Old Dominion Freight Line Inc (ODFL) — Q2 2019 Transcript

Good morning, and welcome to our second quarter conference call. With me on the call today is David Congdon, our Executive Chairman; and Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report the OD team delivered solid operating results and financial results for the second quarter of 2019, including several new company records. We recorded our highest quarterly revenue of $1.1 billion and our highest quarterly earnings per diluted share of $2.16. We also improved on our industry-leading operating ratio by 80 basis points to 77.9%. While we have seen general softness with demand and the economy continues to give us mixed signals, we believe we are continuing to win market share and are maintaining our price discipline while doing so. Our ability to win market share even in slower periods is based on our superior service offering delivered at a fair price. Our on-time service performance was 99% in the second quarter while our cargo claims ratio remained at 0.2%. In addition to providing these superior service metrics, we also improved the productivity of our operations. Our P&D shipments per hour improved 1.6% in the second quarter, while our dock shipments per hour increased 5.4%. Our line-haul latent load average decreased by 1.6%, but this metric was affected by the decrease in weight per shipment. These service and productivity metrics reflect our team's outstanding execution of our long-term strategic plan. I have been particularly pleased with the flexibility of our team and our business plan over the past couple of years. We responded to the material acceleration in volumes that occurred in late 2017 through 2018 and are now responding to lower than originally anticipated volumes this year. Managing through both the ups and downs of the business cycle is not easy. So the consistency in our service and financial results has been remarkable. We have never wavered from our commitment to service despite the associated costs due to the support it provides for our ability to maintain price discipline. The importance of yield to our financial results couldn't be more apparent than it was in the second quarter. We have said many times before that the keys to producing long-term margin improvement include a combination of density and yield with the support of a positive economy and stable pricing environment. Although macroeconomic conditions were not ideal, the strength of our yield performance and improved productivity more than offset the loss of density and operating leverage during the second quarter, which has allowed us to improve our operating ratio to a new company record. As we look forward to the second half of 2019, we will continue to focus on controlling our cost; we anticipate the softer demand to continue, although it is important to note that we are well positioned to respond to any acceleration in volumes that might occur if the domestic economy regains momentum. Regardless of the economic environment, we will continue to execute our long-term strategic plan by providing our customers with superior on-time claims-free service at a fair price. We will also continue to make significant investments in capacity, technology and training and education of our OD family of employees. While these investments may increase expenses in the short run, we have demonstrated how our ongoing investment in our sales is critical to achieving long-term market share with solid returns. Consistent execution on our business fundamentals has helped us create one of the strongest records of growth and profitability in the LTL industry during periods of both economic expansion and contraction. As a result, we are confident in our ability to continue winning market share, as well as long-term prospects for further profitable growth and increased shareholder value. Thanks for joining us this morning. And now Adam will discuss our second-quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue increased 2.6% to $1.1 billion for the second quarter. The combination of the increase in revenue and 80 basis point improvement in our operating ratio allowed us to increase our diluted earnings per share by 8.5% to $2.16. Our revenue growth for the quarter was driven by the 9.5% improvement in LTL revenue per hundredweight. Our LTL tons per day decreased 6.3% as compared to the second quarter of 2018 with LTL shipments per day decreasing 2.6%. These decreases reflect the softer environment for freight, and we also believe that some volume loss was due to our long-term consistent approach to pricing. We expect our LTL weight per shipment in the second half of 2019 to be more consistent with the same period of last year, which will also have an effect on our revenue per hundredweight. On a sequential basis, the trends for both LTL tons per day and LTL shipments per day for both below normal seasonality in the second quarter. As compared to the first quarter of 2019, LTL tons per day increased 2.9% as compared to the 10-year average increase of 8.2% and LTL shipments per day increased 3.7% as compared to the 10-year average increase of 7.5%. For July, our volumes are trending below normal seasonality, although our yield trend is holding steady in terms of the actual reported revenue per hundredweight. We expect our volumes to be a little weaker, based on how the first month of each quarter has trended since July of last year, as well as the way the holiday fell this year. The actual growth rate in our revenue per hundredweight is lower than the first half of this year. However, due to tougher comparisons with the third quarter of 2018, a decrease in the growth rate was expected and we want to ensure that this is in no way misinterpreted as a change to our long-term pricing philosophy. We will continue to target increases that offset our cost inflation while also supporting our continued investments in technology and service center capacity. We will provide actual revenue related details for July and our second-quarter Form 10-Q. Our second-quarter operating ratio improved 80 basis points to 77.9% as a 110 basis point improvement in our direct operating cost as a percent of revenue more than offset the increase in overhead expenses. Greg detailed the improvements in productivity, which resulted in a 70 basis point improvement in our productive labor cost. Operating supplies and expenses also improved 80 basis points, primarily due to lower fuel costs. Our aggregate overhead cost as a percent of revenue increased 30 basis points, primarily due to the 40 basis point increase in our depreciation costs given the significant investments we have made in capacity and technology and the deleveraging effect of lower revenues we expect our overhead costs to be pressured as a percent of revenue for the remainder of the year. Old Dominion's cash flow from operations totaled $255.7 million and $461.9 million for the second quarter and first half of 2019 respectively, while capital expenditures were $159.2 million and $230 million for the same periods. We continue to expect total capital expenditures of approximately $480 million for this year. We returned $147.8 million of capital to our shareholders during the second quarter and $192.2 million for the first half of the year. For the year-to-date period, this total consisted of $164.7 million in share repurchases and $27.4 million in cash dividends. With the increase in repurchases during the second quarter, we completed our prior $250 million repurchase facility approximately one year ahead of schedule and began our new $350 million two-year program. Our effective tax rate for the second quarter of 2019 was 26.1% as compared to 26.2% in the second quarter of 2018. We currently anticipate our annual effective tax rate to be 26.1% for the third quarter of 2019. This concludes our prepared remarks this morning. Operator, we're happy to open the floor for questions at this time.

