Old Dominion Freight Line Inc (ODFL) — Q1 2020 Transcript

Good morning and welcome to our first 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. The first quarter seems like a distant memory at this point, but we were pleased with our financial results for the quarter. We improved our operating ratio to a new first quarter company record and our diluted earnings per share also increased. These were notable achievements given how challenging the first quarter was as both revenue and tonnage were down. We were cautiously optimistic at the beginning of 2020, as we believed the operating environment would turn positive. Our volumes were trending in line with normal seasonality for the fourth quarter of 2019, and January and February 2020 results were in line with our initial expectations. Things changed in the middle of March, however, and we began to realize the profound impact the COVID-19 pandemic would have on the country and the general business environment. While no one could have fully anticipated the effects of this pandemic, the situational awareness guiding our response was developed from the crisis management planning exercises that our team periodically performs. One of the most critical things we focused on during training was the importance of timely communication with our employees, customers and vendors. As a result, we were well-prepared to communicate early and often with these stakeholder groups as we addressed the rapidly-changing environment. While no plan will be perfect in these types of situations, our response was coordinated, quick and effective. Once again, proving the flexibility of our people and our business. I believe our response has also demonstrated the true importance of what we have repeatedly characterized as the foundation of our success, our culture. We have long believed that our culture has differentiated us from our competition and the difference becomes most evident during challenging times. With that in mind, the safety and well-being of our OD family of employees was and continues to be our first priority as we address the impact of the COVID-19 pandemic. We have followed guidelines issued by the U.S. Centers for Disease Control and Prevention and the World Health Organization related to employee health and safety, while also adhering to any national, state, and local mandates within the areas we serve. Among our many initiatives, we have distributed face coverings to our employees, increased the cleanings of our facilities, limited non-employee visitors, established social distancing practices, and provided resources for our employees to clean and disinfect our trucks and workplaces. We also provided non-executive employees with a special bonus payment as a way of thanking them for their extraordinary effort in serving our customers through this pandemic. The trucking industry is crucial to help ensure the availability of groceries, medical supplies, and other essential products around the country. We are proud of the response of our OD family of employees as we continue to deliver best-in-class service. In terms of how we have responded to the rapid decrease in business levels associated with the stay-at-home and similar orders around the country, we have continued to focus on our value proposition of providing superior service at a fair price. In fact, we produced a record quarterly claims ratio of 0.16% in the first quarter. Our service performance has supported our ongoing price discipline, which is critical to our long-term success. Without our long-term improvement in yields, we would not have been able to support investments in capacity, nor improve on our superior service standards over the years. The importance of high-quality and dependable service seems to have also recently increased for many of our customers, which further supports our existing business model. We are fortunate to have so many large national account customers that remain open for business. Although these customers continue to ship goods, often on an accelerated basis, many of our customers are currently closed. As a result, our volumes dropped off pretty significantly at the beginning of April, but they have remained fairly steady ever since. This has allowed us to quickly adjust to our new daily shipment counts. The unfortunate reality of the sudden and significant reduction in revenue, however, has been a necessary adjustment to our workforce. In this case, and with the belief that business levels will be restored once the economy reopens, we implemented an employee furlough program. The duration of this program will provide health benefits for these employees at no cost and they will also retain their seniority with the company. Other measures to reduce costs have included parking certain equipment to minimize maintenance expense while also improving the efficiency of our fleet. We discussed on our fourth-quarter call that our fleet was already a little heavy as we entered 2020, which was why our capital expenditures for equipment were lower than normal this year. We will still incur monthly depreciation cost for all of our units, but this strategy allows us to maintain adequate equipment capacity for the foreseeable future. We are currently experiencing an environment unlike anything we have ever seen, but we continue to be confident that our business model works up and down the economic cycle. A majority of our costs are variable and we are doing an excellent job of managing our costs in relation to the drop in revenue. A rapid decrease in business and ongoing uncertainty about the macroeconomic environment add difficulty to our decision-making process. We have quickly adjusted while also simultaneously preparing how we will manage increased business levels when volumes return. We are also encouraged by