Line]

Good morning, and welcome to our fourth quarter conference call. With me today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. Old Dominion's fourth quarter financial results reflect continued softness in the domestic economy, which is similar to how the economic environment sailed throughout much of 2023. As a result, the rebound in volumes that we had anticipated back in the spring never fully materialized. Despite the softness in the economy and weaker-than-expected volumes, the OD team faithfully executed on the same long-term strategic plan that has guided us through the ups and downs of the economic cycle many times before.

During the fourth quarter, our LTL tons per day decreased 2% as compared to the fourth quarter of 2022. Although our LTL shipments per day and overall market share improved, we also improved the quality of our revenue during the quarter as well, which contributed to an increase in both our quarterly revenue and earnings per diluted share for the first time in 2023. We believe that underlying demand for our LTL service remained consistent in the quarter, which corresponds to the consistency in our volume trends. The stability of our volumes also reflects our ongoing ability to deliver best-in-class value proposition. We were pleased to provide an on-time service performance of 99% and a cargo claims ratio of 0.1% during the quarter, which also supported the ongoing execution of our yield management initiatives.

We have said many times before that long-term improvement in our operating ratio is dependent upon a consistent improvement in density and yield, both of which generally require the support of a positive macro environment. While our network density was challenged this year, we improved our yields by maintaining our consistent cost-based approach to our pricing. This approach focuses on improving the profitability of each customer through yield increases that are designed to offset our cost inflation and support further investments in capacity and technology.

We continued to invest significantly during the 2023, as we remain confident in our ability to win market share over the long term. Our capital expenditures totaled $757.3 million for the year, of which $291.1 million was spent for the ongoing expansion of our service center network. We opened two new service centers in 2023 and have several others under construction and nearly complete that could be opened quickly once the demand environment improves.

Our team knows firsthand how quickly the demand environment can change in the LTL industry, and we are very experienced at growing our company without sacrificing the quality of our service. To do so, however, requires us to maintain certain amount of excess capacity in our service center network. We are pleased to currently have approximately 30% excess capacity in our network, and we have the ability to expand it further as needed to help ensure our network is never limiting factor to our growth.

While the investments in our service center network, our equipment and our technology further improved the overall quality of our service in 2023, the best investment we made was in the OD family of employees. We improved the capabilities of our team and strengthened our unique Company culture, which has defined OD for many years. Our long-term strategic plan may sound simple on the surface, but no one in our industry has been able to replicate our success because they do not have our people or our culture. Our team is fully committed to our proven business model, and as a result, we believe we are strongly positioned to respond to a positive inflection in demand once the domestic economy begins to improve.

We are confident in the opportunities that lie ahead. And it is our belief, our team's focus on delivering superior service at a fair price will support our ability to produce further profitable growth, while increasing shareholder value.

I want to thank you today for joining us this morning. And now, Adam will discuss our fourth quarter financial results in greater detail.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Thank you, Marty, and good morning. Old Dominion's revenue for the fourth quarter of 2023 was $1.5 billion, which was a 0.3% increase from the prior year. This slight increase in revenue was primarily due to a 3.0% increase in LTL revenue per hundredweight that more than offset the 2.0% decrease in LTL tons per day. Our quarterly operating ratio was 71.8% and earnings per diluted share were $2.94, which was a 0.7% increase from last year. As Marty previously mentioned, this was the first quarter with an increase in both revenue and earnings per diluted share since the fourth quarter of last year. While it certainly has not felt like one of our record years from the past, $2.94 also represents a new Company record for fourth quarter earnings per diluted share.

On a sequential basis, our revenue per day for the fourth quarter increased 1.9% when compared to the third quarter 2023 with LTL tons per day increasing 0.6% and LTL shipments per day decreasing 0.3%. For comparison, the 10-year average sequential change for these metrics includes a decrease of 0.8% in revenue per day, a decrease of 1.6% in tons per day, and a decrease of 3.4% in shipments per day. The monthly sequential changes in LTL tons per day during the fourth quarter were as follows: October decreased 0.7% as compared to September, November decreased 0.6% from October, and December decreased 4.8% as compared to November. The 10-year average change for these respective months is a decrease of 3.5% in October, an increase of 3.5% in November, and a decrease of 8.0% in December.

For January, we expect our revenue per day will decrease approximately 3.1% as compared to January of 2023 with a decrease of approximately 5.1% in our LTL tons per day. These numbers could be plus or minus 10 basis points or 20 basis points, depending upon today's revenue performance. We expect our revenue per hundredweight, excluding fuel surcharges, will increase approximately 6.4%, which is generally in line with normal seasonality for this metric. We will file the actual revenue-related details for January in our Form 10-K.

Our operating ratio increased 60 basis points to 71.8% for the fourth quarter. We continued to operate efficiently during the quarter despite the lack of network density, but our direct operating costs increased as a percent of revenue. The increase in these costs was primarily due to an increase in our insurance and claims expense as a percent of revenue, which is attributable to changes in the annual adjustment we record in our fourth quarter each year relating to our third-party actuarial reviews. We were otherwise pleased with our control over direct operating costs during the quarter as our team did a nice job of matching labor to current revenue trends.

While our LTL shipments per day increased, our average headcount was down 4.1% when compared to the fourth quarter 2022. We currently believe that our workforce is appropriately sized for our current shipment trends, but we will likely need to add to our workforce this year as volumes begin to improve.

