Old Dominion Freight Line Inc (ODFL) — Q4 2019 Transcript

Good morning and welcome to our fourth quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. For the fourth quarter, our results reflect another period with a slight reduction in revenue that was due in large part to the service domestic economy. Despite these economic conditions, we maintained our relentless focus on revenue quality and cost controls and are pleased with our consistent financial performance. While our diluted earnings per share decreased compared to the fourth quarter of 2018, the decrease in our pretax income was primarily due to a $30.7 million increase in fringe benefit cost that was partially driven by changes to our Phantom Stock Plan. Adam will address the Phantom Stock Plan expense in more detail, but the amendments to these plans in December 2019 should prevent fluctuations in our share price from materially impacting our earnings in future periods. The overall operating environment in the fourth quarter felt similar to what we experienced for most of 2019. We won't again continue with the decrease in LTL terms although we were pleased to see our volumes perform in line with normal seasonality when compared to the third quarter of 2019. This was the first time this year that we were in line with our normal seasonal trend. We are encouraged by this volume trend as well as economic forecast for the industrial economy to improve during 2020, although we are cognizant of increased political risk associated with an election year. Regardless of the economic or political environment, we will continue to focus on managing the things that we can control. This starts with our steadfast commitment to delivering superior service at a fair price while also diligently controlling our cost. Our on-time performance was 99% and our cargo claims ratio was 0.2% for the fourth quarter. Providing this level of superior service in periods with reduced operating density generally results in the loss of productivity and increased operating cost. We operate with great efficiency in the fourth quarter. However, and improve both our P&D shipments per hour and platform shipments per hour by 1.1% and 4.2% respectively. We have said many times before that long-term improvement in our operating ratio is dependent upon consistent improvements in density and yield both of which require the support of a positive macroeconomic environment. While we didn't get a lot of help from the economy and our volumes were lower than expected for 2019, we improved our yields by maintaining a consistent cost-based approach to pricing supported by our superior service. Long-term improvement in our yields has allowed us to make significant investments over the years to support our market share goals. Despite the softer volumes in 2019, our capital expenditures totaled $479 million and we maintained our commitment to the ongoing expansion of our service center network. Although we only increased our operating service center count by one in 2019, we finished the construction of several other facilities that did not officially open them to avoid the increased operating cost. We intend to open six to eight service centers in 2020 including the ones that have already been completed and believe that adding door capacity to our network should ensure that it will not be a limiting factor to our growth. While 2019 was not the year that we expected it to be, our team is proud of our financial results. We finished the year with company records for annual revenue and diluted earnings per share. If it were not for the phantom stock plan expense associated with the 53.7% increase in our share price, we would have also improved our operating ratio. So I would like to thank our Old Dominion family of employees for their solid execution that produced these results in a challenging environment. As we look forward to 2020, we will continue to focus on managing the fundamental aspects of our business, and adhere to the same business model that has served us well through many economic cycles. We firmly believe that, if we can continue to execute on this plan, we can deliver even greater value for our customers and shareholders. Thank you for joining us this morning. And now Adam will discuss our fourth quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the fourth quarter of 2019 was $1.0 billion, which was a 1.7% decrease from the prior year. Revenue for the year increased 1.6% to a new company record of $4.1 billion. For the fourth quarter, our earnings per diluted share decreased 7.7% to $1.80, due to the combination of the decrease in revenue and a 260 basis point increase in our operating ratio. Earnings per diluted share for the year increased 3.8% to $7.66, which was also a company record. Our revenue results for the quarter reflect the 4.5% reduction in LTL tons that was partially offset by the 2.7% increase in LTL revenue per hundredweight. Excluding fuel surcharges, LTL revenue per hundredweight increased 4%, which was in line with our expectations. On a sequential basis, LTL tons per day decreased 1.6% as compared to the third quarter, which is in line with normal seasonality. LTL shipments per day were down 3.8% on a sequential basis, which was just slightly below the 10-year average decrease of 3.3%. For January, our revenue per day increased 0.2% as compared to January of 2019. Revenue per hundredweight excluding fuel surcharges increased 4.1% to offset the 3.6% decrease in LTL tons per day. The increases in our fourth quarter and annual operating ratio are both attributable to increases in our fringe benefit cost for the periods compared. For the fourth quarter, our fringe benefit cost increased to 39.7% of salaries and wages from 30.7% in the fourth quarter of 2018, due primarily to changes in phantom stock expense. The fourth quarter of 2018 included an $8.4 million reduction in expense that was due to the decrease in our share price for that period. This compares to $17.1 million of expense in the fourth quarter of 2019 that resulted from the previously disclosed amendments to these plans as well as the increase in our share price during this quarter. All of our other combined cost improved as a percent of revenue for the quarter. We were able to offset the increases in insurance and depreciation with improvements in operating supplies and expenses and salaries and wages. Our team did a nice job of matching labor to current revenue trends, while also improving productivity. Our average headcount was down 5.6% as compared to the 4.1% decrease in LTL shipments. We currently believe that our workforce is appropriately sized for current shipment trends and our fleet is in good shape as well. As shipment levels begin to improve, however, we will likely need to add to our workforce this year. Old Dominion's cash flow from operations totaled $236.4 million for the fourth quarter and $983.9 million for the year, while capital expenditures were $109 million and $479.3 million for the same respective periods. We returned $49.2 million of capital to our shareholders during the fourth quarter and $295.5 million for the year. For 2019, this total consisted of $241 million in share repurchases and $54.6 million in cash dividends. We were pleased that our Board of Directors approved a 35.3% increase in the quarterly dividend to $0.23 per share commencing in the first quarter of 2020. This action reflects the Board's confidence in our prospects for continued growth and affirms our commitment of returning capital to our shareholders. Our effective tax rate for the fourth quarter of 2019 was 24% as compared to 26.6% in the fourth quarter of 2018. For the year, our effective tax rate was 25.3%. We currently expect an effective tax rate of 25.5% for 2020. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Good morning, guys. Thank you for taking my questions.

