Universal Logistics Holdings, Inc. (ULH) Q4 2018 Earnings Conference Call Transcript

ULH earnings call for the period ending December 31, 2018.

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Universal Logistics Holdings, Inc.  (NASDAQ:ULH)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, my name is Mariana and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Logistics Holdings, Inc. Fourth Quarter 2018 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Jeff Rodgers, CEO of Universal Logistics. You may begin your conference.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Thanks, Mariana. Good morning. Thank you for joining the Universal Logistics Holdings fourth Quarter 2018 earnings call. Fourth quarter continued the record-breaking trends set in 2018, with the fourth quarter in a row of record revenue and earnings. As a matter of fact, it has been four quarters in a row of double-digit year-over-year increases in revenue and earnings.

Consolidated revenue increased over last year $72.3 million or 23% to $386.4 million. Fourth quarter adjusted operating income of $24.9 million, excluding legal reserves, increased 90%. Adjusted earnings per share of $0.55, excluding legal reserves and losses on our marketable securities portfolio, increased over last year by 150%. Jude will provide a reconciliation of these adjusted operating income and EPS numbers here just a minute. The fourth quarter was a fitting end to the record-breaking year of 2018. The universal team executed well.

As I take a quick look back at 2018, Universal accomplished some pretty good things. In addition to record revenue, operating income and earnings per share, Universal completed four intermodal acquisitions in key strategic locations, all of which have proven to be accretive as we said they would be and are performing as well or better than expected.

Each acquisition brought new customers and new opportunities, as we build out our nationwide intermodal drayage network. Jude and the finance team closed on a new credit facility that gives us plenty of dry powder and flexibility to continue investing in our business as well as continuing with our M&A strategy. Speaking of investment in our business, our equipment is very close to our desired average age for our owned tractors and trailers, and is in the best shape from an average age in our history. Obviously, this is a good thing and very important from a safety and driver retention perspective.

We saw our percent of total revenue from automotive decrease from 43% back in 2016 to 36% in 2018, not because we are getting less automotive but through acquisitions and organic growth outside that vertical. The team worked hard on improving our operating margins, while growing the topline. Our 2018 adjusted EBITDA margin of 10.1% was the best since 2013 and the adjusted OR of 93.7% (ph) was the best since 2015 and I have a lot of reason to believe that 2019 will be our best ever.

Several areas of our business did not go as expected. Our dedicated unit, while profitable, did not meet our return expectations as I have talked about on several previous quarters, due to contract commitments that were below market. We have completed several negotiations with key customers and expect dedicated to meet our margin goal in 2019.

The truckload agent business overall grew revenue and operating income in 2018, primarily due to a strong rate environment, but we continue to lose drivers throughout 2018 in the over-the-road irregular route portion of that business. The truckload team is focused on improved planning for our drivers to optimize their day and week. We fully expect to deploy new technology by the end of 2019, which will greatly enhance visibility, administrative processes and planning, so that the drivers' day-to-day experience with Universal will be better than ever.

Now shifting to current view and the remainder of 2019. The economy is strong and the environment remains pretty good. I would expect 2019 to be a really good year with normal seasonality. While spot pricing has softened compared to what we experienced last year, contract rate increases are holding in the mid-single digit range for truckload and are a little stronger for intermodal. There are still plenty of freight and overall capacity is still tight.

Our sales pipeline remains over $0.75 billion. Our relationship with our key customers has never been better and we are having continual strategic conversation about how supply chains are changing and how Universal can meet those needs, because of our robust capability, our diversified service offerings and our proven track record of solving their problems. As I have said many times, very few companies can do what Universal can do. Appropriate example is our recent win of dedicated transportation with an automotive OEM that has an annual run rate of over $23 million to provide short-haul capacity and for the first time, the automotive customer agreed to fixed and variable pricing to secure capacity that they so desperately need, but could not find in 2018.

