Old Dominion Freight Line Inc (ODFL) — Q4 2022 Transcript

Good morning, and welcome to our fourth quarter conference call. With me on the call today is Marty Freeman, our COO; and Adam Satterfield, our CFO. After some brief remarks, we would be glad to take your questions. The Old Dominion team produced fourth quarter financial results that allowed us to finish the year with company records for annual revenue and profitability. We extended our track record of success and delivered the 10th straight quarter with both an increase in revenue and improvement in our operating ratio. As a result, the fourth quarter of 2022 was also the 10th straight quarter where we produced double-digit growth in earnings per diluted share. Our team produced these results while facing many challenges during 2022, which were primarily related to the unexpected slowdown in the domestic economy. We entered the year anticipating growth in our volumes that didn't ultimately meet our initial expectations. But we made the necessary adjustments throughout the year that once again showed the flexibility and resiliency of our long-term strategic plan. We also maintained a watchful eye on the efficiency of our operations and continued with our disciplined approach to managing discretionary spending. Due to our confidence in our ability to win market share over the long-term, one thing that did not change in 2022 was our commitment to investing for the future. Capital expenditures, totaling $775.1 million in 2022, were a new company record. And we invested $299.5 million in real estate projects that further expanded the capacity of our service center network. We also continued to invest heavily in our OD Family of employees, with improvements in pay and benefits, as well as a company record contribution to our 401(k) retirement plan for employees. In dealing with the reality of slower than anticipated business volumes, we also worked diligently to protect the significant investments that we made over the past two years in our new employees. Thinking of new employees, I am proud to share that there have been over 1,300 new drivers that graduated from our internal truck driving school over the past two years. And in some cases, these driver school graduates that now have their CDLs are temporarily working in non-driving roles. While this comes at an increased cost to the company, we believe this bigger pool of licensed drivers will provide us with the strategic advantage once the freight cycle turns and additional volume opportunities become available to us. We said in our third quarter earnings call that we anticipated volumes could start increasing in the spring of this year. And we continue to remain cautiously optimistic that this will occur despite ongoing risk with the domestic economy. Regardless of the economic environment, I believe our 2022 results provide yet another example of why our long-term strategic plan will remain our focus for the foreseeable future. Consistent execution of this plan has helped us create an unmatched value proposition in our industry that led to over $1 billion of revenue growth for the second straight year, in 2022. I am confident that this commitment to our strategic plan will also continue after my retirement at the end of June this year. Our long-term success is the result of a strong team and their combined commitment to maintaining a strong company culture. After working with Marty for most of my career, I can tell you that he lives and breathes the OD Family spirit and will help take the company to new heights. I think the best is yet to come for Old Dominion. And I look forward to watching OD expand its long-term record of success. Thank you for joining us this morning. And now, here is Marty Freeman to provide some more details on the fourth quarter.

Thank you, Greg, and good morning. I would like to begin by expressing my gratitude to Greg and our Board of Directors for the opportunity to lead this outstanding company. It is a privilege to lead our team, and I assure you that we will work diligently to maintain strong, profitable growth. I was pleased to see Old Dominion's revenue grow by 5.8%, alongside an improved operating ratio of 71.2% in the fourth quarter. These factors contributed to a 21.2% increase in earnings per diluted share. Our financial results reflect the strong demand for our services, as we continue to deliver value to our customers through superior service at a fair price. Our long-term strategic plan emphasizes this value proposition, but the true key to our success lies in our strong family culture and our people. We will keep investing in our OD Family of employees, as they are crucial for building solid customer relationships. We operate in a relationship-focused business, and every employee plays a significant role in delivering our industry-leading service. I'm proud to share that our service metrics were robust during the fourth quarter, with 99% on-time service and a cargo claims ratio of 0.1%. We believe that following our proven long-term strategy will help us gain market share in the future and enable us to continually expand our capacity in anticipation of growth. Our anticipated capital expenditures for 2023 are $800 million, aimed at improving the average age of our fleet and further expanding our real estate network's capacity. Over the past decade, we have invested around $2 billion in real estate expansion, increasing our door capacity by approximately 50% as a result. These investments have supported our ability to double our market share during this period. However, the rising costs of real estate and equipment necessitate that we maintain our pricing discipline. Our long-term pricing approach is meant to assess each customer account's profitability and secure necessary increases to counteract cost inflation while supporting our ongoing investments in capacity and technology. By consistently applying this strategy over the years, we have generally enhanced our cash flow, allowing us to invest between 10% and 15% of our revenue into capital expenditures annually. Staying committed to these priorities reflects our team's focus on executing the business strategies that have established our unique position in the industry. We will continue to concentrate on our people, serving our customers, and investing for the future. This dedication to our core principles sets us apart in the marketplace and gives us confidence in our ability to sustain profitable growth and enhance shareholder value. Now, I will turn it over to Adam, who will provide more details on our fourth quarter financial results.