Good morning, Jack.

So Adam, I want to revisit your comments from January. Greg, I would also like to hear your perspective on this. I appreciate the additional insights regarding the first month of the quarter. Can you elaborate on how you perceive the market during the first four to five weeks of the year? We received a somewhat better-than-expected PMI report earlier this week, but we also have some challenges, such as Boeing halting production and various global trade issues. I'm interested in your thoughts on how the market feels right now and whether you still see stabilization in your outlook compared to typical seasonal trends.

Thanks, Jack. It does seem to be stabilizing. And the commentary from our customers and the communications that I've had with them, for the most part seem to be positive. So, we're positive on where we are and what we look like going forward. So, let's hope that it does improve the rest of the year.

Okay. That's great. That's great to hear. And then, I guess on the cost side for a moment, Adam, could you kind of help us think through the puts and takes, when we think about the sequential progression of OR. I know there are a lot of moving pieces in the fourth quarter. And I guess from a bigger picture perspective, how are you guys thinking about cost inflation on a per shipment basis in 2020?

Sure. The main issue we faced in the fourth quarter was the adjustment for the phantom stock expense, which created a significant challenge. This was particularly noteworthy compared to the fourth quarter of 2018, which included many credits that had a positive impact. Last year, we noted that these credits likely improved the operating ratio by around 150 to 200 basis points. This adjustment was reflected in our fringe benefits line. Additionally, there were a few other unusual items this quarter. The insurance line stood out, as we conducted our annual actuarial assessment and usually make adjustments in the fourth quarter. This resulted in an increase to 1.8% of revenue, while it typically averages around 1.1% to 1.2% throughout the year. Our cargo claims ratio was 0.2%, with the remaining amount related to auto exposure. We did have an unfavorable adjustment from the actuarial assessment, but there were some credits that offset this in other areas, including a favorable adjustment in the fringe benefits line concerning our workers' comp liabilities and other credits in the operating supplies and expenses line. Overall, while there were no significant individual items to highlight, there were various adjustments that should normalize as we move into the first quarter of next year.

Okay. That's helpful. Thanks very much for the time.

Thanks, Jack.

Hey, thanks good morning. I wanted to see if you could elaborate a little bit on the tonnage trends that you saw through the quarter? I apologize if you did go through that I might have missed it. But particularly December it looks like it improved a little bit. And I know you like to wait until the Q comes out or the K, I guess in this case to give us sort of the current month. But any sort of thoughts, just directionally on how things are trending here early in 1Q?

