Old Dominion Freight Line, Inc.

Good day, and welcome to the Old Dominion Freight Line fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.

Thank you. Good morning and welcome to the fourth quarter and full year 2022 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 8th, 2023 by dialing 1-877-344-7529, access code 2673176. 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, 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 today, we welcome your questions, but we ask in fairness to all that you limit yourselves to just one question 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 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 Marty Freeman, our COO, and Adam Satterfield, our CFO. After some brief remarks, we'll 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 and our ability to win market share over the long term, the 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 continue 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 retirement plan for employees. In dealing with the reality of slower than anticipated business volumes, we also work diligently to protect the significant investment that we made over the past two years in our new employees. Speaking of new employees, I'm 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. 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 a 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 extend 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 start today by thanking Greg and our board of directors for providing me the opportunity to lead this great company. It will be an honor to lead our team, and I can assure you that we will work tirelessly to keep producing strong, profitable growth. Along those lines, I was pleased with Old Dominion's revenue growth of 5.8% and the improvement in our operating ratio to 71.2% during the fourth quarter. The combination of these items contributed to the 21.2% increase in earnings for diluted share. These financial results reflected the ongoing strength and demand for our services. As we continue to deliver value to our customers by providing superior service at a fair price. While our long-term strategic plan is centered on our ability to provide this value proposition, the real key to our success is our strong family culture and our people. We will continue to invest in our OD family of employees as our employees are the foundation for building strong customer relationships. We are in a relationship business, and each employee plays a critical role to help deliver our industry-leading service. I am proud to report that our service metrics remained strong during the fourth quarter as we provided 99% on-time service with a cargo claims ratio of 0.1%. We believe executing our same long-term formula for success will allow us to win market share in the future, and as a result, we will also allow us to constantly invest in new capacity ahead of anticipated growth. Our capital expenditures for 2023 are anticipated to be $800 million, which will improve the average age of our fleet and further expand the capacity of our real estate network. We have invested approximately 2 billion in real estate expansion over the last 10 years and increased our door capacity by approximately 50% as a result. These investments supported our ability to double our market share over this time. The ever-increasing cost of both real estate and equipment, however, will require us to maintain our pricing discipline. Our long-term pricing philosophy is designed to evaluate the profitability of each customer account and then obtain the necessary increases to offset our cost inflation while also supporting our ongoing investment in capacity and technology. As we have executed on this consistent strategy over the years, the resulting improvement in our cash flows have generally supported our ability to invest between 10% and 15% of our revenue into capital expenditures each year. Continuing with each of these priorities demonstrates our team's intention to remain focused on executing the same business strategies that we have created our unique position in this industry. We will continue to focus on our people, servicing our customers, and investing for the future. This commitment to the core principles have differentiated us in the marketplace, gives us confidence in our ability to further produce profitable growth while also increasing shareholder value. With that, I'll now turn things over to Adam, who will discuss our fourth quarter financial results in greater detail.

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 times. 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 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 cost improved 200 basis points. These changes more than offset the 260 basis point increase in operating supplies and expenses that primarily resulted from the significant increase in the cost of diesel fuel and other petroleum-based products during the quarter. Our overhead cost 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 in 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 40 cents per share for the first quarter of 2023. Our effective tax rate for both the fourth quarter of 2022 and 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jordan Allinger with Goldman Sachs. Please go ahead.

Yeah, 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? You know, is this 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, folks?

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 nutrition 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 but continuing to operate efficiently. 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. It's certainly the biggest area of focus as we try to continue to run our network as efficiently as possible without giving any sacrifice to service. So I do think that given the environment in the fourth quarter, I think we had, given the circumstances, pretty strong revenue performance. 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.

Max, just as a follow-up, is there a way to, I mean, do you expect that type of control at least for the first half until you get to that inflection, you know, in the spring in volumes? I mean, could we continue to see that trend line stay the same for the time being?

Well, I think we're in a good spot right now with where our headcount is. And, you know, 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. 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 second quarter volumes were higher than the first. And so it would 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 work 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.

Great. Thank you.

Our next question comes from Jack Atkins with Stevens. Please go ahead.

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.

Absolutely.

It's been a good run.

