Old Dominion Freight Line, Inc.

Please stand by. I'll now turn the call over to Drew Anderson. Please go ahead.

Thank you. Good morning and welcome to the fourth quarter 2020 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 12, 2021 by dialing 719-457-0820. The replay passcode is 579-8600. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others, that are set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. As a final note, before we begin, we welcome your questions today, but we do ask in fairness to all that you limit yourselves to just a few questions at a time before returning to the queue. Thank you for your cooperation. At this time for opening remarks, I would like to turn the conference call over to the company's president and chief executive officer, Mr. Greg Gant. Please go ahead, sir.

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'll be glad to take your questions. Old Dominion had a strong fourth quarter that included an increase in revenue and improvement in our operating ratio to 76.3%, which was a new fourth quarter company record. This combination led to the 34.2% increase in our earnings per diluted share. For the year, we also produced a company record operating ratio of 77.4% as well as an 11.4% increase in earnings per diluted share. While I am really proud of these financial results, I am more proud of the OD family of employees who worked through tough conditions in 2020 to generate this success. Despite the operating challenges created by the pandemic and rapid changes in volumes, our team established a new record for our cargo claims ratio at 0.1%, while on-time service continued at 99%. These factors contributed to us winning the Mastio Quality Award for the 11th straight year. Our team is committed to delivering superior service at a fair price regardless of the circumstances, which is why we have often stated that the investment in our OD family is the most important investment we can make. This includes many things such as strong pay and benefits packages, as well as training programs and advancement opportunities. In addition to our non-executive employees, their contributions during the pandemic we made special bonus payments in March and December 2020 that together total approximately $20 million. These factors, as well as a strong family culture, have allowed us to consistently attract and retain talented employees to support our growth initiatives. This is important as we intend to add to our OD family in 2021 by hiring additional employees to further increase the capacity of our workforce. With the demand improvement, environment improving, we also intend to add to the capacity of both our service center network and our fleet in 2021. After opening eight new facilities in 2020 and one more in January of this year, we are currently operating 245 service centers and have approximately 30% of excess capacity within the network to support additional growth. We plan to open two to three additional locations in the first quarter with several more during the remainder of the year. We believe these additional service centers, as well as the expansion of some existing facilities, will increase the overall average capacity within our network to ensure that it is not a limiting factor to growth over the next few years. While we acknowledge that certain uncertainties with the domestic economy may continue, we believe that Old Dominion is uniquely positioned to win additional market share in 2021. We also believe we can drive our operating ratio even lower than the 77.4% record that we established in 2020. We have long maintained that the key components for long-term improvement in our operating ratio are improvements in both density and yield, both of which generally require a favorable macro environment. Our current trends indicate that we can improve on both of these measures in 2021 by remaining fully committed to the core business strategies that put us in our strong competitive position. Disciplined execution of our long-term strategic plan over the course of many years has differentiated us from our competition while also creating long-term record of profitable growth. We are encouraged by our recent revenue trend and believe that we can take advantage of the momentum in our business to increase our earnings and shareholder value in 2021. Thanks for joining us this morning and now Adam will discuss our Fourth quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the fourth quarter of 2020 was $1.1 billion, which was a 6.4% increase from the prior year. Our operating ratio improved 500 basis points to 76.3%, and earnings per diluted share increased to $1.61. These results include $9.6 million of expense related to the special bonus paid to non-executive employees in December. We were pleased to see the improvement in our revenue growth, which included increases in both volumes and yield. The increase in revenue included a 4.9% increase in LTL tonnage and a 1.1% increase in LTL revenue per hundredweight. Excluding fuel surcharges, our LTL revenue per hundredweight increased by 4.2%. The growth in this metric was slightly more consistent with our longer-term average than recent quarters as our business mix continued to normalize while underlying pricing trends remained relatively consistent. On a sequential basis, revenue per day for the fourth quarter increased 4.7% as compared to the third quarter of 2020, while LTL shipments per day increased 1.7%. These are both above our normal sequential trends and reflect the continued recovery from the initial drop in revenue in April that was related to the pandemic. For January, our revenue per day increased 14.6% as compared to January of 2020. This reflects an 11.9% increase in LTL tons per day and a 2.2% increase in LTL revenue per hundredweight. Our fourth quarter operating ratio improved to 76.3% and once again included improvements in both our direct operating cost and overhead cost as a percent of revenue. When compared to the fourth quarter of 2019, we generally improved the efficiency of our operations with increases in our laden load average and P&D shipments per hour. We did, however, lose a little productivity with our platform shipments per hour that was mainly due to the number of new employees hired in the fourth quarter. As our volume trends continue to improve, we intend to add drivers and platform employees during the first quarter. We also expect to continue to use purchased transportation to supplement our workforce until the capacity of our team can fully support our anticipated growth. We improved our overhead cost as a percent of revenue during the fourth quarter by successfully leveraging our revenue growth and maintaining our discipline with discretionary spending. We will continue to control discretionary spending in 2021, as we always do, but we anticipate that certain costs that were reduced in 2020, either directly or indirectly due to the pandemic, will eventually be restored. Old Dominion's cash flow from operations totaled $246.6 million and $933 million for the fourth quarter and 2020 respectively, while capital expenditures were $58.6 million and $225.1 million for the same periods. Based on anticipated growth and the execution of our equipment replacement cycle, our capital expenditures are expected to be approximately $605 million in 2021. This total includes $275 million to expand the capacity of our service center network, although we would increase this amount further if we identify additional properties that fit into our long-term strategic plan. We returned $74.8 million of capital to shareholders during the fourth quarter and $435.1 million for the year. For 2020, this total included $364.1 million of share repurchases and $71 million in cash dividends. We were pleased that our board of directors approved a 33.3% increase in the quarterly dividend to 20 cents per share in the first quarter of 2021. Since we began this program in 2017, and after giving effect to the company's three-for-two stock split in March of 2020, we have increased our dividend in excess of 30% each year. Our effective tax rate for the fourth quarter of 2020 was 25.1% as compared to 24% in the fourth quarter of 2019. currently expect our effective tax rate to be 26.0% for 2021. This concludes our prepared remarks this morning. Operator will be happy to open the floor for questions at this time.

Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one to ask a question. And we'll take our first question from Todd Fowler with KeyBank Capital Markets.

Great. Thanks and good morning. Adam, I wasn't going to start with this, but you threw me off. Maybe you can provide a little bit more color on the strength that you're seeing in January. The 11.9% increase in tons per day was stronger than what you looked like you were trending in December. So if you had any color, if you have any color on what you think is driving the strength in January, that would be great.

Yeah, I think it's a couple of things, Todd. I mean, we've certainly really gone back to April of 2020. Once we took that initial drop, business has just been accelerating since, generally speaking. I think it began with customers reopening their businesses in different regions around the country getting healthier. And it just sort of accelerated from that point forward, and that acceleration continued through the fourth quarter for us and into January as well. I think there's a lot of macro trends that are favorable for our industry, and certainly we're in an enviable position, I think, to take advantage of these changing trends. This is the type of environment, I think, when our model usually shines the brightest. We're in a great spot with respect to the capacity of our service center network. Our fleet is in good shape and we've talked about the fact that we're gonna continue to hire new employees and we've continued to be successful in that endeavor in January as well. And we're also able to use a little purchase transportation to supplement But our customers are getting healthier. Business trends in general are improving. And you're seeing the advantage of our business model just coming through for us. And we're able to take advantage of all of those improving trends and show a little growth, which it's been a long time since we've been able to see growth like this. But certainly, when we start growing, we want to make sure it's profitable growth. Yeah, we're in a good spot right now and look forward to seeing this continue to play out in 2021. Okay, now that sounds good.

And then maybe if you can just give a little bit more color, you know, you did a good job of continuing to leverage, you know, shipment count growing faster than headcount growth in the fourth quarter. You know, obviously in the prepared comments, you're talking about, you know, adding headcounts. You know, can you give us a sense of, you know, kind of the trends, maybe what you're expecting for sequential headcount growth, you know, in the first quarter, in the first half and, and how long you'd expect to continue to be able to increase the shipment count ahead of the headcount growth? Thanks.

Well, as you know, over the long term, the change in our headcount pretty much matches the change in our shipment counts as well. And certainly in a short-term period, they're not always in balance, but that is something that we've seen over the long term. Right now, and really, again, kind of going back to the middle part of last year when we made resource adjustments, we pretty much have been trying to play catch-up, if you will, and our team's been working incredibly hard in operations to keep up and to continue to service and produce essentially record service metrics for us. So we've been really proud of that, but the team's been working incredibly hard. We have been using increased purchase transportation. If you notice, that increased 3.1% in the fourth quarter. And it typically for us is around 2.2% because we like to have 100% of our line haul network in-sourced and using our people and our equipment. But we have had to supplement a little bit until we can really completely staff up to where we want to be. Typically, headcount in the first quarter is kind of flattish on average with the fourth quarter. Based on what we've been able to achieve thus far in January, I think that the maximum sequential change we've ever seen was in one Q of 18 where we had about a 3% increase over four Q. I think we can be in that range and probably even higher, but effectively, we've just got a to catch back up so we can continue to serve our customers and be able to first reduce our reliance on purchase transportation and then just try to get ahead of the curve, if you will, to face whatever volumes come our way for both 2021 as well as 2022.

Okay, got it. That makes sense. I'll turn it over. Thanks for the time this morning.

Next, we'll go to Jack Atkins with Stevens.

Great. Thank you. Good morning. Good morning, guys. Thanks for taking my questions. So, you know, I guess, Adam, when we think about, you know, the sequential progression here, you know, if you kind of back out that special bonus payment there in the fourth quarter, you know, about a 75-4 OR, you know, when you think about tonnage in January being better than normal seasonality, again, it's early in the quarter. Yeah, how are you thinking about the potential, given your headcount comments there to Todd's question, the ability to sort of leverage that tonnage with sequential OR relative to normal seasonal patterns, which I think is typically 100-150 basis point degradation from the fourth quarter to the first quarter. So if you think about that base number of 75-4, given those headcount comments and some of the other items down the P&L, how are you thinking about sequential change given what's happening on the tonnage front?

Sure.

Yeah, you're right.