For the fourth quarter, we were happy to see that our performance aligned with typical sequential trends. Both tonnage and revenue showed results in line with the 10-year average, which was encouraging, especially since it is the first time this year we’ve seen such alignment. Last year, we experienced some unfavorable trends during the latter half. As we moved into January, we reported that year-over-year tonnage was down by 3.6%, with revenue remaining flat. This indicates a positive progression, considering revenue was down about 2.5% on a per day basis in the third quarter and slightly less in the fourth quarter. Now revenue is nearing a flat line but leaning slightly positive, which highlights the good trends developing.

Okay. Okay. That's very helpful. I appreciate that. And then when I think about the phantom stock, if you were to think about the entire year and what that means as we sort of transition into 2020? In terms of the tailwind, I guess there'll be a tailwind to growth potentially from the cost that you incurred in 2019 that won't be recurring. But can you sort of just sum it up just so we know what the total number is for the full year when we look at that clean going into 2020?

Yes. We discussed this in the prepared remarks, noting the volatility of the program, which has fluctuated throughout this year and has shown similar patterns over the past couple of years as our share price has grown. It's pleasing to mention that our share price increased by over 50% this year. However, the accounting treatment for this program led to expenses. In total, we incurred about $35 million in phantom stock expenses in 2019, compared to approximately $6 million in 2018. This presented a significant overall challenge, and that figure contributed to the total fringe benefit line. I anticipate some improvement this year, but I expect the total to be around 34% of salaries and wages as we move through 2019. We likely won't exceed that 34% threshold due to the phantom stock expenses, but we will continue to experience cost inflation related to our health programs, with rising pharmacy costs. Thus, we should expect an increased inflation rate in that program along with other costs impacting the fringe benefit lines.

And Chris it is behind that. That's behind us for sure.

Yes. It's a high-class problem to have, but definitely enough to spot in the rearview. Thanks very much for the time. Appreciate it.

Thanks, operator. Hi, everybody. Thanks for taking my questions. Adam just helping us with what productive labor costs were in the quarter as a percentage of revenue? And then I know you talked about headcount going up or just trending up the shipment increase and that obviously makes sense. But if you could just help us think about the increase in headcount relative to shipment growth? Is it kind of proportional, if you see 2% 3% increase in shipment growth, that's kind of what we should expect on headcount? I think that would just be helpful. And then last very specific question is, D&A took a big step-up in 2019. And I just want to know what the right way to think about it in 2020?

All right. I'll try to see if I can remember all those questions.

That was one question by the way. There were just three parts. Yes.

There were three questions in one. The productive labor costs remained relatively stable in the fourth quarter compared to last year, at 27.9% for both periods. This is actually positive. When we look at all our direct operating costs together, fluctuations in fuel prices mean that fuel costs decreased, with the average price falling over 6% in the fourth quarter of 2019 compared to 2018. This typically impacts both fuel surcharge revenue and fuel expenses. You will notice revenue decreasing and operating supplies and expenses declining due to the drop in fuel prices, but labor costs often increase slightly as a percentage of revenue. Fortunately, we did not see that increase. Overall, the trend for salaries, wages, and benefits reflects this. A couple of factors contributed to this line: performance-based compensation was lower in the fourth quarter this year, primarily because revenue was down and the operating ratio was lower, which are key factors in our bonus programs. Our headcount in the fourth quarter decreased compared to the third quarter, which is usually the opposite trend. Typically, we see a sequential increase from the third to the fourth quarter. As mentioned in our prepared comments, first quarter headcount tends to be about the same as the fourth quarter, and I believe we are in good shape concerning headcount. If these trends continue and our volumes begin to grow, it's likely we will add to our headcount later in the year, which would be a positive development. We also addressed fleet matters in our prepared comments. We are well-positioned, having placed orders last year expecting mid-single-digit growth in volume, but we actually saw a mid-single-digit decrease in tons. This means we may have excess capacity, leading to higher carrying costs in both depreciation and maintenance for our heavier fleet. We hope to balance these costs as we move through 2020.

Yes. So D&A more flattish in 2020, I guess it depends on when the revenue equipment came in, but, I guess, more flattish in 2020?