Absolutely has been. So I guess... Maybe if we could, you know, Adam, if we could maybe expand a bit on the January trends a bit more. You talked about January being up a bit or maybe even flattish versus December. You know, anything you feel comfortable sharing there in terms of January revenue trends and tonnage or shipment trends, that would be helpful. And then I guess as you think about the operating ratio, first quarter versus fourth quarter, you know, anything you can maybe share relative to normal seasonality would be helpful there. So I'll turn it over to you, Adam.

Yeah, I guess from a volume standpoint, you know, on a year-over-year basis, January, our tons per day were down 7.8%. That compares to December where we were down 12.3% overall and I would point out, and obviously we'll continue to give our mid-quarter updates. We had a little bit easier comparison with the January year-over-year comp, and we had very strong performance in February of last year. So that comp gets a little bit more difficult there, and then they obviously start getting easier. So just, I guess, be aware of that when we give that February update in a month or so. But nevertheless, I was pretty pleased with the way, really going back through the fourth quarter, December came in a little bit stronger than what our normal sequential change is. And that's a month we kind of talked about, I think on the last call, in the fourth quarter in particular, in some slower economic environments is where we've seen a pretty hefty drop off in our business levels. And the fact that we stayed pretty steady, rather, I think was a positive takeaway for me. I was hoping that we would see our sequential performance from a volume standpoint be a little bit closer to our 10-year average trends, and certainly it was. The fourth quarter volumes were down 4.4% sequentially. The normal change is a 1.3% decrease, but if we compare back to where we were in the second and third quarters relative to our 10-year average changes, I think we're starting to trend back in the right direction. Whether or not we get back to the full 10-year average, at least in the first half of the year, remains to be seen. I think we probably need a little bit stronger economy, but I do think that we're going to start seeing some increases, like we mentioned, particularly starting in March and continuing through the second quarter. We'll see where things go from there. But, you know, I think that certainly that volume environment, you know, really will dictate what the operating ratio does. Typically, just to give a little bit more color on the first quarter operating ratio, we typically have about 100 basis point increase there coming off the fourth quarter. In this particular first quarter of 2023, We did have a favorable insurance adjustment. We talked and given the guidance for 4Q of assuming that line held steady. There was improvement there, and I think that that will normalize back to around 1.2% of revenue in 1Q of 23. So that becomes a 70 basis point or so headwind for us. I think that we're going to continue to see a little bit of a headwind from depreciation as well. You know, we've talked about this as we've worked our way through last year, that our delivery cycle was a little different than prior years. And so we're probably going to see a little bit more headwind from there. So, you know, on a normalized basis, that probably puts us at about a 200 basis point increase over where we just finished the fourth quarter. But, you know, so that kind of puts us somewhat flattish, if you will, on a year-over-year basis if we were to hit that. Certainly, I think if we get better revenue performance, we've got the opportunity to be able to outperform that longer-term normalized average. But I think the revenue environment will certainly control a lot of it for us.

Okay. Very helpful. Thanks again.

Thanks, Jack.

Our next question comes from Vasco Majors with Susquehanna. Please go ahead.

Following up on the labor piece, your headcount was down about 3% sequentially. I think that's the biggest decline besides the COVID 2Q20 drop that you've had since you began reporting this on a quarterly basis. You talked a little bit earlier in one of the earlier questions about feeling like you're in a fairly good place. Can you elaborate a little more? Does that mean headcount flat to up from here or? you know, flattish and then trend with volumes from here. And just to help put a finer point on that, any commentary on productivity or the cost of heads? I don't know, labor costs per employee or any other guidance you can get to help us kind of frame the cost piece of that and the expectation. Thank you.

Thanks, Baskin. This is Greg. But I'll take that and try to give you as much color on it as possible. But Obviously, we've made some adjustments where we felt like we needed to in head count. As Adam mentioned earlier, he talked about attrition, and we've kind of let attrition control some of these adjustments, but we've made some in other places where we needed to. Certainly, we haven't replaced openings like we typically would in a normal cycle where we're growing and whatnot, but that's that'll continue to be our our efforts until things start to turn the other way so you know we'll see typically you know we'll see a little uptick late february uh going into march you know things really start to pick up so you know exactly is that going to be the trend this year we hope so but just not absolutely certain but i think we are in a good spot because As I mentioned in my comments earlier, we've got an awful lot of qualified drivers that we've got working the platform and whatnot. They're not driving full-time, so I think we'll certainly be ready when the increase does happen. I hope it's sooner than later, but definitely we will continue to make adjustments as needed. We talked about this on some of our prior calls. We've been able to make these adjustments and downturns in the past. I think we've proved again that we can make adjustments when we need to. We've done it again. Feel good about where we are. We just have to continue to stay on top of it and react as the business dictates. I hope that helps.