This piece of business will be operated close to an assembly plant where we already do substantial value-add business. We believe this will be a blueprint for additional dedicated opportunities within automotive, that clearly is a win for us and our customer. Our goal to own the plant continues to materialize.

Automotive SAAR forecast for 2019 remain near 17 million units. Class 8 truck production forecast 2019 to be a record year. As I said, the economy is still strong, the consumer is still spending and we are positioned well to continue our strong performance. Jude will now give you more color around our financials as well as reiterate our 2019 expectations.

Jude?

Jude Beres -- Chief Financial Officer

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $9 million or $0.32 per share on total operating revenues of $386.4 million in the fourth quarter of 2018. This compares to net income of $24.4 million or $0.86 per share on total operating revenues of $314 million in the fourth quarter of 2017. Universal's results in both the fourth quarter of 2018 and 2017 includes certain adjustments that need to be reconciled to determine our normalized operating margin and earnings per share.

Let's start with 2017. If you recall, Universal's reported net income of $24.4 million included an $18.1 million tax benefit due to revaluing our deferred tax liabilities resulting from the Tax Cuts and Jobs Act legislation signed by President Trump in late 2017, as well as $500,000 of unfavorable tax adjustments. On a per share basis, these adjustments netted an additional $0.62 per share in the fourth quarter of 2017. On a normalized basis, EPS in the fourth quarter of 2017 was $0.22 per share. In Universal's fourth quarter of 2018, we reported net income of $9 million, which also included a couple of items worthy of mention.

First, we incurred a $7 million charge related to the settlement of a previously disclosed accident, which was the equivalent of about $0.19 per share on an after-tax basis. The total cost of settling this accident was $9 million, $2 million of which was recorded in the third quarter of 2018. The second item was a significant decline in Universal stock portfolio in the fourth quarter of 2018, which experienced $1.6 million of holding losses or approximately $0.04 per share. Together, these two items negatively impacted the quarter by $0.23 per share. After adding these adjustments back, Universal's adjusted EPS for the quarter would be $0.55 per share, compared to the adjusted $0.22 per share in the fourth quarter of 2017.

Universal's fourth quarter of 2018 operating margin, excluding the $7 million legal settlement, was 6.4% versus the 4.6% reported and adjusted from income from operations was $24.9 million, compared to $13.1 million in the fourth quarter of 2017. Adjusted EBITDA increased $11.8 million to $38.4 million in the fourth quarter of 2018, which compares to $26.6 million one year earlier. Our adjusted operating and EBITDA margins for the fourth quarter of 2018 are 6.4% and 9.9% of total operating revenues. These metrics compare to 4.2% and 8.5% respectively in the fourth quarter of 2017.

Looking at our segment performance for the fourth quarter of 2018, in our transportation segment, which includes our truckload intermodal NVOCC and freight brokerage businesses, operating revenues for the quarter rose 31.6% to $260.5 million, compared to $197.9 million in the same quarter last year. And income from operations increased to $12.1 million to $19.4 million, compared to $7.3 million in the fourth quarter of 2017. In our Logistics segment, which is comprised of our value-added services, including where we service the Class 8 heavy truck market and our dedicated transportation business, income from operations increased 22.4% to $5.2 million, after excluding the $7 million settlement charge and $125.5 million of total operating revenues, compared to $4.2 million of operating income and $115.8 million of total operating revenue in 2017.

On our balance sheet, we held cash and cash equivalents totaling $5.7 million and $9.3 million of marketable securities. Outstanding debt, net of $2.7 million of debt issuance costs, totaled $400 million at the end of the period. Capital expenditures for the quarter totaled $9.4 million. For the year, Universal's CapEx totaled $63.6 million, while generating $34 million of free cash flow.

I would also like to remind everyone that on February 4, 2019, Universal released its 2019 financial outlook. We continue to expect total operating revenues for 2019 to be in the range of $1.6 billion to $1.7 billion, operating margins between 7% and 9%. Capital expenditures are expected to be in the range of $65 million to $75 million and total interest expense between $15 million and $17 million. On Wednesday, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend as well as a special dividend of $0.11 per share based on our 2018 results. This quarter's dividends are payable to shareholders of record at the close of business on March 4, 2019 and is expected to be paid on March 14, 2019.