Thank you, Marty, and good morning. Old Dominion's revenue growth of 5.8% in the fourth quarter resulted from a 16.7% increase in LTL revenue per hundredweight, which more than offset the 9.1% decrease in LTL tons. LTL revenue per hundredweight excluding fuel surcharges increased 8.7% and reflects the continued execution of our long-term pricing initiatives. Our consistent approach to pricing is supported by our ability to provide our customers with superior service and available capacity. We believe this value offering is becoming increasingly important to shippers, which is why we remain absolutely committed to executing on the fundamental elements of our long-term strategic plan. On a sequential basis, revenue per day for the fourth quarter decreased 2.4% when compared to the third quarter of 2022, with LTL tons per day decreasing 4.4% and LTL shipments per day decreasing 4.6%. For comparison, the 10-year average sequential change for these metrics includes a decrease of 0.6% in revenue per day, a decrease of 1.3% in tons per day, and a decrease of 3.3% in shipments per day. For January, our revenue per day increased approximately 4.2% as compared to January of 2022. This growth included a 13.1% increase in LTL revenue per hundredweight that more than offset the 7.8% decrease in the LTL tons per day. Our fourth quarter operating ratio improved to 71.2%, which is primarily due to an improvement in our direct operating cost as a percent of revenue. Within our direct operating cost, productive labor as a percent of revenue improved 170 basis points, while our purchase transportation costs improved 200 basis points. These changes more than offset the 260 basis point increase in operating supplies and expenses that primarily resulted from a significant increase in the cost of diesel fuel and other petroleum-based products during the quarter. Our overhead costs as a percent of revenue were consistent between the periods compared. Old Dominion's cash flow from operations totaled $361.3 million and $1.7 billion for the fourth quarter and 2022, respectively, while capital expenditures were $270.4 million and $775.1 million for the same periods. As Marty mentioned, we currently expect capital expenditures of $800 million in 2023. We utilized $199.9 million and $1.3 billion of cash for our share repurchase program during the fourth quarter and 2022, respectively, while cash dividends totaled $33.0 million and $134.5 million for the same periods. We were pleased that our Board of Directors approved a 33.3% increase in the quarterly dividend to $0.40 per share for the first quarter of 2023. Our effective tax rate for both fourth quarter 2022 and 2021 was 25.0%. We currently anticipate our effective tax rate to be 25.8% for 2023. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Yes, hi, good morning. Question, so on the salary expense side of the equation for the fourth quarter, I think the dollar amount was actually down year-over-year. Can you maybe talk a little bit to your thoughts around the drivers of that, just a lower incentive comp, I think you had mentioned attrition? And then how do we think about the salary line going forward, whether it be on a wage inflation perspective or a growth perspective? Thanks.

Sure. The overall dollars, obviously, we've been making adjustments as we've gone through the year. And I would say through the back half of the year, in particular, we've been letting attrition take place, and just consistently adjusting our headcount and the hours worked by our people in relation to what the volume environment dictates to continue to give service while continuing to operate efficiently. So, I think, overall, that helped drive the decrease in that quarter-over-quarter, those expenses, if you will. We continue to be focused, obviously, on managing those costs. That's our biggest cost element of our business is in the salaries, wages, and benefits. And so, it's certainly the biggest area of focus as we try to continue to run our network as efficiently as possible without sacrificing service. So, I do think that given the environment in the fourth quarter, I think we had, given the circumstances, is pretty strong revenue performance. So, I was pleased with the way our revenue and volumes trended. And that was probably one of the favorable line items, if you will, in comparison to the guidance that we had originally provided with respect to the operating ratio, was how the salary, wages, and benefits ended up coming in for us.

