Old Dominion Freight Line Inc (ODFL) — Q4 2018 Transcript

Good morning, and welcome to our fourth quarter conference call. With me on the call today are Greg Gantt, our President and CEO; and Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report the strong financial results for Old Dominion's fourth quarter. For the third quarter in a row, we exceeded $1 billion in revenue and also produced an operating ratio below 80%. This performance capped off an extraordinary year for Old Dominion, setting new company records for annual revenue and profitability. Financial results for the quarter and the year reflect the consistent execution of our growth strategy. We believe our ongoing ability to win market share is based on a value proposition of providing superior service at a fair price to shippers, while also continuously investing in our service center capacity to support our long-term growth. We also continue to invest in our OD family of employees, and we are proud that our team provided customers with 99% on-time deliveries and our cargo claim ratio of only 0.3% of revenue for the fourth quarter. While there has been some recent disruption to the domestic economy associated with political issues, our outlook continues to be positive for 2019 based on feedback from our customers and other macroeconomic indexes. The pricing environment remains favorable, and a strong domestic economy should support our ability to increase volumes and network density. Even though 2018 marked one of the best operating years in our company's history, we look forward to the opportunities for yet another year of continued growth in revenue and profitability in 2019. And now here is Greg to provide some more details on the fourth quarter.

Thanks, David, and good morning. The OD team delivered once again in the fourth quarter, producing an increase in revenue of 15.2% and an increase in pretax income of 51.1%. The financial results for the quarter and the year demonstrate our team's successful execution of our strategic plan that has been in place now for many years. The plan is centered on our OD family and the relationships our employees build with our customers. To maintain and strengthen these customer relationships generally requires the power of a promise, a promise to provide superior service standards while also providing customers with the capacity, technology, and flexibility to help them grow and be successful. The freight industry has always been about relationships and each member of the OD family understands this concept, as we serve our customer's needs. Being able to keep the promises made to our customers requires significant and ongoing investments in our employees' capacity and technology. Our yield management philosophy is designed to help support these investments while also offsetting our inflationary cost increases. Understanding our costs is particularly important as we add new customers and expand our service center network. Our revenue per hundredweight, excluding fuel surcharges, increased 6.9% in 2018 and this was the key component of the overall improvement in our operating ratio during the year. Having now produced an operating ratio below 80% for three straight quarters and a sub-80 operating ratio for the year, we believe we can continue to drive the operating ratio even lower. We have long maintained that a focus on density and yield, both of which require the support of a favorable macro environment, are key ingredients for long-term improvement in our operating ratio. Driving additional volumes through the existing service center network improves network density, and the resulting operating leverage allows us to improve our existing service center's efficiency, which positively impacts the company's overall operating ratio. Given our confidence in winning additional market share, we intend to expand our service center operations beyond the existing network of 235 service centers. In our fleet, we were able to add seven service centers during 2018, and we plan to open another 10 or so service centers in 2019, depending on the timing of construction projects. We believe that these additional service centers, as well as the expansion of some existing facilities, will increase the overall average capacity within our network to ensure that it is not a limiting factor to volume growth for the next few years. We will focus on all of the previously mentioned initiatives in 2019, and we will also have an opportunity to regain some lost ground relating to the productivity in our operations. With opportunities to further improve revenue and our costs in 2019, we believe Old Dominion is in a unique position to continue delivering industry-leading profitable growth. Our outlook for customer demand trends in the economy continue to be favorable, which gives us confidence in our ability to produce further gains in long-term earnings and shareholder value. Thanks for joining us this morning. And now, Adam will discuss our fourth quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue increased 15.2% to $1 billion for the fourth quarter, and our quarterly operating ratio improved to 78.7%. As a result of these factors, our net income before tax increased 51.1% to $217.4 million. Our earnings per diluted share, however, decreased 18.4% to $1.95, due primarily to the $104.9 million net tax benefit included in the fourth quarter of 2017. I was pleased with our fourth quarter revenue growth, which once again included increases in both LTL volumes and yield. A slight slowdown in the pace of our revenue growth as compared to the growth that exceeded 20% for the first three quarters of 2018 was primarily due to the significant acceleration of revenue that began in the fourth quarter of 2017. Our LTL tons per day increased 2.9% as compared to the fourth quarter of 2017 with a 6.5% increase in LTL shipments per day that was partially offset by the 3.3% decrease in LTL weight per shipment. As we detailed in our third quarter call, we expected this decrease in weight per shipment and also expect a similar trend through the first half of 2019. On a sequential basis, the trend for both LTL tons per day and LTL shipments per day was in line with normal seasonality. As compared to the third quarter of 2018, LTL tons per day decreased 2.3% and LTL shipments per day decreased 4.1%. Our fourth quarter operating ratio improved 520 basis points to 78.7% and included improvements in both our direct operating costs and overhead expenses as a percent of revenue. 390 basis points of this change was due to the improvement in our salaries, wages, and benefit costs as a percent of revenue. While we hired significantly through the first three quarters of the year, as reflected in the 14.2% increase in average headcount, our full-time headcount at the end of December was slightly lower than that at the end of September 2018. Our team will continue to manage workforce capacity with anticipated shipment trends, as we always do, and we currently believe that our workforce is appropriately sized. Old Dominion's cash flow from operations totaled $224.7 million and $900.1 million for the fourth quarter and 2018, respectively. Capital expenditures were $118.4 million for the fourth quarter and $588.3 million for the year. Based on anticipated growth and the execution of our equipment replacement cycle, our capital expenditures are expected to be approximately $490 million for 2019. This total includes $220 million to expand the capacity of our service center network. We returned $97.2 million of capital to our shareholders during the fourth quarter, including $86.7 million in share repurchases. The total amount of shares repurchased and dividends paid for the year was $205.8 million. As noted in this morning's release, we are pleased to announce that our quarterly dividend will increase 30.8% to $0.17 per share in the first quarter of 2019. This allows us to maintain a similar dividend payout ratio as the prior year. Our effective tax rate for the fourth quarter of 2018 was 26.6% and was 25.7% for the year. We currently anticipate our annual effective tax rate to be 26.0% for 2019. One update on our revenue growth for the first quarter of 2019, January's revenue was impacted by severe winter weather over the last two weeks of the month as well as the negative impact on the broad economy related to the government shutdown. While there is no way to truly quantify the impact of these factors, our revenue on a per day basis increased approximately 8% for the month. While it's still very early in February and political risk continues, revenue growth for the first few days of this month averaged approximately 10%. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