With that, we're ready to take some questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Chris Wetherbee with Citi. Your line is open.

Chris Wetherbee -- Citi -- Analyst

Hey, thanks. Good morning, guys.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Good morning, guys. What's going on Chris?

Chris Wetherbee -- Citi -- Analyst

Not much. Wanted to -- thanks for taking the question. Wanted to touch base a little bit on the guidance, particularly the margin guidance, obviously 7% to 9% is a pretty meaningful step up from where you finished 2018. Can you help us sort of bridge the gap a little bit? What is the walk that -- what are the key sort of drivers that get that sort of step up from a margin perspective as you look across your book of business, your portfolio of businesses?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Right. I can help with that, Chris. So if you look at where we went through and it was a little bit choppy as you go through the year, but if we look at where we're at from a logistics, the value-add space, we're getting back to normal margins. So if you just project that forward, that helps into 2019. With the acquisitions on intermodal, those margins are higher than our existing margins within intermodal and intermodal -- our legacy intermodal continues to get better all the time, which is very good for us. So if you just play that out into 2019, that's a big part of what the margin improvement is from those two areas.

We also feel there's a lot of strength in the other areas of business from dedicated, which has not been where we needed it to be in 2018 or actually 2017, either from a margin perspective and that was a pretty big drag. So if you take the $90 million to $100 million that we expect and dedicated in 2019 and get it back to that 8% to 10% margin in that business and we feel we can do that based on all the renegotiations of pricing and what we see going forward, that's a pretty big step-up, because our margin there was basically 1% to 2% (ph). So, that's a big step-up as well there.

So, if you take those three areas, that's really what gets us to the 7% and 9% range and we feel pretty comfortable with that.

Chris Wetherbee -- Citi -- Analyst

Okay. That's helpful. And then when you're thinking about the intermodal business, specifically we've seen some nice acceleration in profitability in some of the intermodal players that are out there. Could you talk a little bit about what you are looking at in terms of rate expectations for 2019? How do you think sort of the early stages of going through contract bidding has been and sort of what do you think that could shake out for the full year?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Yes, I was just talking to Tim Phillips, our President and Head of that intermodal area and we're still seeing -- intermodal is still a little bit stronger from a rate than truckload. Everybody knows truckload rates are starting to soften up a bit. We're still seeing, what I would call, mid-single digits on the truckload side. Intermodal is maybe another point or two higher. The contract rates that we're getting are in probably that 5% to 7%, maybe even up to 8% in one case or two. So I would call it a little bit stronger than truckload, but still pretty darn good from an intermodal perspective. So we feel pretty good about that.

Chris Wetherbee -- Citi -- Analyst

Okay. It's an interesting dynamic as we've heard other folks talk about the prospects for intermodal rate increases to sort of outpace truckload rate increases. Can you talk a little bit about sort of the sustainability of that dynamic? I think there is sort of the view that it's hard to see that maintained over the course of maybe an entire year, maybe it could be sort of a temporary dislocation, but obviously we're looking at some really great rate increases from 2018 that you're comping against. So, any sense about how we think about the sustainability of sort of that outperformance of intermodal relative to truckload?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Yes, it's hard to say what's going to happen by the end of the year. Everything we're seeing in from a customer perspective, we're not getting any push back at all when we're going with 5% to 7% to 8% increase depending on the customer. And if you look at what's going on from a precision railroading perspective, where everything is going on, the railheads are still extremely congested, the ports are extremely congested. So, at the end of the day, what we do is drayage. So customers are willing to pay that higher rate because they got to get that stuff out of either the port or the railhead. And so I think from a drayage perspective, we feel more confident that that's more sustainable than maybe the domestic intermodal piece. And that's why we're playing in there and that's why our acquisitions are really targeted with drayage, because we think the sustainability in that space of intermodal is better.