The first quarter is typically 100 to 150 basis points of degradation from the fourth quarter. The special bonus that was in the fourth quarter, that's certainly something that I know you all will probably be adjusting. But that's not the only thing. That's one big thing that was called out. But you can see some other items, like our insurance and claims, for example. that was a little bit lower than what the normal trend is. So we anticipate that that will increase back to where we normally see it, which is around one to 1.2% of revenue. And like many other carriers, we're gonna be facing some increased inflationary cost with our insurance premiums and so forth this year, just like we've faced the last couple of years. So there's gonna be some, General supplies and expenses is another one that I think will be stepping up. We referenced in our prepared remarks that certainly there's gonna be some costs that will be restored this year and some of those will be some of our marketing and advertising programs. We're not at the point to where our sales team can get out and travel around and do some things. We still anticipate for the foreseeable future with some savings related to travel and customer entertainment, but certainly intend to restore some of those expenditures. So while they may not go back to where that cost had been between three, three and a half percent, certainly anticipate them being higher than where we were in the fourth quarter. So there's gonna be some puts and takes. We don't give guidance on the operating ratio, but we always use that normal sequential trend is a benchmark to measure ourselves against. I think on the salary, wages, and benefits line, when we talked about on the last quarter call going from third quarter to fourth quarter, we wanted to try to keep the change in those costs and we felt like we could keep them in line with what our long-term trends are based on productivity and the fact that we felt like revenue was improving. having nice revenue growth on a sequential basis certainly gives you a lot of cover on some of those other more fixed-type expense elements. And I think we saw that leverage in us being able to take advantage of that strong revenue performance in the fourth quarter to do just that. We created leverage from it. We kept the change in salaries, wages, and benefits in line there. And so I think certainly that will give us leverage when we go from 4Q into 1Q as well to be able to keep the salary cost, if you will, in line, even though we will be bringing on and adding new people. So there will be puts and takes on different line items, but that sort of 100 basis point mark, I think, will be a good benchmark, and we'll just see how we perform from there. Okay.

Okay. That makes sense, and thank you for all that color. I guess for my follow-up question, maybe kind of a bigger picture question for you, Greg. You know, when you look back over just the broader LTL market over the last, you know, call it 10 to 15 years, you know, there really hasn't been a lot of underlying market growth. Old Dominion has just done a great job taking a lot of market share, you know, as you guys have been investing in your business and investing in service. You know, as you look out over the next, you know, three, five, seven years, Greg, I mean, you know, do you see the market growth accelerating for the LTL industry as And I'm thinking specifically about e-commerce and the middle-mile impact that e-commerce is having across the transportation sector. I would just be curious to get your thoughts on sort of where you see the broader industry going. Obviously, OD is going to expect to continue to take market share, but would appreciate your thoughts there.

I would hope we would see some growth on the LTL side. I think some of the e-commerce trends and whatnot that we've seen are somewhat positive for LTL. The fact that all the Amazons of the world and many others have opened so many distribution facilities all across the country and have actually gotten closer to customers. You hope that some of the suppliers then are shipping to all these different type facilities That lends itself to LTL versus truckload when you're talking about smaller quantities getting in customers' hands quicker. I think that's a positive trend from an e-commerce standpoint, certainly. I think that just the broader macro economy will be the telltale. How does it do? I don't think we've really had a huge boom, certainly not in the last couple years, maybe back to 18, but not in the last two. We think the macro certainly will drive our market as well as truckload and some of the small packages. Let's hope that there's certainly strength from that standpoint, but I think it's positive. I'm not expecting a boom, certainly, compared to over the last 10 years, but I think it will be certainly steady, and we do expect some continued growth. Okay, great.

Thanks for the time.

Next, we'll go to Jason Seidel with Cohen.

Thanks, operator. Gentlemen, good morning. Hope everyone is well. I wanted to talk a little bit about contract pricing. Could you tell us or give us an idea of how that went in the quarter? And then sort of what do you expect going forward now that UPS Freight has been purchased by TFI considering they've been more of a discounter in the marketplace? And then I have a follow-up.

We don't necessarily detail out what our contractual business has done versus our tariff-related business, but I think that Generally speaking, we've had a pricing philosophy that's been cost-based, and we expect each customer to give us pricing that's above those costs to support the investments we make in service and capacity and technology. That's worked out well for us. I think we had success last year, and it was pretty continuous throughout the year. in all four quarters of being able to get increases as contracts renewed and certainly would expect to continue that as we transition into 2021.

Any comments on the market with UPS Freight and the purchase of those guys or do you not run into them too much?

I don't really want to comment on one specific carrier per se, but I certainly think that the industry itself showed a lot of discipline working through last year, especially in the second quarter when there was a lot of volume pressure. So it's been good to see the industry overall perform. Certainly that's been supportive of our own pricing initiatives, which we maybe have philosophies that are slightly different from the industry generally. You certainly would expect a very favorable pricing environment in 2021. There's a lot of factors that would go into that. Certainly demand is incredibly strong. Capacity is generally limited. That's a lot of feedback that we're getting from customers right now. And that's just across the transportation space. And then I think that some of the other LTL carriers that utilize some truckload carriers for their line haul services certainly are facing maybe more cost inflation than we are. And typically in that type of environment, rates are rising faster as well to offset that cost inflation for those other carriers' businesses. So I think there's a lot of factors that would point to industry pricing being very favorable for this year and certainly should be supportive of our pricing initiatives.

Yeah, I would agree. It seems like the backdrop's pretty good for the LTL business. I wanted to do a quick question. Adam, you mentioned that there's going to be some marketing, advertising costs coming back. Could you give us an idea of the magnitude of those costs?

We've never really split out exactly what we spend and where, so to speak. Obviously, we've got some big national deals and we kind of put some programs on hold last year, and so I think that would not expect those costs necessarily to be higher than where they were last year, but it's certainly something that we're expecting the cost to be higher, if you will, than maybe what we've just seen in the past couple of quarters. That's really since we started making some changes and trying to address all of our costs initially in the second quarter of 2020. A lot of those items that were directly or indirectly affected by the pandemic, some temporary and some may be permanent, were in that general supplies and expenses line. And generally speaking, in the second quarter, third quarter, those costs are more between two and a half to 3%. Would expect it to kind of go back up where in the past they've been three to three and a half percent. You know, somewhere not maybe to the full extent of that three and a half percent because we'll be continuing to see some of those savings, like I mentioned earlier, related to travel and so forth. But certainly kind of coming back, you know, maybe more to that range. But hopefully at the low end of it.

