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Edited Transcript of ODFL earnings conference call or presentation 6-Feb-20 3:00pm GMT

Q4 2019 Old Dominion Freight Line Inc Earnings Call

Thomasville Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Old Dominion Freight Line Inc earnings conference call or presentation Thursday, February 6, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam N. Satterfield

Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary

* Greg C. Gantt

Old Dominion Freight Line, Inc. - President, CEO & Director

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Ariel Luis Rosa

BofA Merrill Lynch, Research Division - Associate

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Fourth Quarter 2019 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through February 14, 2020, by dialing (719) 457-0820. The replay passcode is 8210669. 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. (Operator Instructions)

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 Gantt. Please go ahead, sir.

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [2]

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Good morning, and welcome to our fourth quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. For the fourth quarter, our results reflect another period with a slight reduction in revenue that was due in large part to the sluggish domestic economy. Despite these economic conditions, we maintained our relentless focus on revenue quality and cost controls and are pleased with our consistent financial performance. While our diluted earnings per share decreased as compared to the fourth quarter of 2018, the decrease in our pretax income was primarily due to a $30.7 million increase in fringe benefit cost that was partially driven by changes to our phantom stock plans. Adam will address the phantom stock plan expense in more detail, but the amendments to these plans in December '19 should prevent fluctuations in our share price from materially impacting our earnings in future periods. The overall operating environment in the fourth quarter felt similar to what we experienced for most of 2019. We won't, again, continue with the decrease in LTL terms, although we were pleased to see our volumes perform in line with normal seasonality when compared to the third quarter of 2019. This was the first time this year that we were in line with our normal seasonal trend. We are encouraged by this volume trend as well as economic forecast for the industrial economy to improve in -- during 2020. Although, we are cognizant of increased political risk associated with an election year.

Regardless of the economic or political environment, we will continue to focus on managing the things that we can control. This starts with our steadfast commitment to delivering superior service at a fair price, while also diligently controlling our cost. Our on-time performance was 99%, and our cargo claims ratio was 0.2% for the fourth quarter. Providing this level of superior service in periods with reduced operating density generally results in the loss of productivity and increased operating cost.

We operated with great efficiency in the fourth quarter, however, and improved both our P&D shipments per hour and platform shipments per hour by 1.1% and 4.2%, respectively. We have said many times before that long-term improvement in our operating ratio is dependent upon consistent improvements in density and yield, both of which require the support of a positive macroeconomic environment.

While we didn't get a lot of help from the economy, and our volumes were lower than expected for 2019, we improved our yields by maintaining a consistent cost-based approach to pricing supported by our superior service.

Long-term improvement in our yields has allowed us to make significant investments over the years to support our market share goals. Despite the softer volumes in 2019, our capital expenditures totaled $479 million, and we maintained our commitment to the ongoing expansion of our service center network. Although we only increased our operating service center count by 1 in 2019, we finished the construction of several other facilities but did not officially open them to avoid the increased operating cost. We intend to open 6 to 8 service centers in 2020, including the ones that have already been completed and believe that adding door capacity to our network should ensure that it will not be a limiting factor to our growth. While 2019 was not the year that we expected it to be, our team is proud of our financial results.

We finished the year with company records for annual revenue and diluted earnings per share. If it were not for the phantom stock plan expense associated with the 53.7% increase in our share price, we would have also improved our operating ratio. So I would like to thank our Old Dominion family of employees for their solid execution that produced these results in a challenging environment.

As we look forward to 2020, we will continue to focus on managing the fundamental aspects of our business and adhere to the same business model that has served us well through many economic cycles. We firmly believe that if we can continue to execute on this plan, we can deliver even greater value for our customers and shareholders. Thank you for joining us this morning, and now Adam will discuss our fourth quarter financial results in greater detail.