Chris Wetherbee -- Citi -- Analyst

Okay. That makes sense. One specific question on the Class 8 side, so you had mentioned obviously that we're seeing spot rates kind of tick down pretty meaningfully here and contract rates probably decelerating a little bit too on the truckload side. There's going to be a big build year in '19, but how do you think about sort of the normal cyclicality of the Class 8 production cycle relative to the rate cycle? I just want to make sure I kind of understand what your thoughts are? Is there a possibility that as we get into the tail-end '19 those numbers could be looking a little bit different from a production standpoint? Just trying to get a sense of how that kind of placed with your business there.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Yes, that's interesting. If you look at where we're at, we had a great year from a production perspective in 2018, but there was a lot of disruptions from the supply side because suppliers couldn't produce enough parts to keep the production at the high level. I think some of that's been corrected, some of it maybe not as we go into 2019. So -- and I think you've heard that from just about everybody. You may have ordered tractors in 2018 but they didn't get delivered and there still some production carrying over into 2019. I think 2019 is still going to be a bigger year from a production schedule, at least the forecast from our OEMs are telling us that. I think the supply chain is going to be better. I think people have figured it out now and they've increased their capacity.

So I would expect 2019 to really be very robust from a production schedule. 2020 I think is a different story, but we'll have to wait and see. If they can keep up, you may have some carryover from '19 into '20, which may make '20 a whole different picture than what they're seeing right now. So we'll just have to see, but I just think there is so much pent-up production that just didn't happen in '18. '19 is going to still be a really, really good year. We expect it to be the best year from a forecast perspective than ever.

Chris Wetherbee -- Citi -- Analyst

Okay. Now, that makes sense. And then last question is just -- when you think about sort of some of the macro trends that we're looking at and curious if you feel like there is some evidence across your networks, whether it be on the value-added side, warehousing or otherwise, intermodal of a pull forward of volume activity ahead of any trade or tariff type issues, maybe that was in the fourth quarter, maybe it sort of early here in the first quarter? Do you think you've seen any of that, number one? And then number two, does that potentially lead to a little bit of a hangover or low-end volume as you look into the second half of the first quarter or maybe early second quarter?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

I'll answer it by what we know and what we saw and what we talk to our customers, because we -- obviously with the acquisitions there in Southern California, we've got some very, very large retail customers and the few very specific ones that we talk to did not pull anything forward because they didn't have warehouse space to hold the extra inventory. So it would cost them more to try to figure that out and pull forward. Now, I do know that there has been pull-forward but not specifically to us. We just haven't seen that from our customer base. We are -- January was extremely strong on the intermodal side, February is starting to soften a bit because of the Chinese New Year and that period of time comes right in, right now. So, there is going to be some -- some weakness I think because of that for the next couple weeks going forward, but right now, from our perspective, I didn't see anything from a significant basis that says there was a whole lot of pull-forward with our customer base.

Chris Wetherbee -- Citi -- Analyst

Okay, OK. That's extremely helpful color. I really appreciate the time this morning, guys. Thank you very much.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

(inaudible) see you, Chris.

Operator

Your next question comes from Bruce Chan with Stifel. Your line is open.

Bruce Chan -- Stifel -- Analyst

Yes, good morning, gentlemen. Thanks for taking the question. Just a couple here on the value-added services side and I think you've discussed this in the past, but can you just remind us what's driving the continued headcount declines on the value-added services side?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Yes. One specific was Mexico. If you remember, we talked about Mexico a year ago, where we really struggled and that was a much larger project than it is now. So there is significant heads reduced in our Mexico operation, which is in value-add. The rest of it is really just cost control and squeeze in that margin. Back to the question that Chris asked about what we're seeing from a margin improvement is just squeezing out the heads, because over time at the end of the day, it's like anything else. You get a little bit smart, you get a little bit better. And when you hold these pieces of business for multiple years, you should start seeing reductions in headcount over time.

