Old Dominion Freight Line, Inc. (ODFL) Q4 2022 Earnings Call Transcript

Old Dominion Freight Line, Inc. (NASDAQ:ODFL) Q4 2022 Earnings Conference Call February 1, 2023 10:00 AM ET

Company Participants

Drew Andersen - Senior Director, Product Management

Greg Gantt - President and Chief Executive Officer

Marty Freeman - Chief Operating Officer

Adam Satterfield - Chief Financial Officer

Conference Call Participants

Jordan Alliger - Goldman Sachs

Jack Atkins - Stephens

Bascome Majors - Susquehanna

Tom Wadewitz - UBS

Christian Wetherbee - Citigroup

Scott Group - Wolfe Research

Allison Poliniak - Wells Fargo

Jon Chappell - Evercore ISI

Ravi Shanker - Morgan Stanley

Ken Hoexter - Bank of America

Amit Mehrotra - Deutsche Bank

Ari Rosa - Credit Suisse

Jeff Kauffman - Vertical Research Partners

Operator

Good day, and welcome to the Old Dominion Freight Line's Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Drew Anderson. Please go ahead.

Drew Andersen

Thank you. Good morning, and welcome to the Fourth Quarter and Full-Year 2022 Conference Call for Old Dominion Freight Line. Today's call is being recorded, and will be available for replay beginning today and through February 8, 2023, by dialing 1-877-344-7529, access code 2673176. The replay of the webcast may also be accessed for 30 days at the company's Web site.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

As a final note, before we begin today, we welcome your questions, but we ask, in fairness to all, that you limit yourselves to just one question at a time before returning to the queue. Thank you for your cooperation.

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

Greg Gantt

Good morning, and welcome to our fourth quarter conference call. With me on the call today is Marty Freeman, our COO; and Adam Satterfield, our CFO. After some brief remarks, we would be glad to take your questions.

The Old Dominion team produced fourth quarter financial results that allowed us to finish the year with company records for annual revenue and profitability. We extended our track record of success and delivered the 10th straight quarter with both an increase in revenue and improvement in our operating ratio. As a result, the fourth quarter of 2022 was also the 10th straight quarter where we produced double-digit growth in earnings per diluted share. Our team produced these results while facing many challenges during 2022, which were primarily related to the unexpected slowdown in the domestic economy.

We entered the year anticipating growth in our volumes that didn't ultimately meet our initial expectations. But we made the necessary adjustments throughout the year that once again showed the flexibility and resiliency of our long-term strategic plan. We also maintained a watchful eye on the efficiency of our operations and continued with our disciplined approach to managing discretionary spending.

Due to our confidence in our ability to win market share over the long-term, one thing that did not change in 2022 was our commitment to investing for the future. Capital expenditures, totaling $775.1 million in 2022, were a new company record. And we invested $299.5 million in real estate projects that further expanded the capacity of our service center network. We also continued to invest heavily in our OD Family of employees, with improvements in pay and benefits, as well as a company record contribution to our 401(k) retirement plan for employees.

In dealing with the reality of slower than anticipated business volumes we also work diligently to protect the significant investments that we made over the past two years in our new employees. Thinking of new employees, I am proud to share that there have been over 1,300 new drivers that graduated from our internal truck driving school over the past two years.

And in some cases, these driver school graduates that now have their CDLs are temporarily working on non-driving roles. While this comes at an increased cost to the company, we believe this bigger pool of licensed drivers will provide us with the strategic advantage once the freight cycle turns and additional volume opportunities become available to us. We said in our third quarter earnings call that we anticipated volumes could start increasing in the spring of this year. And we continue to remain cautiously optimistic that this will occur despite ongoing risk with the domestic economy.

Regardless of the economic environment, I believe our 2022 results provide yet another example of why our long-term strategic plan will remain our focus for the foreseeable future. Consistent execution of this plan had helped us create an unmatched value proposition in our industry that led to over $1 billion of revenue growth for the second straight year, in 2022.

I am confident that this commitment to our strategic plan will also continue after my retirement at the end of June, this year. Our long-term success is the result of a strong team and their combined commitment to maintaining a strong company culture.

After working with Marty for most of my career, I can tell you that he lives and breathes the OD Family spirit, and will help take the company to new heights. I think the best is yet to come for Old Dominion. And I look forward to watching OD expand its long-term record of success. Thank you for joining us this morning.

And now, here is Marty Freeman to provide some more details on the fourth quarter.

Marty Freeman

Thank you, Greg, and good morning. I would like to start today by thanking Greg and our Board of Directors for providing me the opportunity to lead this great company. It will be an honor to lead our team. And I can assure you that we will work tirelessly to keep producing strong profitable growth.

Along those lines, I was pleased with Old Dominion's revenue growth of 5.8%, and the improvement in our operating ratio to 71.2% during the fourth quarter. The combination of these items contributed to the 21.2% increase in earnings per diluted share. These financial results reflect the ongoing strength and demand for our services as we continue to deliver value to our customers by providing superior service at a fair price.