Oh no, it's very helpful. Just to maybe cap that off, any thoughts on items that could impact the cost per head this year? I don't know if there's some variables on incentive comp or other things that might make that a little wonky versus what we would deem a normal trend based on history. Thank you.

Not as I know of, Bascom. I don't think so. I think it should be fairly normal from that standpoint. We've certainly had some good experiences in the recent past with our benefit costs and those kind of things. So, you know, you just hope that those things continue to be consistent and don't turn the other way for some unknown reason.

Thank you, Greg.

Sure thing.

Our next question comes from Tom Leedwitz with UBS. Please go ahead.

Uh, yeah, good morning and, uh, congratulations also, uh, to both of you, Greg and Marty and, and Greg. Yeah, just a, uh, remarkable run. So, you know, congratulations is a great, uh, performance over time. Um, let's see. I think if I, I guess just in, in terms of the view on tonnage, I know you have a large customer base, so, so maybe it's tough to parse it out, but what would you say about the, uh, I guess, dynamic in terms of volume from retail customers? and volume from industrial customers. It seems like, you know, probably there's been a lot of weakness and focus on inventory reduction with retail customers. Maybe a little less clear what's happened with industrial. So just trying to think about, you know, is there potentially some weakness yet to come with industrial? You know, have you seen a pretty big difference in the volumes from those two groups? You know, so kind of any thoughts on that topic would be helpful. Thank you.

Good morning, Tom. I would say during the fourth quarter, we saw 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. 55% to 60% industrial overall and 25% to 30% or so on the retail side. Longer term, that retail business has been growing faster than the industrial. I think that reflects some of the e-commerce trends and the effect of those on our customer supply chains. We certainly continue to believe that that will be a longer term tailwind for us and And I think that as we start working through 2023, we believe that we'll start seeing customers' orders for their product picking up and some inventory rebalancing, if you will. And I think that's why we've seen in some of the prior slow periods that I spoke of earlier, why you start seeing the orders and freight flows kind of leading the other macroeconomic indicators. So we believe that the freight cycle will start turning and we'll start seeing some pickup. And, you know, it's through these customer interactions and conversations that support our belief that we're going to start seeing freight flowing again as we get into March and into the second quarter.

But it sounds like you haven't seen a big difference maybe over the past, you know, in 4Q or even 3Q in performance from industrial and retail? And I guess looking forward, do you think maybe both of them kind of bottom and improve at the same time?

And maybe we start seeing retail outperform again. You know, while ISM and some of the industrial numbers look a little bit weaker, we start getting some of that retail performance as an offset leading us out. And eventually we'll start seeing the industrial picking back up again.

Right. Okay, great, thanks for the time. Thanks, Tom.

Our next question comes from Chris Weatherby with Citigroup. Please go ahead.

Hey, thanks, good morning. Yeah, congrats, absolutely, to Greg and Marty. It's been an act of a run, certainly, Greg. 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, you know, incremental margins, which obviously you guys have performed quite well with over time?

Yeah, I think that, you know, Chris, some of the conversation earlier about headcount, You know, 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, you know, 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. increases and certainly with the year-over-year comps particularly in the first half of the year we've got some some tougher year-over-year comparisons there before we get back to you know just being able to show year-over-year growth but but I think that'll be the important thing for for us to continue to watch is are we seeing those type of sequential increases and Certainly, we've got a lot of flexibility within our workforce. 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. Certainly, we're looking at right now in the first quarter, like I mentioned with the January tonnage levels, we've got you know, probably the volumes that are going to be the toughest comp. And, you know, certainly overall in the fourth quarter, we were down 9.1%. You know, 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 you know, converging factors, if you will, that drive the top line, depending on what the overall fuel environment looks like and so forth. But, you know, 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 And our real estate network and technologies that can both improve customer service, but also drive further operating efficiencies for us. So, you know, a lot of things to kind of manage through in particular the first half of this year. But, you know, I think we're in a good spot to be able to handle the volumes that they do in fact flow our way.