That's very helpful. Well, listen, gentlemen, I appreciate the time as always. Please be safe out there. Thank you, Dave.

And next we'll go to David Ross with Stiefel.

Good morning, gentlemen.

Dave. Dave.

So sometimes less is more or stop doing stupid stuff is good advice. What is the one thing that you were doing maybe five to ten years ago, Greg or Adam, that you're not doing now that has made the biggest impact?

Oh, my gosh.

I might have to go back a little further than that, David. I don't know. I think we quit doing stupid things maybe a little further than that. I don't know. Your question kind of took me by surprise, but...

Well, if you go back to kind of 05, 06, because I know that's when a lot of the service improvement started. Is there anything that you were doing then that just got in the way that you removed?

We were somewhat like some of our competitors back in the day. We used a lot of purchased transportation. We were dependent upon those for our line haul moves and whatnot. We eliminated that over the years. And I think by and large, we've just gotten better. I don't want to say that we did stupid things. Maybe that's not exactly the right terminology, but I think we've just gotten smarter and we've gotten better over the years. We've understood better what our customer needs are and we've figured out how to meet those needs. You know, what do they really want? What do they really need? And I think we're just better at it today than we were some years ago, certainly. I think it's indicative of our share growth, continuing to win the Mastio, which is a pretty good measuring stick of service. I think it's maybe not what we did stupid, but just what we've done smarter and what we've done better than our competitors have done. Maybe that's the best way to state it.

The Mastio survey is terrific. Something else you've done smarter and better has been on the pricing side, but that also wasn't always the case. Can we talk a little bit about the process to get to where you had your old pricing system, model, accounts, rates, and getting it to where you want to go? Is there a few key things you need to focus on or do along the way? Because you don't want to just raise rates and have customers leave.

Well, David, I think the pricing really goes hand in hand with the service. When your service is poor, Sometimes the only way you're going to put a shipment on the truck is give a cheaper rate. Once we really got the service clicking like it needed to be, then we were in a much better position to raise our prices. I think we've been extremely disciplined over the years. As the years have gone on, we've put in all the systems, the dimensioners, and all the techniques and all the technology that that helps us to better understand exactly what our costs are, be it P&D, be it line haul, be it movement, delivery, whatever. I think we certainly better understand our costs now than we did certainly 15 years ago. And we've executed on that understanding. So I think that's certainly been huge for us, no doubt. And will continue to be. We're disciplined. We know what our costs are. I think that's certainly one thing that sets us apart and helps to drive our numbers for sure.

Excellent. Well, thank you very much.

Sure. Thanks, David.

Next, we'll go to Chris Weatherby with Citi.

Hey, thanks. Good morning. Just taking a look at sort of the outlook for 2021, and I know you guys don't like to guide VOR, but if I go back to the last time you were able to grow tonnage double digits, it was 2018. Your incremental margins were sort of in the 35% range. Not looking for a specific number this time around, but when you think about 21 relative to 18, at least from a cost perspective, is there anything that we should be thinking about? Is labor tighter or is the cost generally a little bit more inflationary now and maybe the timing of sort of volume growth versus resource additions potentially more challenging? Or is there anything else that we should be thinking about if we're trying to use that as a rough rule of thumb of how you guys might perform over the course of 21?

Certainly we're going to face a lot of challenges as we go through this year. And while certain top-line comps might be easier, if you will, we were pretty proud to produce a lot of growth and profits in 2020, despite the fact that our revenues were down. At the end of the day, we generated almost $90 million of increase in operating income despite our revenues being down about $95 million. So certainly in some respects we'll have some tough comps. But I think that just sort of pulling back and looking at our cost inflation, I anticipate that we'll probably see cost per shipment inflation around 4% this year. And it's a little bit higher than our longer term average, but You know, I think we've got some factors that will be coming back to us. You know, I mentioned some of the general supplies and expense type inflation we might see would anticipate a little bit higher healthcare inflation this year. So, you know, we're gonna see some inflationary pressures in some of the other categories. You know, we always have kind of a three to three and a half percent inflationary cost in our salaries, wages, and benefits as we continue to improve that program for our employees. And so all those factors will kind of go into that metric, and that'll be our target. And then that kind of becomes the target for which our long-term philosophy of trying to get 75 to 100 basis points of rate increase above the cost inflation. And then we just sort of work through from there. But I think that we've talked about the key ingredients for long-term operating ratio improvement are the improvement in density and yield, and I think certainly the macro setup would lead you to believe that we should be able to produce nice improvements in both. We've gone through two years of being flat, and each year I thought that we would have had some growth, and certainly didn't expect the industrial slowdown in 19. I don't know that Nostradamus could predict what we saw last year, but we worked our way through it, and I think we're in a good spot as we enter the year, and we're just gonna continue to work a plan to try to drive the operating ratio lower. We've talked about kind of having a goal per se, not necessarily incremental margins, because the reality is we're managing the business to put as much profit to the bottom line as we can, and last year, the success that we saw sort of proves that out, but certainly should be in a position to create some strong incrementals this year, and we'll keep working towards the long-term goal that we've talked about of driving the operating ratio to a 75, so we'll just Keep making progress there month by month and quarter by quarter as we work through 21. Got it.

That's very helpful. Just a quick follow-up here, thinking about the CapEx budget obviously stepping up and understandably so. Can you talk a little bit, I know you're giving us some breakdown, but can you talk a little bit about the opportunities that you see there? in terms of deploying that capital, and then relative to that 30% available capacity coming into 21, how do you want to maintain that? Is that roughly the right amount of available capacity you'd like to have as you move forward?