While our long-term strategic plan is centered on our ability to provide this value proposition, the real key to our success is our strong family culture and our people. We will continue to invest in our OD Family of employees as our employees are the foundation for building strong customer relationships. We are in a relationship business, and each employee plays a critical role to help deliver our industry-leading service.

I am proud to report that our service metrics remained strong during the fourth quarter as we provided 99% on-time service, with a cargo claims ratio of 0.1%. We believe executing our same long-term formula for success will allow us to win market share in the future. And as a result, we will -- also will allow us to constantly advance to new capacity ahead of anticipated growth.

Our capital expenditures for 2023 are anticipated to be $800 million, which will improve the average age of our fleet and further expand the capacity of our real estate network. We have invested approximately $2 billion in real estate expansion over the last 10 years, and increased our door capacity by approximately 50% as a result. These investments supported our ability to double our market share over this time. The ever-increasing cost of both real estate and equipment, however, will require us to maintain our pricing discipline.

Our long-term pricing philosophy is designed to evaluate the profitability of each customer account, and then obtain the necessary increases to offset our cost inflation, while also supporting our ongoing investment in capacity and technology. As we have executed on this consistent strategy over the years, the resulting improvement in our cash flow has generally supported our ability to invest between 10% and 15% of our revenue into capital expenditures each year. Continuing with each of these priorities demonstrates our team's intention to remain focused on executing the same business strategies that we have created our unique position in this industry.

We will continue to focus on our people, servicing our customers, and investing for the future. This commitment to the core principles have differentiated us in the marketplace, gives us confidence in our ability to further produce profitable growth, while also increasing shareholder value.

With that, I'll now turn things over to Adam who will discuss our fourth quarter financial results in greater detail.

Adam Satterfield

Thank you, Marty, and good morning. Old Dominion's revenue growth, of 5.8% in the fourth quarter, resulted from a 16.7% increase in LTL revenue per hundredweight, which more than offset the 9.1% decrease in LTL tons.

LTL revenue per hundredweight excluding fuel surcharges increased 8.7% and reflects the continued execution of our long-term pricing initiatives. Our consistent approach to pricing is supported by our ability to provide our customers with superior service and available capacity. We believe this value offering is becoming increasingly important to shipper, which is why we remain absolutely committed to executing on the fundamental elements of our long-term strategic plan.

On a sequential basis, revenue per day for the fourth quarter decreased 2.4% when compared to the third quarter of 2022, with LTL tons per day decreasing 4.4% and LTL shipments per day decreasing 4.6%. For comparison, the 10-year average sequential change for these metrics includes a decrease of 0.6% in revenue per day, a decrease of 1.3% in tons per day, and a decrease of 3.3% in shipments per day. For January, our revenue per day increased approximately 4.2% as compared to January of 2022. This growth included a 13.1% increase in LTL revenue per hundredweight that more than offset the 7.8% decrease in the LTL tons per day.

Our fourth quarter operating ratio improved to 71.2%, which is primarily due to an improvement in our direct operating cost as a percent of revenue. Within our direct operating cost, productive labor as a percent of revenue improved 170 basis points, which our purchase transportation costs improved 200 basis points. These changes more than offset the 260 basis point increase in operating supplies and expenses that primarily resulted from a significant increase in the cost of diesel fuel and other petroleum-based products during the quarter. Our overhead costs as a percent of revenue were consistent between the periods compared.

Old Dominion's cash flow from operations totaled $361.3 million and $1.7 billion for the fourth quarter and 2022, respectively, while capital expenditures were $270.4 million and $775.1 million for the same periods. As Marty mentioned, we currently expect capital expenditures of $800 million in 2023. We utilized $199.9 million and $1.3 billion of cash for our share repurchase program during the fourth quarter and 2022, respectively, while cash dividends totaled $33.0 million and $134.5 million for the same periods. We were pleased that our Board of Directors approved a 33.3% increase in the quarterly dividend to $0.40 per share for the first quarter of 2023.

Our effective tax rate for both fourth quarter 2022 and 2021 was 25.0%. We currently anticipate our effective tax rate to be 25.8% for 2023.

This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Jordan Alliger

Yes, hi, good morning. Question, so on the salary expense side of the equation for the fourth quarter, I think the dollar amount was actually down year-over-year. Can you maybe talk a little bit to your thoughts around the drivers of that, just a lower incentive comp, I think I you had mentioned attrition? And then how do we think about the salary line going forward, whether it be on a wage inflation perspective or a growth perspective? Thanks.

Adam Satterfield

Sure. The overall dollars, obviously, we've been making adjustments as we've gone through the year. And I would say through the back-half of the year, in particular, we've been letting attrition take place, and just consistently adjusting our headcount and the hours worked by our people in relation to what the volume environment dictates to continue to give service by continuing to operate efficiently. And so, I think, overall, that helped drive the decrease in that quarter-over-quarter, those expenses, if you will. So, we continue to be focused, obviously, on managing those costs.