Yeah, that's very helpful. I appreciate that color. On the point of pricing, just to follow up, you know, ex-fuel yield did accelerate. The year-over-year growth did accelerate in the fourth quarter. You'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 4Q22 versus 4Q21. 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 2016 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 a 30 basis point 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. You 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, in a flat to a slightly down revenue environment. But there's still a lot up in the air when it comes to the top line for this year. Okay.

That's very helpful. Thanks for the time, guys. Appreciate it.

Our next question comes from Scott Group with Wolf Research. Please go ahead.

Hey, thanks. Morning, guys. And again, congrats, Greg and Marty. I was wondering, can you give us – so 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. Any way you can just help us on the gross – on the net of fuel? I just want to understand if that net of fuel is continuing to accelerate. Thank you.

Net of fuel in January was about 8.5%, so fairly consistent with what we just did in the fourth quarter overall. 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. You know, I think that if fuel holds steady with where we are right now, it certainly becomes a headwind as we get into the later quarters of the year. But nonetheless, you know, I think that, you know, certainly there's always mixed changes that can drive that number higher or lower. But I think it's pretty consistent with what our long-term philosophy has been. You know, we certainly dealt with higher cost inflation on a per shipment basis. in 2022 than 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 continued to execute on that same consistent philosophy that we always have. And I think that's why we saw the yield performance that we did. But I believe that cost should be a little bit more favorable versus the last couple of years. in 2023, or 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 just sort of roll out typically the first quarter or yield metrics are up about half a percent over the fourth quarter. You know, we'd expect to continue to see if mix is constant, those numbers increase sequentially quarter after quarter. But, you know, certainly that some of 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 with the cost. 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. I think overall it would be a positive for the economy and something that would be good to see. I don't know anybody that would like showing up at the pump and seeing that bigger number. Certainly that's been a big cost driver for what we've seen. I think it's better too for just cost inflation and other line items. I think the increased cost of fuel is driving inflation in about anything. whether it's a product or a service that we're buying. 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 to building out our rates with customers, whether it's base rates, fuel surcharge, or accessorials, 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 as we're working through renewals with our customers. every day and just looking and seeing where we are and what we feel like we need to keep driving improvement in our customer-specific pricing and profitability.

Very helpful. Thank you, guys. Thanks, Scott.

Our next question comes from Allison Polnack with Wells Fargo. Please go ahead.

Hi, good morning. I just want to ask about potential customer attrition. You know, just given some of the freight challenges out there and certainly your customer focus on cost, are you seeing any sort of attrition as customers try to trade down, obviously quality, but price as well? Or are the dynamics maybe a little different this cycle? Just any thoughts there?

Yeah, good morning. This is Marty. I'll take that one. You know, we aren't seeing anything like we saw back in 2008 or 2009. You know, we have customers in here every week, and, you know, our larger customers, contract customers come in, and it's business as usual. They're coming in and asking for contract renewals, additional services, and so forth. So we're not seeing anything like that. you know, out of the ordinary for the economic circumstances, you know, no major price cutting or anything like that. So I feel pretty confident that, you know, that the end is probably near what we're going through.

Perfect. Thank you.

Our next question comes from John Chappell with Evercore ISI. Please go ahead.

Thank you, good morning. Marty, since we have you, you're entering, you know, you're already there, but you're entering the head seat and, you know, the best mousetrap in the industry probably on the precipice of, you know, 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, you know, the labor, et cetera, Or is it just kind of ride the cycles with 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 that's made us successful in the past.

Thanks, Marty.

Our next question comes from Robbie Shanker with Morgan Stanley. Please go ahead.

Thanks, everyone. Congrats, Greg and Marty. And Marty, please don't change a thing. Just lie in that seat and don't change a thing. A couple of follow-ups here. Do you feel like you have a better ability to capture that spring inflection and growth if it comes versus peers, given how much free capacity you have? Do you have a sense of your ability to grow into that volume relative to peers?

I don't know about relative to peers, but certainly we feel confident about our ability to grow. I think you look at things in the past, we 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. Certainly our service is what wins us share and having 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.

Got it. Sounds good. Maybe as a follow-up on the fuel topic, there's a lot of speculation in the investment community about fuel and how much is driven earnings. I think a lot of you and a lot of your peers have been saying that, hey, there's a new algorithm when it comes to fuel pricing and it's stickier than you think, et cetera, et cetera. So how do we think about how fuel becomes a headwind in the back of the year? Does anybody quantify that? And also, how much of that fuel can be sticky and convert to base rate over time, do you think?