I wanted to maybe pick up on some of the comments that you made about the improvements you've been able to make in the operating ratio and maybe get a sense of sort of how you're thinking about the potential going forward? I know you don't like to give guidance around this, and so happy to kind of talk about this in more general terms, either on sort of shorter term next couple of quarters or maybe bigger picture taking a step back and think where you can go over the next couple of years. But clearly there's been significant progress in pricing, but also efficiency on the operating side seems to be driving. Can you give us a sense of maybe what you think the business is now capable of as you look forward?

Sure, Chris. As we mentioned, we don’t want to give specific guidance at this point in terms of how low we think the operating ratio can go. There were definitely some factors in the fourth quarter that helped us from an operating ratio standpoint, especially when you look on a sequential basis versus the normal third quarter to fourth quarter trend. But I think it's important to point out that for the year, the operating ratio improved 310 basis points. And really, when you go back in time and look, it's pretty incredible what we're able to achieve this year and it really compares to the type of improvement we had coming out of the recession. And I think it does get at the heart of what we always talk about, from a big picture standpoint, continuing to focus on density through the network and improving yield, and those two factors combined helped in this regard. And I think our costs pretty much came in line with what we expected this year, but from a revenue standpoint, we certainly had more volumes than we anticipated going into the year, as well as the yield performance was really strong as well. Going forward, obviously, we'd like to see the same type of mix continue from a top-line standpoint, but the yield performance that we had this year is probably not going to continue long term, and it's certainly not in line with what our long-term trends have been either. We generally have more of a balance and weighting, including from a shipment standpoint than the yield. But I think we've certainly got continued opportunities to grow market share, and that will continue to drive the business through the existing network. We'll continue to add capacity, and we'll continue to look at putting as many dollars on the bottom line as we can from the revenue growth that we're achieving.