That's our biggest cost element of our business is in the salaries, wages, and benefits. And so, it's certainly the biggest area of focus as we try to continue to run our network as efficiently as possible without giving any sacrifice to service. So, I do think that given the environment in the fourth quarter, I think we had, given the circumstance, is pretty strong revenue performance. So, I was pleased with the way our revenue and volumes trended. And that was probably one of the favorable line items, if you will, in comparison to the guidance that we had originally provided with respect to the operation ratio, was how the salary, wages, and benefits ended up coming in for us.

Jordan Alliger

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

Adam Satterfield

Well, I think we're in a good spot right now with where our headcount is. And typically, we start seeing increases in volume. And certainly, we're not in a normal environment by any stretch. But our January volumes were slightly positive versus December, pretty flattish overall, really when you look at it from a shipment perspective. But we continue to anticipate that we will see volumes return to us in the spring. And I think we want to make sure that we've got all elements of capacity in place to deal with that environment whenever it inevitably comes. We're certainly very confident about what our future market share opportunities will be.

And so, we want to make sure that we're in a position with our people, our equipment, and certainly our service and our network to be able to effectively respond when that does happen. Typically, the February volumes are a little bit higher than January. And it's March when we start seeing the increase coming. And so, I think that what we're trying to do is just, again, measure and manage all elements of capacity to ensure that we're in a good spot when that happens. So, again, I think that certainly a lot in the first quarter and probably the first-half of the year really depends on what the volume environment gives us.

But we continue to believe that we are going to see some increase. We've certainly seen it in the past, even in down economic environments, whether you look at something as bad as the environment was in 2009. I think 2016 is another good example, where our second quarter volumes were higher than the first. And so, it'll be a little different situation, I think, playing out this year in comparison to 2022, when, beginning with April, our volumes were either decreasing or flattish on a month-over-month basis as we worked our way through the year. Certainly, we'd like to see volumes flowing into us as we transition and make our way through 2023. And hopefully start getting a little help from the macroeconomic environment as well.

Jordan Alliger

All right, thank you.

Operator

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

Jack Atkins

Okay, great. Thank you. Greg, congratulations on your retirement, and I think the $34 billion of shareholder value you've created since you've been CEO. Congrats on that. And Marty, you've got some big shoes to fill, but congratulations to you as well.

Marty Freeman

Thank you, Jack. He taught me well.

Greg Gantt

Thanks, Jack. Appreciate the kind words.

Jack Atkins

Absolutely.

Greg Gantt

And it's been a good run.

Jack Atkins

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

Adam Satterfield

Yes, I guess from a volume standpoint on a year-over-year basis, January, our tons per day were down 7.8% that compares to December where we were down 12.3% overall. I would point out and obviously we will continue to give our mid quarter updates. We have a little bit easier comparison with the January year-over-year comp, and we had very strong performance in February of last year. So, that kind of gets a little bit more difficult there. And then, they obviously start getting easier.

So, I guess be aware of that when we give that February update in a month or so. But nevertheless, I was pretty pleased with the way really going back through the fourth quarter. December came in a little bit stronger than what our normal sequential change is. And that's the month we kind of talked about I think on the last call in the fourth quarter in particular in some slower economic environment is where we have seen pretty hefty drop-off in our business levels.

And the fact that we stayed pretty steady rather I think was a positive takeaway for me. I was hoping that we would see our sequential performance from a volume standpoint to be a little closer to our 10-year average trends. And certainly, it was. The fourth quarter volumes were down 4.4% sequentially, the normal changes of 1.3% decrease. But if we compare back to where we were in the second and third quarters relative to our 10-year average changes, I think, we are starting to trend back in the right direction, and whether or not we get back to the full 10-year average at least in the first-half of the year remains to be seen.

I think we probably need a little bit stronger economy. But I do think that we are going to start seeing some increases like we mentioned particularly starting in March and then continuing through the second quarter. And then, we will see where things go from there.

But I think that certainly that volume environment really will dictate what the operating ratio does typically just to give a little bit more color on the first quarter operating ratio. We typically have about a 100 basis point increase there coming off the fourth quarter. In this particular first quarter of 2023, we did have a favorable insurance adjustment. We have talked on -- and given the guidance for 4Q assuming that line held steady. There was improvement there. And I think that that will normalize back to around 1.2% of revenue in 1Q of 23. So, that's becomes a 70 basis point or so headwind for us.

I think that we are going to continue to see a little bit of a headwind from depreciation as well. We have talked about this as we worked our way through last year that our delivery cycle was a little bit different than prior year. And so, we are probably going to see a little bit more headwind from here. So, on a normalized basis that probably puts us at about 200 basis point increase. So, we are where we just finished the fourth quarter. But -- so, that kind of puts us somewhat flattish if you will on a year-over-year basis if we were to hit that. And certainly, I think if we get better revenue performance, we have got the opportunity to be able to outperform that longer term normalized average. But I think the revenue environment will certainly control a lot of it for us.