Our overhead cost also increased as a percent of revenue despite our best efforts to control discretionary spending. Depreciation expense as a percent of revenue increased 80 basis points when compared to the fourth quarter of 2022, due primarily to the execution of our 2023 capital expenditure plan. The increases in depreciation and other overhead costs were partially offset by a 90 basis point improvement in our miscellaneous expenses as a percent of revenue, which included $15.1 million of gains on the disposal of property and equipment.

Old Dominion's cash flow from operations totaled $436.7 million for the fourth quarter and $1.6 billion for the year, while capital expenditures were $105.9 million and $757.3 million for the same respective periods. We utilized $85.5 million and $453.6 million of cash for our share repurchase program during the fourth quarter and 2023 respectively, while cash dividends totaled $43.6 million and $175.1 million for the same periods. We were pleased that our Board of Directors approved a 30% increase for the quarterly dividend to $0.52 per share for the first quarter of 2024.

Our effective tax rate for the fourth quarter of 2023 was 24.1% as compared to 25.0% in the fourth quarter of 2022. We currently anticipate our annual effective tax rate to be 25.6% for 2024.

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

Questions and Answers

[Operator]

[Operator Instructions] Today's first question comes from Bruce Chan with Stifel. Please go ahead.

[Matt, Analyst at Stifel Nicolaus]

Good morning, team. This is Matt on for Bruce Chan. Thanks for taking our question. You've highlighted some market share gains in the past couple of quarters here post Yellow, and wanted to get your sense of to what extent do you expect these to continue as more competitors bring on new capacity?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Sure. We -- certainly, our long-term story has been winning market share over time, and we believe we'll continue to win market share into the future as well, primarily based on the value proposition that we offer and superior service at a fair price. And as we mentioned earlier, our on-time service continued to be 99% during the quarter and our claims ratio was at 0.1%, and that is what's driven our market share over time. Typically, when we're in a slower macro-environment like we've been in, our market share tends to be flatter. But once we start seeing a recovery in the economy, that's when we think our model shines the brightest. If you look back in periods past, when the upcycle begins, that's when we've got plenty of network capacity. The job that we've done with managing our people capacity and equipment capacity as well, combining with the real estate, positions us to capitalize on those upswings, and that's when in the past, we've been able to outgrow the other publicly-traded peers anywhere from 600 basis points to 1,000 basis points. So we are still waiting on that positive inflection in the economy, but I feel like we're better positioned than we've ever been to capitalize on it when the upswing begins.

[Matt, Analyst at Stifel Nicolaus]

Great. Thanks for that. And as a quick follow-up, how do you see industry capacity this year versus last year? And do you have a quick view of what percentage of late and offline capacity might return as we progress throughout this year? Thanks a lot.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, I think that there's a lot of settling that still needs to occur post Yellow closing their doors. But if you go back a year or more, we were a capacity-constrained industry. And I feel like once all the dust settles, capacity is shifting around a bit, but we will continue to be a capacity-constrained industry. All of those service centers will not end up in the market. Yet all of those freight shipments will be and will have to be handled by someone. So, I feel like, especially once the economy recovers, we'll most likely be viewed as a capacity-constrained industry once again.

[Matt, Analyst at Stifel Nicolaus]

Thanks for the time.

[Operator]

Thank you. The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

[Ravi Shanker, Analyst at Morgan Stanley]

Thanks. Good morning, gentlemen. Maybe as a follow-up on that, I'd just love to get your thoughts on how the Yellow asset auctions stand out versus your expectations. And maybe a broader quick question there is based on that, do you think the next upcycle is going to play out differently with the redistribution of capacity from one entity like Yellow that was constantly ceding share over several years to a handful of entities now trying to gain share? Do you think that changes the competitive dynamics at all?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

I don't think so. just like I mentioned before, we've been able to win market share over the long term based on the quality of our service, first and foremost, and the value proposition that we're offering and our customers. And we believe that, that same formula will continue to win share for us as we go forward. It takes adding capacity to be able to continue to grow, and that's why we've always invested ahead of the growth curve and tried to target having about 25% excess capacity in the service center network at all times. And so, right now, we mentioned that we're at about 30% excess capacity, so we're a little north of where we've historically been. But we believe it's always important to consistently invest and keep that focus on the long-term opportunities, and that certainly played to our benefits in the past.

It's hard to say with the Yellow process, with their service centers, but net-net, we believe that there would be some exit of capacity, and I think that's generally what we'll end up seeing once all the dust has settled on things. And we obviously took a look at those service centers early on, didn't end up with anything. And that's why, given the state of where our network is today and the opportunities that we continue to have to expand it, and we felt like just given the cost that -- you can see now in hindsight that it was better for us to just maintain control. Our network is in a great spot as it is, but we continue to have the ability to control when we add to the network in time, where we decide to add the facilities, and how exactly we want to build them. So we felt like continue with the same formula that's worked for so many years for us. We want to keep executing on the same business plan as we go forward.

[Ravi Shanker, Analyst at Morgan Stanley]

Very helpful. Thank you.