I wanted to follow up on pricing from the first quarter call when you noted some signs of rational or aggressive behavior from competitors. I'm interested in an update on whether this trend continued into the second quarter and if there have been any changes in the pricing environment. It seems like yields are staying steady, but I'm curious about the competitive dynamics.

Yes, Allison this is Adam and we still see it is pretty consistent with last quarter. And I think that when you look at our yield trends, certainly they were very consistent with the first quarter as well. And I'll point out we said in our prepared remarks on the first quarter call that we view the environment as stable and things went maybe a little sideways as part of the Q&A, but we continue to view things as stable and we're still getting consistent increases in our contractual renewals and so forth and still seeing our increases offsetting our cost inflation, which is the primary target that we go after each year is a contract is renewing.

And then on the resource side, since you guys were really ramping up on hiring through most of 2018 and now that demand levels are quite a bit softer. Do you think that you've sort of over-resourced and you need to rightsize that a bit, and how should we think about that in the second half in terms of headcount levels and what impact that may have on productivity? Thank you.

Allison, we have made the necessary cuts to re-establish our labor at tonnage levels, but we are currently working on that and we have made those adjustments. Obviously, we did if you look at our productivity gains; you can't do that without making the labor adjustments. So we feel pretty good about where we are going through the quarter and business conditions will dictate what we do with labor going forward.

Congratulations on the strong operating performance during the quarter. I wanted to ask about the year-over-year comparisons for weight per shipment. It seems they are starting to get easier, but we've seen a slight decline in shipments. As you manage your cost structure, does this drop in tonnage allow you to better adjust costs? Also, could you discuss your ability to maintain profitability if tonnage decreases, especially if it's more influenced by shipments rather than weight per shipment?

We've been trying to emphasize shipments this year due to the differences in weight per shipment and the changes we experienced during the first half of 2018 compared to the second half. The initial response has been encouraging, and we believe we positioned ourselves well despite some slowing last year. Our shipments were still performing positively in the first quarter of this year but then turned negative. We mentioned that our headcount has aligned with the changes in shipments. If you compare our headcount at the end of June to the end of September, we’ve reduced it by about 4%. Additionally, when we look at the change in shipments per day from the second quarter of 2019 to the third quarter of 2018, we see a similar decline of around 4%. Thus, our headcount is in line with shipment levels, as Greg noted, and this alignment has contributed to our productivity improvements as we moved through this quarter. Our direct cost performance has been strong, and we are witnessing enhancements in our productive labor costs, along with some improvements in operating supplies and expenses, particularly driven by fuel costs. This has more than offset the loss of leverage we faced in overhead costs.