Jack Atkins

Okay, very helpful. Thanks again.

Adam Satterfield

Thanks, Jack.

Operator

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

Bascome Majors

Following up on the waiver fees, your headcount was down about 3% sequentially. I think that's the biggest decline besides the COVID 2Q '20 jobs that you had since you began reporting this on a quarterly basis. You talked a little bit earlier in one of the other questions about feeling you are in a fairly good place. Can you elaborate a little more? Does that mean your headcount flat to up from here, or flattish and then trend with volumes from here? And just to help put a finer point on that, any commentary on productivity or the cost of heads -- I don't know, labor cost for employer, any other guidance you can get to help us kind of frame the cost piece of that in the expectation? Thank you.

Greg Gantt

Thanks, Basc. And this is Greg. But I will take that and try to give you as much color only as possible. But obviously we made some adjustments where we felt like we needed to in headcount. And as Adam mentioned earlier, we talked about attrition. And we have kind of let attrition control some of these adjustments. But we have made some in other places where we needed to. Certainly, we haven't replaced openings likely typically would in a normal cycle where we are growing and what not. But -- and that will continue to be our efforts still thanks to our return of the other ways. So, we will see typically -- we will see a little uptick late February. Going into March, things really start to pickup. So, is that going to be the trend this year? We hope so, but just not absolutely certain. But I think we are in a good spot because as I mentioned in my comments earlier, we've got an awful lot of qualified drivers that we have got work on the platform and what not.

They are not driving full time. So, I think we will certainly be ready when the increase does happen, you know, hope it's sooner than later, but definitely we will continue to make adjustments as needed. We talked about this on some of our prior calls. We have been able to make these adjustments in downturns in the past. I think we pretty began we can make adjustments when we need to. We have done it again. We feel good about where we are. We just have to continue to stay on top of it and react as the business dictates. I hope that helps.

Bascome Majors

No, it's fairly helpful. To maybe cap that off, any thoughts on items that could impact kind of the cost per head this year? I don't know if there are some variables on incentive comp or other things that might make little bit lengthy versus what we would deem a normal trip based on history? Thank you.

Greg Gantt

Not that I know of, Basc, and don't think so. I think it should be fairly normal from that standpoint. We certainly had some good experiences in the recent past with our benefit cost and those kinds of things. So, you just hope that those things continue to be consistent and don't turn the other way for some or no reason.

Bascome Majors

Thank you, Greg.

Greg Gantt

Sure thing.

Operator

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

Tom Wadewitz

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

Greg Gantt

Good morning, Tom. I would say during the fourth quarter we saw a pretty consistent revenue performance with both our industrial customer base and our retail customer base. I would say earlier part of the year we had seen a little bit stronger performance on the industrial side. And those two kind of converged, if you will, in the fourth quarter. Obviously, our customer bases leans more industrial than retail. We are still 55% to 60% industrial overall and 25% to 30% or so on the retail side. In longer term that retail business has been growing faster than the industrial. And I think that reflects some of the ecommerce trends and the effects of those on our customer supply chains. And we certainly continue to believe that that will be a longer term tailwind for us. And I think that as we start working through 2023.

And we believe that we will start seeing customer's orders for their products picking up and some inventory rebalancing if you will. And I think that's why we've seen in some of the prior slow period that I spoke of earlier why you start seeing that orders and freight flows kind of leading the other macroeconomic indicator. So, we believe that the freight cycle will starting turning. And we will start seeing some pick up. And it's through these customer interactions and conversations that, that support our belief that we're going to start seeing freight flow, and again, as we get into March and into the second quarter.

Tom Wadewitz

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

Greg Gantt

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

Tom Wadewitz

Right, okay, great. Thanks for the time.

Greg Gantt

Thanks, Tom.

Operator

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

Christian Wetherbee

Hey, thanks. Good morning. Yes, congrats. Absolutely to Greg and Marty, it's been a heck of a run, certainly, Greg. When I guess I wanted to talk a little bit about how you guys are planning for the potential improvement in tonnage that you may see in the spring, you guys have always been very good at being out in front of potential opportunities. But do you think that there are incremental costs that need to come on the network. Before that happens, are you fairly comfortable being able to sort of let tonnage lead you out of this to drive incremental margins, which obviously, you guys have performed quite well with over time?

Greg Gantt

Yes, I think that, Chris, that some of the conversation earlier about headcount, probably on paper, we may be a little bit heavy now, if you just look at things statistically, if you will. But that's kind of the point of the, what we've said is, I think that we're in a good spot, with our headcount with our fleet, and certainly with the service center network to be able to let volume start flowing again. And when we talk about increases, just keep in mind that we're talking about sequential increases, and certainly with the year-over-year comps, particularly in the first-half of the year, we've got some tougher year-over-year comparisons there before we get back to, does being able to show year-over-year growth. But I think that'll be the important thing for us to continue to watch is, are we seeing those types of sequential increases? And certainly we've got a lot of flexibility within our workforce. And I think that, given the team that we have, and the current levels, we should be able to respond to growth when it starts coming at us and get some good leverage, as it does.