Well, we've still got a decent-sized CapEx program, not as much on the equipment side, but it's still $315 million. Some of that will be technology, which has a shorter depreciation period. So you get hit with a little bit more of that. Longer term, I think when you look at kind of the change in average or the annual depreciation rate, rather, it's somewhere in kind of the 5 percentage range of the overall CapEx budget for the year. But since we've got a continuation of the real estate and the real estate making up the majority of the CapEx plan, then it certainly should be lower than that. But we'd certainly expect it to be increasing, as we progress through the year and continue to execute on that CapEx plan.

Right. And then, regarding the share count, is the way the phantom arrangement functions that the variability of the stock price will not affect the fringe benefit cost, and you will just increase the share count slightly? Is it a 357,000 increase in the share count, is that how it simply works?

Yes. The diluted shares will reflect that, that will go into that diluted share count, if you will, those shares that are outstanding and we'll give that detail too that should be in our 10-K filing, but you can kind of go back and look at last year's 10-K as well and see kind of the outstanding shares that were there. Not a lot of impact to the fourth quarter, given the timing of when that program or when we made that change, if you will. But certainly, that will impact diluted shares going forward.

Got it. Okay. Very good. Thank you for taking my questions. Appreciate it.

Thank you, operator. Could you guys touch a little bit on, sort of, LTL pricing? It feels like it's still pretty stable out there in the marketplace and sort of how shippers are communicating to you, what to expect for 2020?

Yes. I believe it has remained stable and was generally in line with our expectations for the fourth quarter. We had previously discussed how that trend would develop during our third quarter call. We are still engaged in our bidding process and have achieved some wins, but with revenue declining in the latter half of last year, there have been more losses than wins overall. As we move into this year, we've noticed that some competitors' yield numbers have decreased as they navigated the latter part of last year, likely due to their own bidding situations. After our first quarter call, we observed a slight competitive response around March and April of last year, and that trend continued. This is reflected in the competitive yield figures disclosed by public carriers as well. We plan to maintain our cost-based pricing strategy and stick to the consistent approach we've employed year after year. Regarding cost inflation projections, we estimate an increase of about 4% on a per shipment basis for this year, which will serve as the baseline for discussions with our contractual customers and will influence our considerations for announcing a General Rate Increase for our tariff-based business.

Okay. That's great color. And the other thing, any reaction from any of your customers?

Can you repeat that?

No, no. Yes. No. Any reactions from your customers about the impacts of the coronavirus at all on their supply chains? Just trying to think out how first quarter might work out?

Jason, not to my knowledge. We haven't heard anything negative related to that so far, thankfully.

Okay. It's me knocking on wood. Gentlemen, thank you for your time.

Okay.

Thanks. Good morning, gentlemen. Just want to follow-up on the insurance comments and thanks for the color in your prepared remarks. I'm really surprised that you guys have such a low historical claims ratio. And, obviously, our such amazing operators are seeing a spike in insurance rates. I mean, if it's this bad for you, what's it like for the rest of the industry? And, I think, you said you had some kind of actuarial hit? Was there a particular incident that drove that? I mean, any color there would be helpful.

There wasn't any specific accident that impacted the fourth quarter negatively. We have an annual review process where actuaries assess all outstanding claims over the years. Some years show a positive development, while others reflect unfavorable outcomes. In the fourth quarter last year, we actually had a positive adjustment. This year, our expenses were 0.9% of revenue, compared to 1.1% or 1.2% during the first three quarters. This year, several open claims exhibited unfavorable development, and we also accounted for expenses related to accidents this year. We expect things to normalize next year. The long-term favorable trend is primarily due to our commitment to safety, investing in technology for our units, and enhancing training in safety protocols for our drivers. This focus has contributed to improvements in our accident frequency ratios and overall severity trends. Like many other companies, we are facing some inflation in premium costs, and we are currently in the process of renegotiating those rates. Most of our auto expenses come from the self-insured portion we cover, so while we anticipate an increase in premiums, we will continue managing and hopefully mitigating any inflation related to the self-insured aspect we are responsible for.

Got it. So do you feel like the inflation would have been much worse if you didn't have the deck?