Thanks. As a follow-up, can you share if you expect to maintain that type of control at least for the first half until you reach a turning point in the spring regarding volumes? Will we likely continue to see that trend remain consistent for now?

Well, I think we're in a good spot right now with where our headcount is. And typically, we start seeing increases in volume. And certainly, we're not in a normal environment by any stretch. But our January volumes were slightly positive versus December, pretty flattish overall, really when you look at it from a shipment perspective. But we continue to anticipate that we will see volumes return to us in the spring. And I think we want to make sure that we've got all elements of capacity in place to deal with that environment whenever it inevitably comes. We're certainly very confident about what our future market share opportunities will be. And so, we want to make sure that we're in a position with our people, our equipment, and certainly our service and our network to be able to effectively respond when that does happen. Typically, the February volumes are a little bit higher than January. And it's March when we start seeing the increase coming. And so, I think that what we're trying to do is just, again, measure and manage all elements of capacity to ensure that we're in a good spot when that happens. So, again, I think that certainly a lot in the first quarter and probably the first half of the year really depends on what the volume environment gives us. But we continue to believe that we are going to see some increase. We've certainly seen it in the past, even in down economic environments, whether you look at something as bad as the environment was in 2009. I think 2016 is another good example, where our second quarter volumes were higher than the first. And so, it'll be a little different situation, I think, playing out this year in comparison to 2022, when, beginning with April, our volumes were either decreasing or flattish on a month-over-month basis as we worked our way through the year. Certainly, we'd like to see volumes flowing into us as we transition and make our way through 2023. And hopefully start getting a little help from the macroeconomic environment as well.

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

Thank you, Jack. He taught me well.

Thanks, Jack. Appreciate the kind words.

Sure. Adam, could you provide some additional insights on the January trends? You mentioned that January was slightly up or possibly flat compared to December. Is there anything you can share regarding the January revenue trends and tonnage or shipment trends? That would be useful. Additionally, regarding the operating ratio for the first quarter in comparison to the fourth, could you share any thoughts on the typical seasonality? I'll pass it to you, Adam.

From a volume perspective, we saw a year-over-year decline of 7.8% in January, which is an improvement from December's decrease of 12.3%. We will continue to provide mid-quarter updates, and January's comparison is slightly easier due to strong performance in February of last year, making the following months a bit more challenging. I was encouraged by the stability we maintained in the fourth quarter, especially given the slower economic conditions that impacted our business levels. December performed a bit better than our usual sequential trends. Although the fourth quarter volumes were down 4.4% sequentially compared to a typical decrease of 1.3%, we are beginning to trend in a more positive direction compared to the second and third quarters. It remains to be seen if we can fully return to our 10-year average in the first half of the year, which may depend on a stronger economy. However, I am optimistic about potential increases starting in March and continuing through the second quarter. The volume environment is critical, as it influences our operating ratio. Typically, we see about a 100 basis point increase in the first quarter following the fourth quarter. For the first quarter of 2023, we benefited from a favorable insurance adjustment, which is expected to normalize to around 1.2% of revenue. This presents a 70 basis point headwind for us, alongside ongoing depreciation challenges from our delivery cycle being different than last year. Overall, we anticipate a normalized increase of about 200 basis points, which positions us to be roughly flat year-over-year if achieved. If revenue improves, there’s potential for us to exceed that long-term normalized average, but the revenue environment will significantly influence this outcome.

Okay, very helpful. Thanks again.

Thanks, Jack.