You know, it's something that we've certainly faced this question before when fuel changes. I think that we got a pretty long period where we were at low fuel prices, kind of going back to when that final decrease happened in 2016. I'd say we had pretty good results between 2016 and 2020 when we were in a lower fuel environment. Again, I think that it's something that maybe people on the street, it's hard to understand if you're not negotiating with some of these types of contracts. But for us, it's all about having a good cost model, understanding our costs, and knowing what the revenue and the cost inputs are going to be, whether it fuels at $5 a gallon or $3 a gallon. It's just something that we've got to manage through. In some environments, you know, some customers may want more or less of an increase coming through a base rate type of change. Some may want more exposure to that variable component of pricing that would be the fuel surcharge. And, you know, there's ways to increase yields by driving productivity with customers as well where we can obtain the same objective by just looking at the operational factors underneath and having all of our systems tied into our cost model allows us to have those types of conversations with our customers as well. Ultimately, it's just about driving customer-specific profitability improvement and working our continuous improvement cycle so that we can continue to purchase real estate and expand our network so customers have got that to leverage within their own supply chains. We're effectively buying capacity on behalf of our customers. So, you know, I think we've got to just continue to execute on that front, and I think that we've shown in terms of going through prior cycles that we'll be able to do so.

Understood. Thanks, guys.

Our next question comes from Ken Hexter with Bank of America. Please go ahead.

Great. Good morning. And again, congrats, Greg, on your tenure and Marty on the new role. Just a quick clarification, I guess, on that spring pickup you've talked a bit about. Is that just comp-based or is there commentary that you're hearing from customer comments or just a guess on chewing up inventory? I just want to understand why the, I guess, the confidence in that given the market. And then my question is on depreciation. You noted depreciation is going to be higher. Last year you targeted, I think it was $485 million in on equipment at the beginning of the year. This year, you're doing $400 million on equipment. Is that because the delivery schedule was slower? What's your view on getting that equipment? And does that still allow you to stay at that 20%, 25% excess capacity that you typically target? Thanks.

Yeah, Ken, this is Greg. I think so. I'll take your revenue question first. you know, we typically always pick up in the spring, so certainly we're hopeful that we get back into a more normal cycle than what we've certainly been in really since COVID. You know, we've kind of been, you know, off cycle, if you will, if that makes sense, and the normal numbers and sequentials that we compare with all over the years, they've just been different the last couple years, so Certainly, getting back to a normal cycle would be one reason we are somewhat hopeful. Some of the things that we've seen, heard, and read, inventories are starting to get low compared to where they were back, say, a year, six months ago. I think there's some things that lead us to believe that we could be coming out of this thing. Plus, we've been through many, many cycles over the years, and And typically they're a year, 16 months. And, you know, we kind of think that that's what we've been in this one. So, you know, yeah, we're hopeful. Got our fingers crossed that we will come out of this thing, you know, as we get into the spring and, you know, later on in the second quarter. As far as the equipment, yeah, it's been kind of, kind of funky the deliveries that we cycle that we've been on this time. We certainly didn't get everything back last year like we typically would. Typically, we would have all of our orders in the early fall. We'd have everything in place. That wasn't the case this year. We're actually still taking some equipment that we should have gotten back last year. It's been a little different. So we'll just have to see how the business develops, and I think that's going to determine where that $400 million that we talked about number, where that goes this year. So we'll just have to see, and it'll certainly be based on our business conditions and the numbers that we see as we get on into 2023 as to how that $400 million develops this year compared to last year.

Great. Thanks, Greg. Appreciate the time.

Our next question comes from Emmet . Please go ahead.