Sure. The technology has certainly been beneficial. It's difficult to quantify its impact precisely, but we have invested a significant amount of time assessing the technology as we've integrated it into our trucks. We believe we have effective technology in our accident avoidance systems, including forward-facing cameras and collision detection systems. We anticipate that these advancements will lead to reduced accident severities over time. Ultimately, our goal is to prevent accidents entirely, but reducing their severity is already a significant advantage for everyone involved.

Got it. And just one last one. The last few years have been probably the most volatile that the industry has seen in a long time. It doesn't look like it's going to get much better, especially with changes like e-commerce and new entrants and such. What are your views on consolidation in this space? And kind of where do you think the LTL space looks like five years from now? Do you think it looks similar to where we are today, or do you think it looks meaningfully different?

Well, I'm not sure that at this point Ravi, we see much of any change in the LTL space ahead of us. I think our competition has been relatively stable. We lost a couple of smaller carriers in the last year or so, but I think it's been relatively stable and we don't see anything that would change that in the near future. But certainly, I think to some degree over the years we've lost competitors as you know. But I think we're in a good spot right now. I think we're well positioned. I think the things that we've done from an expansion standpoint, from a capacity standpoint puts us in a good spot, but I don't think from a competitive standpoint we'll see that many changes.

Very good. Thank you.

Yeah. Hi. Good morning. I know density is sort of the key over the long run to improving OR. I'm just sort of curious given the declines that we saw in LTL tonnage in 2019, as you think ahead and hopefully we get to an inflection on industrial production and industrial outlook. What sort of volume growth do you need to start improving OR again on a year-over-year basis would you say? Is it just something? Is it a certain order of magnitude to make up for the impact in 2019? Thank you.

There's not necessarily a volume growth figure. We demonstrated this in the first and second quarters of this year, as we experienced some weakness. It's essential to generate revenue to cover the high fixed costs associated with our network. In the second quarter of this year, our revenue growth was about 2.5% on a per day basis, and we managed to achieve a slight improvement in our operating ratio. There needs to be a balance. Looking at our long-term revenue growth rates of 12% to 13%, approximately 8% comes from shipment volume, with the remainder from yield. Density is certainly significant, but it's crucial to stay ahead of density by continuously investing in service center capacity, which allows us to grow within our existing network. A consistent yield management process is also essential. Over the long term, we've seen an average annual improvement of around 4.5% in revenue per shipment, which is about 75 to 100 basis points higher than the long-term trend for cost improvements on a per shipment basis. This differential is necessary to support the substantial investments we are making in our service center network and technology, all aimed at mitigating per unit cost inflation as much as possible. Numerous factors contribute to this, and fortunate for us, we have maintained a favorable balance of density and yield over the years.

Thank you.

Thank you

Hey. Thanks. Morning, guys.

Good morning, Scott.

When I observe the other LTL companies, it seems they are experiencing a more significant recovery in tonnage trends for December and January compared to your company. I am curious about your perspective on this. Could this indicate that the competitive environment is possibly becoming tougher?

We haven't seen any signs of things getting worse if you will. I mean, I can't comment on what the other carriers are doing. We can only comment on what we're seeing. And we feel good to see the trends kind of come back in line if you will on the volume side. And as Greg mentioned there's still a lot of positive comments that we're hearing from customers feel like that forecast for industrial production to increase this year. We've got maybe some clarity now with some trade deals done. And so there's a lot of reasons to be positive as we transition into this year. And I think the other thing that we'd like to see and hope to see I guess as well as now that once we get through the first quarter and we've still got a pretty healthy comp with revenue and yield in the first quarter, but once we get through that period and we start getting to the 12-month point of where we started seeing some increased discounting by some of our competitors. If truckload rates start increasing that increases the line all cost for many of our competitors perhaps some of our customers that we might have lost some business on aren't satisfied with the level of service they've received over the past 12-months or the competitor is not satisfied with the operating ratio with a lower price inherent that maybe some of those bids come back and we'll start regaining maybe a little bit more of the business that we lost. So a lot of things to sort of look forward to as we start progressing into 2020.

Okay. Adam, you mentioned a 4% cost inflation this year. Is that typical? Is it higher or lower than usual in terms of annual cost inflation? As we hopefully return to revenue growth, particularly starting in the second quarter, how should we approach incremental margin?