Following up on the waiver fees, your headcount was down about 3% sequentially. I think that's the biggest decline besides the COVID-related jobs you had in the second quarter of 2020 since you began reporting this quarterly. You mentioned earlier that you feel you are in a fairly good place. Can you provide more details on that? Does that imply your headcount will remain flat or increase from here, or is it expected to trend with volumes moving forward? Additionally, can you share any insights on productivity or labor costs for employers to help us understand the cost aspect better? Thank you.

Thanks, Bas. This is Greg. I'll provide as much detail as possible. We made some necessary adjustments to our headcount. As Adam mentioned earlier, we've discussed attrition, and that has influenced some of these adjustments. We have also made changes in other areas where needed. We haven't filled certain positions that we normally would in a growth cycle. Our efforts will continue despite these challenges. Typically, we see a slight uptick in late February, and things start to improve in March. We hope that trend continues this year, although we're not entirely certain. However, I believe we are in a good position because, as I mentioned earlier, we have a substantial number of qualified drivers on our platform who are not driving full-time. We will be ready when the increase occurs, hopefully sooner rather than later, and we'll make adjustments as necessary. We have successfully navigated downturns in the past and have shown our ability to adjust when needed. We feel confident about our current situation and will continue to monitor and respond to business needs. I hope that clarifies things.

No, it's fairly helpful. To maybe cap that off, any thoughts on items that could impact kind of the cost per head this year? I don't know if there are some variables on incentive comp or other things that might make little bit lengthy versus what we would deem a normal trip based on history? Thank you.

Not that I know of, Bas, and don't think so. I think it should be fairly normal from that standpoint. We certainly had some good experiences in the recent past with our benefit costs and those kinds of things. So, you just hope that those things continue to be consistent and don't turn the other way for some or no reason.

Good morning, and congratulations to both Greg and Marty. Greg, you have had a remarkable run, so congratulations on your great performance over time. Regarding the view on tonnage, I know you have a large customer base, which makes it difficult to analyze. Can you share your thoughts on the volume dynamics between retail and industrial customers? It seems there has been considerable weakness and an emphasis on inventory reduction among retail customers. The situation appears less clear for industrial customers. Is there a possibility of experiencing further weakness in industrial volume? Have you observed a significant difference in volumes between these two groups? Any insights on this topic would be appreciated. Thank you.

Good morning, Tom. I would say during the fourth quarter we saw a pretty consistent revenue performance with both our industrial customer base and our retail customer base. I would say earlier part of the year we had seen a little bit stronger performance on the industrial side. And those two kind of converged, if you will, in the fourth quarter. Obviously, our customer base leans more industrial than retail. We are still 55% to 60% industrial overall and 25% to 30% or so on the retail side. In longer term that retail business has been growing faster than the industrial. And I think that reflects some of the e-commerce trends and the effects of those on our customer supply chains. And we certainly continue to believe that that will be a longer-term tailwind for us. And I think that as we start working through 2023. And we believe that we will start seeing customers' orders for their products picking up and some inventory rebalancing if you will. And I think that's why we've seen in some of the prior slow period that I spoke of earlier why you start seeing that orders and freight flows kind of leading the other macroeconomic indicator. So, we believe that the freight cycle will start turning. And we will start seeing some pickup. And it's through these customer interactions and conversations that, that support our belief that we're going to start seeing freight flow, and again, as we get into March and into the second quarter.

Hey, thanks. Good morning. Yes, congrats. Absolutely to Greg and Marty, it's been a heck of a run, certainly, Greg. When I guess I wanted to talk a little bit about how you guys are planning for the potential improvement in tonnage that you may see in the spring, you guys have always been very good at being out in front of potential opportunities. But do you think that there are incremental costs that need to come on the network before that happens? Are you fairly comfortable being able to sort of let tonnage lead you out of this to drive incremental margins, which obviously, you guys have performed quite well with over time?