[Operator]

Thank you. The next question is from Chris Wetherbee with Citigroup. Please go ahead.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Hi, thanks. Good morning. I guess, I wanted to talk a little bit sort of near term and get a sense of how things are progressing. I guess, first quarter, we've seen some weather here in January. I think typically OR gets a little bit worse as we go from 4Q to 1Q, but maybe you can put some -- help us a little bit. I think there were some moving parts in particular in the fourth quarter with the gain, as well as some of the insurance actuarial stuff that was going on there. So just trying to get a sense of how you're thinking about the first quarter, both from sort of an operational perspective but also from an OR standpoint.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes, it's -- winter weather comes every year, and it's something that we content with and is generally in our averages. So we don't view that as a one-time event, but a couple of weeks ago we -- us and everyone else had to deal with weather issues and made up for a little bit of lost ground with that last week, and then we've got a short week to finish out the month, the year, so we'll see where the final numbers land. But as of -- right now, our shipments per day are trending pretty much in line with where we thought they would be. I gave the 10-year average earlier with respect to the rental changes from a shipments per day standpoint. Our December was 5.9% below November. That's better than the 10-year average. But over the last five years, we've kind of changed -- we've given one extra day of paid time off around the holidays, and so our five-year average in December is actually a decrease of 6.5%. So we were a little bit better than that revised average that changes the month little bit, not so much the quarter. But looking at January, the five-year average sequential change is a plus 0.3% increase. And so, we'll see where we end up, but I feel like certainly that, that number has been impacted a little bit. It looks like it's going to come in below that overall sequential number that we would go up a bit, but how much will we get back in February, will we see kind of a traditional bump, and then, March will continue to be the important month. That's a month where we typically up about 5% sequentially over February. And if you remember, we anticipated in 2023 that we would see a recovery in the spring, and unfortunately, it didn't materialize like we thought it would, but -- so, that will kind of be the key point for this quarter is when we start seeing that re-acceleration in our business levels, and that will obviously dictate us a lot in terms of the operating ratio and general performance for the fourth -- first quarter.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

And just one point of clarification. So for 4Q, do you think that with those two big moving parts, that's sort of the number that we have is the right jump-off number as we think about the normal sequential progression of OR?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, the normal change in OR from the fourth to the first quarter is about 100 basis point increase, maybe 110 basis points. And those two particular items that we called out in the press release, we'd expect some normalization, if you will. To start with the insurance and claims, that was 1.9% of revenue in the fourth quarter. That number had averaged 1.2%, 1.3% each quarter in the first three quarters of the year. And so, we'd expect that to somewhat normalize and our expense to be more consistent in the first, second and third quarters of 2024. Now, it may be a little bit higher. We've had four, five straight years of double-digit premium increases and continued to content with higher costs in that line item, but I still expect that, that would be maybe 1.3%, 1.4% of revenue in the first quarter, so -- yet maybe 50 basis points of benefit, if you will, as we transition into the first quarter on that line item.

And then, the miscellaneous expenses, we wouldn't expect for those gains to be that significant. That was pretty unusual. Typically, that miscellaneous expense line item is 40 basis points or 50 basis points, and so we'd expect that to somewhat get back to normal as well. So, that could be kind of a 100 basis point, 110 basis point headwind. So, I think net-net, thinking about the 71.8% that we did in the fourth quarter, as we transition into the first, maybe a 170 basis points to 220 basis points deterioration. 170 basis points would be kind of normalizing for those items that I just mentioned. And then, just maybe -- being on the high side of that was just the uncertainty of where [Phonetic] we really get the economic recovery and volume performance through the quarter, that acceleration that we normally would. If we get that acceleration, we're certainly managing all of our costs, and it could be on the low end of the scale or better, but as of right now, probably better to sustain capital on the higher side of that normalized average.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Got it. That's very helpful. Thanks for the time. Appreciate it.

[Operator]

Thank you. The next question is from Ken Hoexter with Bank of America. Please go ahead.

[Ken Hoexter, Analyst at Bank of America]

Great. Adam, just to clarify, that insurance and claims, that was an annual adjustment, right? So, when you're talking about normalizing that, I just want to understand that actuarial change. But my question would be on, you didn't bid for the -- or I guess, maybe you didn't win the centers. Maybe your thoughts on the industry, if you think there was -- I presume you think that there was overpayment, right, given you were trying to be the stalking horse bid. So what does that mean for the environment? Do you think those peers need to get a return quickly on that investment and you see increased pricing competition? I just want to understand your thoughts or view on what the impact of overpaying from your peers' competitive perspective means.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, I won't say anybody overpaid. We looked at the whole thing, obviously, with that initial bid and felt like if we could get everything and get it at somewhat of a discounted price than we were willing to take that risk, and obviously, it would have come with increased cost if we had absorbed all that property. But I think each carrier is different. They looked at those opportunities, and I guess that fit in with their long-term strategic plan. I think if anything, it's increase in the cost basis. And like we've said for many years, as we've invested in real estate, you've got to build that into your overall cost structure and appropriately capture that with rates. And that's been our strategy over time, and it's certainly played to our advantage. So if our competitors' cost structures are increasing, I wouldn't expect that they would change their approach to pricing. But I think if anything, they've got to build it in there and try to capture for it. But fortunately, that's something that we're not having to contend with. Like I mentioned earlier, we're good with our strategy, and we feel like it's worked for us over time. And we believe that same formula and strategy can continue to work for us in the future. So, that's what we're going to keep executing under.