But certainly we're looking at right now in the first quarter. Like I mentioned, with the January tonnage levels, we've got probably the volumes that are going to be the toughest comp, and certainly, overall, the fourth quarter we were down 9.1%. Our yield performance is still looking good. And we certainly expect to continue to push for core yield increases this year to offset our cost inflation, as well. But there could become some converging factors, if you will, that drive the top line, depending on what the overall fuel environment looks like, and so forth. But we're certainly going to continue to look and execute on the same pricing philosophy that we have in the past and look for cost plus increases to offset the cost inflation that we see in the business and to keep supporting these expensive investments that we're making in our real estate network and technologies that can both improve customer service, but also drive further operating efficiencies for us. So, a lot of things to kind of manage through it particularly the first-half of this year, but I think we're in a good spot to be able to handle the volumes if they do backflow our way.

Christian Wetherbee

Yes, that's very helpful. I appreciate that, that color. On the point of pricing, just to follow-up, ex-fuel yield did accelerate, the year-over-year growth that accelerate in the fourth quarter, and I guess they're guiding the first quarter or roughly speaking to around flattish which may coincide with the worst tonnage, you're going to see from a year-over-year standpoint. So, when you take a step back and think about 2023, more broadly, is OR expansion on the table, given those circumstances is pricing good enough to be able to offset inflation as we go and tonnage potentially gets less worse as the year progresses?

Greg Gantt

Well, I think that again, the revenue environment will have a lot to say about that, more broadly speaking, we've talked and kind of pointed everyone to our performance in 2016 and 2019, when we've been in a flatter revenue environment, certainly, given the planned investment of about $800 million in capital expenditures this year. And with some pressures that we'll see on depreciation, starting earlier in the year than normal, we will have some pressures, if you will, on those overhead costs. And we saw a little bit of that in the fourth quarter already where overhead costs as a percent of revenue were flat in 4Q '22 versus 4Q '21. But like we did in '16 and in '19, the focus when we're in a flat to a down revenue environment will be managing our variable costs flat, and we'd love to see improvement, but trying to hold all those costs flat. And then, any deterioration if there is anything would be in those overhead costs in particular, on the depreciation side. And so, I think that in '16, we certainly saw a little bit of a decrease in the operating ratio or an increase, rather depending on how you look at it.

But I think our operating ratio deteriorated 60 basis points that year. And that was something that was right in line with the change in the depreciation line item. And then, '19 was the same thing, where we had 30 basis points deterioration there. So, we'll take it quarter-by-quarter, certainly, and we'll talk as we get to the end of next quarter's call about what we think we may be able to do in 2Q, but certainly feel like we're probably going to have a little bit more pressure on the overhead side this year if we are in fact a flat to slightly down revenue environment, but there's still a lot up in the air when it comes to the top line for this year.

Christian Wetherbee

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

Operator

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

Scott Group

Hey, thanks. Good morning, guys, and again, congrats, Greg and Marty. I was wondering, can you give us some of the yields ex-fuel accelerated in Q4, is any color, is underlying pricing accelerating here? And then, Adam, I think you talked about 13% total yield growth in January, anyway you can just help us on the gross and on the net of fuel, I just want to understand that that net of fuel is continuing to accelerate? Thank you.

Adam Satterfield

Yes, net of fuel in January was about 8.5%. So, fairly consistent with what we just did in the fourth quarter overall. And we are starting to see a decrease in fuel. And we'll see how that continues to trend this year. And so, perhaps the yield with and without the fuel, those two numbers will maybe be a little bit more consistent. I think that fuel hold steady with where we are right now, it certainly becomes a headwind as we get into the later quarters of the year, but nonetheless, I think that certainly there's always mix changes that can drive that number, higher or lower. But I think it's pretty consistent with what our long-term philosophy has been. We certainly dealt with higher cost inflation on a per shipment basis in 2022 than then what at least I initially expected I thought we would see some cost moderation as we got into the back-half of the year, which obviously did not happen. So, we just continue to execute on that same consistent philosophy that we always have. And I think that's why we saw that the yield performance that we did, but I believe that call should be a little bit more favorable versus the last couple of years. And 2023 are certainly that's our hope. And we'll continue to build our cost model around what that cost inflation expectation is and then continue to try to achieve 100 to 150 basis points of positive spread above that inflation to again support the investments that we're going to make.

So, I think overall, if you did sort of roll out typically the first quarter our yield metrics are up about 0.5% over the fourth quarter. We'd expect to continue to see if mix is constant. Those numbers increase sequentially quarter-after-quarter, but certainly that some of that, that growth if you will may start to moderate a bit but again you're going to see that same type of moderation or should, what the costs. But nonetheless, the overall philosophy stays the same, and we'll continue to look for cost plus pricing.