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [3]

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Thank you, Greg, and good morning. Old Dominion's revenue for the fourth quarter of 2019 was $1.0 billion, which was a 1.7% decrease from the prior year. Revenue for the year increased 1.6% to a new company record of $4.1 billion. For the fourth quarter, our earnings per diluted share decreased 7.7% to $1.80 due to the combination of the decrease in revenue and 260 basis point increase in our operating ratio. Earnings per diluted share for the year increased 3.8% to $7.66, which was also a company record. Our revenue results for the quarter reflect the 4.5% reduction in LTL tons that was partially offset by the 2.7% increase in LTL revenue per hundredweight. Excluding fuel surcharges, LTL revenue per hundredweight increased 4%, which was in line with our expectations. On a sequential basis, LTL tons per day decreased 1.6% as compared to the third quarter, which is in line with normal seasonality.

LTL shipments per day were down 3.8% on a sequential basis, which was just slightly below the 10-year average decrease of 3.3%. For January, our revenue per day increased 0.2% as compared to January of 2019.

Revenue per hundredweight, excluding fuel surcharges, increased 4.1% to offset the 3.6% decrease in LTL tons per day. The increases in our fourth quarter and annual operating ratio are both attributable to increases in our fringe benefit cost for the periods compared.

For the fourth quarter, our fringe benefit cost increased to 39.7% of salaries and wages from 30.7% in the fourth quarter of 2018, due primarily to changes in phantom stock expense. The fourth quarter of 2018 included an $8.4 million reduction in expense that was due to the decrease in our share price for that period. This compares to $17.1 million of expense in the fourth quarter of 2019 that resulted from the previously disclosed amendments to these plans as well as the increase in our share price during this quarter.

All of our other combined cost improved as a percent of revenue for the quarter. We were able to offset the increases in insurance and depreciation with improvements in operating supplies and expenses and salaries and wages. Our team did a nice job of matching labor to current revenue trends while also improving productivity.

Our average headcount was down 5.6% as compared to the 4.1% decrease in LTL shipments. We currently believe that our workforce is appropriately sized for current shipment trends, and our fleet is in good shape as well. As shipment levels begin to improve, however, we will likely need to add to our workforce this year.

Old Dominion's cash flow from operations totaled $236.4 million for the fourth quarter and $983.9 million for the year, while capital expenditures were $109 million and $479.3 million for the same respective periods. We returned $49.2 million of capital to our shareholders during the fourth quarter and $295.5 million for the year. For 2019, this total consisted of $241 million in share repurchases and $54.6 million in cash dividends. We were pleased that our Board of Directors approved a 35.3% increase in the quarterly dividend to $0.23 per share, commencing in the first quarter of 2020. This action reflects the Board's confidence in our prospects for continued growth and affirms our commitment of returning capital to our shareholders.

Our effective tax rate for the fourth quarter of 2019 was 24% as compared to 26.6% in the fourth quarter of 2018. For the year, our effective tax rate was 25.3%. We currently expect an effective tax rate of 25.5% for 2020. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Jack Atkins with Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [2]

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So Adam, if I could just go back to your comments around January and Greg, I'd love to get your thoughts on this as well. But I appreciate the added color there on the first month of the quarter. If you could just sort of expand a bit about sort of how the market is feeling to you guys to the first, call it, 4 or 5 weeks of the year? Obviously, we got a little bit better-than-expected PMI print earlier this week. And then -- but we have some offsets there with this production halted Boeing and some of these things happening with global trade. So would just be curious to get your take on the market, how it feels today? And are you continuing to see stabilization in your view relative to normal seasonality?

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [3]

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

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [4]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [5]

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Sure. Obviously, the biggest item that we dealt with in the fourth quarter and called out was the -- that adjustment for the phantom stock expense. So that was a big headwind, if you will, and especially when you consider that fourth quarter of 2018 rather included so many credits that kind of went the opposite way. And we had talked last year about how those help the operating ratio, probably somewhere in the neighborhood of 150 basis points to 200 basis points last year. So I think that we've got that that, that was in our fringe benefits line. There are probably a couple of other things that stand out in this quarter that were a little unusual. Obviously, the insurance line for one is probably the easiest one to see. We had -- we go through our annual actuarial assessment and usually make those adjustments in the fourth quarter. So that ticked up to 1.8% of revenue, typically averages around 1.1%, 1.2% throughout the year. And that's our cargo claims ratio, which is 0.2%. And then typically, the balance is our auto exposure, but we had an unfavorable adjustment related to our annual actuarial assessment there. What you don't see is there are some credits that kind of offset that unfavorable that are in some of the other lines. Some of those are in the fringe benefit line, we had a favorable adjustment related to the same actuarial assessment on our workers' comp liabilities, some other credits that are in the operating supplies and expenses line. So all those other things, nothing material to call out one way or the other, individually, but kind of had just some puts and takes in those other lines that would most likely normalize as we progress into the first quarter of next year.