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

Not at all. And I think that's why we've tried to, in Greg's comments, repeat that when we look out over the system and see that the operating ratio improvement that we're seeing at the individual service center level, the ongoing improvement that we can believe is we're adding capacity to these centers. That trend can continue, and it’s generating phenomenal incremental margins for us.

I'll add, this is David, that just the quality of the business that we have and the way it's generally priced though and our mixture of variable and fixed costs in our overall financial structure just lends itself to the operating ratio being able to improve. It's additional density and a rational pricing environment, which we believe we have, with a little help from the economy, which we believe we'll have. That density across the network should yield some improvement in margins going forward, and we just feel stronger about that.

Okay. That's very helpful.

This is Greg. To keep in perspective, that 310 basis point improvement in 2018 was versus a record year in 2017. It was the best year we'd ever had at that time.

Yes, certainly, very impressive. Can you provide tonnage numbers for January? I apologize if I missed that information. It seems that February has shown some improvement in the first few days. Could you give us an idea of the volume trends from January to February? That would be great.

Yes. Chris, I intentionally did not provide the volume number because I wanted to shift the focus away from short-term metrics. Some investors suggested that we stop sharing that data. We will continue to include it in our quarterly and annual reports, but we preferred to discuss our revenue from a broader perspective. We're currently seeing revenue growth at about 10%, early this month, although daily results are still influenced by weather conditions. January was similar; we face winter every January, and it is not a one-time issue. However, this year, the significant storms during the last week of the month affected us and other carriers when freight volumes usually increase. Despite this, we are starting the year on a strong note and are optimistic. As mentioned in our prepared comments, much of our optimism comes from positive macroeconomic trends and feedback from our sales team regarding customer demand. Overall, we feel well-positioned as we begin the year.

I wanted to ask about the headcounts. You mentioned the workforce is appropriately sized. So is the Q4 average headcount a good run rate to use for 2019? Or do you expect a little bit of variability there in the quarters? And then could you comment on your driver turnover sites in Q4 versus Q3?

I think where we are today with the headcount, think about going all the way back to '17, we got behind our growth a little bit. Last year, we were playing catch-up, and I think that's why we saw the headcount growth exceeding that of our shipment volumes. Over the long term, those two generally are fairly close together. I think where we are, we're continuing to evaluate and we do this on a daily basis at each of our service centers, what the labor force looks like that's managing the freight. And I think we're in good shape overall. We'll probably have some service centers that are making additions and some that are staying flat. I think the point is, normally by this point and like in the fourth quarter, for example, we're typically increasing the workforce. It generally averages about a 2.5% increase from the third into the fourth quarter as we're getting everybody onboard and ready for the next year's growth. And then that increase is likely as we go through the first quarter. I think what we realized was by the fall of last year, and we communicated this on the last call, we felt like we were in good shape then. So we've kept everybody in place. Because we're still anticipating growth, I think that we can hold the headcount fairly steady in the early part of the year, but anticipating growth. We will have that higher, and we'll see some net additions later in the year, I just think, by the time that we get to the middle point of the year. Hopefully when you look at a longer-term basis, our headcount growth is more in line with what the shipment growth looks like. And some of that will depend on, are we gaining on productivity as well? From a turnover standpoint...

Okay. With respect to the...

To address your question about turnover, by the end of the year, the average turnover rate for the company was 8%. Additionally, nearly one-third of our drivers come from our in-house driver training program, and for those graduates, the turnover rate was between 5.5% and 6%.

Okay. Excellent. And then on the service center side, I know you mentioned the expectations are to open about 10 this year, I think you opened six in 2018. How do we think about the headwinds from the startup costs related to the service centers? Would you expect there to be meaningful headwinds going from 6 to 10 or through the productivity benefits and ability to handle more tonnage? Does that offset any costs that come from the additional 10?

Allison, I think our ability to better service our customers and gain market share surely should help meet some of the additional expense. There are some startup expenses that we can absorb, but in the whole scheme of things, I don't think it's going to be significant.