Yes. Obviously, we need the revenue to start having that conversation again. But we've got a lot of things that we should be able to do I think and can help ourselves grow into the fleet is one of those that should help. That 4% is kind of in line with what our longer-term trends have been. Most of that is based on the wage increase to employees last year but probably anticipating like we mentioned some health cost increases the premiums on the insurance. There are some other things that are going up that might move that kind of underlying number north of the 3%. But certainly we're going to do everything we can to help ourselves. And last year our number was probably a little bit higher than we came into the year thinking 4% to 4.5%. It was a little bit higher than that but a lot of that was the volume weakness. So you've got overhead cost on a per shipment basis that are going higher than what you would expect. So if we can't get the revenue growth, we should be able to get some leverage there. On the repair side like, I mentioned earlier we face some significant cost headwinds there this year where adding all of the power units that we did and not really maximizing the miles and utilization you're still maintaining all of that fleet. So if we kind of grow into the fleet that we have should get some leverage on that side as well. So certainly, some areas that we should be able to get some leverage on as we progress through the year.

Okay. And just last one quickly. The CapEx guidance I think it's the lowest in six or seven years on tractor trailer down a lot. Should we think about this as sort of a one year or so equipment holiday or something longer?

No, I believe it's a one-year kind of scenario. Last year, we anticipated mid single-digit tonnage growth, but it actually decreased. This situation gives us the opportunity to grow into it. We aim to be responsible with our capital and are assessing the state of our fleet and our potential actions. If volumes increase more than we expect, we can certainly respond, as we have in the past. We will make any necessary adjustments. Typically, we allocate about 10% to 15% of our revenue for capital expenditures. When examining the allocation, the expenditures for real estate are consistent with past percentages of revenue. This will likely be a one-year pause on fleet investments, and we'll reassess our needs as we approach the end of the year and into 2021.

Okay. Appreciate the time guys. Thank you.

Thanks. Good morning. So, I just wanted to go back to your comments about share gains? Because I think last quarter you talked about recapturing some business from customers that had left earlier in the year to take advantage of lower rates and that may be contributed to what you started to see in terms of volume stability and more normal seasonal trends. So I was just curious to know if this also played out in Q4? And to the extent that it did, was there any change in the pace in which you're seeing these customers come back, basically just trying to gauge whether this is something that you would normally see happen in advance of a recovery.

Allison, we've noticed a return of some business that we lost due to pricing issues earlier on. Throughout last year, that business has gradually come back to us for our service. I don't see any significant shift in the trend. We've also seen a slight increase in our market share over the year, which is encouraging, especially considering past downturns when our share gain either slowed or completely dropped off. So far this year, those numbers have continued to grow slightly, which is positive. We are winning some bids and reclaiming some lost business. However, it's difficult to determine the pace of this recovery since we don't track those specifics. Overall, we are still experiencing gains.

Okay. Great. That's helpful. And then Adam, could you walk us through the monthly weight per shipment trends in Q4 and January. I'm sorry if I missed that if you said that earlier in the call.

On the weight per shipment, I want to revisit something that gives us confidence as we move into this year. If you remember, we reached a low point in our weight per shipment in August 2019, but we began to see some upward movement afterward. Year-over-year through the fourth quarter, we were still down; we saw a 1% decline in October, a 0.4% increase in November, and then a 0.7% decline in December. However, in terms of trends, we hit a weight of about 1,530 pounds in August, which increased to around 1,600 pounds by November and December. Overall, the quarter’s movements aligned with typical sequential trends, representing an improvement compared to where we were. In January 2020, while we are still down compared to 2019, we are consistent with a decline that aligns with our 10-year average, landing at 1,554 pounds. The weight per shipment remained relatively stable in January of the previous year before showing some sequential weakness. I believe we're in a good position, and I hope to see steady improvements in this area as we progress through the year.

Perfect. Thank you, guys.

Good morning everyone. In the upcoming quarter, we're facing a challenging environment. However, when I hear your perspective on the operating conditions, it seems some truckload carriers are focusing on a recovery in the second half of the year, but you appear to have a more positive outlook. I want to confirm that I understood you correctly. Do you believe there's something specific about LTL that sets it apart from truckload, contributing to that difference?