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Operator [6]

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We'll go next to Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [7]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [8]

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Yes. Well, for the fourth quarter, to start with that, we were pleased to see that overall for the quarter, we were in line with what our normal sequential trends typically are. And we did that both on the tonnage side and just revenue in general kind of performed as the 10-year average, I guess, has performed. So that was good to see. And it's really the first time that, that's happened this year and really goes back into last year, in the back half, we started seeing a little bit of unfavorable trend as well. So that was good to see. As we transitioned into January, we gave the number, but the year-over-year, January, the tons were down 3.6%, revenue flat. So that was -- we're starting to see the progression where we were -- the revenue was down about 2.5% in the third quarter on a per-day basis, down a little bit less in the fourth quarter on a per day basis. And now it's flattish, but we're on the good side of flat being just slightly positive. So all kind of good trends to see developing.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [9]

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Okay. Okay. That's very helpful. I appreciate that. And then when I think about the phantom stock, if you were to think about the entire year and what that means as we sort of transition into 2020. In terms of the tailwind, I guess, there'll be a tailwind to growth potentially from the cost that you incurred in '19 that won't be recurring. But can you sort of just sum it up just so we know what the total number is for the full year, when we look at that clean going into 2020?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [10]

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Yes. I think we talked about that in the prepared remarks, but the volatility that we've had with that program. It kind of went up and down as we progress through this year. And frankly, it's been doing that and trending along as we've progressed through the last couple of years, as our share price has increased, and it's always nice to be able to go back and say, just like Greg did that our share price increased 50% or over 50% this year. But that -- the way the accounting was on that program, it resulted in expense. So in total, we had about $35 million of phantom stock expense in 2019, and that compared to -- when you go back to 2018, we only had about $6 million. So a big overall headwind, if you will, but that number went into the overall fringe benefit line. I think that we'll see a little bit of improvement there for this year. But I'm still looking at overall -- that total probably being somewhere in the neighborhood of 34% of salaries and wages as we progress into 2019. We won't have -- we were north of that 34% bogey for 2019 because of that phantom stock expense, but we'll still face some cost inflation related to our health programs, pharmacy costs continue to increase. So I think that we'll see that increased rate of inflation on that program as well as some of the other costs that go into those fringe benefit lines.

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [11]

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

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [12]

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Yes. It's a high-class problem to have, but definitely nice to put it in the rearview.

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Operator [13]

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We'll go next to Amit Mehrotra Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [14]

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Adam, just helping us with what productive labor costs were in the quarter as a percentage of revenue? And then I know you talked about headcount going up or trending up the shipment increase, and that obviously makes sense. But if you could just help us think about the increase in headcount relative to shipment growth? Is it kind of proportional, if you see 2%, 3% increase in shipment growth. That's kind of what we should expect on headcount. I think that would just be helpful. And then last very specific question is D&A took a big step-up in '19. And I just want to know what the right way to think about it is in 2020?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [15]

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

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [16]

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That was one question, by the way. There were just 3 parts. Yes.