Scott Group

Very helpful. And just because you mentioned the fuel, and maybe the surcharge revenue and flex negative, how does that impact your thoughts on the question earlier about operating ratio improvement this year?

Greg Gantt

Well, again, it's just it's one of the drivers on the top line, that is a change that we will deal with. And I think overall, it would be a positive for the economy and something that would be good to see. But I don't know anybody that would like showing up at the pump and seeing that bigger number. And certainly, that's been a big cost driver for what we've seen.

I think it's better to for just cost inflation and other line items. I think the increased cost of fuel is driving inflation and about anything, whether it's a product or service that we're buying. And so, I think a decrease there certainly helps. But as we look back 2015-2016 were the timeframes that we last went through a bigger decrease in average fuel prices. And I think we continue to try to manage, just like we did in those periods, and continuing to manage the different components that go into building out our rates with customers, whether it's base rates, fuel surcharge, or as is oils managing all the revenue inputs with the cost inputs and trying to account for whether or not fuel goes up or down. So, it's just something that our pricing and costing teams and our sales teams have got to work through is we're working through renewals with our customers every day, and just looking at and seeing where we are and what we feel like we need to keep driving improvement in our customer specific pricing and profitability.

Scott Group

Very helpful. Thank you, guys.

Greg Gantt

Thanks, Scott.

Operator

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

Allison Poliniak

Hi, good morning. I just want to ask about potential customer attrition, just given some of the freight challenges out there and certainly your customer focus on costs. Are you seeing any sort of attrition as customers try to tray down obviously, quality but prices low or the dynamics may be a little different this cycle, just any thoughts there?

Marty Freeman

Yes, good morning. This is Marty, I'll take that one. We aren't seeing anything like we saw back in '08 or '09. We have customers in here every week, and our larger customers, contract customers coming in. Its business is usual. They're coming in and asking for contract renewals, additional services and so forth. So, we're not seeing anything out of the ordinary for the economic circumstances, no major price cutting or anything like that. So, I feel pretty confident that the end is probably near what we're going through.

Allison Poliniak

Perfect, thank you.

Operator

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

Jon Chappell

Thank you. Good morning. Marty, since we have you, as you're entering, you're already there. But you're entering the head seat and the best mousetrap in the industry probably on the precipice of breaking the 70 OR basis. You've already laid out your CapEx for this year. But as you think strategically over the next few years, anything you're thinking about differently as it relates to growth, as it relates to the labor et cetera or is it just kind of ride the cycles of what you've had and continue to get incremental productivity out of that mousetrap?

Marty Freeman

Well, one of the reasons we've been able to grow like we have over the last years is because we continue to build capacity even during slow times, and I don't see us moving away from that focus. So, we'll continue to do that. We'll continue to buy new equipment and hire employees as needed. So, I don't see any change from what we've been doing, this made us successful in the past.

Jon Chappell

Thanks, Marty.

Operator

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

Ravi Shanker

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

Adam Satterfield

I don't know about relative to peers, but certainly, we feel confident about our ability to grow. And I think you look at things in the past, we've certainly have been outgrowing the market relative over the last 10 years, in particular, year in and year out. When we're in up cycles, that's when our business shines the brightest. And certainly, our service is what wins us share and have an available capacity to respond to customers when they need us the most. That's kind of our hallmark. And so, we're sitting in a very good spot right now to be able to respond to that growth when the phone calls come, we're going to be picking them up.

Ravi Shanker

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

Adam Satterfield

It's something that's -- we certainly faced this question before when fuel changes. I think that we got a pretty long period where we were at low fuel prices kind of going back to when that final decrease happened in 2016. And I'd say we had pretty good results between 2016 and 2020 when we were in a lower fuel environment. And again, I think that it's something that maybe people on the Street, it's hard to understand if you're not negotiating with some of these types of contracts. But for us, it's all about having a good cost model, understanding our cost and knowing what the revenue and the cost inputs are going to be whether fuels at $5 a gallon or $3 a gallon, it's just something that we've got to manage through. In some environment, some customers may want more or less and increase coming through, a base rate type of change, some may want more exposure to that variable component of pricing that would be the fuel surcharge.

And there's ways to increase yields by driving productivity with customers as well, where we can obtain the same objective by just looking at the operational factors underneath, and having all of our systems tied into our cost model allows us to have those types of conversations with our customers as well. Ultimately, it's just about driving customer-specific profitability improvement and work in our continuous improvement cycle so that we can continue to purchase real estate and expand our network. So, customers have got that to leverage within their own supply chains. We're effectively buying capacity on behalf of our customers. So, I think we got to just continue to execute on that front. And I think that we've shown in terms of going through prior cycles that we'll be able to do so.

Ravi Shanker

Understood, thanks, guys.