We generally talk about 25% plus or minus of excess capacity. I think that continuing our CapEx programs through 19 and 20 and continuing to build out the service center network certainly is gonna pay dividends for us this year with the increase in volumes that we're seeing now and would expect and probably for 22 as well. So we've maintained our CapEx spending on real estate and really last year was more just cutting back on the equipment and that was a plan we had in effect when we started the year and before seeing the pandemic on our business, but we were fortunate that that was part of the plan and certainly helped, and we didn't see the type of inflation and depreciation cost that we normally would see, and that was a big benefit there. But I think we're in a good spot. We're gonna continue to look for opportunities. We've got a good plan on the real estate side. The 275 is a good starting point, We maintain our long-term plan and trying to look multiple years out and still sort of have a target list of 30 to 40 properties and we'll keep our eyes peeled and if some things become available, certainly we've got the strength to be able to pull the trigger on that and would look to just continue to make those expansions to really prepare the network for growth that's multiple years down the road.

Okay. Got it. Thanks for the time. I appreciate it. And next we'll go to Scott Group with Wolf Research.

Hey, thanks. Morning, guys. Just a couple of follows first. How many service centers are you adding this year? And then within the January update, can you just talk about weight per shipment trends?

Not only additional service centers, we have that were very close to opening that that may open in the first quarter if not first early second and then we have another half dozen or so that we're working on so just depends if we if we get them completed or not you know it's it's not always easy to sit here nine months out and say exactly what we're going to finish but hopefully hopefully another half dozen or so on top of the three that we are really, really close to opening now.

Then on the weight per shipment, it was 1,625 pounds in January, which was a 4.6% increase there. So continuing to see strong weight per shipments. Our business is still leaning a little heavier, if you will, on our larger national accounts that have a higher weight per shipment on average. But, you know, I think that the strength in that number is some of our smaller customers get healthier and are making up a, you know, coming back to normal, if you will, in terms of a percent of our business is just a reflection on the strength in the economy right now and probably seeing a little bit of some spillover type freight that's coming into the network as well.

Okay, and then, Adam, how quickly do you expect the PT spend to normalize? With higher than normal head count and growth in 1Q, do you think you get back to normal PT by 2Q, or is it more back half, you think?

You know, it's hard to say because it's going to be dependent upon the top line performance. And, you know, certainly we had really strong sequential performance in 4Q. You know, it was... going through the sequentials last year is an unprecedented drop, like everyone else experienced, from one Q to two Q, and then the reverse happened going into the three Q, but then incredibly strong performance going into the four Q, and I think we're starting out with some strength here in January as well. So we're gonna continue to make use of it really until the capacity of our team sort of catches up with the volume growth that we're seeing. So I wouldn't expect it to necessarily go any higher because I think we're doing a great job of onboarding people right now and keeping pace. So certainly in the first quarter would expect it to stay pretty consistent with where we were in 4Q and would hope that we can start seeing it reduce a little bit in the second. You know, it could be more of a second half of the year. But, again, I think it's just going to be top line driven more than anything.

Okay. Thank you, guys.

And as a reminder, it's star one. If you have a question, next we'll go to Robbie Shanker with Morgan Stanley.

Thanks. Morning, everyone. I want to follow up to a response to one of your earlier questions. It was pointed out that you've significantly outgrown the industry, and a lot of that has been driven by share gain over the years. And you said that you expected the industry to be good, but not gangbusters growth in the next five years. So I just wanted to get a sense of, in your analysis of the industry structure right now, do you feel like you can keep up that outsized share gain kind of trend over the next several years? Do you think that potential exists?

I think it certainly does, Robbie. Our entire strategy is to continue to grow our capacity and increase our service center network, which is what we've, as you know, we've worked extremely hard to do that over the past, 10, 15 years, and I think we've done it extremely well. So I think we're positioning to take advantage of whatever growth is out there, and I would certainly expect that we would outgrow our competitors. For the most part, we have not seen that from them. So we'll see where that goes, but I think we're well positioned and certainly in a good spot to continue to take share.

And you have said in the past that you tend to gain accelerated share when the market's starting to turn up rather than the market's going down. Are you seeing that already in the fourth quarter and in January so far?

We are, yes. We are seeing that. We're seeing the response from our customers. We've had numerous situations where our competitors couldn't or didn't respond for whatever the reason, and we were able to take advantage of that. Again, that's why we're doing what we're doing from a capacity standpoint, so we can be there when the need arises.

Gardner, just to follow up, can you give us a little more color on your thoughts on this UPS TFI deal, because I think it's a pretty big deal for the industry structure going forward. Were you surprised by that transaction at all, and do you think this kicks off a domino effect of M&A or consolidation in the industry, especially among some of the non-union players?

Like I said earlier, we'd rather just not comment on any specific competitors and transactions or whatnot, but I think regardless of who our competitors are, I think we've kind of proven what Greg just said. We keep focused on executing our plan, making the investments. We have a service advantage in the marketplace and we have a capacity advantage as well. And we're just gonna keep doing our thing and staying focused on our employees, staying focused on our customers, and then just letting the financials kind of fall out in the end. And that's included a lot of profitable growth over the years. And I certainly expect to continue to do that regardless of the landscape.

Okay, thank you.

Okay, next we'll go to Tom Wadwitz with UBS.

Yeah, good morning. I wanted to ask you, I know you've had a few on this topic and you're not being granular about it, but The TFI UPS, you could argue that there might be some freight spilled into the market and the need to price up a lot. And I think TFI has certainly shown that they're disciplined in their approach. They're not focused on volume. They're focused on making money. So I don't know if you have a thought on whether they have good quality freight or not. But if you don't want to be that granular, perhaps you could offer a thought on, is there bad freight that you don't want when there's tight capacity? Or is it simply a function of all freight's good as long as you price it right?