Adam, I guess, everyone is concerned rightfully or wrongfully about when the downturn in volume and yields will come for the general LTL sector. So I think it would be helpful maybe if you could help us think about how Old Dominion is positioned in that kind of opposite environment to what you're seeing now in terms of the 10% revenue growth in January. Certainly, you showed stellar performance in '16 in the last industrial recession, but where specifically you had the opportunities on the cost side to limit decremental margins that come with negative revenue growth? Do you guys think you can still be in kind of the low 80s operating ratio environment in medium and more severe downturns?

I guess, you have to just look back at how we've reacted in the past and what our plan has been in prior slowdowns, and '16 obviously was an industrial slowdown and we had flatness overall with the revenue. Then you go all the way back to the recessionary environment, and that’s the '07 to '09 period. But we stick to the same strategic plan that we've always stuck to. We stay focused on our yield management practices, trying to continue to serve our customers well and keep service metrics high, so we can really give our customers a value proposition that may be more important in a slowdown and a slower time than when things are busy. If we can take the total cost of transportation down by providing 99% on-time service and a 0.2% to 0.3% claims ratio, that can ultimately save cost. The trade invoice might look a little bit higher, but overall cost of service might be cheaper for customers. So that's the big thing, and then we'd also look at any potential opportunities from a long-term standpoint for any service centers that might become available as competitors and others might be looking to sell facilities and generate cash flow. So we look at any opportunities that may present themselves in that regard, but I think that the way we manage cost, the way we manage our labor cost on a day-to-day basis, we've obviously got opportunity from a productivity standpoint. We lost some productivity across our operations last year, despite the fact that we're very efficient. We lost a little, and I think we can regain that. So there's multiple things that we can go through and look at, and ultimately, we'll be trying to protect the bottom line. And I think when you look back in prior downturns, that's what we've got a history of doing.

That's helpful. As a follow-up, I'm trying to understand how incremental margins change as shipping growth continues to align with tonnage growth. I would expect costs to align more closely with shipment growth, but that wasn't the case in 2018. Could you share your thoughts on this and your expectations for how operating expenses should trend in relation to shipment growth in 2019?

Sure. At the beginning of the year, I mentioned that I anticipated the cost on a per shipment basis, excluding yield changes, would increase by about 4.5%, and that's how it turned out. As shipments grow, we are acquiring new business, and each new business relationship may involve different pickup costs, delivery costs, or line-haul costs. We have been managing these factors effectively and stayed close to our expectations. I foresee a similar increase as we head into 2019, targeting around the same 4.5% increase on a per shipment basis, excluding fuel costs, while we continue to manage every dollar as efficiently as possible. A significant driver of this inflation is the 3.5% wage increase granted to employees in September.

It seems like you talked a lot about volumes driving additional density, and the question I want to ask is, what does density really mean? And where I'm going is, I assume your load average is already pretty high in this environment. And so what benefits does additional density give you? Is it loading more directs? Is it cut out dock handling? Just kind of explain that if you don't mind.

I believe there are several aspects of density to consider. The first that comes to mind is that it will certainly assist us with our pickup and delivery operations. This should result in shorter distances to reach our customers and enhance the service they experience, particularly in terms of response times. Additionally, improving our load factor could be beneficial if we expand our business, as there's an opportunity there to make more directs. However, opening more facilities comes with challenges, as it also means distributing tonnage across more locations until we scale back up. We'll manage that as we progress, but typically, we see a temporary dip that we recover from over time. So far, we've only experienced success with opening new facilities, and I don't foresee that changing. The key advantage lies in getting closer to our customers and improving our responsiveness compared to our competitors.

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

Absolutely. We'll never get to Utopia from a load factor standpoint. That will never happen.

I missed that, Brad, excuse me. Sorry guys, I think the headset was dying on me. Are you still there?

Yes.

Yes.

Could you clarify if the decrease in fringe benefits was connected to the phantom stock? Also, can you provide a dollar figure for that reduction on a year-over-year basis?