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [17]

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Three questions in one. I don't want to -- I guess, but anyways, the productive labor costs were pretty flat in the fourth quarter compared to last year, 27.9% for both of the periods compared. But that's actually a good thing. We look at all of our direct operating costs combined. And when you've got a period where fuel prices are fluctuating, and our fuel costs were down, the average price were down, was down a little over 6% in 4Q of '19 versus '18. So typically, that impacts obviously your fuel surcharge revenue as well as fuel expenses. So you see revenue going down, your operating supplies and expenses going down as a result of the drop in fuel price, but typically, the labor would go up slightly as a percent of revenue. So I think we've got that benefit. And overall, in the salary, wages and benefits line, I think that you can kind of see that trend sort of playing out. One of the things that -- a couple of things that sort of benefit that line, performance-based compensation was lower for the fourth quarter this year, and that, frankly, just relates to the fact that revenue was down, and the operating ratio was lower. Those are kind of 2 ingredients that go into most of our bonus programs. Our headcount in the fourth quarter, it was down versus the third quarter. Typically, you've got an increase, a sequential increase, if you will, from the third into the fourth. And so like we said in the prepared comments, typically first quarter headcount on average is kind of flattish with the fourth quarter and I think that where we see trends right now that we're in pretty good shape on the headcount. Obviously, these trends continue to play out. If we can see our volumes start to grow then likely that would mean that we would be adding to our headcount later in the year. And that would be a good thing actually. We hope that we're in that position with the workforce, but the fleet, we kind of addressed that in prepared comments as well. I think that we're in good shape. We made orders last year, anticipating kind of mid-single-digit growth. And on the volume side, and we ended up with mid-single-digit decrease in tons. So we're probably a little bit heavy, and there's a lot of carrying costs, both in the depreciation line as well as the maintenance and repair cost on that heavier fleet. So those are things that hopefully will grow into the fleet that we have as we progress through 2020.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [18]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [19]

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

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [20]

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Right. And then the share count, last question for me, the share count. Is that -- so the way the phantom thing works. I guess now the variability of stock price will have no impact on the fringe benefit cost, and you're just going to add it a little bit to the share count? Is it like a 357,000 increase in the share count. Is that simply how it works?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [21]

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

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Operator [22]

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We'll go next to Jason Seidl with Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [24]

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Yes. I think that it's been stable, and certainly, it was pretty much in line with what we thought it would be in the fourth quarter. And I think what we talked about on the third quarter call for how that trend would play out. So we continue to go through our bid process and continue to had wins, but obviously, with revenue down, and the back half of last year, I guess, there were more losses than wins overall, if you will.

So as we transition into this year, I think that you've seen some of our competitors' yield numbers compress as they went through the back half of last year, and that was just probably as their own bid situations kind of went through. And I think we talked after the first quarter call that we started seeing a little bit of competitive response in kind of the March, April time frame of last year. And that pretty much played out. And I think it played out in the competitive yield numbers that were disclosed for the public carriers as well. So we would expect to continue to try to get our cost-based pricing and continue to execute on this type of consistent approach that we've had year in and year out. And so I think Jack asked earlier, but our cost inflation projections, kind of underlying costs for this year, probably somewhere around 4% on a per shipment basis, and that becomes the baseline for the conversations that we have with our contractual customers and go -- will go into our thinking when we get to the point of announcing a GRI for our tariff-based business as well.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [26]

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Can you repeat that?

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27]

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

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [28]

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

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Operator [29]

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We'll go next to Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [30]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [31]

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Not necessarily one particular accident that drove the hit in the fourth quarter. We go through an annual process where the actuaries look at all open claims going back for all the years. And some years, you have positive development, in some years, you have unfavorable development. When you go back to last year in the fourth quarter, we did have a positive adjustment in that period. I think our expenses were 0.9% of revenue, where it did trend at 1.1%, 1.2% or so for the first 3 quarters of the year. So this year was just several claims that are still open that had some unfavorable development to them. And then you also look at the expense that was applied for the accidents that we had this year. And so we'd expect that things should get back to normal next year. And a lot of that and the reason that we've got the favorable trend over the long term is the focus that we have on safety, continuing to invest in technology on our units and continuing to invest in training on proper safety protocol for our drivers. And I think that's played out long-term and the improvement that we've seen in our accident frequency ratios as well as the general severity of trends.