Yeah. I don't know that there's anything any different. And I guess it's easier to say that the back half of the year should be better than the first half, because we're in the first half. And frankly, we're not seeing in numbers that are there to write home about when we think about long-term growth and how we've been able to generate this revenue improvement and growth in pre-tax income and so forth, being flat is not kind of what we aspire to be if you will. But it just feels like things are starting to turn a little bit. And there's just little positive developments here and there. We'll see kind of as it takes hold. I think that we still have to be cognizant of the fact that there are political risks, and we're in an election year. And historically speaking volumes have kind of underperformed seasonality slightly in election years. So we kind of keep all of that in mind but we finally saw ISM go back above 50 and just continue to have conversations with our customers that we're probably – it's not like its robust growth expectations or anything like that from our customers but they're more positive than there are negative conversations. So we're cautiously optimistic as we go through the first part of the year and that's probably the best way to describe it is cautious optimism.

Okay. That's helpful. And then second you mentioned a couple of times just weakness in the industrial economy specifically, maybe you could talk about the split in terms of what you're seeing between industrial versus some of your more consumer-oriented customers? And then just a bit of a strategic question. Do you think there's an opportunity, or is it something that is a compelling idea to maybe look to build a book of business more in the consumer space, or is that not something that's really being entertained too much for various reasons?

Yes our – the book of business really didn't change a whole lot this past year. Our numbers were pretty consistent in terms of the breakout of retail and industrial. So it's about between 55% to 60% industrial closer to the 60% range and then kind of the 25% to 30% on the retail side closer to the 30%. And then hodgepodge of things from an SRC code basis that kind of go from there. We've seen over the last couple of years maybe more growth in our retail-related business. And I think that that kind of gets to some of the longer-term e-commerce trends and the importance that some of the retailers and vendors that are supplying product to retailers are placing on service and that fits right in our wheelhouse as we can help our customers avoid costs like chargebacks and fines and so forth by delivering on time and in full into some of these distribution centers. We can charge a fair price. But it's one that was consistent with the level of service that we're providing. And I think it benefits from a total cost of transportation standpoint. Our customers that want to use us because they end up avoiding some of those secondary costs that may come from the retailer. So it creates win-win scenarios and is definitely a good avenue for growth. But other things that maybe get more attention in that space of doing last mile deliveries and across the threshold is just something that we're really not interested in from a corporate strategy standpoint as it exists right now.

No. That's entirely understandable. But I guess my question was is there an opportunity kind of given the growth in e-commerce? Obviously staying within the LTL space, not going out into final mile or something of that sort. But is there an opportunity to grow retail business particularly in e-commerce, or is that or should we expect that split of 55% to 60% industrial 25%, 30% retail to kind of continue?

That's a hard question to answer. But we've got a huge sales force that's working the entire economy be it retail or industrial whatever. And as those opportunities present themselves we'll certainly try to participate. I think we've had some competitors that have been far more aggressive than we have on the retail side. So that's probably why the percentage is like it is. But certainly as those opportunities present themselves we'll be there and hopefully will be a solution for our competitors or for our customers if they have the need. And if they're looking for better service we'll be there.

Terrific. That makes a lot of sense. Thanks for the time.

Great. Thanks and good morning. Adam maybe just to put a bow on the conversation around margins, particularly into the first quarter. Is the right way to think about the sequential margin change 1Q over 4Q is to adjust fourth quarter for the 150 basis points or whatever the impact was from the Phantom stock and normalize a little bit for incentive comp – or excuse me for insurance expense and then think about a typical 100 basis point change off of that? Is there something else we need to think about sequentially into 1Q?

I think, yes on most of your points I would really only look at this Phantom stock really as the only thing to sort of adjust and normalize for. Because as I mentioned the insurance line you see the increase there and that's the one thing that stands out but there are some offsetting credits and some of the other line items that I think will normalize as we progress into 1Q as well. And so some of that being kind of within the fringe benefit line, some being in the operating supplies and expenses as well. So you get a normalization kind of in those categories. And it really just becomes kind of the offset of that Phantom stock expense sort of 150, 170 basis points. And then you sort of look as you mentioned, about 150 basis points is kind of the average sequential change from the fourth quarter into the first. The only thing I would say with that as well though is we did a lot of good things in the fourth quarter. And oftentimes, if you kind of look at what the change from 3Q into 4Q was oftentimes when we've had periods like that where we really do well. If we do have to start hiring, it will be at a different pace. And so there could be some higher costs that maybe end up kind of as you're below maybe a trend one quarter you might be a little bit higher than next. So that wouldn't necessarily be a surprise, if we're on a normalized basis a little bit higher than what that normal sequential trend might be, if that makes sense?