Sure. That was part of it, Brad. We have and we put this in our 10-Ks that there's about 356,000 invested shares stock and we remeasure the phantom stock, we remeasure that every quarter as you know, based on the 50-day movement average or a stock. And so with the drop in our stock price during the third to the fourth quarter, that was about a little over $8 million favorable impact in the quarter. So that was part of it. We also have an annual remeasurement of our workers' compensation liabilities. We get through an actuarial process in the fourth quarter for that and for other claims as well, and that was a favorable entry as well. So we put that number in the release, and certainly that was a big part of it. If you recall, I think, at the beginning of the year, we felt like the fringe rate would be 34% to 34.5%, that's our fringes as a percent of salaries and wages. Going into next year, I'd expect the same kind of average for the year. I think that you'll see probably some choppiness in the first quarter that might be a little bit higher, especially if our stock price recovers somewhat from where it was low closing out the year.

I want to talk a little bit about looking forward in terms of how OD is going to stay at the top of the market? One of the things, I think, over time that you've clearly been at the forefront has been technology. Can you tell us a little bit about any new initiatives that you had planned or that are sort of going through the system right now that will keep you guys up on top?

Jason, I think that technology has been key for our operating efficiency over many years, and we're always looking at implementing new technologies and improvements. Our foundation for success, a key piece of that is continuous improvement, and that applies to all areas of our operations. So I think we'll continue to look at tweaking our operational technologies to improve dock efficiencies, our P&D efficiencies and we're looking at ways really to improve a lot of our processes here in the corporate office. And so if we can continue to drive process-level improvement, it may save us costs, but ultimately what we're trying to do is improve customer service, and that may be anything related to just getting better information from a billing process out to our customers and improved shipment visibility as well. So we're going to continue to invest. I think we spend generally about $20 million to $25 million every year in technology and a lot of that was all designed to try to improve our operating efficiencies.

Okay. I guess, the next question was brought up before. People talk about a slowdown. Have any of your customers indicated to you that there was a pull forward for some of their business due to the tariffs that are set to take place on March 1?

We hadn't heard that at all. We started getting that question last year quite a bit and pulled our sales team, and we got no such response. It's more a deer in the headlights kind of look.

So first, I want to touch on the seasonality. Typically, I think, over the last couple of years, you guys have seen about a 200 basis point deterioration from third quarter to fourth quarter in terms of the operating ratio. Just wanted to get your thoughts on, has something changed in terms of shipping patterns or customer behavior that may change that dynamic going forward? Or was there something unique this year that or for 2018 that caused it to be so much smaller than the historical trend?

A significant part of our performance showed minimal change, with an increase of only 30 basis points. However, the discussion regarding our fringe benefit rate indicates it was approximately 0.5% or slightly higher when comparing the third quarter to the fourth. This brings us close to the 200 basis points mark, although in recent years, we have experienced higher rates, averaging around 240 basis points over the last three to five years. We are pleased with this outcome. Throughout the year, we've continued to experience quality revenue growth and strong yield performance, which has enabled us to enhance our costs across the board.

Got it. That makes sense. Historically, if we look back a couple of years, you have mentioned a long-term goal of achieving double-digit market share, which you have achieved. Looking ahead, I wonder if there are limits to growth potential regarding customer willingness to pay for the premium quality of service you provide. Do you think there’s a threshold for how much customers are willing to pay or how large your market share could grow? Will you encounter any constraints in that area at some point?

So we certainly don't see or feel any limits, and part of that is we don't want our prices, it all kind of comes back full circle. You go back to the technology discussion we were just having and driving efficiency in our operations, we can continue to drive efficiency and keep our costs lower. The price to market is not always is big of a gap between us and our competitors as what might have seen when you compare our operating ratio. So we're doing everything we can to keep our costs in check, but certainly, we feel like we're investing heavily and servicing our capacity to be able to continue to grow, and that's a key part of it. If we don't keep adding the capacity, that could become a limiting factor to our growth. But when we look out, the number one carrier in terms of size in the industry is about close to 20% in the market. So I think that creates a bogey that you can say certainly we can sort of keep set our sights out further ahead from where we are today.

Great, that's really helpful. And just a quick follow-up on that point. In terms of the service center footprint, hypothetically if you were to get to that 20% market share target, could this current service center network handle that capacity? Or where would you have to get to in terms of investments or expansion to meet that target?