But like many of the other carriers, we will be facing some inflation on the premium side. We're kind of in the midst of renegotiating that this year. But we have -- the majority of kind of our auto expense is related to the self-insured piece that we fund. So we'll have the increased hit on premiums. And then we'll just continue to look to manage and hopefully mitigate any inflation on the self-insured piece that we're on the hook for.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [32]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [33]

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Sure. Obviously, the technology has helped. It's hard to say one-for-one, but we certainly -- we spent a lot of time going through and evaluating the technology over the years as we put it in the trucks, but we feel like we've got good technology, the accident avoidance systems that we have in place now, the forward-facing cameras and collision detection systems and so forth. Certainly, we would expect to see that continue to play out with reduced accident severities over the years and hopefully, preventing accidents one would be the ultimate objective, but certainly lessening the severity is a benefit to us all.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [34]

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Got it. And just one last one. The last few years have been probably the most volatile that the industry has seen in a long time. It doesn't look like it's going to get much better, especially with changes like e-commerce and new entrants and such. What are your views on consolidation in this space? And kind of where do you think the LTL space looks like 5 years from now? Do you think it looks similar to where we are today? Or do you think it looks meaningfully different?

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [35]

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

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Operator [36]

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We'll go next to Jordan Alliger with Goldman Sachs.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [38]

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There's not necessarily a volume growth number. And I think we proved that in the first and second quarters this year when we were still seeing some weakness. Certainly, you need some revenue and you got to have revenue to offset the high fixed costs that are inherent in our network. And so we saw that still in the second quarter of this year when our revenue growth was about 2.5% on a per-day basis, and we were still able to produce a little bit of operating ratio improvement. So there's a balance that's required. And over the long run, when you look at our long-term revenue growth rates of 12% to 13%, it's kind of been made up of about 8% or so on kind of the shipment volume side and then the balance in yield. And so the density is certainly important and -- but staying ahead of the density with the continued investment in service center capacity that always gives us that ability to grow into the network that we've built. But you've got to have a consistent yield management process in place as well. And when you look over the long run, we've been able to get on a revenue per shipment basis, improvement in kind of an average of 4.5% a year. And that's somewhere around 75 to 100 basis points higher than the long-term trend on our -- of the cost on a per shipment basis. And so you got to have that delta in place, though, to support high-dollar investments that we're making in our service center network to support investments in technology and all the things that we want to do to try to keep that per unit cost inflation down as much as we can. So there's a lot of factors that go into it. And fortunately, we've had a really nice balance of density and yield over the years.

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Operator [39]

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We'll go next to Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [40]

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So when I look at the other LTLs, looks like they are seeing more of a recovery in December, January tonnage trends relative to you guys. I'm wondering your thoughts or any -- is this a sign to at all the competitive environment getting maybe a little bit worse?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [41]

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

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [42]

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Okay. And then Adam, you mentioned, I think, 4% cost inflation this year. I'm wondering, is that normal? Is that better or worse than normal in terms of cost inflation year? So when we get -- hopefully, we get back to some revenue growth and a more meaningful revenue growth starting in the second quarter. Any thoughts on how we should think about incremental margin?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [43]

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

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [44]

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Okay. And just last one quickly. The CapEx guidance, I think it's the lowest in 6 or 7 years on tractor trailer down a lot. Should we think about this as sort of a 1 year or so equipment holiday or something longer?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [45]

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No. I think it's a 1-year kind of deal. And again, we went into last year thinking that we would have somewhere in kind of the mid-single-digit tonnage growth, and it ended up being down. So I think that gives us room to grow into it. And we want to be good stewards of capital and trying to evaluate kind of where the fleet is and how we think we can go into it. And obviously, if volumes pick up more than what we might expect, then certainly, we can respond and have been able to do that in our past life as well. So we'll make whatever changes that are necessary. But typically, we spend about 10% to 15% of our revenue on CapEx. And I think when you look at sort of the breakdown, the expenditures for real estate are pretty much in line with -- as a percent of revenue with what we've seen in the past. This will be probably a 1-year holiday on the fleet side, and then we'll just get to the end of this year and sort of evaluate where we are and what we feel like we need going into 2021.