Yes, I think that, Chris, that some of the conversation earlier about headcount, probably on paper, we may be a little bit heavy now, if you just look at things statistically, if you will. But that's kind of the point of the, what we've said is, I think that we're in a good spot, with our headcount with our fleet, and certainly with the service center network to be able to let volume start flowing again. And when we talk about increases, just keep in mind that we're talking about sequential increases, and certainly with the year-over-year comps, particularly in the first half of the year, we've got some tougher year-over-year comparisons there before we get back to, does being able to show year-over-year growth. But I think that'll be the important thing for us to continue to watch is, are we seeing those types of sequential increases? And certainly, we've got a lot of flexibility within our workforce. And I think that, given the team that we have, and the current levels, we should be able to respond to growth when it starts coming at us and get some good leverage as it does. But certainly we're looking at right now in the first quarter. Like I mentioned, with the January tonnage levels, we've got probably the volumes that are going to be the toughest comp, and certainly overall, the fourth quarter we were down 9.1%. Our yield performance is still looking good. And we certainly expect to continue to push for core yield increases this year to offset our cost inflation, as well. But there could become some converging factors, if you will, that drive the top line, depending on what the overall fuel environment looks like, and so forth. But we're certainly going to continue to look and execute on the same pricing philosophy that we have in the past and look for cost plus increases to offset the cost inflation that we see in the business and to keep supporting these expensive investments that we're making in our real estate network and technologies that can both improve customer service, but also drive further operating efficiencies for us. So, a lot of things to kind of manage through it particularly the first half of this year, but I think we're in a good spot to be able to handle the volumes if they do backflow our way.

Yes, that's very helpful. I appreciate that, that color. On the point of pricing, just to follow-up, ex-fuel yield did accelerate, the year-over-year growth that accelerated in the fourth quarter, and I guess they're guiding the first quarter or roughly speaking to around flattish which may coincide with the worst tonnage you're going to see from a year-over-year standpoint. So, when you take a step back and think about 2023, more broadly, is OR expansion on the table, given those circumstances is pricing good enough to be able to offset inflation as we go and tonnage potentially gets less worse as the year progresses?

Well, I think that again, the revenue environment will have a lot to say about that, more broadly speaking, we've talked and kind of pointed everyone to our performance in 2016 and 2019, when we've been in a flatter revenue environment, certainly given the planned investment of about $800 million in capital expenditures this year. And with some pressures that we'll see on depreciation, starting earlier in the year than normal, we will have some pressures, if you will, on those overhead costs. And we saw a little bit of that in the fourth quarter already where overhead costs as a percent of revenue were flat in 4Q '22 versus 4Q '21. But like we did in '16 and in '19, the focus when we're in a flat to a down revenue environment will be managing our variable costs flat, and we'd love to see improvement, but trying to hold all those costs flat. And then, any deterioration if there is anything would be in those overhead costs in particular, on the depreciation side. And so, I think that in '16, we certainly saw a little bit of a decrease in the operating ratio or an increase, rather depending on how you look at it. But I think our operating ratio deteriorated 60 basis points that year. And that was something that was right in line with the change in the depreciation line item. And then, '19 was the same thing, where we had 30 basis points deterioration there. So, we'll take it quarter-by-quarter, certainly, and we'll talk as we get to the end of next quarter's call about what we think we may be able to do in 2Q, but certainly feel like we're probably going to have a little bit more pressure on the overhead side this year if we are in fact a flat to slightly down revenue environment, but there's still a lot up in the air when it comes to the top line for this year.

Hey, thanks. Good morning, guys, and again, congrats, Greg and Marty. I was wondering, can you give us some of the yields ex-fuel accelerated in Q4, is any color, is underlying pricing accelerating here? And then, Adam, I think you talked about 13% total yield growth in January, anyway you can just help us on the gross and on the net of fuel, I just want to understand that that net of fuel is continuing to accelerate? Thank you.