Yes, and then would you just related to that, I would have imagined you have some opportunity on the overtime side on the hourly side and we didn't really see that come through. Just given salaries, wages and benefits per employee were actually up a little bit. I don't know if that partly related to some inflation and fringe costs in the phantom shares. But if you could just talk about your ability to maybe control hours prospectively from here, just given the decline in the revenue trends?

I believe the improvement we’re observing in our productive labor costs is noteworthy. The labor component has increased by 70 basis points, as previously mentioned. However, we did experience some inflation in our fringe benefit costs during this period. I had anticipated the fringe rate to be around 34% at the beginning of the year, and that aligns with where we stood in the second quarter of last year. Our fringe rate was 32.8%, indicating a slight decline, partly attributed to a more favorable situation in the previous year. In terms of overhead labor costs, they remain fairly stable as a percentage of revenue because much of our compensation is performance-based. The absence of the same level of growth as seen last year may explain the reduced metrics. Overall, this situation is balancing out relative to fixed salaries and the performance-based compensation.

Right, I have a quick follow-up on pricing. You've mentioned yield, but Adam, could you clarify what portion of that yield comes from same-store pricing? It’s a bit challenging to determine due to the weight per shipment and a slight increase in haul length. I'm trying to grasp the core pricing within that yield number.

Yes, we stopped given that contractual renewal number, primarily because I think that for us and maybe some of the other carriers as well and never necessarily seems to reconcile into what the components are, but you know what I'll say is we always target revenue per shipment, that's what we're looking at is the shipments we handle and the revenue for those shipments and then the cost per shipment and we're still getting our renewals kind of in our long-term target range. That's 80 basis points to 100 sort of north of cost inflation and we always we go through, we look at what we anticipate cost inflation is going to be on a per shipment basis each year. And then we need that extra as we talked about with the ongoing and continuous investments in our real estate network and in our technology systems that we're trying to drive operating efficiencies. So we've continued to get increases. They are not as strong necessarily as what we saw last year, but we didn't expect that coming into this year. You know our pricing philosophy is more on an account-by-account basis in each account's operating ratio should stand on its own and some of those lower-performing accounts we got higher increases last year that we didn't necessarily think should repeat. So, I feel good about the way our renewals are trending and certainly that's showing up, and is the big reason why I mean Greg said in his comments, but the yield performance is what drove this record-setting quarter for us both in revenue or in EPS.

Maybe could I ask you just to run through what the tonnage numbers look like in the month of June, I don't know if you had mentioned that before, but it looks like they stepped down a little bit from what the quarter-to-date had been through May. Just curious what that number was?

Sure, yes, on the tonnage side, we had a 7% decrease in tons in the month of June and that was after a 5.8% decrease in both April and May. And then on the shipment side we had a 3.4% decrease in shipments per day in June. And that followed a 2.1% decrease in April, and a 1.9% decrease in May.

And the July commentary, although you don't give the number, the suggestion was the transition from 2Q to 3Q, is a little weaker than typical seasonality would suggest?

It is and it seems like this trend has been in place now for the last several quarters. But I think that our revenue trends have been really consistent as we progress through the quarter, but we kind of start this first month out of the quarter, below normal seasonality and it's been that way since going back to July of last year. And so, we've been pretty well below in January in April this year. And so, but what we've seen is a consistency from the start to the year-end, so we would expect to see things continue to build. The July has a negative set up and, like I mentioned, we expected to see a little bit weaker, just the way all the days fall with regard to the holiday and continued through the month, but I would expect to see it pick up - kind of back above seasonality in August.