Operator

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

Ken Hoexter

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

Greg Gantt

Yes, Ken, this is Greg. I think so on the -- I'll take your revenue question first, but we typically always pick up in the spring. So, certainly, we're hopeful that we get back into a more normal cycle than what we've certainly been in really since COVID. We've kind of been off cycle, if you will, if that makes sense. And the normal numbers and sequentials that we compare with all over the years, they're just been different in the last couple of years. So, certainly, getting back to a normal cycle would be one reason we are somewhat hopeful. Some of the things that we've seen, heard and read, inventories are starting to get low compared to where they were back, say, a year or six months ago. So, I think there are some things that lead us to believe that we could be coming out of this thing, plus we've been through many, many cycles over the years. And typically, they're a year, 16 months, so we kind of think that that's what we've been in this one.

So, yes, we're hopeful, got our fingers crossed that we will come out of this thing as we get into the spring and later on in the second quarter. As far as the equipment, yes, it's been kind of funky. The deliveries that we -- cycle that we've been on this time. We certainly didn't get everything back last year like we typically would. Typically, we would have all of our orders in the early fall. We had everything in place that wasn't the case this year. We're actually still taking some equipment that we should have gotten back last year. So, it's been a little different. So, we'll just have to see how the business develops, and I think that's going to determine where that $400 million that we talked about number, where that goes this year. So, we'll just have to see, and it will certainly be based on our business conditions and the numbers that we see as we get on into 2023 as to how that $400 million develops this year compared to last year.

Ken Hoexter

Great, thanks, Greg. Appreciate the time.

Operator

Your next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.

Amit Mehrotra

Thanks, Operator. Hi, everyone, Greg, hearty congratulations on the retirement; and Marty, looking forward to working with you as well. I guess I wanted to ask about pricing. I know pricing discipline is good, so it's not really about that, but I guess we've seen a lot of LTL companies in recent months announced general rate increases. I guess what's surprising to me is some of the ones that have even a little bit weaker service that may be more tempted to lean into price have also announced big price increases. And I wanted to understand like the reaction from the customers because, in the typical cycle, a customer would maybe trade down to regional lanes with high-quality carriers. Maybe you lose 20%, 30% of your lanes or two or three lanes or whatever it is, that doesn't seem to be occurring right now where shippers are not moving to other high-quality, but regional lanes.

And I want to understand, one, why you think that might be like what's the psychology of your customers in terms of how they think this cycle is going to play out? And then second, how does that impact your ability to bounce back? Because I would assume as there's a big seasonal pull in March and April, May. You don't have to win back lanes, you don't have to win back customers so you can kind of see it first in terms of that upswing. So, sorry for the long-winded question, but hopefully that was clear.

Adam Satterfield

I don't know if I can explain the psychology of our customers, but I did take a psych class in college one, so I'll give it a shot, but I think that we've talked a lot about this that since going through COVID, there's been so much disruption to customer's supply chains and missed revenue opportunities, incremental cost added to production lines just because of all the supply chain challenges that many of our customers have been dealing with over the last couple of years. So, I think, for that reason, we've seen a little bit of change in customer behavior. I think customers have been sticking with us. And certainly, over the last year, as Marty mentioned earlier, despite the weakness that we've seen in the economy, we've seen good customer trends. We get periodic reporting from our national account sales teams. And we just -- we have not been losing customer accounts. I think customers have been keeping us in place because they inevitably know that one that many are still dealing with challenges.

A lot of the conversations that we continue to have are more around challenges within the supply chain. And I think two is that they know that we are probably closer to things turning and orders picking back up for our customers' products. And they want to make sure that they have got capacity that's available as needed. There are a lot of competitors that had embargoes in places and communication to customers saying I am keeping you up today. But I can't pick you up tomorrow. And we were able to respond in particular in 2021 to a lot of those customers that called on us needing capacity. And so, I think that that's strengthened the relationships that we have with our customers. And we have got a lot of continuity within our customer base anyway. So, I think those -- everything that's happened over the last couple of years has really strengthened those customer relationships.

So, I think that one of the things you said as part of your questions though gives us a little confidence in terms of when those orders for our customer product start picking up again in the sense that in prior cycles like 2016 or 2019 where we may have lost a few lanes or lost a customer account, we were always confident that the business would return to us in many case because the customer told us that they wanted to bring this back in when they could. But we had to wait until the next bid cycle before we got that opportunity. Customers are keeping us in place. They are keeping their contracts current, pricing terms updated. And so, I feel like that whenever those orders start picking up, we may be getting three shipments instead of two at every pick up. And volumes should return to us quicker than perhaps they have in prior down cycles.

Amit Mehrotra

Right. Okay, very good. Thank you.