Yes, net of fuel in January was about 8.5%. So, fairly consistent with what we just did in the fourth quarter overall. And we are starting to see a decrease in fuel. And we'll see how that continues to trend this year. And so, perhaps the yield with and without the fuel, those two numbers will maybe be a little bit more consistent. I think it's pretty consistent with what our long-term philosophy has been. We certainly dealt with higher cost inflation on a per shipment basis in 2022 than then what at least I initially expected I thought we would see some cost moderation as we got into the back half of the year, which obviously did not happen. So, we just continue to execute on that same consistent philosophy that we always have. And I think that's why we saw that the yield performance that we did, but I believe that call should be a little bit more favorable versus the last couple of years. And 2023 are certainly that's our hope. And we'll continue to build our cost model around what that cost inflation expectation is and then continue to try to achieve 100 to 150 basis points of positive spread above that inflation to again support the investments that we're going to make. So, I think overall, if you did sort of roll out typically the first quarter our yield metrics are up about 0.5% over the fourth quarter. We'd expect to continue to see if mix is constant. Those numbers increase sequentially quarter-after-quarter, but certainly, some of that, that growth if you will may start to moderate a bit but again you're going to see that same type of moderation or should, what the costs. But nonetheless, the overall philosophy stays the same, and we'll continue to look for cost plus pricing.

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

Well, again, it's just it's one of the drivers on the top line, that is a change that we will deal with. And I think overall, it would be a positive for the economy and something that would be good to see. But I don't know anybody that would like showing up at the pump and seeing that bigger number. And certainly, that's been a big cost driver for what we've seen. I think it's better for just cost inflation and other line items. I think the increased cost of fuel is driving inflation and about anything, whether it's a product or service that we're buying. And so, I think a decrease there certainly helps. But as we look back 2015-2016 were the timeframes that we last went through a bigger decrease in average fuel prices. And I think we continue to try to manage, just like we did in those periods, and continuing to manage the different components that go into building out our rates with customers, whether it's base rates, fuel surcharge, or as is oils managing all the revenue inputs with the cost inputs and trying to account for whether or not fuel goes up or down. So, it's just something that our pricing and costing teams and our sales teams have got to work through is we're working through renewals with our customers every day, and just looking at and seeing where we are and what we feel like we need to keep driving improvement in our customer-specific pricing and profitability.

Hi, good morning. I just want to ask about potential customer attrition, just given some of the freight challenges out there and certainly your customer focus on costs. Are you seeing any sort of attrition as customers try to trade down obviously, quality but prices low or the dynamics may be a little different this cycle, just any thoughts there?

Yes, good morning. This is Marty, I'll take that one. We aren't seeing anything like we saw back in '08 or '09. We have customers in here every week, and our larger customers, contract customers coming in. Its business is usual. They're coming in and asking for contract renewals, additional services, and so forth. So, we're not seeing anything out of the ordinary for the economic circumstances, no major price cutting or anything like that. So, I feel pretty confident that the end is probably near what we're going through.

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

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

Thanks. Good morning, everyone. Congratulations, Greg and Marty. Please keep doing what you're doing. I have a couple of follow-up questions. Do you think you have a better chance of capturing growth if it comes in the spring compared to your competitors, considering the amount of free capacity you have? Also, do you have an idea of your ability to increase volume compared to your peers?

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

Sounds good. As a follow-up to the fuel topic, there has been a lot of speculation in the investment community about fuel and how it impacts earnings. Many of you and your peers have mentioned that there's a new algorithm for fuel pricing that's stickier than expected. How should we consider fuel as a headwind in the latter half of the year? Can we quantify that? Additionally, how much of that fuel factor could be sticky and convert into base rates over time?

We have encountered this question before regarding fuel changes. For a significant period, we experienced low fuel prices, tracing back to the last drop in 2016. Between 2016 and 2020, we achieved strong results within that lower fuel environment. It can be challenging for those not involved in negotiating such contracts to fully grasp this. For us, it's crucial to maintain an effective cost model, comprehend our costs, and be aware of revenue and cost inputs, regardless of whether fuel prices are $5 or $3 a gallon. We must navigate through various customer preferences, as some may prefer base rate changes while others seek more exposure to variable pricing like fuel surcharges. We can also enhance yields by improving productivity and addressing operational factors, which allows us to have meaningful discussions with our customers. Ultimately, our goal is to boost customer-specific profitability and engage in continuous improvement, enabling us to purchase real estate and expand our network for our customers' benefit. We are essentially acquiring capacity for them, and it is vital that we continue executing effectively in this area. Our track record through previous cycles indicates that we are capable of doing so.