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Operator [46]

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We'll go next to Allison Landry with Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [47]

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

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [48]

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Allison, we have continued to see some business return that we lost over price prior. Earlier last year, we have continued to see that business come back to us for our service. So I don't think there's a huge change in the trend. We did continue to see our share gain increase slightly over the year, which was good to see because we've seen it in other down economic cycles, where our share gain actually slowed or diminished completely. But this year so far, that number's continued to increase slightly. So I think that's a good thing. But we are still -- we're winning some bids, and we are gaining some business back that we lost. At what pace? It's kind of hard to gauge. We don't measure those things. So anyway, and that'll -- we are having some gains still.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [49]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [50]

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The tonnage or the weight per shipment?

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [51]

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The weight per shipment.

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [52]

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Okay. So on the weight per shipment, just to kind of go back a little bit, and this is another one of those points that give us a little bit of confidence going into this year. But if you recall, we kind of hit a low point on our weight per shipment back in August of 2019. And then we started seeing a little bit of movement north there. So on a year-over-year basis through the fourth quarter, still down. We were down 1% in October. We were positive 0.4% in November on a year-over-year basis and then down 0.7% in December. But the trends, when we look at it, we had hit that sort of 1,530 mark in August, it came back to around 1,600 pounds by the November and December time frame. So most of those, I would say, kind of moved for the quarter, kind of moved in tandem with sort of what the normal sequential trend might be, but certainly, a positive development than where we were for January is down versus 2019, but it's pretty much in line with down sequentially about like our 10-year average. So we're back to 1,554 pounds in January of this 2020. The weight per shipment kind of held up a little bit in January of last year before we started seeing some sequential weakness. I feel like we're in a good spot there. And hopefully, we'll see that trend on the weight per shipment side stay pretty steady and see some steady improvements we progress through the year.

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Operator [53]

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We'll go next to Ari Rosa with Bank of America.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [54]

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So first off, nice quarter in a tough environment. But -- so when I hear your outlook or kind of what you're saying about the operating environment. Some of the truckload carriers really kind of diverted attention to a second half recovery, but it sounds like you guys are a little more optimistic there. I just wanted to make sure I'm hearing that correctly? And do you think there's something unique about LTL that's maybe different from truckload that's causing that dynamic?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [55]

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

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [56]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [57]

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Yes, our -- the book of business really didn't change a whole lot this past year. Our numbers were pretty consistent in terms of the breakout of retail and industrial. So it's about between 55% to 60% industrial, closer to the 60% range and then kind of the 25% to 30% on the retail side, closer to the 30%. And then hodgepodge of things from an SRC code basis that kind of go from there.

We've seen over the last couple of years, maybe more growth in our retail-related business. And I think that, that kind of gets to some of the longer-term e-commerce trends and the importance that some of the retailers and vendors that are supplying product to retailers are placing on service, and that fits right in our wheelhouse as we can help our customers avoid costs like chargebacks and fines and so forth by delivering on time and in full into some of these distribution centers. We can charge a fair price. But it's one that was consistent with the level of service that we're providing. And I think it benefits from a total cost of transportation standpoint. Our customers that want to use us because they end up avoiding some of those secondary costs that may come from the retailer. So it creates win-win scenarios and is definitely a good avenue for growth. But other things that maybe get more attention in that space of doing last-mile deliveries and across the threshold is just something that we're really not interested in from a corporate strategy standpoint as it exists right now.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [58]

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

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [59]

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

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Operator [60]

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We'll go next to Todd Fowler with KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [61]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [62]

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

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [63]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [64]

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Correct.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [65]

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

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [66]

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We've definitely built some capacity, particularly in 2019 with the -- I think you know what our capital expenditures were, they were significant last year. So we definitely built some capacity having such a flat year. As we go into this year, we continue to be flat, and we're continuing to build out the network and build where we know we'll have needs in the future. So at this point in time, we're in really good shape from a capacity standpoint. Exactly what it is? It's hard to say, but probably 25%, maybe even better than 25%, but we do have some capacity, and I like where we are today. We've addressed the needs that we had back a couple of years ago when we were really, really busy. We've addressed those, and we've been able to accomplish some of the needs that we had, and I think we're well set for the future.