Bruce Chan -- Stifel -- Analyst

Okay, great. That's helpful and certainly good news. And I know that you've discussed aerospace is being a big opportunity on that value-added services side. Just want to see if you can give us an update on where you are in terms of that sales cycle and opportunity?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Yes, I think we picked up a couple of small little pieces of business additionally last year in the aerospace vertical. We absolutely are trying to be aggressive and grow that faster. It's a very long sales cycle with aerospace as you might imagine. They -- one, it's just extremely expensive and they are very risk adverse. So, they want to make sure they're picking the right partners. We have a very good relationship with the OEM that we're doing business with now and we expect more business coming forward. As a matter of fact, we just got word yesterday as an RFP that we're going to be included off with them going forward. So, we feel pretty good about that.

Bruce Chan -- Stifel -- Analyst

Okay. And then assuming that you do hopefully win some of that business, is there substantial investment that's got to be made in order to bring that business online in terms of what you have to do to get it and what's the typical lag on the margin in terms of start-up costs?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

The cool thing about aerospace, which is a little bit different than what we have found with the automotive guys is typically one, all of -- whether it's capital investment is all in the price whether you pay it, whether they pay for it upfront or it's in the piece price over the life of the contract. So far, our experience with aerospace is they typically pay upfront. So, we wouldn't be too concerned about that being an extra cost for us on the capital side. There's always start-up costs and there's always additional costs when you start these big projects or any project, but it's really covered within the contract, whether it's a three-year, five-year or whatever. So that's typically -- you will see some extra costs there, but with the aerospace guys, it's actually kind of cool, they pay for a lot of it upfront.

Bruce Chan -- Stifel -- Analyst

That's certainly is nice. But just one last question here on the logistics side. One of your competitors talked about introducing payment factoring and said that that was something that's fairly commonplace in the business. Is that the case for you? Is factoring something that you all do? And maybe more broadly, are you seeing any pressure on the working capital side in that business line?

Jude Beres -- Chief Financial Officer

Bruce, it's Jude. No, we've never done factoring. I mean we hit collections pretty hard. I mean, I personally meet with our collections group every two weeks. Our DSO has been very stable between 45 and 48 days since I got here in 2015. So, I mean, no, we don't -- we don't really see, we don't really have a lot of drama with collections, the OEMs. They pretty much stick to their payment terms as long as the bills are right. So, if you focus on getting the invoices right upfront, you really don't have a lot of problem on the back and get the money in the door, plus (multiple speakers) -- plus we'll never shave off additional margin points by the factor of receivable. That doesn't make any sense in this business.

Bruce Chan -- Stifel -- Analyst

Okay. That's super helpful. And then just one last one before I hop off and give someone else an opportunity. Jeff, you talked about getting your average fleet age down to record levels for your owned equipment. Just want to know how that's trending on some of the kind of independent owner-operator side and square it with some of these production numbers that we're seeing and maybe some of the insurance results and what the implications are for potential claims. Are you seeing that small fleet count, fleet age come down or is it still kind of up there?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Well, keep in mind there is difference between the owner-operators because I don't control what they do with their equipment. They choose to give the tractor or not. So I couldn't really tell you what's going on with the average age of that fleet. I just know that we want to get our tractors to an average age of two to three years and we are very close, we want to get trailers to an average age of seven and we're very close there. And that's been -- obviously, a lot of capital investment over the four years that I've been here that was different than previous. So we're going to get through a consistent capital spend and that's the whole goal.

Bruce Chan -- Stifel -- Analyst

Okay. That's helpful. And I guess really what I was just trying to do is get an idea of where we're seeing a lot of these Class 8 orders go and it's something that we've been talking about all year. We've heard some people say that small fleet growth is increasing a lot faster than large fleet growth. So, just wanted to know if you had any color on that front as to where, again, some of this capacity is going?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Well, it could be. I mean, again, as we say, we're replacing and there's a little bit of growth here and there, especially like that -- the point I just made on that dedicated piece of business we picked up. We're going to actually have to -- got to buy some additional equipment for that. But it's very specific piece of business. I do know that where we see some of the driver defections in our irregular route business, they are going to smaller fleets, because most large fleets are very similar in what we do, how we -- what we offer the driver.