I think that the latter comment probably is the most appropriate. There probably is such a thing as bad freight. Not a ton of it, but there's a lot of bad pricing out there. Priced appropriately, there's very little bad freight. You just have to price based on what that particular commodity cost you to move it. Anyway, I think, Tom, we've done that better than most, and we understand if there's something that's expensive to haul and handle, then we're going to price it accordingly. So what does that mean from the UPS or transhorse acquisition? Who knows? We'll just have to wait and see. I'm not sure what their strategy has been up in the, Canadian market or down on this side at all. But, you know, we'll have to wait and see. Certainly if they execute on the raising prices and whatnot, I think that'll be good for our industry. So I don't see it as certainly not, from this standpoint now, it's not a negative. So I think that'd be good for all of them.

Yeah, right. Okay. That makes sense. How do you think about mix in terms of industrial versus consumer? I think, you know, the kind of surprisingly strong swing back in freight in June, July, August, even in the fall was more on the consumer side. And I think that the story in 21 would seem to be that industrial catches up or at least there's a stronger swing in industrial. Is that something which could be meaningful in terms of your mix and helpful in terms of the operating ratio performance? Or how do you think about that? potential impact if there's more industrial freight and not as much of a step up in consumer?

One, we are more exposed to the industrial markets as is the industry, and our percentages stayed pretty consistent in 20 with 19. We're still, you know, 55 to 60 percent of our revenue is industrial related, and close to 30, 25 to 30%. And over the balance of the year, they came in about the same that they were the year prior. And fourth quarter revenue performance was pretty consistent with our industrial customers and retail related customers as well. They were both in about the same range. So we'd look to certainly see The improvement in the industrial economy, though, create freight opportunities for us. And then, as Greg mentioned earlier, I think that there's going to be ongoing opportunity on the retail side. And kind of leading up to 2020, we've probably seen a little bit more growth in that retail area than on the industrial side. And I would expect that we'd see a little bit stronger performance there. But I think with respect to margins, and we talked a lot about this throughout 2020 in our calls that our operating philosophy is we want each customer to stand on its own. We measure the profitability of each customer and we look at each customer's operating ratio and whether it's a large national account or a smaller account or retail or industrial, they all should contribute in their own ways and that's how we try to to manage the business and then look at each individual customer and try to drive continuous improvement with their operating ratio by keeping the business intact and just continuing to make improvements year in and year out with them. The balance and the mix shift from one category to the next, when that industrial versus retail categories are the national shipper versus the smaller one. I think we kind of proved out last year with our operating performance that we're true to our word in that regard and that each do kind of operate close to one another. So either way we get the growth going into 21, certainly we'd expect that it can continue to drive and help us drive improvement in the operating ratio.

Great. That's very clear and helpful. Thank you.

Next, we'll go to John Chappell with Evercore ISI.

Thank you. Good morning. First one, kind of bigger picture macro, Greg, kind of on the last question as well. I think there's a consensus view that the industrial economy is going to catch up to the consumer this year, at least that's the hope. That number that you put up on tons in January is obviously a pretty big number. Is that indicative of the industrial economy starting to show signs of really building momentum, in your opinion, or is that really kind of just a catch-up from the depths of the pandemic in the middle part of last year?

I think it's maybe an effect of both, to be honest with you. I know there's catch-up and resupply for sure, but no doubt about that. So, you know, we'll see where it goes as the year develops, but Hopefully, the industrials do start to catch up. I think that'd be certainly a good thing for us as well as our industry.

Okay. Are your customers generally optimistic just from tone?

For the most part, yes.

Great. And then the follow-up is you mentioned right at the beginning of your comments about your spare capacity, so it certainly seems like you're lined up if this industrial economy does catch up. Are there any issues that may restrict your ability to take on new business, whether that's labor restrictions, just hiring, whether it's drivers or at terminals, or any other issues beyond the obvious kind of equipment capacity?

I don't think so, not beyond the obvious. I mean, labor is a challenge. It's a little tougher than it used to be, for sure, but we're having success. Adam mentioned it in his comments before, but Our service centers are responding to their needs, and we are having success of adding employees, drivers, platform, whatever the need, wherever the needs are. We are having that success, so that's a good thing. I wish it was a little bit faster. We could respond a little bit quicker, but it is what it is. I think we're getting there. Sometimes your growth numbers changes your challenges, if you know what I mean. It's one thing if it's some moderate-type growth. If the growth really starts to accelerate, then the challenge becomes a little bit greater. I think in a control-type growth environment, we're in great, perfect shape. If we get a huge acceleration, then that challenge is going to accelerate along with it. We'll see where it goes, but nothing right now is standing in our way, certainly. Great year.

It certainly seems like you're responding quicker than most.

Thanks for the thoughts, Greg. Next, we'll go to Alison Landry with Credit Suisse.

Thanks. Good morning. So just in terms of the January revenue per hundredweight up 2.2, is that inclusive of fuel? And if so, could you give us the ex-fuel number? And then just thinking about the 4.2% yield growth ex-fuel in Q4, maybe if you could give us a sense of what that looked like if you excluded the mixed impacts from weight per shipment and length of haul, just trying to get a sense of the underlying core pricing trends.

