Operator: Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group: Hey, guys. Thanks. So, relative to the newly adjusted 1Q OR of 89% 1Q a year ago, how are you thinking about OR and Q1 this year? And any thoughts on full year operating ratio for LTL?
Mario Harik: Yeah. So, what — first, I’ll start on the full year. So, when you look — because obviously, we had the old definition last year, Scott, that was updated with, as Carl mentioned earlier on with the corporate allocations and the removal of pension income. So, last year’s OR — the number was 83.9%. And when you account for the allocation of corporate and the exclusion of pension income that would have been in 86% and change OR. Now for the full year of 2023, we’re obviously not guiding for the full year, given where things are this year, but there is a path to improve OR this year, but it will depend on the macro. We feel cautiously optimistic about the demand outlook, as I mentioned earlier. And based on what we’re seeing today and our results, again, volume is up is better than seasonality, and we’re seeing stronger demand from customers.
And we’re hearing optimism from our customers as you head into the spring and the back half of the year. But obviously, we’re watching the macro like everybody else is. Now specifically in the demand environment, the segments are different retail has been — had sequential declines in the fourth quarter, but the feedback we hear now that the retailers have gone through that inventory and now that we’re going to see more normal seasonal buying patterns in 2023. And the industrial, we’re seeing short-term softness, but we’ve seen some strength in some of the areas like auto, machinery, short cycle manufacturing where that are outlining a more robust 2023. So, depending on what the that environment does for the rest of the year would dictate what OR would do.
And obviously, there are dynamics at our yield. And there are a lot of company-specific initiatives we’re driving on the cost side like in-sourcing line haul. And all of these variables would lead to the outcome for 2023 on OR. But again, there is a path to improve out in 2023, but all of these variables will dictate that outcome. For the first quarter, as I mentioned earlier, we expect OR seasonally to be better than typical seasonality from the fourth quarter to the first quarter. And typically, that’s a 50 basis points deterioration is what we see from Q4 to Q1, and we expect to do better than that.
Scott Group: And I think we’re all just a little confused because we don’t — there’s new numbers now, so we’re not really sure with the seasonality. So, just to be clear, you did — on the new methodology, you did a 90.3% OR in Q4, 89% in Q1 of 2022, and you’re saying it should be — typically, it’s 50 basis points worse Q4 to Q1, but maybe it’s going to be something better than that?
Mario Harik: Correct. And on the high end of the range, if you think of an EBITDA improvement for the first quarter, Scott, that would be an OR improvement for the quarter.
Scott Group: OR improvement sequentially or year-over-year?
Mario Harik: No, year-over-year, on the low end of the range in terms of EBITDA being slightly down, that would be a year-on-year deterioration, but better than seasonality. On the high-end of the range where EBITDA improved slightly in the first quarter, that would be an OR improvement on a year-on-year basis.
Scott Group: Okay. And then just bigger picture, right? If I take a step back in the model, it looks like you’re really outperforming everybody on tonnage. You’re really underperforming on yield. So, it seems like maybe sacrificing some price to get volume. Is that what’s happening here is what it looks like in the model, but just — is that what we’re doing here?
Mario Harik: No, we’re not sacrificing price to buy volume with price. There were a few dynamics in the fourth quarter that impacted us. The first one, Scott, is that we were lapping early GRI we took in Q4 of last year. While this year, we took that in the month of January, which is usually our customary time line. And I mentioned the yield dynamic on the mix channel earlier on, so we onboarded those national accounts that are strategic for our network, yet the higher yielding local accounts, again their shipment count is up mid single digits, so we’re taking market share. However, we’ve seen a weight per shipment decline in that channel that caused the overall weight to be down. So that dynamic is what effectively impacted yield.
And then finally, life of haul was down 1.3% for the quarter, where we onboarded more next day and two-day lanes shipments to our network. And we also saw less outbound California freight coming through lesser imports in the fourth quarter which has a direct correlation to yield. Now if you take a step back, our contract renewals in the quarter were up roughly 7%. That’s for existing business. And we continue to see from us in the overall industry, very rational pricing in how we price the business.
Scott Group: Thank you, guys.
Mario Harik: You got it. Thanks Scott.
Operator: Thank you. Our next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.
Allison Poliniak: Hi. Good morning. Just wanted to talk about the CapEx for the year. If you can maybe break that down a little bit more. And then in terms of the new door adds, maybe talk to, I would say, relative capacity available today with how you’re thinking about the investment as we go through the year in terms of discipline around that? Thanks.
Carl Anderson: Thanks Allison. Yeah. If you look at 2022, our total CapEx, the company is about $521 million. About 85% of that relates to the LTL business. And as you can see from our guide for our planning assumptions for 2023, we do expect CapEx at the midpoint to be up over what it was last year. So — and again, I think that same percentage mix between LTL and Europe is how you should think about it.
Mario Harik: And on the lower side, so, we — obviously, when we started the LTL 2.0 plan, our goal was to open up 900 new doors. And these were based on areas where we have line of sight on demand from customers. So, a lot of the markets that we go after, we already know that we need capacity and we’re seeing that demand come from customers. So, over the next 90 days, we’re going to be opening up additional doors, 167 net new doors in Salt Lake City, in Atlanta and in Dallas, Texas as well. And we have a plan through the remainder of the year to open up more doors in those markets where we need that capacity. For example, Houston is a great market for us. Florida is a great market for us, where we need more capacity that we’re going to be looking to add. But we’re being very disciplined in how we open up those stores and all the terminals we’ve opened up have been operating better than expectations.
Allison Poliniak: Got it. And then just a follow-up on the shipment cost inflation. Should we be assuming sort of up mid single digit for this year? Or is it lower or higher than that? Just any color. Thanks.
Mario Harik: This is — it would be in the ZIP code of mid single digit, but it will depend on what the truck for us because we have roughly around a quarter of our line haul miles are outsourced. It will depend what the truckload rates do for the balance of the year. We expect this to be a good tailwind for us here in the first half of the year, but it depends on the demand environment in the back half and how that translates. On the wages side, we expect it to be in the sub mid single digits, but in that territory.
Allison Poliniak: Got it. Thank you.
Mario Harik: You got it. Thank you.
Operator: Thank you. Our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.
Tom Wadewitz: Yeah. Good morning. Mario, I know you’ve had some questions on price a bit. I was wondering if you could tell us a bit more just in terms of the broader strategy, what type of freight are you trying to bring on? What — I guess, what’s the — if you push harder on price versus tonnage kind of what’s the overall strategy for what you’re trying to build that’s going to be OR accretive in terms of kind of price mix, and how much tonnage matters relative to that? Thank you.
Mario Harik: Sure. So, first, starting with the type of freight that we look for, we look for freight that can build density in our network. So, effectively, these are 48×48 skids that are — that fit well in an LTL network, typically going dock-to-dock in terms of B2B type shipments is the primary type of freight that we’re going after. We also look to go after freight that creates density around our terminals. So, we think about pickups that are in proximity to our terminals is another way we think about the quality of the freight and the how it relates to our network as well. Now in terms of channel mix, we are looking to build density, both international channel and the local channel. As I mentioned earlier, in the local channel, we’re making great strides onboarding new customers.
This year, we ended the year with 27,000 customers, which was up 2,000 from our prior number of 25,000 customers and a lot of these were new local accounts we are onboarding. And with having that success in sales, it’s driven by two main areas of focus. One, our service is up and to the right. And we’re hearing great feedback from customers on the quality of service. And two, is the investments we are making in capacity to be able to handle that business. And we want to grow in both of these channels with the type of freight and the type of profile I just mentioned.