We couldn't handle what we have today, not by any stretch. So we would have to continue to increase capacity. That took us a lot of years to get to where we are today. So I’m sure it's going to take a while to get to double our market share, but we would absolutely have to continue to add capacity. I think we're doing that today. We're adding it at a pace that doesn't cripple us. From an operating standpoint, we're adding it at a pace that we can handle that makes sense and continue to meet our customer needs.

We've got to be methodical and do it selectively. It will take more service centers and larger service centers, and we keep a good gauge on the door pressure at every service center and look at it continuously, and try to look at it over a long range so that we can get ahead of need and rather acquire land and build and so forth before we run out of capacity. That's been our practice and will continue to be our practice going forward.

So a pricing question. If you could maybe provide a little bit of color in terms of your expectations for contract rate increases? I think in a relatively healthy economy, you look for something in a 3% to 4% range, but was just curious to get your thoughts on what increases could look like this year?

Generally, our long-term approach has been to seek increases that cover our cost inflation. As I mentioned, we believe cost inflation may be around 4.5%. This will typically serve as the starting point for whatever the general rate increase might be for the year and will form the basis for these discussions. However, it also depends on the current environment. This past year, our revenue per hundredweight improved significantly. The yield increase was driven not only by core price increases but also by the consistent increases that are crucial for our customers. Additionally, we onboarded many new accounts and took on new business, which in some cases came with higher handling costs. Therefore, the overall yield increase of 6.9% was influenced by more than just core price increments.

Okay, that's helpful. And then some of your competitors have already announced the GRI. Just curious to hear if GRI could be in the cards for you guys?

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

Okay. And then just last question. If I look at your targeted CapEx for this year of $490 million, it's down about $100 million, it's a pretty big swing. Wanted to hear your thoughts on, if that $490 million number could look a little bit different depending upon the environment, let's just say, you grow at a faster-than-expected rate. What could that number look like? And then I'm assuming it's not going to be above $100 million. But the message here is you probably have incremental free cash flow, right, in '19 to potentially deploy, I think the dividend increase ate up about $10 million of that, but what are your thoughts on deploying cash in '19?

Regarding the CapEx, we generally allocate 10% to 15% of our revenue to it annually, which is slightly lower than last year, mainly concerning our tractor and trailer operations in the truckload sector. This amount varies each year due to changing replacement needs, alongside a growth component included in that total. Given our recent replacement cycle, we likely don't have as many units needing replacement this year. The average age of our equipment has improved to about 3.5 years, reflecting positive progress in our fleet over the past few years. We're in a solid position, but we have flexibility. If volumes exceed our expectations, we can increase orders with our OEM partners and, conversely, can cancel orders if necessary.

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

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

Well, as you know, the repurchases have been the priority for us in terms of returning capital. We stepped up our repurchases in the fourth quarter compared to what we had been spending in the early part of the year, and a lot of that was just based on our share price being depressed, we felt like. So certainly we've got that opportunity to step those up even further. The share price continues to stay low, and we're always buying on a daily basis with our 10b5 program that works and buys a consistent amount. We were pleased with an approximately 31% increase in the dividend. And typically, the way we've looked at that is what are the earnings from the prior year have been and what the payout for the next year might be; and that increase just kind of keeps that overall dividend level pretty much in check from a percentage standpoint as where we've been in the past.

I think maybe David made a comment earlier about the quality of the freight in the network at this point. And I guess, I'm just curious, do you still have opportunity to trade up freights? And if you saw any freight that was kind of nontraditional maybe truckload freight coming into the network last year when the market was relatively tight? Has a lot of that gone back? And I'm just curious on kind of your pricing opportunities and the ability to continue trading up freight going into 2019.

Todd, I don't know that trading up is the term that we use a lot. We'll certainly try to improve pricing. If it's poor, we'll certainly try to improve it. Don't know that we try to trade up a lot, but we have challenging accounts; on accounts it's challenging that if the costs are high, then we'll certainly try to take increases on that business more aggressively than on account that otherwise operates efficiently and all those things. But anyway, I think there's always some opportunity there. I mean, with the number of shipments we handle on a daily basis, you're always going to run across something. So I think there's always some opportunity. I do think we probably harvest some of that low-hanging fruit, if you will. There is not nearly as much as it was at one time. But there should be something in there possibly to improve this year, but I think it's not going to be a big boom for us in any way.