Yeah, Allison, that January number did include the fuel price. And excluding the fuels, pretty consistent. The growth rate was pretty consistent with the fourth quarter, so just over 4%, if you will. And we'll continue to see until about April, really, I think that that delta and some pressure on the fuel surcharge revenue and showing up in those metrics, I think that fuel was pretty consistently higher until about April of last year and then fuel trends hold current and that'll start becoming a little bit of a tailwind finally for us on a top line basis. But I think that certainly when you look through last year and kind of how that yield number excluding fuel is up 4.2% in the fourth quarter. There's not a perfect analysis, if you will, that there's not a linear way, purely linear way to evaluate the change in weight per shipment and length of haul. But we had more pressure from the increase in weight per shipment in the middle part of the year, in the second and third quarters. So certainly that 2.5% increase on weight per shipment has got a negative effect, but then you've got to 1.3% increase in the length of haul. So I mean, they're somewhat offsetting. And I think that just underlying performance, we'd review our growth in renewals and so forth consistent with our long-term average. We've been around, whether you look over the past 10, 15 years, we've been able to average about a 4.5% increase in our revenue per shipment. And I think that we're pretty much in that category, somewhere around that ballpark for last year. And certainly, like I mentioned earlier, the strategy is always to try to target 75 to 100 basis points above our cost. And I think that that's been a good, consistent approach. We're not trying to necessarily always follow the market with more of a roller coaster type approach. We like it to be consistent. Customers generally appreciate that and it's an easier conversation to have when you're just talking about pure cost or customers operating ratio to talk about the need for an increase. But we'll continue to sort of target that type of range and certainly expect next year to be supportive of our ability to do so.

Okay. Thank you for that. So it seems like you should be able to generate pretty strong free cash flow this year, even with elevated capex. I know you raised the dividend. Maybe if you could share any thoughts you have on buybacks in 2021 and if that might accelerate from the repo in 2020. Thank you.

Yeah, you know, certainly when we've talked about priorities for capital allocation in the past, Obviously, the $605 million of CapEx, CapEx is the number one position. I think while we've been able to create such strong returns on invested capital, and I want to keep investing there, but the excess capital that we've been generating in the business, we've been increasingly returning to our shareholders. We stepped up the pace of our buybacks last year and spent a little over $360,000. on the buyback program in 20, so that was a nice step up and we'll just continue to look at stepping those dollars up most likely, because it's certainly not something that we want to continue to have a significant balance of cash hanging around on the balance sheet. But we also want to be mindful of the fact that there may continue to be some opportunities out there from a real estate standpoint And some of those in areas like on the West Coast and in the Northeast have got some really expensive price tags. So we'll continue to look for some opportunities there and would rather spend our dollars on something that's more strategic, like a long-term investment in a service center. But absent those opportunities, we'll continue to return capital to our shareholders.

OK, thank you, guys.

Next, we'll go to Amit Mehrota with Deutsche Bank.

Thanks, guys. I'll make it quick. I know we're coming up on the hour here. Just one quick one for me, Adam. If you can just help us how shipments trended sequentially from December to January versus maybe how they've done over the last 10 years, what the actual number was. I know they were up 7% year over year, but just trying to gauge the sequential strength in shipments. relative to seasonality from December to January.

And I'll just go for the benefit of everyone. I'll go through the fourth quarter and these will be our shipments per day. So October versus September was down 3.3%. November was 3% higher than October. And then December was 4.2% lower than November. January was 1.4% higher than December. The 10-year average on those going back to October is a 3.3% decrease. November is a 1.8% increase, and December is a 9.8% decrease. January is normally a 3% increase, but I think that given the strength of the performance that we had in both November and December is why that January numbers a little bit lower than the 10-year average, given the outperformance of those two months prior. So it's been really strong performance, like we've said, really just throughout the year. We took a little bit of a breather in October, if you will, and as we were continuing to play catch-up and we're starting to get a lot of heavy shipments into the mix, but that was just really very temporary, and you can see kind of once we We lifted any of those restrictions. Just the volumes continue to accelerate through the rest of the year and now into the first month of the new year. So a lot of good favorable trends on the volume side.

Yeah, so I just wanted to dig into that a little bit more. So it looks like December was, you know, double better than seasonality or half of the seasonal decline. May explain a little bit of the January lag relative to seasonality. But there's three reasons why volumes could be inflecting. One is underlying growth in the industrial economy. Two is spillover from truckload. And three is just simple market share gains. And what I want to just be clear on is that you guys are clearly gaining market share. You're clearly in the best position to drive spillover from truckload. I'm trying to understand the January strength on a year-over-year basis. Is that more indicative of OD-specific factors? Or is it a read-through to the overall industrial economy? Because U.S. industrial production is still negative on a year-over-year basis. Everybody expects it to inflect as we move through this year, and we're right up there as well as expecting that. But I'm just trying to understand, like, you know, decipher between those three attributions in terms of the strength and volumes.

You left out the quality of our sales team. So, you know, that's point number one. But I think that we've kind of talked about these points earlier, that we've got a service advantage that's unique in our industry, and we're giving better service than anyone else. We've got a capacity advantage, and we're starting to see, and this has played out in years before, but we're starting to see this capacity advantage play out for us as well, and we're getting feedback from customers that support that And then you've got other factors. The industrial economy is improving. You know, there was a lot of uncertainty, and there always is in an election year. And now, you know, that's behind everyone, so you kind of have a better feel for what the regulatory environment and so forth is going to be. And so hopefully, you know, that's going to continue to support an improving economy, as well as just the country sort of reopening throughout, and so all those factors, the demand improvement, inventories being low, and the need for restocking, it's all just a matter of those are all favorable trends, but I think that we're uniquely positioned to take advantage of that with market share wins for customers that we strengthen relationships throughout last year as we work with them and we're flexible. And I think that we've got improvements there that should pay dividends for the long run. And those customers are gonna increasingly give us business, we think. And some that historically had been more price sensitive now have seen our ability to respond with them and give them capacity in a challenged time and to give them service. And maybe it's proved to many customers that you may pay a little bit more upfront, but the total cost of transportation service when selecting Old Dominion can save a company money in the long run. So there's multiple factors, but at the end of the day, it goes back to the fact that we have a service advantage and a capacity advantage, and those two factors are unique and have been the basis for why we've been able to grow market share more than anyone else in our industry over the past 10 years.