And then just, mechanically, as we think about the revenue per hundredweight that you report and the relationship with the weight per shipment. I think you mentioned that the weight per shipment is going to begin to sort of move towards comparability or flat relative to the second half of last year. This is mechanically, that has sort of a negative impact on the revenue per hundredweight growth. Can we just sort of walk us through, remind us sort of that relationship? Is it one for one, as you see that sort of decline start to normalize the impact on the revenue per hundredweight?

There is no completely linear way to track and to adjust for weight per shipment and the other mix changes you've got length of haul in class of freight that impact that reported metric as well, but typically, and we're still seeing the increases, like I mentioned on contracts that are renewing in and there is no one renewal period for us. They're renewing and we're evaluating contracts every day as they come up so we would expect and historically, it's shown that you would expect to see holding mix constant a little bit of an increase, going into the third quarter out of the second. And so with that said, and based on the acceleration that we saw from 2Q to 3Q last year, just assuming a little normal acceleration in the actual reported number in the second quarter going into the third has been that may change that growth rate metric somewhere between the 5% to 6% type of range versus where we've been double digit this year.

So, just another question on the tonnage here, I mean your tonnage doesn't run negative for very long. I mean, if you go back the last 15 years, it's going to usually run for like four quarters in a row. I think you're already at that level, does it feel like tonnage is going to imminently flip positive in the second half and going into 2020 or do you feel like the macro environment is still far too uncertain to make that call?

It still feels a little bit soft and lower comparisons get a little bit easier in the last part of the year, but it feels a little softer. So, we don't expect our tonnage to flip to positive but it hopefully at the macro pickup and we'll have a better end than we expect. But right now, it just appears to be a little bit soft. Consistent, that's the good thing. It is really consistent day to day. But just not seeing the levels that would certainly that we did last year this time.

And, Ravi I'll just add, when you look at all the macroeconomic numbers that we pay attention to, particularly on the industrial side, it's still showing growth, but certainly that hasn't reconciled to freight across the transportation landscape I'd say it's not just us, but there is - it's been hard to read the tea leaves because you've got a lot of metrics that suggest positive trends and maybe not as strong as certainly is what we were seeing last year but still all showing positive. And I think the one bright spot in everything is the fact that the consumer is still healthy and so there's a lot of good economic data on that, if you will and so in that regard, consumers keep consuming somebody has got to produce and ultimately ship that freight.

And just maybe the follow-up to that, when you think of what your OR has historically done kind of in those negative tonnage environments in 2016 your OR deteriorated but so far you've kept it improving. Again you spoke of a number of initiatives that you're putting in place, but is your messaging here that you can continue to keep improving the OR even in a negative tonnage environment again, obviously, if you go into recession all bets are off, but if it continues in the current environment, the OR can keep improving even with the tougher comps that you have?

Ravi we've done it now for a couple of quarters and I think that I was pleased with the sequential operating ratio performance from the first quarter into the second. Operating ratio improved 410 basis points and the long-term average is 440. So comparing back to periods where we've had slower revenue growth, it's sort of been in 350 basis points kind of range so feel good about our cost trends. They are - typically the third quarter is very consistent with the second-and long-term operating ratio is typically up 20 to 30 basis points and so, I feel good with what we've done with respect to our cost. Certainly, we've got a few other things that we can focus on with respect to saving some money and protecting some of the costs there, but even at its worst kind of going back into some of the periods in 2009 and 2015, that was a 60 basis point increase so we still certainly got more or room rather in terms of where we were last year in the third quarter to show some slight operating ratio improvement and that's definitely the goal for us is to continue to try to protect the bottom line to grow our earnings and improve the operating ratio.

And then last one from me, IMO 2020 is around the proverbial corner. How are you guys thinking about that and maybe any ripple effects through the transportation space when that does happen?

I think at this point we're going to take the wait-and-see approach. I mean we obviously, we are prepared for growth if it comes back. As I mentioned in my earlier remarks, we have continued to execute on our gaming capacity. Our plan to gain capacity so, I think we're in a good spot. If in fact it's better than we expected it to be, so if it's not we'll make adjustments then proceed accordingly. Again, I think we've proven that we can make the adjustments that we need to make in a positive or negative environment. So hopefully, with what we've done, particularly in the last several quarters, you see that we are able to do it. So let's just hope that things pick up.