[Ken Hoexter, Analyst at Bank of America]

And I'm sorry, just -- thanks for that. It's a great answer. But do you mind clarifying on the insurance?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Sure. Yes, you're right. It was -- we do an annual actuarial assessment in the fourth quarter each year of our reserves. And so we, unfortunately, had an unfavorable adjustment this year. And those go either way. In the last few years, they've been favorable adjustments. And we've got an expense rate that we use through the first three quarters of the year, and that's why you see that number that's more consistent, if you will, but -- and then, we just had that third-party review done, make adjustments, and then just kind of move on. But just looking at that activity, that's why I think that our expense rate will be a little bit higher in 2024 through the first three quarters versus where we were last year, but maybe only 10 basis points, 20 basis points or so. And then, we'll conduct another actuarial assessment in the fourth quarter of '24, make whatever adjustments are necessary then, and then just move on. But I think it's been since -- 2019 was the last year we had an unfavorable one. So best case scenario is when we get to the end of the year, they conduct the study, and we don't have an adjustment either way. But unfortunately, this year, it was an unfavorable one.

[Ken Hoexter, Analyst at Bank of America]

Great. Thanks for that. Appreciate the time.

[Operator]

Thank you. The next question is from Amit Mehrotra with Deutsche Bank. Please go ahead.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, thanks. Adam, I think in your prepared remarks, you mentioned that maybe there's a need to add headcount in anticipation of volume growth. Can you just put a little bit more color around that? How far ahead of this inflection of volume, when could we expect the headcount to go and how quickly? And then, the industry has always -- this is another follow-up to that. The industry has obviously been disrupted over the last six months and the dust is settling. Curious to get your view on like how you think the competitive dynamic has evolved from both a service quality perspective and a pricing perspective. Have you seen service disruptions? I know there's maybe early signs of that in the third quarter, but have those fixed itself or you continue to see service disruptions create market share opportunities for you? And what are you seeing on the competitive pricing side that makes you feel better or worse or neutral about kind of where the discipline is in the industry?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes. That's a lot in one question. I'll see if I can keep it all straight. But we have heard about some service issues, and we obviously stay very engaged with our customer base, our large national accounts and 3PL customer accounts as well and meet with them often. And so, we have heard about some service issues and believe that, that's something that may continue. And it's very typical in an upcycle, especially. And so, I think some of the carriers that maybe took on some of that extra Yellow business may cause some issues for them throughout the system or their system. And so, that's usually a source of market share for us, especially when the economy starts to pick up. But from a pricing standpoint, it's continued to be a very favorable pricing environment, I would say. We've seen -- obviously, we've continued on with our consistent and cost-based increases, and that will be our strategy going forward as well. But just looking at some of the GRIs and some of the feedback that we've had from [Indecipherable] as well, it seems like the other carriers have continued to push for increases. So that's generally a good thing for us as well. If the competitors are increasing their rates and -- again, in increasing demand environments, generally, we see competitors that are increasing rates faster than us. And if we're at a price premium to the market and that gap closes, that too creates market share opportunity for us. So that's why we feel good about where we're positioned and the opportunities that we have going forward. It's been a long, slow cycle that we've been in. ISM has been below 50 for 14 months now. And you compare that to '08, '09, I think, it was below 50 for 12 months. It's been a very long, slow cycle, but we're ready to get back to growing again. But going through these slow cycles requires patience. I think we've managed well, managed cost efficiencies, managed our discretionary spending to go through a year where tonnage was down 9%. Our operating ratio was at 72%. To me, it was pretty remarkable. And so, I'm really proud of what our team accomplished this year and what we've done to position ourselves for opportunities that are ahead.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Yes, great. Okay. Thank you very much.

[Operator]

Thank you. The next question is from Jon Chappell with Evercore ISI. Please go ahead.

[Jon Chappell, Analyst at Evercore ISI]

Thank you. Good morning. Adam, thanks for the commentary around the 4Q to 1Q move in the OR, given some of the noise in the fourth quarter. As we think about the rest of the year, and I know it's difficult to predict the volume landscape, so let me frame it, if you will, it sounds like you're in a good position, 30% capacity. Maybe you can see the whites of the eyes on adding headcount, maybe pull the PT lever if necessary, if things kind of accelerate quicker than expected. But should we expect a return to kind of normal seasonal trends in the OR this year? Or can we see even better in the first maybe nine months, if you get some of the volume back on a stickier basis, more of an industrial recovery, and then maybe lag a little bit some of the resources that you need to handle that, just given your spare capacity today?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes. Obviously, a lot of it is going to be volume dependent, and will we really get some type of economic recovery and when does that begin? It'd be great to see it start early. But I'm not sure. The general economic forecasters are predicting that things are going to start so early in the year, but we're ready. We actually hired and increased our headcount during the fourth quarter, much of which was on the platform where we were hiring folks to backfill some of the jobs, where our combo employees -- with the freight volumes that were higher in the second half of the year, we pulled people off the dock and put them right back into a truck and were driving again. So we backfilled some of those positions in particular. But we're cautiously optimistic about things, and we're not going to get ahead of it by any means. So once we start seeing line of sight into some volume recovery and increased demand, and we'll make sure that we're adding to the workforce as appropriate to keep up with it to make sure that we're efficiently handling any growth that comes without any sacrifice to the quality of our service. So -- but I would say that from a big picture standpoint, when you look back in time and just thinking about the fiscal year overall, generally, when we've gone through a slow period, even going back to 2009, 2016, 2019, we've gone through periods that have been really slow. If we've lost anything from an operating ratio standpoint, when the volumes and revenue come back into the system, we've been able to more than recover that OR loss.