Okay. Great. I'll take credit for the term trading, but I appreciate your perspective on it. And then just for my follow-up, Adam, can you speak a little bit to the insurance and claims line item here this quarter? It looks like it was favorable on an absolute basis, and then also as a percent of revenue, was there anything unusual in there? Or are you getting some benefit from some of the investments that you've made in the fleet? And how would you expect that to trend going forward?

Yes, the fourth quarter every year also includes an annual actuarial adjustment and process that we go through, which can be favorable or unfavorable. And if you look during the year, we averaged about 1.2%. We had a favorable adjustment in there that drove it down to the 0.9%. And then when you look in last year's fourth quarter, it was an unfavorable adjustment. So that was up to 1.4% in the quarter. So I think that'll go back. The two components that are in there are auto liability, exposure, including the premiums and then our cargo claims ratio. So the claims ratio is in that between 0.2% and 0.3% type of range, and the auto has been in that kind of 0.9% to 1% range as I knock on wood here. So we'd expect, based on all the investments we've made in safety tools and so forth and claims prevention tools to keep that number trending, I would think in somewhere in that same type of range as we work our way through the first three quarters of the year.

I've two quick questions. One, can you talk about any regional strength, any parts of the network feeling tighter or looser than others, anywhere you see business particularly good? And then the second question is just on the $95 million of IT spend for '19. Is that focused on any specific areas?

Yes, well, let me address that one first. That $95 million is IT and other assets basically, and the other assets component in that forecast is about $50 million. That's our forklifts, switchers, all sorts of other things that go in there. It's generally somewhere about $35 million. Other things that we put scales and dimensions and so forth into the service center, so with the plan for 10 service centers this year, that piece of that net total is a bit higher. And then the IT is higher this year and that number includes costs that we're planning to replace our logging devices so that hardware in each of our 9,000-plus units will be replaced this year. And so that's why that IT piece is a little bit higher than our normal $20 million to $25 million.

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

It's been quite balanced for us, which is what we aim for to maintain the line-haul network effectively. This year, we're experiencing strong growth in the Midwestern region of the U.S., which aligns with overall industrial activity and reflects the significant capacity we've added there over the last few years. Additionally, we're seeing substantial growth on the West Coast. Our CapEx plan this year is set to impact all regions, focusing on the Midwest and Gulf Coast where we have seen strong growth, as well as in the West and Southeast. Overall, our planned door additions this year will benefit various areas.

I was hoping you could address the question about headcount efficiency from a different perspective. Looking back at 2016, the year-end headcount was roughly flat or possibly slightly decreased, while in 2018, headcount increased by about 10% alongside a similar rise in volumes. What has changed regarding workforce efficiency? Additionally, what excess capacity or efficiency exists within the workforce that makes you confident in maintaining these levels for 2019, especially if we anticipate more volume growth driven by a better economy?

Yes, I think going all the way back to 2016, that I think you referenced, '16, as I mentioned earlier, was a flat year from a revenue standpoint. And look, it's not easy across the network today of 235 service centers to get the workforce exactly right. And so when we went through a flat year of 2016, we leave the hiring decisions up to our service center managers, likely a little hesitant and careful with making additional hires as we started progressing through '17. And '17, the volumes and revenue really stepped up as we progressed through the year, and we were a little bit stronger than what we were initially anticipating. So we're playing catch-up for quite a bit of the year. And that's why we've lost some productivity, but we also had to increase our use of purchase transportation as we progressed through '17, and it did slow down. I mean, that was when that material acceleration happened as we finished out September '17 and as we got up to about 19.5% revenue growth in the fourth quarter and that continued at plus 20% as we progressed through '18. So we were hiring the same kind of reverse of '16 as volumes were continuing to come through a set of very rapid pace. People were adding capacity for an employee account standpoint to make sure that we could keep up with what was coming at us and what we anticipated coming at us this year. And so we may have got a little bit heavy as we progressed through the year, and that was why we made the decision in the fall that on an overall basis, that we felt like things were in good shape, and we could keep it fairly steady. But that's to say that we've got some normal attrition that may be happening in some locations and then you got other locations that are still growing at significant rates and they are hiring people as they should be.