Yes, it does. I think so what you're saying is, if we think about how 1Q headcount trends versus 4Q, we may not see that normal change because 4Q is a little bit better. But it also sounds like from earlier in the call, if you're hiring that's probably an indication that tonnage is picking up?

Correct.

Okay. And then just for my follow-up, can you talk about the available capacity in the network right now. And typically I think about your model being built to have that available capacity. And when you do see tonnage come back that you can really drive high incremental margins because you can handle that additional freight coming in that maybe some of your competitors can't. So can you give us just a sense of where you think the network is? And how much more tonnage you can handle? And just the thought process around the leverage you'd see with tonnage coming back in with the available capacity in the network?

We have definitely increased our capacity, especially in 2019, and our capital expenditures last year were significant. Although we are experiencing a flat year, we are continuing to expand our network in anticipation of future needs. Currently, we are in a strong position regarding capacity. While it's difficult to determine the exact level, it's likely that we have around 25% or possibly even more. I am pleased with our current capacity as we have managed the needs we faced a couple of years ago when we were particularly busy. We have addressed those requirements and are well-prepared for the future.

Sounds good. Thanks a lot for the time this morning.

Thank you for including me. Adam, as you look at cash flow and the balance sheet in the coming years, have there been any changes in your willingness to carry leverage? Whether there have been changes or not, how do you plan to allocate returns to shareholders moving forward? The dividend payout ratio seems to have increased and has potential to rise further, so could you discuss that as well? Thank you.

We are continuously assessing our approach and are pleased to report a more than 30 percent increase as we head into 2020. When we began the dividend program, our aim was to maintain a payout ratio at about 10 percent of the previous year's earnings. We initially adopted a conservative stance to allow for future increases. Until now, our earnings growth had not reached the desired threshold, but this year's increase addresses that concern. We have slightly adjusted the payout ratio to help us achieve our goal and will keep looking to increase the dividend going forward. Additionally, we have stepped up our share buyback program, and we will continue to implement that strategy. We must balance our overall cash flow, considering cash from operations, planned capital expenditures, and any strategic real estate opportunities that arise. In 2019, we ended up spending more than expected due to some favorable opportunities, and we will keep exploring such options. Ultimately, we need to manage our overall positioning, cash balances, and projections while remaining committed to returning excess capital to our shareholders when it’s appropriate.

One final one. Any specific IT projects on the horizon either in 2020 or beyond that are of note?

We have several projects underway this year, including a transition to a new human capital management system that we believe will benefit us. We are eager to complete this implementation and we always seek ways to enhance our existing systems. All of our operating systems have been developed internally, with some utilizing off-the-shelf products that integrate and provide assistance. One key reason for our operational efficiency is the investments we've made in these systems over the years, which help us stay competitive. We are committed to continually making incremental improvements and assessing any new systems that could be advantageous. However, it's important to recognize that any investment in a system carries risks and should be considered in terms of potential returns. This guides our decision-making process for initiating projects. Moving forward, we will keep exploring investment opportunities, aiming for positive outcomes from these investments.

Appreciate the time.

Yes, thank you. Real quick, I wanted to talk a little bit about the transition that you all have made from the AOBRDs since you were grandfathered in to ELDs. Is that fully behind you now I'm assuming? And was there any permanent impact to the business, the network, the costs from doing that?

David, it is behind us. We completed that project back in the fall, but it's completely behind us. No material impact at all. Obviously, it took a lot of hard work and a big effort from our folks to accomplish it in the time that they did. But glad to have it behind us. But nothing material, I don’t think to talk about.

And then last question for Adam. I guess how much would volume have to grow this year to exceed your current tractor CapEx expectations?

We've assessed our current capacity and have confirmed that we have sufficient equipment available. Although this time of year is typically slower, we are not close to our peak levels and we have the necessary equipment to reach our maximum capacity. Overall, we believe we are in a solid position and may even have a bit more equipment than needed, particularly with tractors and trailers. We are in good shape with our resources.

Good. Thank you.

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.