Greg, I guess, first one would be for you, just curious to know what you're hearing from your customers about their expected business trends in the second half of the year. I think UPS yesterday on their conference call so they expected industrial production to be slightly negative in the fourth quarter. You sort of aggregate your customer conversations over the past couple of months. How are you thinking about underlying business fundamentals heading into the second half of the year?

Relatively positive honestly, for the most part, most of our major customers are fairly busy. So it seems to be from that standpoint positive and that makes you feel good. The other side of that is our things like our customers are extremely happy with our performance and what we're doing and I think that has put us in a very, very good position to continue to gain share as we go forward, but that is definitely a positive. Our customers do seem to be busy and that's a good thing for the industry in particular.

Okay, that's helpful. And then following up on that Adam, you talked about July being a little bit below normal seasonality, but the expectation that August, so may be a little bit better than normal seasonality, as you think about the third quarter in aggregate from a tonnage perspective, is it your thought that we're kind of at the point now where we should as a whole kind of return back to more towards normal seasonality. When we think about 3Q versus 2Q or is it just too early to make that call?

I don't think we want to give that guidance at this point but we'll continue to watch it and continue to adjust as we need to in handling the freight that we get.

So Adam, your comment about weight per shipment flattening out, is that something you're seeing in July. Is that where you think you're going to get to in the second half and then is it flattening out because it's starting to move up sequentially or is it just flattening out because the comps are just a lot easier?

The comp, if you recall last year in June our weight per shipment was about 1620 pounds and then by July it was about 1560 pounds and most of that related to, we were just getting in a lot of heavier weighted shipments truckloads spillover type of freights and we made some operational changes to try to control the exit of that freight versus letting it happen to us naturally. And so we saw an immediate effect on our weight per shipment then and we've kind of been in this sort of 1550 to kind of 1580-ish pound range flexing up and down and there is some seasonality aspect of that, but I'd say it's been pretty consistent this year, which has been another bright spot that we hadn't necessarily seen that going any lower that you might expect from a read on the economy per se.

In terms of pricing, are you saying that the competitive pricing environment you start to see a little bit in first quarter's improving now or is it that it's the same, but we're not freaking out about it as much as maybe we reacted last quarter? And then, revenue per shipment has been growing 5%, 6% do you think that's sustainable in the back half of the year?

I would say, on your first question it's, we're still saying it's stable just like we did last year or last quarter rather, and certainly I think that that was coming off of two years of favorable very favorable environment. But, so it's very consistent with what we're seeing and from a revenue per shipment standpoint, I would say, ex-fuel, certainly that continues to be the target coming into this year we talked about our cost per shipment expectation of somewhere around 4.5% and so we want to continue to try to get increases on a revenue per shipment basis that are north of that we are and I think we'll continue to see that. Including fuel, though we do, we've seen it in the second quarter and it's definitely continued into July, where we're seeing fuel rates down versus where they were last year. So that will be a little bit of a headwind on that yield metric with the fuel and as well as just on top line revenue performance in general.

And just real quick, I may have missed it, did you say if you think headcount is going to be flat or down maybe up sequentially?

Expected to stay somewhat flat through the third and fourth quarter.

In your non-industrial business were any of your customers talking about the tariffs impacting them in the first half of this year from a pull-forward perspective?

Yes, certainly it’s been a conversation point particularly with customers we visited several weeks ago out on the West Coast and heard a little bit more of it out there. But overall, our retail business continues to perform well for us and I think we've got a very good product many retailers that have been optimizing their supply chains, got programs in place that really favor high-service carriers. And certainly, that's been a big benefit for us and we've seen good growth in that element of our business, we call it our most arrived by date business, but it's just managing the on-time and full type of programs that many retailers have put in place. So that's been good for us and has been a bright spot.

So, it's safe to say that it's come up, but probably not really impacted the 1Q volumes that much?

Well, it's hard to say. I think there has been an impact there, but we're just continuing to gain market share that maybe is offset any individual customer that may be feeling a little bit of pressure. But we're just, we're continuing to gain market share in that piece of our business.