And then just the 76.3 OR and the quarter, can you just tell us you know, deconstruct that between direct and indirect. And I guess the bonus payments would obviously be the part of the direct cost, I would imagine. But if you could just deconstruct that for us.

It's about 56% on the direct side. And so, you know, our overhead costs, you know, now are kind of, we've talked about those costs over the long run have been sort of between 20% to 25% of revenues. And so again, kind of getting back to the quality of that revenue performance, we were able to move that number back down to the lower end of that range. So it's something we'll just continue to build on. Those bonuses are kind of split, obviously more heavily on the direct side, but for management and non-productive labor, meaning drivers, dock workers, and our mechanics, you know, those costs we put more on the overhead side. And so there's an element of that bonus that, you know, would therefore be split into overhead as well. But the majority of it's going to be on the direct side.

Okay. Thank you very much.

Next we'll go to Jordan Alliger with Goldman Sachs.

Yeah. Hi. Good morning. I'm just curious, you know, the expansion – that you're talking about with the service centers. Just sort of wondering, how long does it typically take to, if you will, get the density needed to fully season one of these facilities so that it gets closer to the margins that you want? Or is it a situation where the density is such in the area that it could come in pretty quickly close to an OD type of margin level? Thanks.

It typically does not take long in our system, and we won't open an additional facility until the need is there for the most part. We may certainly have excess capacity in there, but we don't fully utilize it from day one, so we're not absorbing necessarily all those costs from the outset, but typically we will put a lot of business in that service center from the get-go. So there's not usually a long climb to our typical normal type returns in a service center.

Okay, great. That was it for me. Thank you.

Next, we'll go to Ari Rosa with Bank of America.

Hey, good morning, guys, and congrats on a nice quarter. So I had kind of two questions. So first I wanted to ask about just the weight per shipment trends. And I know Scott touched on this earlier, but seeing more supply seemingly entering the truckload market and some elevated order numbers on the Class A trucks, Maybe you could talk about what your expectation is for kind of the weight per shipment trend over the course of the year, and if we see that maybe return to kind of normal levels or more normalized levels as we move towards kind of the second half.

You know, we're, like I mentioned, we're at 1,625 pounds. And I think when we've been in strong environments from, you know, strong demand backdrops, we've been around 1,600 pounds. Certainly you can go back and look at 2018 and that was around the range we were in then. So I think it can stay in this 1600, maybe 1650 kind of range as we progress through the year and certainly would see some ups and downs. But I think that like I mentioned, we're continuing to see good performance with our smaller customers and they're naturally gonna have a little bit lower weight for shipment So that'll bring it down, but just the overall demand environment, I think, is keeping all shipments a little bit stronger from a weight perspective. I don't think we're really getting flooded, if you will, with spillover-type freight. When I look through the business we have with third-party logistics companies, a lot of time when there are capacity constraints in the market, they're able to go out and find and help their customers, who are also our customers, find capacity, and certainly we've seen a little bit higher weight for shipment growth with business that's controlled by the three PLs than the rest of our book of business, if you will. So I would expect it to stay in that sort of elevated range, just given all the favorable economic backdrop numbers and then just the fact that we still believe capacity is generally constrained in the industry.

Got it, got it. That's very helpful. And then just for my second question, and I know a number of people have obviously asked about the TFI deal with UPS Freight, but stepping back and not necessarily addressing them specifically, but thinking about the idea of having a more focused competitive set. You guys have obviously benefited tremendously from delivering exceptional service levels. Does it perhaps risk kind of a part of your competitive advantage if peers start to improve service levels and start to kind of emulate OD more in terms of the structures of their network and the service levels that they're able to provide? Do you see that as a competitive threat at all, or do you think kind of margins can kind of remain best in class and kind of you guys can continue doing what you're doing regardless of what competitors you're doing on the service side?

I think it's obviously a threat. No doubt. I mean, you know, if you've got a bad team, you improve the players, and it's a threat to all the other teams, so no doubt. But, you know, I think they've got to do it. They've got to pull it off, and, you know, there's an awful lot that goes into service, and we've worked awfully hard on it over the years, and not only A to B on time, but all the other things that go into a true service product, and...

think we do it better than others and you know hey it's it's out there it's not rocket science but they've got to do it so you know we'll see how they do is add though to that that the fact that you know it is a unionized company and the non-union carriers generally have got more flexibility within their workforce and a better service product and you've seen more market share movement to the non-union players as lengths of haul shrink in and there's more of a premium within supply chains to look at carriers that can respond to next day and second day needs. I think that we've got more flexibility as a group of non-union carriers. I think we've got an advantage within that group, as we talked about earlier, to be able to continue to win shares. You know, that's something that's been playing out over the long run, and we'd expect to continue to see share movement from unionized to non-unionized players.

Got it, got it. And that's a terrific answer, and thank you for the time. And you guys clearly have a strong track record in that regard. So thanks for the time.

Sorry.

Okay, and that does include today's question and answer session. I'll turn the call back over to management for any additional or closing remarks.

Well, thank you all for your participation today. We appreciate the questions, and please feel free to call us if you have anything further. Thanks, and have a great day.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.