recent news that certain states are in the process of allowing various businesses to reopen. I believe our country will return as strong as ever and fully realize that responding to rapid growth can be difficult. We know this from experience as we have seen many periods with 20% plus revenue growth. I am confident that our past experience, existing capacity, and the dedication of the OD team puts us in a better position than any other carrier to respond to increased customer needs whenever that time comes. I'm incredibly proud of our employees for both our performance in the first quarter and their response to this pandemic. Our employees are on the frontlines and clocking in every day, so that OD can continue helping the world keep promises. Thank you for joining us this morning. And now Adam will discuss our first quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the first quarter of 2020 was $987 million, which was a 0.3% decrease from the prior year. The first quarter of 2020 included one extra workday, so the decrease per day was 1.9%. Our operating ratio improved 60 basis points and our earnings per diluted share increased to $1.11. These results include $10.1 million of expense related to the special bonus paid to employees in March. Our revenue results for the first quarter reflect the 3.9% reduction in LTL tons that was partially offset by the 2.6% increase in LTL revenue per hundredweight. Excluding fuel surcharges, LTL revenue per hundredweight increased 3.3%. While this growth rate was lower than recent periods, our yields were negatively affected by the 1.3% increase in weight per shipment. Our yield numbers for the month of March were flattish as compared to the same period of 2019, due primarily to a 6.3% increase in weight per shipment. It is important to understand revenue per hundredweight is a yield measurement that is not always equivalent to actual pricing. Multiple factors can have a significant impact on revenue per hundredweight, most notably being average length of haul and weight for shipments. As an example, our average weight per shipment increased 113 pounds from February to March this year, and this contributed to a $0.56 sequential decrease in revenue per hundredweight, excluding fuel surcharges. The last time our average weight per shipment changed so quickly was the 60-pound decrease from June, July of 2018, which led to a $0.54 sequential increase in revenue per hundredweight excluding fuel surcharges. Changes in revenue per hundredweight are also not linear with respect to changes in mix. We continue to negotiate rate increases as we work through bids in accordance with our long-term pricing philosophy. We also believe the price environment remains relatively rational considering the significant drop in demand due to the COVID pandemic. Our first quarter operating ratio improved 60 basis points to 81.4%, due primarily to the quality of our revenue and increased operating efficiencies. These efficiencies allowed us to effectively improve our direct operating cost as a percent of revenue in the first quarter. Our average headcount also decreased 5.2% as compared to the 5.1% decrease in average shipments per day. In regards to our April top-line trends, revenue per day is down close to 20%. Our average weight per shipment has increased close to 10%, while shipments are trending slightly worse than revenue. The decrease in revenue also reflects reduced fuel surcharges as the average price of diesel fuel is 20% lower than it was in April 2019. Our actual results have been slightly better than we initially expected when the stay-at-home and similar orders were implemented throughout the country. We take no solace in that fact however and eagerly await the reopening of markets around the country. As usual, we will provide actual revenue-related details for April in our 10-Q. Due to the unprecedented decrease in revenue we experienced in April, we implemented the furlough program in an attempt to balance the number of employees actively working with current freight trends. As a result, our current number of active employees has decreased approximately 15%, compared to April 2019. While the loss of revenues will have a de-leveraging effect on our fixed costs, approximately two-thirds or more of our costs are variable or semi-variable. We will continue to make our best efforts to match these costs with revenue while also controlling discretionary spending. We will not overcut expenses though as we believe we are the best positioned LTL carrier to capitalize on an improving economy. Therefore, we want to ensure that we have the people, equipment, and door capacity in place to support our customers when the economy and business levels return to normal. We're fortunate to have the balance sheet strength to provide us with this flexibility. Old Dominion's cash at the end of the first quarter totaled $357 million, and our outstanding debt totaled only $45 million. We have approximately $200 million of borrowing capacity on our revolving line of credit and we also have communicated with our traditional lenders to discuss additional sources of liquidity if needed. In addition, we continue to generate strong cash flow from our business. Our cash flow from operations totaled $204 million for the first quarter while capital expenditures were $52.2 million. We returned $196.6 million of capital to our shareholders during the first quarter, including $178.3 million of share repurchases and $18.3 million cash dividends. Our effective tax rate for the first quarter of 2020 was 26.3% as compared to 26.1% in the first quarter of 2019. We currently expect our effective tax rate to be 26.3% for 2020. This concludes our prepared remarks this morning. Operator, we will be happy to open the floor for questions at this time.