So those guys are going to some of the smaller guys that one, may not force ELDs and depending on the age of the tractor or the mileage that they run. So there are some issues there, where some of the drivers are going to the smaller fleets because of some of the ELD requirements that we've heard. But that's about the only thing I can really add back. I really don't know exactly what's going on with all the small fleets.

Bruce Chan -- Stifel -- Analyst

Okay, fair enough. Well, appreciate the time and hope you all have a great weekend. Thanks.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Thanks.

Jude Beres -- Chief Financial Officer

Thanks, Bruce.

Operator

Your next question comes from Jason Seidl with Cowen. Your line is open.

Jason Seidl -- Cowen -- Analyst

Thanks, operator. Hey, gentlemen, good morning. Couple of quick questions here. Want to talk a little bit about the margins in the dedicated side and you said it was due to some contracts under market. Did you guys add the written amount of contracts that were in their sort of final year, if you will, in 2018?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Well, keep in mind, a lot of the automotive guys, which is predominantly all of our dedicated in the past, we are growing some non-automotive now, but for the most part, it's been automotive and those were almost always on a one-year cycle or a two-year cycle. So, if you think about if we locked in something like at the beginning of '18, the market was significantly different by the end of '18. If you locked in -- so it really just dependent, but I can tell you that the vast majority of those now have been dealt with. I think we've got one more fairly large one that we're working with now that ends in June of this year that will get figured out and bring it to market. So we feel -- that's why I feel very confident we'll get the margins that we need and dedicated this year.

Jason Seidl -- Cowen -- Analyst

So, basically we got all but (inaudible)?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

All but one big win. I mean, keep in mind, there's always lanes that change day-in and day-out, but for the most part, the program, the big large programs with a specific OEM, we've got really one more big win to deal with. And we've already had lot of discussion, it's just a matter of accepting what we're asking for.

Jason Seidl -- Cowen -- Analyst

That's always the case. Speaking of the automotive mixing and obviously it's come down over a last couple of years, but 36% is still pretty high. Just sort of a goal when you're looking at future acquisitions sort of too branch out away from automotive?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

As I've always said, I really don't have a specific number in mind, because I am not sure what that number would be. All I can tell you is we're going to continue to, one, if we continue to acquire in the intermodal space, which our plan is, yes, we're going to continue to do that. That's going to be non-automotive. So that will help those percentages. And we're going to continue to try to grow in verticals outside of automotive. I've also said in the past, it's always tough to do that because the automotive guys are constantly giving us more business, which is a good thing, but it's always good to also expand in other verticals. So I just can't give you a good number because I really don't have one in my head that I'm shooting for.

Jason Seidl -- Cowen -- Analyst

Okay. Fair enough. And speaking of sort of about intermodal business, how has been sort of the port congestion and sort of the interchange congestion with the railroads? And what are you guys -- what have you been told to expect from negative impacts from PSR from either of the three railroads now?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

I didn't hear the last part of that question, but we definitely are seeing congestion in any other railroads that are shifting to PSR. There is quite a period of time where things just get gummed up. There's talk about closing different -- of the railheads or different terminals, but we haven't seen anything materialized yet to that effect, but it's really I think just the railroads kind of getting their act together where they want to be from a PSR perspective. It just creates some real congestion for a while in the railheads.