And back to our cost structure, and really pleased with the performance, as I said, that we generated improvement in our direct operating costs for the year this year, even despite the lack of density that we had with the volume weakness. And really, the OR loss was just limited to our overhead expenses increasing, and most of that was depreciation as we continued to expand the network, as we brought in new equipment into our fleet to replace some of the older stuff that we've been hanging on to in the last couple of years with OEM challenges. So, as we incurred a lot of the expense on our own selectively, we're positioning ourselves to capitalize on future growth opportunities. So, that will be the power of leverage in the model is, once we get that top line growth going again, we'll continue to be able to improve further those direct operating costs as a percent of revenue, but we regained lost ground on the overhead side, get right back to the operating ratio improvement and have that same formula working, where we're growing the top line, improving the operating ratio and having the income growing faster than the revenues. And that's -- producing profitable growth has been our long-term story, and it's led to a big increase in shareholder value over time as well.

[Jon Chappell, Analyst at Evercore ISI]

Yes. Okay. Thank you, Adam.

[Operator]

Thank you. The next question comes from Tom Wadewitz with UBS. Please go ahead.

[Tom Wadewitz, Analyst at UBS Group]

Yes, good morning. Wanted to ask you just on pricing and, I guess, if we look at the January, I think you said the January is up like 6.4% and 4Q was 7.5%, I believe, for revenue per hundredweight ex-fuel. Do you think there's kind of further deceleration in the pace of year-over-year pricing that you would expect looking forward? And where do you think things settle out? Is it 4% or 5%? And then I guess, just one other kind of related question, how do you think we ought to think about cost inflation this year compared to what it was last year? Thank you.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Sure. Yes, from a -- just revenue per hundredweight, excluding fuel surcharge, if you apply normal seasonality quarter-by-quarter, then the yields would compress to around 6.5% growth kind of in the first and second quarters, and then that would start to moderate to be closer to 5.5% by the fourth quarter, which -- as you know, if you look long term, our revenue per shipment has been more in the 5%, 5.5% range over time. So we'd expect, absent any mix changes for that -- for us to be able to get consistent increases as we go through the year, as bids are coming due [Phonetic], and that's why you just see that absolute number increase quarter-by-quarter. But that rate of growth may start to compress. Now granted, I had anticipated that it would compress a little bit last year and we had the decrease in weight per shipment, and so that supported some of that reported yield metric.

Now, the reverse could happen this year, especially as we get into the back half of the year. If the economy is improving, we'd expect weight per shipment to be higher, and that generally results in a lower revenue per hundredweight, so -- but higher revenue per shipment. So it'll all kind of balanced out, we believe this year. That will be the more important factor, though, we feel like is will we start seeing some real growth in that revenue -- or I mean, weight per shipment metric rather, that would mean that orders for our customers' products are starting to increase. There's more widgets for every shipment. And that's what we hope that we'll start seeing sometime soon here early this year.

From a cost per shipment standpoint, we saw a moderation in our cost per shipment throughout this year, and that's what we had anticipated. We originally had expected core inflation this year of 5% to 5.5%, and that's pretty much where we finished. It was higher than that in the first half of the year, better than the average in the second. So I feel like our cost per shipment will likely get back into more of our -- more consistent with our longer-term average, probably be somewhere around the 4% mark or so. And that 4% plus or minus, where we land, obviously, you can do a little bit better than that if you get volume growth and you're getting density and so forth, that drives a lot of operating efficiencies. And we've dealt with the opposite over the last year, year and a half. But that number, when you think about it, a lot of our line items, I mentioned the insurance premiums, but we've dealt with significant cost inflation in many of the income statement line items that we have over time. And fortunately, we've been able to improve operating efficiencies and do other things to mitigate that such that our longer-term inflation on a cost per shipment basis has been in that 3.5% to 4% range.

[Tom Wadewitz, Analyst at UBS Group]

Great. Okay. Yes, that's all very helpful. Thanks, Adam.

[Operator]

Thank you. The next question is from Bascome Majors with Susquehanna. Go ahead.

[Bascome Majors, Analyst at Susquehanna Bancshares]

Thanks for taking my questions. Just to follow up on that last question, based on the recent contract conversations, you said, certainly, your peers continue to raise price. Do you feel fairly confident you can maintain your historic 1 point to 1.5 points spread above that cost inflation this year?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes. That's always the focus for us. And again, that's why, especially when we get into stronger demand environments, we've historically seen competitors raising rates faster than us. And a lot of that in the past, I think, has been driven by competitors that generally run their networks closer to full utilization. And so, if they've not been able to grow volumes in those large upswings, they take advantage of the strength in the market and get more by way of rate. And we like to do both. And go back to reference 2018 and 2021, we outgrew the market in those years, 1,000 basis points to 1,200 basis points, meaning on an LTL tons per day basis, and we were able to get good consistent yield increases in those years as well. But to us, we feel like it's better. It's worked over time to be able to sit across the table from a customer and talk about our cost inflation and say we need cost plus. The plus comes into supporting the long-term consistent investments that we've made in our service center network. We've invested $2 billion in our network over the past 10 years to consistently grow it. And we've increased our door count by about 50% over that last 10-year basis. And right now, there's still some dust to settle, but the 10 years that ended 2022, the industry's number of service centers were down about 10%, at least for the public carriers. So that's something that's created an advantage for us in the marketplace. It's something that we always want to invest in, in capacity, invest in technology that's designed to improve our customer service, to connect with our customers or to be able to drive operating efficiencies for us to keep our cost inflation low. So we're always investing in capacity and technology on behalf of our customers generally, and that's why we've got to build those costs into our price model. But to us, it's a lot easier to sit and say, we want a consistent approach, if you will, versus just something that's more market-driven, trying to get big increases when the market is in our favor and not as much if the market is in the shippers' favor. It's a formula that's worked over time, and it's what we continue to focus on as we go forward.

