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Old Dominion Freight Line Inc (NASDAQ:ODFL)
Q4 2019 Earnings Call
Feb 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 of 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 maybe 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]. Thank you for your cooperation.

At this time, for opening remarks, I would like to turn the conference over to the Company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.

Greg C. Gantt -- President and Chief Executive Officer

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 pre-tax income was primarily due to a $30.7 million increase in fringe benefit costs 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 of 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 once again continue with the decrease in LTL tons, although we were pleased to see our volumes performed 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 trends.

We are encouraged by this volume trend as well as economic forecasts for the industrial economy that -- to improve in 2000 -- or in 2020, although we are cognizant of increased political risk associated with an election year. Regardless of the economic and 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 and periods with reduced operating density generally results in the loss of productivity and increased operating costs.

We operated with great efficiency in the fourth quarter, however, an 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 one 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 six to eight 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.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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%, $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 costs 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.

If 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 and 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we'll go first to Jack Atkins with Stephens.

Jack Atkins -- Stephens Inc. -- Analyst

Good morning, guys. Thanks for taking my questions.

Greg C. Gantt -- President and Chief Executive Officer

Good morning, Jack.

Jack Atkins -- Stephens Inc. -- Analyst

Adam, if I could just go back to your comments around January, 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. You know if you could just sort of expand a bit about sort of how the market's feeling to you guys of the first, call it four weeks or five 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?

Greg C. Gantt -- President and Chief Executive Officer

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 are positive on where we are and what we look like going forward. So let's hope that that it does improve the rest of the year.

Jack Atkins -- Stephens Inc. -- Analyst

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?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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. That was a big headwind, if you will, and especially when you consider that fourth quarter of 2019 or '18 rather included so many credits that kind of went the opposite way and we had talked last year about how those helped 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 was in our fringe benefits line. There are probably a couple of other things that stand out in this quarter that were 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's 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 is some credits that kind of offset that unfavorable that are in some of the other line. 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 to 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.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, that's helpful, thanks. Thanks very much for the time.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

You bet.

Operator

We'll go next to Chris Wetherbee with Citi.

Christian Wetherbee -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Hey, thanks, good morning. 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 till the Q comes out of the K, I guess in this case to give us sort of the -- the current month, but any sort of thoughts just directionally on how things are trending here early in 1Q?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah. Well, for the fourth quarter to start with that, we were pleased to see that, 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 the 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 transition 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 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.

Christian Wetherbee -- Stifel, Nicolaus & Company, Incorporated -- Analyst

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 will be a tailwind to growth potentially from the costs 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?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah, 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 progressed through this year, and frankly it's been doing that and trending along as we 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's 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 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 progressed 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 that go into those fringe benefit lines.

Christian Wetherbee -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay. That's clearly helpful. I appreciate your time.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

[Speech Overlap]

Christian Wetherbee -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Yeah, it's a high-class problem to have but definitely excluded in the rearview. Thanks very much for the time. I appreciate it.

Operator

We'll go next to Amit Mehrotra with Deutsche Bank.

Amit Mehrotra -- Deutsche Bank -- Analyst

Thanks, operator. Hi, everybody. Thanks for taking my questions. 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 head count going up, you are trending up a shipments increase 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 head count. 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 wanted to know what the right way to think about this in 2020?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

All right, I'll try to see if I can remember all of those questions, but --

Amit Mehrotra -- Deutsche Bank -- Analyst

That was one question by the way, there was just three parts. Yeah.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Within -- the questions been one, the follow-on -- 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 -- were down a little over 6% in 4Q '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 revenues. So I think we've got that benefit, and overall on 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. It was lower for the fourth quarter of this year, and that frankly just relates to the fact that revenue was down and the operating ratio was lower. Those are kind of two ingredients that go into most of our bonus programs. Our head count 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 head count on average is kind of flattish with the fourth quarter and I think that where we see trends right now that we're in a pretty good shape on the head count.

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 head count later in the year. And that would be a good thing, actually, it's, 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, 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 cost, both in the depreciation line as well as the maintenance and repair cost on that heavier fleet. So, those are things that that hopefully will grow into the fleet that we have as we progress through 2020.

Amit Mehrotra -- Deutsche Bank -- Analyst

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

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

So we've still got 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%-ish range of the overall capex budget for the year. But since we've got 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 had certainly expected it to be increasing as we progress through the year and continue to execute on that capex plan.

Amit Mehrotra -- Deutsche Bank -- Analyst

Right. And then the share count, last question for me, the share count is that -- so the -- the way that phantom thing works, I guess now the variability of the stock price will have no impact on the fringe benefit costs and you 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?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 will give that detail to -- 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 for 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.

Amit Mehrotra -- Deutsche Bank -- Analyst

Got it. Okay, very good. Thank you for taking my questions. Appreciate it.