Good morning, and congratulations, Greg, on your tenure, and Marty, on the new role. I have a quick clarification regarding the spring pickup you mentioned. Is it purely based on comparable sales, or are you receiving feedback from customers or insights on inventory levels? I'm trying to grasp the basis for your confidence in this, considering the market conditions. Additionally, I have a question about depreciation. I understand that depreciation will be higher this year. Last year, you projected $485 million for equipment at the start of the year, but this year you are looking at $400 million. Is that due to a slower delivery schedule? What’s your perspective on acquiring that equipment? And does that still allow you to maintain your usual target of 20% to 25% excess capacity? Thank you.

Yes, Ken, this is Greg. I'll address your revenue question first. We generally see an uptick in the spring, and we're hopeful that we'll return to a more typical cycle compared to what we've experienced since COVID. We've been somewhat off cycle, and the usual numbers and trends we compare with from previous years have changed significantly in the last couple of years. Getting back to a regular cycle gives us hope. Some indicators suggest that inventories are beginning to decrease compared to a year or six months ago, which makes us think we might be emerging from this situation. Having gone through many cycles in the past, typically lasting around a year to 16 months, we believe we've been in this one for a while. So, yes, we are hopeful and optimistic about coming out of this as we approach spring and the second quarter. Regarding equipment, this cycle has been unusual. We didn't recover everything we expected last year as we usually would, with most orders typically placed in early fall. This year, we are still receiving some equipment that should have returned last year, making it different. We'll need to observe how the business progresses, as that will influence the expected $400 million in equipment spending and how it compares to last year. We'll have to assess our business conditions and the figures we see as we move into 2023 to understand how that $400 million will play out this year.

Thanks, Operator. Hi, everyone, Greg, hearty congratulations on the retirement; and Marty, looking forward to working with you as well. I guess I wanted to ask about pricing. I know pricing discipline is good, so it's not really about that, but I guess we've seen a lot of LTL companies in recent months announced general rate increases. I guess what's surprising to me is some of the ones that have even a little bit weaker service that may be more tempted to lean into price have also announced big price increases. And I wanted to understand like the reaction from the customers because, in the typical cycle, a customer would maybe trade down to regional lanes with high-quality carriers. Maybe you lose 20%, 30% of your lanes or two or three lanes or whatever it is, that doesn't seem to be occurring right now where shippers are not moving to other high-quality, but regional lanes. And I want to understand, one, why you think that might be like what's the psychology of your customers in terms of how they think this cycle is going to play out? And then second, how does that impact your ability to bounce back? Because I would assume as there's a big seasonal pull in March and April, May. You don't have to win back lanes, you don't have to win back customers so you can kind of see it first in terms of that upswing. So, sorry for the long-winded question, but hopefully that was clear.

I can't fully explain the psychology of our customers, but I will try. Since the COVID pandemic, our customers have faced significant disruptions in their supply chains, missed revenue opportunities, and increased production costs due to these challenges. This has led to some changes in customer behavior. However, many customers have remained loyal to us. Despite the economic downturn, we've noticed positive customer trends over the past year, and our national account sales teams indicate that we have not lost any customer accounts. Customers recognize that they still face challenges within their supply chains and that we are likely closer to a turnaround, leading them to want to ensure they have available capacity when needed. Other competitors have communicated limitations to their customers, but we were able to respond to capacity needs in 2021, strengthening our customer relationships. Overall, the events of the past couple of years have reinforced our customer ties. We are confident that when customer orders increase again, they will likely ramp up more quickly, potentially providing us with more shipments than in previous cycles when we faced account losses. Customers are maintaining their contracts and updating pricing terms, which bodes well for our recovery.

Great. Thanks. Good morning, everyone. And, congrats Greg, it's certainly been an impressive run that you have, and congrats also to Marty on some big shoes to fill here. So, I wanted to ask about you guys have talked about for some time the ability to get the OR into the 60s. I understand obviously there are different puts and takes on kind of economic uncertainty, maybe some cost inflammation, but also talking about this inflection that's expected for second quarter, it seems like there is some optimism there around the ability to perhaps improve OR year-over-year which would certainly suggest that you are kind of bumping up against that ability to get the OR to the 60s. I just want to get your updated thoughts kind of given the progression of OR improvement that we have seen over the last couple of years, do you think that OR in the 60s is achievable whether it's 2023 or into 2024?