[Bascome Majors, Analyst at Susquehanna Bancshares]

Thank you.

[Operator]

Thank you. The next question is from Jason Seidl with TD Cowen. Please go ahead.

[Jason Seidl, Analyst at TD Cowen]

Thank you, operator. Good morning, gentlemen. How should we think about sort of the normal seasonal patterns as we move throughout the year and your year-over-year comparisons with tonnage in terms of when you first started seeing the freight come over from Yellow?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes. Obviously, it was midyear in the third quarter when they closed and we got that bump. We were at 47,000 shipments per day for the longest time.

[Jason Seidl, Analyst at TD Cowen]

Right. But you didn't even see it earlier as they started to bleed a little bit in June?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Not really. Our monthly average was 47,000 from December of '22 through July of '23, so it's flat there, and then we got an initial bump of about 3,000 shipments per day. And we stayed pretty consistent there from around 50,000 or a little bit north of that from August through November, and then just had the seasonal drop through December. So, as we're starting now -- right now, we're a little below January of last year, which, as just mentioned, is at 47,000. If we get the bump, that the normal seasonal bump, if you will, that would sort of put us flattish with February and March. And then, the question will be, are we getting some type of normal seasonality? If so, that would put the second quarter above the second quarter of last year, and then we can kind of go from there, if you will.

[Jason Seidl, Analyst at TD Cowen]

Okay. Makes sense. I want to clarify also something that you guys said. You mentioned you expect an exit of capacity once the dust settles when you were talking about the terminals. Are you talking an exit of capacity from where we are now? Or are you talking a total exit of capacity from when Yellow was an operator?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes, when Yellow was in operations. Obviously, they had, what, 45,000, 50,000 shipments per day, and they had how many ever service centers that they did, and net-net, there's going to be a reduction in those number of service centers that were in operation. There's still quite a few that have not settled in any way. And that's what we had believed. We thought that there would be an exit of some percent of their capacity, if you will, but that same level of freight has got to be moved. And I continue to believe that some of it is currently in the truckload world. And so, I think that there'll likely be a second wave of freight that comes into LTL once the overall market is improving, the truckload world is getting back to normal, and if you've got truckload carriers that are looking for any payload and maybe willing to handle a 5,000 to 10,000 pound LTL and try to put multiple large shipments on one trailer together and do multiple stops. That's the type of freight that they will shy away from once the market improves and will spill right back into the market and become normalized LTL freight again. So I think that that's another unique opportunity probably for 2024 that should provide a little bit of tailwind to everyone.

[Jason Seidl, Analyst at TD Cowen]

Yes. Well, I'm hoping it comes back in '24 for a normalized market. We all have been waiting for it for quite some time, so fingers crossed. Appreciate the time.

[Operator]

Thank you. The next question is from Jack Atkins with Stephens. Please go ahead.

[Jack Atkins, Analyst at Stephens]

Okay, great. Good morning, guys. Thanks for taking my question. So I guess going back to the weight per shipment and just broader demand comment you were making earlier, Adam, we saw weight per shipment tick up a bit sequentially in the fourth quarter. I know some of that was probably seasonality. But are you starting to see anything, whether it's conversations with customers that would lead you to be a little bit more optimistic about how underlying demand may be trending as we kind of get into the spring? And I guess, kind of within that, are you seeing anything different, whether it's consumer versus your industrial customer base? Just would be curious about that.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes, sure. The weight per shipment in the fourth quarter was a little bit stronger than it was in the third, which is fairly typical. And we've seen so far in January, normally, we'd have a drop in weight per shipment of about 2% to 3%. And our weight per shipment is -- right now, it's about 1,515 [Phonetic] pounds in January, and so it's dropped a little bit, but better than what the normal seasonal trend would otherwise be from December. So I think that's usually an early indicator on the economy is going to start turning. We try to read all the economic tea leaves and look at things like the inventory-to-sales ratio and have conversations with customers that would indicate that inventories are normalized, lower than maybe where they should be. And so, that causes us to be cautiously optimistic about what may end up coming at us this year, but we still want to be careful about not getting ahead of it after missing it in the spring of '23. So I certainly feel like there's some opportunity there to see some real recovery in volumes this year, and we'll be prepared for that if it happens. I mentioned that ISM has been below 50 for 14 months. And my goodness, that's just been such a long slow period that the slow cycle is getting [Indecipherable]. We're ready for it to recover, but we've seen that impact in our business levels. It's -- our revenue in the fourth quarter on the industrial side was a little bit slower than the Company average. So that too will be an area of opportunity once we can start seeing some improvement there.

[Jack Atkins, Analyst at Stephens]

Okay. That's helpful. Thanks again.

[Operator]

Thank you. The next question is from Eric Morgan with Barclays. Please go ahead.