Thanks, operator. Hi, everyone. Greg Hardy, congratulations on the retirement. I'm already 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. I guess we've seen a lot of LTL companies in recent months announce 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 want to understand 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'd 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, you know, 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 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. 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 don't know if I can explain the psychology of our customers, but I did take a psych class in college once, so I'll give it a shot. You know, I think that we've talked a lot about this, that since going through COVID, there's been so much disruption to the customer supply chains and missed revenue opportunities, incremental costs added to production lines, just because of all the supply chain challenges that many of our customers have been dealing with over the last couple of years. So, you know, I think for that reason, we've seen a little bit of change And customer behavior, I think customers have been sticking with us. And certainly over the last year, as Marty mentioned earlier, despite the weakness that we've seen in the economy, we've seen good customer trends. We get periodic reporting from our national account sales teams, and we've not been losing customer accounts. I think customers have been keeping us in place because they inevitably know that, one, many are still dealing with challenges. A lot of the conversations that we continue to have more around challenges within the supply chain, and I think, too, is that they know that we're probably closer to things turning and orders picking back up for our customers' products, and they want to make sure that they've got capacity that's available as needed. You know, there were a lot of... competitors that had embargoes in places and communication to customers saying, I'm picking you up today, but I can't pick you up tomorrow. And we were able to respond in particular in 2021 to a lot of those customers that called on us needing capacity. And so, you know, I think that that strengthened the relationships that we have with our customers. And we've got a lot of continuity within our customer base anyway. So I think those everything that's happened over the last couple of years has really strengthened those customer relationships. So I think that one of the things you said as part of your question, though, gives us a little confidence in terms of when those orders for our customer products start picking up again in a sense that in prior cycles like a 2016 or 2019 where we may have lost a few lanes or lost a customer account, we were always confident that the business would return to us in many cases because the customer told us that they wanted to bring this back in when they could. But we had to wait until the next bid cycle before we got that opportunity. Customers are keeping us in place. They're keeping their contracts current, pricing terms updated. And so I feel like that whenever those orders start picking up, we may be getting three shipments instead of two at every pickup, and volumes should return to us quicker than perhaps they have in prior down cycles.

Right. Okay, very good. Thank you.

Next question comes from Ari Rosa with Credit Police. Please go ahead.

Great, thanks. Good morning, everyone, and congrats, Greg. It's certainly been an impressive run that you've had, and congrats also to Marty on some big shoes to fill here. So I wanted to ask about, you know, 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 inflation, but also talking about this inflection that's expected for second quarter. It seems like there's some optimism there around the ability to perhaps improve OR year over year, which would certainly suggest that you're kind of bumping up against that ability to get the OR into the 60s. I just wanted to get your updated thoughts on kind of given the progression of OR improvement that we've 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 like we were saying earlier, certainly 2023, just given the environment, it's certainly going to be a little bit more challenging. And we're continuing to keep our eye for the future. We're investing or plan 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've talked about, and you can make your own assessments as to what you think revenue may end up being for us for this year, but if we're in a flattish revenue environment, then certainly we've seen the operating ratio increase slightly in those years, but you know, the positioning that we're going through is to make sure that we're 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% revenue growth per year over the last 10 years. And we think of ourselves as a growth company, but we're certainly going to be disciplined in periods where the economy is softer. And we've seen you know, flattish type of revenue in those environments in the past when the economy has been slower. So, you know, I think certainly a lot depends on that. But, you know, if we have any type of OR degradation in the short run, meaning just for this year, the positioning and the recovery year is usually pretty doggone strong. And so, you know, 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 the sub 70 for the year. We certainly did it for two quarters this year and the second and third quarters. And so I think we've shown that it can be done and 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.

Got it. Understood. And then I wanted to ask also, As I think about the conditions that you've kind of been describing for 2022, where volumes have been a little bit softer than what you would have hoped for, obviously we've seen headcount come down, and yet your earnings growth was obviously very strong this year at 35% plus. To what extent, when you're going out and talking to customers who maybe were a little bit squeezed on capacity during COVID conditions, As supply chains normalize, does that put a little bit of a headwind on your ability to go to customers and kind of ask for rate increases? Or conversely, do they kind of push back and say, look, we gave you rate increases when capacity was really tight, but now the supply chain's kind of normalized a little bit. Are they pushing back any more on some of the rate increases relative to what they were over the past kind of 12 to 18 months?

I think the answer to that is yes. They push harder when they know they are in a position to do so. And certainly with conditions being soft like they've been, yes, they're pushing us for not as big of an increase and that kind of thing. But you've got to remember, we don't necessarily go into a customer and start talking about price. We talk about the value that we provide that customer, and that's what we will continue to sell them. We sell them value and many times value and price are pretty darn close if you know what I mean. Because if you're not getting value, what does the price matter? So that's what we'll continue to sell and thankfully I think our customers have seen that and what OD has delivered over the years and that's a huge reason for the success that we've had. We'll continue to focus on selling value and not price. And, you know, honestly, try not to have those conversations.