Well, again I think we were saying earlier, certainly 2023 just given the environment it's certainly going to be a little bit more challenging. And we are continuing to keep our eye for the future. We are investing or planning to invest $800 million in capital expenditures this year when the economy is certainly soft right now. And we may end up being in a flattish type of revenue environment. So, revenue will certainly dictate a lot. But I think that just given the comparison to the two years that we have talked about, you can make your own assessments into what you think revenue may end up being for us this year. But if we are in a flattish revenue environment, then certainly we have seen the operating ratio increase slightly in those years. But the positioning that we are going through is to make sure that we are in a great position to be able to respond when that inflection does happen and we get back to a revenue growth environment. And we've averaged 11% to 12% of revenue growth per year over the last 10 years. And we think of ourselves as a growth company. But, we are certainly going to be disciplined in periods where the economy is softer. And we have seen flattish type of revenue in those environments in the past when the economy has been slower. So, I think certainly a lot of depends on that. But, we had many types of OR degradation in the short run. I mean just for this year, the positioning in the recovery year is usually pretty doggone strong. And so, we continue to stand behind our goal of wanting to get to a sub-70% operating ratio. We didn't put a timeframe behind that when we laid it out last year, at this time, for this sole reason; we don't want to be beholden to something that's, in the short-run, that may jeopardize our opportunity for producing strong profitable growth in 2024, '25, and beyond. And I'm confident that we'll certainly be able to get to sub-70% for the year. We certainly did it for two quarters this year, in the second and third quarters. And so, I think we've shown that it can be done. And just to be clear, we continue to say that that is our next goal, but it will not be the final goal. We think that we can continue to go further from there, but we're going to keep that goal in sight for now. And once we achieve it, then we'll lay out where the next stop might be in this long-term OR journey.

Thank you very much, and I want to congratulate both Greg and Marty. Many of my questions have been addressed already. I have a quick question regarding fuel and the potential challenges you mentioned for 2023. Looking at this quarter, fuel surcharge revenue increased by $97 million, while fuel expenses went up by $48 million, or $49 million. So my first question is, is the math that straightforward, that of the $58 million operating improvement, $48 million was due to the fuel difference? If that's the case, as I look at 2023 and considering the current fuel prices, can you estimate the extent of that headwind, particularly concerning the decrease in the fuel surcharge component, which you referred to in the January data, compared to fuel expenses?

The answer is that the calculations are not straightforward. Fuel is just one part of many factors that are negotiated in a customer's rate each year. We might receive a higher fuel surcharge in one case and a higher base rate in another. Therefore, comparing the surcharge revenue with potential expenses is not a simple one-to-one relationship. The surcharge, when a customer chooses to take on more variable exposure to fuel fluctuations, covers various costs beyond just fuel and other oil-based products. While that is its primary aim, it encompasses more than just that variable pricing component. If we reflect on a declining fuel environment, it's useful to examine the years 2015 and 2016. In 2015, the average fuel price dropped by 30%, and with volume growth and a different macro environment, we managed to improve our operating ratio that year. In 2016, fuel prices fell further, by about 15%, which coincided with a 60 basis point increase in the operating ratio due to a softer overall macro landscape, leaving volumes relatively flat. This indicates a different top-line structure. Therefore, it makes sense to compare how revenue and cost changes progressed quarter-to-quarter during those years. We're actively managing this situation, and contracts are continuously adjusted. Currently, if fuel prices remain stable, we would be looking at a base rate of $4.58 per gallon, compared to last year's rate, which was above $5. It's essential to consider the current environment and adjust for potential fuel price changes, whether they rise or fall, and how those fluctuations will affect each customer's top line and cost inputs. Ultimately, we focus on ensuring we are compensated for the services we provide and the value we offer, making the individual account profitability less critical in this context.

We 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.