[Eric Morgan, Analyst at Barclays]

Hi, good morning. Thanks for taking my question. I wanted to ask one on service. You've been -- kind of been up against the ceiling on claims ratio and on-time performance for some time now. So I guess, I'm just wondering what else you can do to improve the customer experience and stay differentiated, particularly as you're looking to maintain your pricing strategy and keep taking share. I'm not sure if there are opportunities with technology or speed in certain lanes or anything else. Just trying to get a sense for where you're focused outside of those typical metrics we track.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes. Obviously, the two metrics that we talk about the most are on-time performance and claims ratio. One, it's -- we got to stay focused to make sure that we keep those where they are and make sure, as we hire new people, as we start growing and things like that, that we don't see those numbers change in any way. So we're always striving for perfection because every shipment we pick up, it's -- we're helping the world keep promises, right? That's a shipment that is going to our customer's customer, and we want to make sure that it's delivered on time and without damage. But when we study the Mastio quality data that we get every year, there's 28 attributes related to service and value that they measure. So obviously, there's much more than just being on-time and claims-free. And so, we study that data very intently and look at any feedback in areas where we can continue to improve. And we've done that over time, and we're proud that we won 25 of the 28 -- we were Number 1 in 25 of the 28 Mastio categories in this most recent year. So, we're always striving to get better. That's part of our foundation for success is continuous improvement. So we always look for ways and stay engaged with our customers to figure out the things that we can do for them to drive value, to create win-win scenarios. And so, it's just a never-ending battle to try to stay ahead of the curve, particularly with respect to technology, [Indecipherable] so much is changing there, the things that we can do to try to connect more with our customers, drive some automation in the corporate office and the back-end processing and so forth. So a lot of opportunities there to keep improving the customer service experience and also mitigating costs when it comes to our technology investments.

[Eric Morgan, Analyst at Barclays]

Thank you.

[Operator]

Thank you. The next question comes from Stephanie Moore with Jefferies. Please go ahead.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Hi, good morning. I wanted to maybe double-click a little bit on your commentary on the labor and adding to headcount this year. I just wanted to maybe compare your view on headcount additions for 2024 versus 2023. I think I was under the assumption that in 2023 that you were able to hold on to some labor, kind of protect as many drivers and positions as possible, kind of waiting for the demand to pick up in 2024. So just trying to compare, I think, that commentary from prior quarters to your outlook for this year. Thanks.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Sure. We did have some attrition as we worked through 2023. So the overall headcount has been lower on a quarter-over-quarter basis as we went through the year. And like I mentioned, in the fourth quarter in particular, the average headcount was down 4% compared to the fourth quarter of last year, but it was up compared to the third quarter of this year. And so, we're adding some positions. We're -- just under 23,000 employees was our average for the fourth quarter, and that compares back to -- we were 24,000, 25,000 average full-time employees back in parts of 2022. So it will be shipment-driven. Typically, when you look at long-term changes in our shipments per day and long-term changes in our headcount, those two numbers are very closely aligned. And so, you're exactly right, we were trying to hang on to as many people as we could, particularly our drivers that we've invested so much in, as we progressed through this last year, year and a half of slower economic times, and that gave us an advantage.

I mentioned this earlier, but we had employees that have their CDLs and they were working primarily on the dock. And when we saw that positive inflection in volumes back in the third quarter, that was something that we were easily able to tap into and put those folks right back into a truck. So that worked to our advantage. We're running our truck driving schools right now to continue to produce more employees that have their CDLs and will be available to drive as demand continues to improve. So that's why we're always trying to keep our focus on the long term and be prepared for when the demand gets strong and we start seeing the levels of shipment growth like we've been able to experience in the past. Back in 2021, we grew shipments per day at 19.5%. That year, our competition was up 4%. And we were able to accommodate that 19% shipment growth and be able to keep our service metrics best-in-class and so forth, and it's that investment and trying to stay ahead of the curve with all the things that we do, with all three elements of capacity that allows us to put on significant levels of growth like that when the demand environment dictates.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Got it. And just as a quick follow-up, seeing any difficulties meeting some of those hiring or headcount additions thus far this year? Trying to get a sense of the strength of the labor environment.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Not at this point. And again, we're trying to get ahead of it a little bit in the sense of creating some of our own drivers. But I think right now, just the state of the market overall, it's totally different than, compare and contrast, 2021 when things were so tight everywhere and it was more of a challenge to get drivers. That's why we focus so much on keeping everyone that we could through the slow period, but go ahead and starting our schools back up well ahead of the growth coming at us. We want to make sure that, particularly with respect to drivers, that we get ahead of it as best we can.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Great. Thank you so much.

[Operator]

Thank you. The next question comes from Scott Group with Wolfe Research. Please go ahead.

[Scott Group, Analyst at Wolfe Research]

Hi, thanks. Good morning. So just maybe a bigger picture question. Adam, someone asked about pricing earlier, and you answered, well, based on normal seasonality, here's what yields would look like. And I would have thought maybe with this big Yellow event that maybe we'd be better than normal seasonality on pricing. And same thing, right, where Yellow has gone and tonnage is still down. And so, I guess, ultimate question is we all treated Yellow as this really, really big event in the industry. Is it not really a big event? Or is it that it's a really big deal, but it's all being masked by a slow macro and ultimately, whenever the macro gets better, we'll really feel the impact of Yellow and it's all still sort of on the come?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes, I certainly think it's -- the macro being in the state that it is, that helped the carriers absorb the freight that they were hauling before pretty effectively. But like I mentioned, I think some of that freight has gone into some different modes and believe that, that will be short-lived until really demand improves overall for transportation in general. But when it comes to pricing and just the yield improvement that we've had, we had incredibly strong yield performance in '21, followed that up with '22. And then our rev per hundredweight ex-fuel was up 8.1% this year. So some of that, like I mentioned, has been mix-driven, but we've had really strong yield performance really over the last three years. But we've said, even during that time, that our strategy is what it is, and we think it has worked for us. And when we operate at 72% for the year, I don't know that anyone else will be anywhere close to that. And so -- but it's just a disciplined focus of keeping our costs as low as we can and then pricing -- understanding our cost on a per customer basis, and then having a yield that makes sense to try to constantly improve the profitability on each customer account. But we've never said that, that was the right long-term rate.