Okay. So as you look at it from an efficiency point of view and I don't know if you'll get it maybe from a capacity point of view. You've kind of kept dock towards your terminal capacity above maybe 15% to 20%. What would you say that is when you look at your workforce? I mean, how much more volumes do you think you can put through before maybe that has to get addressed again?

We probably are on the higher side of the capacity right now, which is opening those excess service centers starting out the first of the year, which is typically our slower months. But we've got, like I mentioned earlier, 10 service centers planned to open this year. So as we open those, that capacity will continue to grow unless we get unexpected surges in volume. So we'll have to see how that works out, but right now the capacity is good. I think it's on the higher side of what we've talked about being in the 15% or 20%, but it's a moving target. You've got less in some, more on others. And so we just have to keep addressing the locations where we're tight, which is what we're doing with those facilities that we've got planned for this year, and we were focused in the areas where we're struggling, and that's where we're adding.

So, Adam, that 8% and 10% for Jan and Feb, do you think you can give us that ex fuel? I imagine a good amount of the deceleration in the revenue growth is just fuel. So if you have those two numbers, it'd be helpful. And then just on the fuel, like, do you think it had much of an impact in 4Q? And do we need to think about it as a potential maybe small headwind in 1Q since it's lower year-over-year?

At this point, the average rate is quite similar to where fuel prices were last year. From a revenue per hundredweight perspective, the figures with and without fuel have largely returned to alignment. Depending on your fuel forecast, if prices remain stable, last year we noticed a significant rise in the average price of diesel starting more noticeably in the second quarter, though there was some alignment in the first quarter. We'll have to monitor how prices change and how they compare to the previous year, but it was primarily in the second quarter that we began to see that sequential increase in prices.

Adam, regarding the CapEx question, a few quarters ago, you mentioned that CapEx typically falls within the range of 12% to 15% of revenue, which has been the historical norm. However, the current guidance is slightly below that, sitting at the lower end of the recent range. Considering our discussion today about capacity and preparing for anticipated growth, is the 12% to 15% range still a relevant benchmark? Should we be focusing on the lower end moving forward based on the 2019 guidance, or should we aim for a midpoint within that range?

I don't know that anything has changed necessarily with that range. I mean, certainly we've got another healthy year with respect to real estate and some of what we'd spend in that regard is dependent upon what's available and how many projects our internal team can complete, but a lot of the real estate in the area that we're continuing to expand into metro type of areas, the cost of land continues to accelerate and some of the costs of these facilities are measured in the tens of millions of dollars. So we still want to continue to own the real estate that we have in the network, and that's our number one priority. But I think that the biggest change, as I mentioned earlier, and why it might be a little bit lower as a percent of revenue this year is just we've got a little bit less need on the equipment side, but that kind of goes in cycles. We've got generally about $150 million on average from a replacement standpoint on the equipment, and I would say we're replacing less than that this year based on the patterns of the prior two.

I just had a quick question about when you guys are opening new service centers, how you resource those? Are you reshuffling assets? Are you going out and buying new trucks and trailers to source those? And also how do you approach the headcount? Are you moving employees around? And roughly about how many employees do you need to have to have one of those new facilities fully staffed?

We often reorganize our employees when we open new service centers. Recently, we have expanded in the cities we already serve by finding new locations in different parts of town. This allows us to relocate employees, many of whom move closer to their homes. Our approach is focused on getting nearer to both our customers and employees. We relocate equipment and personnel, and in many cases, we've seen faster growth in these new locations compared to the older ones, which eventually fill up again. By being closer to our customers, we provide better service and experience stronger growth than we do in our existing locations. The number of employees needed really depends on the market size, and it can range from 15 to 20 drivers up to 50.

We want to thank all of you today for your participation and your questions. Feel free to call us if you have any further questions. Thanks, and have a great day.