Also, there have been some bankruptcies in the LTL side in the last 6 months. Have you guys picked up much freight from what you can tell from either of those bankruptcies?

We have picked up some, but they were both very small, but we definitely did pick up some. We had kind of a flurry of phone calls and opportunities from the get-go. And I'm sure we've kept some of that business, but most probably all of the business that we initially took on. But they are very, very small so not a big impact, but we did get some.

Not a big one, okay, and does that help keep pricing somewhat stable in the LTL world?

Honestly, I'm not sure either of those were large enough to move the needle.

So the first question I wanted to ask you just was about some of the capacity additions and the extent to which you think that might have a drag on the operating ratio in the second half of 2019 or going into 2020. Certainly with incremental margins in the mid 40s and I think it went north of 50 this quarter. Maybe you could address what you think of the sustainability of those levels given the capacity adds?

Some of that incremental margin is just a function of the way the math is working. And we've talked many times before about the fact that we don't manage the business to incremental margin. We're independently trying to put on revenue at a good operating ratio and always trying to take cost out of the business. And I think in the first and second quarters this year, that cost element has certainly caused the benefit to that metric, but most of the capacity additions that we make don't have a huge impact. And I’m speaking of service center capacity that have a huge impact on that depreciation line. Certainly, the equipment costs have added depreciation to us and we were anticipating growth in shipments this year, and at least in the second quarter, we're seeing those down. So our fleet is probably a little heavy versus where we'd like it to be. And we cut $10 million out of our CapEx going into this quarter on the tractor side to help a little bit, but there are other carrying costs, besides the depreciation on the fleet. And we've seen some inflation there as a result. And some of that it kind of gets buried overall in the operating supplies and expenses, but there has certainly been some excess fleet maintenance costs there.

That's great color; it actually leads well into my next question. So I wanted to talk a little bit about free cash flow conversion. Obviously, the net income numbers that you guys are putting up quite impressive. But the free cash flow has trailed about a little bit and that's obviously partly the nature of asset-intensive businesses. But if there is a slowdown do you think there's a little bit of an opportunity to maybe improve that free cash flow conversion? And how much of an eye are you guys keeping on that?

Well, it depends the easy answer to say, but one of the things that we look at will be what other opportunities may present themselves. And what we've seen in slower periods in the past is that gives us an opportunity to potentially accelerate some service center expansions and potentially some opportunities of existing facilities. And so we certainly are going to keep our eye open for those opportunities. We've got long-term market share of goals. And we think we've got a long runway of growth ahead of us in that regard and that will require significant investments in service center. So if we can accelerate some of that in a slower environment where in the past other carriers have made service centers available, then I think we would certainly look at it accelerating on that opportunity.

And just remind me, I think we talked about it last call, but remind me what's the target the long-term target in terms of where you might like to get to in terms of service center footprint?

Yes, that constantly changes right now. I think we're at 235 service centers today and we kind of got a list of about 40 service centers or so. But you know as we've gone through time what we've figured out as the company gets bigger, the network plan and configuration changes. And we've kind of figured out with growth that is more efficient for us to have multiple service centers in metro areas. We've been doing some other operational changes around some of our breakbulk locations and managing break versus local freight. So there are multiple elements to it and we don't know what we don't know. So I think we get smarter as we go when it comes to the configuration and network, but we're trying to build it with optimizing efficiencies both in our line haul and our pickup and delivery operations. So my guess is, as we approach 275 it may be that looking out further on the growth curve that maybe it needs to be more than that. But that's just one of those things that right now we've got a line like the 275.

I think that you typically put in the annual wage increase sometime during the third quarter, and I was wondering if you could share any expectations that you have from that for this year from a timing and magnitude standpoint?

The same timing as always, we always give our annual wage increase effective the first Friday in September and that will be the same this year as well.

And Greg just from a magnitude with the labor environments and with what you're expecting on the pricing side. Is that something maybe below where it's been in the past couple of years or how do we think about kind of the magnitude of what you'd be putting through this year?