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Operator [67]

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We'll go next to Ben Hartford with Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [68]

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And Adam, just at a higher level, as you think about cash flow in the balance sheet over the next several years. Any changes to your appetite to carry leverage? And if so or if not, I mean, how do you think about this -- the allocation of the returns to shareholders going forward? It looks like the dividend payout ratio has been stepping up, but has a lot of room to continue to move higher. So maybe you could address that as well?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [69]

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Sure. That certainly is something that we continue to look at and evaluate, and we were pleased to be able to produce another 30-plus percent increase as we're going into 2020. So the payout ratio, when we first started the dividend program, kind of our target was we looked at the prior year and sort of wanted to have a basis of about 10% of kind of the prior year earnings. And we started out on the conservative side, to make sure that we had room to continue to increase it and so forth. And we really had not -- because our earnings growth that had been so strong since we implemented that program, had not really reached that threshold that we want it to be. So this year, I think, was a good sort of increase to kind of address that. And I think that we've moved that payout ratio north a little bit to try to at least achieve that goal, and we'll continue to look at increasing the dividend as we move forward. And then on the other side would be the share buyback program, and we kind of stepped that up a little bit last year as well, and we'll continue to execute on that plan. And I think we've just got to balance from an overall cash flow standpoint looking at the cash coming in from operations, what we spend on capital expenditures that are planned, also taking advantage of opportunities that may present themselves strategically on the real estate side. And we did a little bit of that in 2019. We ended up spending more than we had originally planned and a few opportunities kind of became available to us. So we'll continue to look at those. And then I think we just got to balance overall kind of where we are from an overall positioning standpoint, our cash balances and kind of cash projections and just sort of stay true to trying to return excess capital to our shareholders as it makes sense.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [70]

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One final one. Any specific IT projects on the horizon, either in '20 or beyond that are of note?

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [71]

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We've got several projects going on. We're converting to a new human capital management system this year. We're working on an implementation of that, which will be a good thing for us. And -- so we're excited to try to get that behind us. And we're always looking at incrementally how we can continue to improve the systems that we have. And I think when you look at our operating systems, those have all been created in-house. And some places may have plug-ins where we've got off-the-shelf products that kind of interface with and assist. But one of the reasons we operate so efficiently is the systems that we've invested in over the years and trying to stay ahead of our competitors in that regard. So we're always going to be looking at making incremental improvements to those programs and evaluating any other system that we think will help us. But any return or any investment rather that we make in a system, it is an investment. And there's risk that go along with that, and we think that, that's something that should be accounted for and expenses we incurred the expense. And we should assume a return on any project as well. So that's kind of the baseline of when we make that decision to pull the trigger on a project. And so we're going to continue to look at making investments and hopefully getting returns on those investments.

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Operator [72]

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We'll go next to David Ross with Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [73]

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

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [74]

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David, it is behind us. We completed that project back in the fall, but it's completely behind us. No material impact at all. Obviously, it took a lot of hard work and a big effort from our folks to accomplish it in the time that they did. But glad to have it behind us. But nothing material I think to talk about.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [75]

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

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Adam N. Satterfield, Old Dominion Freight Line, Inc. - Senior VP of Finance, CFO & Assistant Secretary [76]

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David, I'll say, a fair amount. We've got some capacity. We looked at that recently. We've got some equipment capacity right now without a doubt. We're nowhere near peak. I mean, obviously, it's slow this time of year, but we're nowhere near our peak levels, and we've got the equipment to accomplish our absolute peak level right now. So we're -- we think we're sitting in a good position. Maybe, if anything, still a little bit heavy on equipments or tractor certainly and trailing equipment as well. We're in good shape there.

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Operator [77]

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And there are currently no further questions in queue. I'd like to turn it back over to today's speakers for any additional or closing remarks.

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Greg C. Gantt, Old Dominion Freight Line, Inc. - President, CEO & Director [78]

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

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Operator [79]

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And that concludes today's conference. Thank you for your participation. You may now disconnect.