Operator

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

Jason Seidl -- Cowen and Company -- Analyst

Thank you, operator. 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 shippers are communicating to you, what to expect for 2020?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah. 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 in 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 compressed as they went through the back half of last year and that was just probably is 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 about our cost inflation projections kind of underlying cost 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 will go into our thinking when we get to the point of announcing a GRI for our tariff based business as well.

Jason Seidl -- Cowen and Company -- Analyst

Okay, that's great color. And the other thing, any reaction from any of your [Technical Issues]

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Can you repeat that?

Jason Seidl -- Cowen and Company -- Analyst

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

Greg C. Gantt -- President and Chief Executive Officer

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

Jason Seidl -- Cowen and Company -- Analyst

Okay. It's me knocking on wood. Gentlemen, thank you for your time.

Greg C. Gantt -- President and Chief Executive Officer

Good, thanks.

Operator

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

Ravi Shanker -- Morgan Stanley -- Analyst

Thanks. Good morning, gentlemen. I just wanted to follow up on the insurance comments and thanks for the color in your prepared remarks. I'm really surprised that that you guys have such a low historical claims ratio, and obviously our such amazing operators are seeing a spike in insurance rates. I mean if it's just bad for you, what's it likely to 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? Any color there would be helpful.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 and 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 they did trended to 1.1%, 1.2% or so for the first three 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 that, the expense that was applied for the accidents that we had this year. And so we would 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 the best in technology on our units, and continuing to invest in and 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 expenses related to the self-insured piece that 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.

Ravi Shanker -- Morgan Stanley -- Analyst

Guys, do you feel like the inflation would have been much worse if you didn't have the deck?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Sure. Obviously, the technology has helped. It's hard to say one for one, but we certainly, we spend 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.

Ravi Shanker -- Morgan Stanley -- Analyst

Got it. And just one last one. The last few years has been probably the most volatile that this entire 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 what do you think the LTL space looks like five years from now? Do you think it looks similar to where we are today or do you think it looks meaningfully different?

Greg C. Gantt -- President and Chief Executive Officer

I'm not sure 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. So, but I think it's been relatively stable and we don't, 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 are 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.

Ravi Shanker -- Morgan Stanley -- Analyst

Very good. Thank you.

Operator

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

Jordan Alliger -- Goldman Sachs -- Analyst

Yeah, hi, good morning. 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 -- the impact in 2019? Thank you.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

There is 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 steel 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 is 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 and yield.

And so that 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 and kind of an average of 4.5% a year. And that's somewhere around 75 basis points to 100 basis points higher than the long-term trend on our the cost on a per shipment basis. And so you got to have that that delta in place there 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 unfortunately, we've had a really nice balance of density and yield over the years.

Jordan Alliger -- Goldman Sachs -- Analyst

Thank you.

Operator

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

Scott Group -- Wolfe Research -- Analyst

Hey, thanks, good morning guys.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Good morning, Scott.

Scott Group -- Wolfe Research -- Analyst

So when I look at the other LTLs, it looks like they were -- 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 you at all that the competitive environment getting maybe a little bit worse?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 coming back in line, if you will, on the volume side. And as Greg mentioned, there is still a lot of positive comments that we're hearing from customers. We 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.

I think the other thing that we 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 calls 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 have 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 lot of things to sort of look forward to, as we start progressing into 2020.

Scott Group -- Wolfe Research -- Analyst

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 the 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?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah, 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 our sales growing into the fleet is one of those that should help. That 4% is kind of in line with what our longer-term trends has been. Most of that is based on the wage increase to employees last year, but we are 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 get the revenue growth, we should be able to get some leverage there. On the repair side, like I mentioned earlier, we faced some significant cost headwinds there this year. We're 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, we 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.

Scott Group -- Wolfe Research -- Analyst

Okay, thanks. And just last one quickly, the capex guidance. I think it's the lowest in six years or seven years on tractor-trailer down a lot. Should we think about this is sort of a one-year or so equipment holiday or something longer.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

I think it's a one-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 is now 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 spent in the past. This will be probably a one-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.

Scott Group -- Wolfe Research -- Analyst

Okay. I appreciate the time guys. Thank you.

Operator

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

Allison Landry -- Credit Suisse -- Analyst

Thanks, good morning. So I just wanted to go back to your comments about share gains. 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 may be 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, I'm just trying to gauge whether this is something that you would normally see happen in advance of a recovery.

Greg C. Gantt -- President and Chief Executive Officer

Allison, we have continued to see some business return that we lost over prior, earlier last year, we have continued to see that business come back to us for our service. So I don't think there is 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 has 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. So, at what pace, it's kind of hard to gauge. We don't, we don't measure those things, so anyway.

Allison Landry -- Credit Suisse -- Analyst

Okay.

Greg C. Gantt -- President and Chief Executive Officer

We are having some gains still.

Allison Landry -- Credit Suisse -- Analyst

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

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

The tonnage or the weight per shipment?