It's going to be somewhat similar, Todd. But I don't really want to talk about numbers exactly there, but it will be somewhat similar to what we've done in the past.

We haven't announced this internally yet, so we're not prepared to.

You're not going to give us the first look, that's fair but Adam so with the commentary on the sequential operating ratio progression. I think you said typically 40 to 50 basis points of deterioration 3Q versus 2Q that's something that you would expect, or that would be embedded in kind of your thought process on kind of a typical seasonal change within the operating ratio?

Correct.

And then, Adam, you made the comment on the expectations for the fringe for the full year to be around 34% and it sounds like that you’re in that range for 2Q. I think in the fourth quarter of 2018 you had. It's a really difficult comp on the fringe side. I know that we've got some of the year to play out but can you help us think about anything that we should factor in for the second half on the fringe side that would make the benefit to be different than the 34% that you're thinking about or is that something that you think you've got pretty good line of sight into at this point?

Well, last year in the fourth quarter, we had several favorable adjustments and typically the operating ratio was about 200 basis points higher in the fourth quarter versus the third. Last year it was only 30 basis points higher. Some of that was we go through an annual process of actuarially evaluating our certain insurance reserves. And we had favorable adjustments in our workers' comp and our auto liability claims. And we just had several favorable adjustments similar to that that roll through that fringe line in the fourth quarter of last year. I think our fringe benefit rate was between 30% to 31% and that reflected some of that favorability in the workers' comp. I think we had favorable group health trends in that quarter and then favorable phantom stock adjustment as well. So we just had a lot of favorability that rolled through that quarter and you never know which way some of those actuarial adjustments are going to go. And that's why when you look at kind of that fourth quarter, while I mentioned the second and third quarters are very, very consistent year-in and year-out. There is more variability from that third to fourth quarter for that reason.

But for a starting point, it sounds like we should think about fourth quarter sequentially versus third quarter and be careful for doing fourth quarter year-over-year comparison. Just given the number of benefits in the fourth quarter of last year?

Right would not necessarily expect those to, can go either way.

Right.

But would not necessarily expect - all of them come in, in the same magnitude and all in the same direction like they did last year that was very unusual when you look at that third to fourth quarter of 2018 type of performance.

Well Greg let’s wish in the tonnage comes back, we won't have to worry too much about those things, I guess so?

None of us.

Just going back to service centers. I think you talked previously this year about opening or expanding on 6 to 10 locations, Adam. I'm just curious to hear your thoughts about that number. If we're going to be at the higher end or lower end and if you have the service center count for the first quarter that would be great?

At the end of the first quarter, we’re currently sitting at 235 service centers is what our current count is and just based on completion schedules. We think that we'll finish another 6 service centers this year. But as we talked about I think on our last quarter call, some of those service centers may just defer the actual opening of those facilities until we start getting into the normal ramp of freight in the spring of next year. So they will be finished and we'll be ready. Just may not be that we pull drivers and staff them up and so forth just keep things as they are and then move the operation in early 2020.

So, even with lower tonnage levels you still committed, it sounds like to opening up more service centers, just the timing maybe a little bit, a little bit different than you had previously thought entering the year?

Of that total six, two or three of those will probably just be open and will be open for business. But once you're committed and in these projects they fit in the long-term plan and that's some of what we've talked about. Our long-term plan is just that, it's for the long term. And we think we've got plenty of revenue growth opportunity. The decisions we're making now are going to help us for the next several years. And much like the investments we made in 2016 when freight was slower. Had we not made those expansion projects in the real estate team completing the projects when they did. We certainly wouldn't have been in a position to handle the increased revenue that we saw in 2017 and 2018. So we've got to keep those projects going. We think they’re critically important to our long-term future and we want to make sure we complete them and move on to the next location where we know that we've got some capacity needs. And overall, we like to maintain about 25% excess capacity in the system and even with the seven openings that we had in 2018 and with the expectation of what we'll complete this year our excess capacity that is in about the 20% ballpark. So we want to make sure that we keep these projects going and put ourselves in good shape from when we know the economy will pick back up. And certainly, we believe that our service will continue to drive market share growth for us.