One of the things our sales team does a fantastic job of is sharing our costing with our customers, especially our large customers. You know, we're an open book. We actually show them, you know, what we're paying for equipment, how much it costs to cross-dock their freight, pick it up, sort and seg it, whatever the cost may be. And once you explain to them what our costs are, it's a lot easier to swallow a general rate increase. So I think most of our customers understand what our costs are, and we try to explain that to the best of our ability.

Okay, makes a lot of sense. Thanks for the time and the thoughtful answers, and congrats again, Greg and Marty.

Thank you. Our next question comes from Jeff Kaufman with Vertical Research Partners. Please go ahead.

Thank you very much, and I'll also echo congratulations, Greg, and congratulations, Marty. You know, a lot of my questions have been answered at this point. Just kind of a real quick one on fuel and the potential headwind that you're talking a little bit about for 23. If I just look at this quarter, fuel surcharge revenue up $97 million incrementally, fuel expense up $48 million incrementally, or $49. So the net of that was a positive $48 million. Total operating income was a positive $58 million. So I guess part one is, is the math that simple that of the $58 million operating income improvement, $48 million was the fuel differential? And then I guess if so, as I look at 23, given where fuel is right now, Can you put or quantify what the magnitude of that headwind would be, say, the fuel surcharge component coming down, which you alluded to in the January data, versus fuel expense?

Yeah, the short answer is the math is really not that simple. Going back to prior comments, fuel is just one of many elements that get negotiated as part of a customer's rate each year. It could be that we get more fuel surcharge in one particular year, more base rates in another. And so trying to look out and measure what the surcharge revenue piece is versus what the potential expense might be, it's not really a one-for-one comparison in that regard. If a customer has decided to take on more variable exposure to that fluctuation in fuel, it's covering many more cost elements than just the cost of fuel and other petroleum-based products. Certainly, that's what it's designed to cover, but that's not everything that is covered by that variable component of pricing. Again, I think if you want to look back into a declining fuel environment, I would point people to look at 2015 and 2016. In 2015, the average price of fuel was down 30% that year. Of course, we had volume growth. It was a little different macro environment. As a result, we were able to improve the operating ratio that year. In 2016, the average price of fuel decreased further. It decreased about 15% that year. And that was one of the years, as I mentioned earlier, that we had a 60 basis point increase in the operating ratio. The overall macro was a little softer. Volumes were certainly flattish that year. And so a little bit different top line makeup, if you will. But so that's probably a little bit more relative comparison is looking back at how some of those revenue changes quarter to quarter and cost changes progressed in that year. But we're certainly managing through it and we're looking at, we've got contracts that turn over every day and they progress through the year. So if fuel stays where it is today, then we're looking at a contract with a base rate of fuel at $4.58 a gallon versus last year we were looking at it and it would have been $5 something per gallon. So you just always got to look at what the current environment looks like and then try to risk adjust for do you think fuel prices may go up? If they do, again, how does the top line for each individual customer account change and what do the cost inputs change? If fuel goes down, you do the same thing and try to make sure that those fuel scales as they work on each customer account that we're still effectively getting paid for the service that we're providing and, like Greg said, the value that we are offering. And so that's what we stay focused on, and it's why it's so important for us to look at the profitability of each customer account.

All right. Thank you for the clarification. But the math for the fourth quarter would be fair at face value, but there's more uncertainty, to your point, looking to 23. Is that the right way to think about it?

Well, certainly there's uncertainty with respect to what fuel may end up averaging. We had seen it declining a little bit more, and then it kind of reverted back and had a little bit of an increase over the the last couple of weeks as well. But certainly if it holds steady from here, then maybe we see fuel prices that are down 10% or so this year. But I think it's better for the U.S. economy if we get back to a lower fuel environment. And certainly we will deal with that from a company standpoint. It's not going to change our long-term objectives, and we're not changing our operating ratio goals just because fuel may ultimately decline. Those are certainly built into what our longer-term forecasts are. We think that it should decline overall, and hopefully we get back to a lower fuel environment.

This concludes our question and answer session. I would like to turn the conference back over to Greg Gantz for any closing remarks.

Well, thank you for all 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.