We just want to be consistent and be fair with our customers in that 100 basis points to 150 basis points positive spread of yield above cost has worked for us. But we were in a much different position than a lot of other carriers, I think, in terms of that long-term consistency that we've had in our pricing. We didn't have the same need to go out and try to take advantage of that market change and really increase rates in any way. We kept the same measured fair approach. And I think that pays dividends. I think it is a reason why we've had good volume stability as well when we've gone through this last slow period is that we've got good customer relationships. Freight, at the end of the day, is a relationship business, and so we want to continue to strengthen relationships. And we've got an understanding with our customer base in terms of what we're trying to achieve. And we worked through a slow year. We really didn't have any major customer losses. We didn't lose lanes from customers. We kept most of our large national accounts as we progressed through the year. Just the volume weakness was a result of -- there were reduced orders for our customers' products. So, pleased with the customer retention that we had last year and look forward to demand improves for our customers' products. We're in place and we'll be able to bring on that freight into the truck line and get back into doing what we do best, which is growth.

[Scott Group, Analyst at Wolfe Research]

That's helpful. I know we're past here. If I can just sneak in one more, I'm just looking at this like, 2022, you guys bought back a lot of stock at the lows, and your pace of buybacks have really slowed in the last couple of quarters sort of with the stock at the high. So you've had a pretty good feel for your stock. How are you thinking about your buyback this year?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, we will have the same approach that we always do. We start with looking at what we think our cash from operations will be and then what we're going to spend with capital expenditures, and then we have the fixed dividend component. And the net cash balance, we target trying to return to shareholders through the buyback program. But we generally have a grid-based approach, where we're buying more when the stock is lower and less when it's higher, but consistently in the market. And I think that's what you've seen. But that $1.3 billion was double what we spent, about $600 million, the year prior. And so, it was reduced this year in the back half, in particular. But as we go into 2024, we'll just continue to look at how much free cash we think that we'll have and how much we try to return to shareholders and in what ways as we go through the year such that we don't obviously want too much cash building up on the balance sheet. But it's all about driving returns on invested capital, and we've done a pretty good job over time with improving that metric.

[Scott Group, Analyst at Wolfe Research]

Thank you, Adam.

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Thanks, Scott.

[Operator]

Thank you. Today's last question comes from James Monigan with Wells Fargo. Please go ahead.

[James Monigan, Analyst at Wells Fargo & Company]

Hi, guys. Thanks for squeezing me in. Actually, wanted to follow up on Scott's question about sort of the yields versus seasonality and pricing versus seasonality. You mentioned that the market sort of moved pricing up and your competitors have been aggressive on that. And you have improved or have [Phonetic] strong service. And so, has that like sort of fair price moved away from where it is now? And is there a bit of a catch-up trade on price across the remainder of the year relative to service, based on where everybody else is in the market?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

I'm not sure that I fully understand your question, but like I mentioned before, that -- we anticipated that, that metric would eventually compress back to the longer-term averages. And for us, it's 100 basis points to 150 basis points positive spread, which, by the way, reconciles to the average operating ratio improvement, we've been able to generate over time as well. And so, we'll continue to do our best to manage our cost and to continue to ask for necessary increases on our customer accounts to offset the cost inflation that we'll have in the business and to support the wage increases that we give to our employees to allow us to retain the employees that we have but continue to attract new employees to our business as well, which we've been able to do over time to support the consistent growth that we've been able to produce. So it takes a lot to keep growing the Company year in and year out and to be able to keep our cost inflation as we're doing so as well. So, try to keep that cost under control and keep asking for that same positive spread over time, that's what our focus is going to be.

[James Monigan, Analyst at Wells Fargo & Company]

Yes. And just real quick, on a percentage basis, how much do you expect to grow doors [Phonetic] this coming year or any other measure of capacity?

[Adam N. Satterfield, Executive Vice President - Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, we've probably got line of sight into adding four or five service centers. As Marty mentioned, we've got several that have been under construction. But a lot of that will really depend on the volume environment as well. We've -- in the past, we've finished service centers and may complete the construction, would have to start depreciating them and incurring other overhead-type costs with them, but if the volumes don't dictate the opening, then we might sort of keep them in ready reserve, if you will, and wait until volumes are stronger to start incurring the cost because with growth, that's another incremental cost. Every new service center that we open, you've got incremental line haul cost and other expenses that we're going to incur as a result of that opening, in addition to just the general depreciation and overhead. So that will be something that we'll be mindful of as we go through the year. And hopefully, the volume environment will be such that we're ready to open them and turn them on day one as soon as we're finished.

[James Monigan, Analyst at Wells Fargo & Company]

Great. Thank you.

[Operator]

Thank you. This concludes our question-and-answer session. I would now like to turn the call back to Marty Freeman for closing remarks.

[Kevin Freeman, President and Chief Executive Officer at Old Dominion Freight Line]

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.

[Operator]

[Operator Closing Remarks]