Operator

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

Ari Rosa

Great. Thanks. Good morning, everyone. And, congrats Greg, it's certainly been an impressive run that you have, and congrats also to Marty on some big shoes to fill here. So, I wanted to ask about you guys have talked about for some time the ability to get the OR into the 60s. I understand obviously there are different puts and takes on kind of economic uncertainty, maybe some cost inflammation, but also talking about this inflection that's expected for second quarter, it seems like there is some optimism there around the ability to perhaps improve OR year-over-year which would certainly suggest that you are kind of bumping up against that ability to get the OR to the 60s. I just want to get your updated thoughts kind of given the progression of OR improvement that we have seen over the last couple of years, do you think that OR in the 60s is achievable whether it's 2023 or into 2024?

Adam Satterfield

Well, again I think we were saying earlier, certainly 2023 just given the environment it's certainly going to be a little bit more challenging. And we are continuing to keep our eye for the future. We are investing or planning to invest $800 million in capital expenditures this year when the economy is certainly soft right now. And we may end up being in a flattish type of revenue environment. So, revenue will certainly dictate a lot. But I think that just given the comparison to the two years that we have talked about, you can make your own assessments into what you think revenue may end up being for us this year. But if we are in a flattish revenue environment, then certainly we have seen the operating ratio increase slightly in those years. But the positioning that we are going through is to make sure that we are in a great position to be able to respond when that inflection does happen and we get back to a revenue growth environment.

And we've averaged to 11% to 12% of revenue growth per year over the last 10 years. And we think of ourselves as a growth company. But, we are certainly going to be disciplined in periods where the economy is softer. And we have seen flattish type of revenue in those environments in the past when the economy has been slower. So, I think certainly a lot of depends on that. But, we had many type of OR degradation in the short run. I mean just for this year, the positioning in the recovery year is usually pretty doggone strong. And so, we continue to stand behind our goal of wanting to get to a sub-70% operating ratio. We didn't put a timeframe behind that when we laid it out last year, at this time, for this sole reason; we don't want to be beholden to something that's, in the short-run, that may jeopardize our opportunity for producing strong profitable growth in 2024, '25, and beyond.

And I'm confident that we'll certainly be able to get to sub-70% for the year. We certainly did it for two quarters this year, in the second and third quarters. And so, I think we've shown that it can be done. And just to be clear, we continue to say that that is our next goal, but it will not be the final goal. We think that we can continue to go further from there, but we're going to keep that goal in sight for now. And once we achieve it, then we'll lay out where the next stop might be in this long-term OR journey.

Ari Rosa

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

Greg Gantt

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

Marty Freeman

I wanted to thank our sales team who does a fantastic job of sharing our costing with our customers, especially our large customers. We're an open book; we actually show them what we're paying for equipment, how much it costs not to put -- freight, pick it up, sort and flag it, whatever the cost may be. And once you explain to them what our costs are, it's a lot easier to swallow a general rate increase. So, I think most of our customers understand what our costs are. And we try to explain that to the best of our ability.

Ari Rosa

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

Marty Freeman

Thanks.

Greg Gantt

Thanks.

Operator

The next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Jeff Kauffman

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

Adam Satterfield

Yes, the short answer is that the math is really not that simple. Going back to prior comments, fuel is just one of many elements that get negotiated as part of a customer's rate each year. So, it could be that we get more fuel surcharge in one particular more, more base rate in another. And so, trying to look out and measure what the surcharge revenue piece is versus what the potential expense might be is not really a one-for-one comparison in that regard. The surcharge, if a customer has decided to take on more variable exposure to that fluctuation in fuel is covering many more cost elements than just the cost of fuel and other petroleum-based products.

Certainly that's what it's designed to cover, but that's not everything that is covered by that variable component of pricing. So, again, I think the -- if you want to look back into a declining fuel environment, I would point people to look at 2015, and 2016. In '15, the average price of fuel was down 30% that year. Of course, we had volume growth, it was a little different macro environment, and so as a result we were able to improve the operating ratio that year. In '16, the average price of fuel decreased further. It decreased about 15% that year, and that was one of the years, as I mentioned earlier, that we had a 60 basis point increase in the operating ratio.

That the overall macro was a little softer, volumes were certainly flattish that year. And so, a little bit different top line makeup, if you will. But so, that's probably a little bit more relative comparison, is looking back at how some of those revenue changes quarter-to-quarter, and cost changes progressed in that year. But we're certainly managing through it. And we're looking at -- we've got contracts that turn over every day, and they progress through the year. So, if fuel stays where it is today, then we're looking at a contract with a base rate of a fuel at $4.58 a gallon versus, last year, we were looking at it and it would have been $5-something per gallon.

So, you just always got to look at what the current environment looks like, and then try to risk-adjust for do you think fuel prices may go up? If they do, again, how does the top line for each individual customer account change, and what do the cost inputs change? If fuel goes down, you do the same thing, and you try to make sure that those fuel scales, as they work on each customer account, that we're still effectively getting paid for the service that we're providing and, like Greg said, the value that we are offering. And so that's what we stay focused on. And it's less important for us to look at the profitability of each customer account.

Jeff Kauffman

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

Adam Satterfield

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

Operator

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

Greg Gantt

We 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

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