Allison Landry -- Credit Suisse -- Analyst

The weight per shipment.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 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 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 are positive 0.4% in November on a year-over-year basis, and then down 0.7% in December. But the trend 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 timeframe.

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. It's down versus 2019, but it's pretty much in line with -- it's 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. So 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 improvement as we progress through the year.

Allison Landry -- Credit Suisse -- Analyst

Perfect, thank you guys.

Operator

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

Ari Rosa -- Bank of America Merrill Lynch -- Analyst

Hey, good morning guys. 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 is something unique about LTL that's may be different from truckload that's causing that dynamic.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah, I don't know that there is 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. It's been frankly where 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 pre-tax 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 a 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 risk, and we're in an election year. And historically speaking, volumes have kind of underperformed seasonality slightly in election year. 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 there are more positive than there are negative conversations. So we're cautiously optimistic as we go through the first part of the year and, and that's probably the best way to describe it, is cautious optimism.

Ari Rosa -- Bank of America Merrill Lynch -- Analyst

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?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Yeah. The book of business really didn't change a whole lot this past year. Our numbers were pretty consistent in terms of the break out 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 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 cost like charge backs and filings 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. I mean is definitely a good avenue for growth. But other things that may be 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.

Ari Rosa -- Bank of America Merrill Lynch -- Analyst

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 the 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 that split of 55% to 60% industrial, 25%, 30% retail to kind of continue.

Greg C. Gantt -- President and Chief Executive Officer

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 will be there and hopefully we'll be a solution for our competitors or for our customers. If those, if those -- if they have the need and if they are looking for better service, we will be there.

Ari Rosa -- Bank of America Merrill Lynch -- Analyst

Terrific. That makes lot of sense. Thanks for the time.

Operator

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

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Great, thanks and good morning. Adam, maybe just to put a bow on the conversation around margins, particularly in to the first quarter. Is the right way to think about the sequential margin change 1Q over 4Q is to adjust fourth quarter for that 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 points change off of that. Is there something else we need to think about sequentially into 1Q?

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

I think, yes on most of your points. I would really only look at this phantom stock really is the only thing to sort of adjust and normalize for, because that as I mentioned, the insurance line, you see the increase there and that's the one thing that stands out. But there is some offsetting credits in 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 basis points, 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 often times if you kind of look at what the change from 3Q and the 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 that may be end up kind of as you're below maybe a trend, one quarter, you might be a little bit higher the 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.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

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

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Correct.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

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.

Greg C. Gantt -- President and Chief Executive Officer

We've definitely built some capacity particularly in 2019 with -- 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 will 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 in -- 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 are well set for the future.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

It sounds good. Thanks a lot for the time this morning.

Operator

We'll go next to Ben Hartford with Baird.

Benjamin Hartford -- Robert W. Baird & Co. -- Analyst

Thanks. Forgive me and Adam just at a higher level as you think about cash flow on 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 that the allocation of 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. Thanks.

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 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 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 looking at increasing the dividend as we move forward. And then on the other side, would be the share buyback program and we kind of step that up a little bit last year as well and we will continue to execute on that plan and I think we've just got a 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, and 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.

Benjamin Hartford -- Robert W. Baird & Co. -- Analyst

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

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

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 in 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 that 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 is risk that go along with that and we think that that's something that that should be accounted for, and expenses we incurred the expense and we should assume return on any project as well. So that's kind of the baseline of when we make that decision to pull the trigger on the project. And so we're going to continue to look at making investments and hopefully getting returns on those investments.

Benjamin Hartford -- Robert W. Baird & Co. -- Analyst

Appreciate the time.

Operator

We'll go next to David Ross with Stifel.

David Ross -- Stifel -- Analyst

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 grandfathered in, 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?

Greg C. Gantt -- President and Chief Executive Officer

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 and the time that they did that. Glad to have it behind us. But nothing material I think to talk about.

David Ross -- Stifel -- Analyst

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

Greg C. Gantt -- President and Chief Executive Officer

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 slower this time of year, but we're nowhere near peak levels, and we've got, we've got the equipment to accomplish our absolute peak level right now. So we are, we think we're sitting good position. Maybe if anything still a little bit heavy on equipment so or tractor certainly and trailing equipment as well. We're in good shape there.

David Ross -- Stifel -- Analyst

Good, thank you.

Operator

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.

Greg C. Gantt -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Greg C. Gantt -- President and Chief Executive Officer

Adam N. Satterfield -- Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary

Jack Atkins -- Stephens Inc. -- Analyst

Christian Wetherbee -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Amit Mehrotra -- Deutsche Bank -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Ravi Shanker -- Morgan Stanley -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Scott Group -- Wolfe Research -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Ari Rosa -- Bank of America Merrill Lynch -- Analyst

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Benjamin Hartford -- Robert W. Baird & Co. -- Analyst

David Ross -- Stifel -- Analyst

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