Jason Seidl -- Cowen -- Analyst

Okay. Fair enough. Last question, we've seen some large customers sort of in-house some more operations. So it's like Amazon, (inaudible) while that's early on. Is this something that we should be on the lookout for with you guys? Do you think maybe automotive companies might even start looking at this, considering sort of Amazon and Walmart have been sort of a leader, if you will, on the shipper community?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Well, keep in mind, automotive has been in that space for a long time as far as just in time. So when you think about the e-commerce, whatever doing is they're building warehouses closer to the consumer. The automotive guys have done that for a long time. They build big warehouses right next to the assembly plant, so that we can deliver the parts just in time. So that's -- there's not going to be a change from how automotive does it because they've already done it and we're big part of that.

We are having conversations with the customers that you just talked about, Walmart being one, where they are looking at difference, because we do an awful lot of cross-dock business for Walmart. We have three of their cross-docks within their distribution network. So they are looking at how are they going to do things different, but I don't think it's going to be -- it's not going to be like we're going to lose the business. I think it may shift to a different type of arrangement whether it's a bigger warehouse, closer to where they want to have that distribution done or what -- we're having great conversations with them to be part of a solution for them as they change their supply chain.

Jason Seidl -- Cowen -- Analyst

Okay. Well, listen, I appreciate all the commentary as always and nice to see the special dividend. Take care, guys.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Thanks.

Jude Beres -- Chief Financial Officer

Thanks.

Operator

(Operator Instructions) Your next question comes from Jeff Kauffman with Loop Capital Markets. Your line is open.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thanks. Hey, Jeff, hey, Jude.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Jeff, what's going on?

Jeff Kauffman -- Loop Capital Markets -- Analyst

Congratulations, solid quarter. Jude, just a couple of detailed questions. Tax rate was about 240 basis points below what I was looking for a little bit below the part of the year. I know fourth quarter is always a true-up on the tax side. What caused the lower rates in 4Q and what's the right way to think about tax rate in terms of your 2019 outlook?

Jude Beres -- Chief Financial Officer

Yes, so we suggest that you model between 24% and 25% going forward. Q4, we had the return to provision from '17 that was favorable. We did a (inaudible) study, which allowed us to accelerate some tax depreciation. So we had a little bit of noise in the quarter that's not really run rate. So we just keep using that 24% to 25% and we feel comfortable that's where it's going to land.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Okay, perfect. The new ASC 824 (ph) on leases, how does it affect you? Are we going to have to capitalize any of the operating leases and is that in the guidance at this point? Or do we announce that in first quarter?

Jude Beres -- Chief Financial Officer

Yes. Now we're going through that right now. So we're still working through with our auditors how that's all going to shake out. So we'll have a lot more color on that on our Q1 call.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Okay. And then one final question for Jeff, because a lot of mine were hit in the earlier questions. You were talking about the challenges you're having with the OTR drivers and that's an industry phenomenon. Is this something that higher wages or higher rates fixes or at any wage or any rate is a structural issue and it's more about reconfiguring the network for quality of life?

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

I would say, the latter. But if you think about what those guys went through or what rates did in 2018, in some cases 20%, 30% higher rates on revenue per mile, so those guys were getting paid more per load in 2018 than probably ever, but yet their lives still sucked basically. So I think at the end of the day, it's really a shift in the supply chain and it's a shift in business models, and that's what we're wrestling with and working with our agents in the truckload groups to figure out, because at the end of the day, I don't think money solved that. I think it really has to be more of a regional-based approach, more of an opportunity for those guys to spend a little bit more time at home versus in the back of the sleeper berth. So I think it's just something that's got to change over time.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Okay, very good. Well, thank you and congratulations.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Good night, Jeff.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters.

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Great. Well, we appreciate you joining us. We appreciate your support and look forward to talking to you here in a couple of months. Thanks, everybody.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 37 minutes

Call participants:

Jeffrey A. Rogers -- CEO & Director on the Board of Directors

Jude Beres -- Chief Financial Officer

Chris Wetherbee -- Citi -- Analyst

Bruce Chan -- Stifel -- Analyst

Jason Seidl -- Cowen -- Analyst

Jeff Kauffman -- Loop Capital Markets -- Analyst

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