So, I guess to start off and Adam thank you very much for that color there in terms of what you're seeing so far in April. And it's encouraging to hear that the competitive environment remains relatively rational right now. Could you maybe talk for a moment about, are you seeing issues with share loss in certain markets or anything like that going on or do you feel like market share in general is fairly stable and are customers at all trying to kind of push back on rates and maybe trying to take advantage of sort of what's happening out there, just given this drop in tonnage over the last call it three, four weeks?

Jack, this is Adam. I think customers or certain customers are always pushing back on price regardless of the environment. With that said, right now, I think about every customer is getting some form of a rate reduction just by the sense that fuel surcharges are down so much and the significance of the surcharge that it can be on each customer's freight bill. So that is happening due to the 20% reduction in the cost of diesel fuel right now and the impact for each customer's freight bill in that regard. Otherwise for us, just like we said the pricing philosophy and the discipline that we've had over the years have been critically important to supporting the investments that we've made in our service centers and our service. And so we had no intention of wavering on that in this regard. And at this point, we haven't seen really any competitive behavior that’s any different than what we saw basically in the last half of last year. So I think things have been pretty disciplined in this regard thus far. And in the past recession, you saw a lot of companies that financed rate reductions through cutting employee wages and doing some other things like that. And we haven't necessarily seen those types of actions at this point either. And, in fact we just saw one other LTL company, we saw yesterday that will also be announcing I think a similar company bonus program like we had. So that would suggest that the other companies hopefully will be just as disciplined with respect to their yield management process such that we are.

Okay, that's great to hear. And then I guess for my follow up question, you guys are coming into this crisis with such a strong balance sheet, loss of liquidity. How are you guys thinking about the opportunity for industry consolidation as we emerge from this over the next couple of years? And even though you're reducing CapEx this morning, sort of what's going on to make you consider perhaps leaning into this to some degree and trying to take advantage of what's probably going to be a more consolidated LTL market on the other side of this?

Jack, this is Greg. That's possible, I suppose. But I think the things that we've done over the last several years in trying to expand our capacity, trying to build on our terminal network and give us capacity in all the different markets that we service and particularly the big metro markets that are so critical to our future growth and whatnot. I think that's the correct strategy as we go through this. Where it comes out on the other side, we’ll just have to wait to see. But again, I think we've done the right things to prepare for whatever that might be if we lose a competitor or not. Again, I think we've done the right things. I think our capital expenditure investments will help us on that side whatever it is. So feel good about it. Who knows? I don't really want to speculate on this kind of thing.

And just a point of clarification, I think it’s helpful to give sort of the shipment color relative to where April revenue per day is trending a little bit weaker than revenue. Is that fair to say that sort of tonnage is the same relationship? I would imagine the answer is yes. But just want to make sure I understood, maybe some puts and takes that could be going on just given the mix shifts that we're seeing?

Yes. The mix in the businesses that we're seeing that are still open, weight per shipment has been much heavier than what it normally is. And I think some of that, there's probably multiple factors driving it, but some of that is just respect to which customers remain open and the fact that there's probably more demand for those customers’ products. But nevertheless, the comments which are broad and rounded, just to give a sense of direction for you guys. But we're down on the revenue per day basis, close to 20%. The shipments per day are trending worse than that, but our weight per shipment is up almost 10%. So, tonnage then obviously is going to be trending better, but that big increase in the weight per shipment is also having the negative effect on reported yields like what we have already seen in March. So, changing dynamics and whenever things start to reopen, obviously at some point things will stabilize and we'll get back to more of your normal book of business and so forth. But right now we are seeing a much heavier weight per shipment across the board with the freight that we're handling.

Okay. Okay. That's helpful. I guess that sort of leads into the second question, which would just be about, the discussions you've had with the customers, I know it's really difficult to sort of make predictions about what's happening from a volume perspective, but do you feel like there is sort of non-essential pieces of the business where customers are shut down and so we sort of have seen this level of activity here in late April is kind of what it feels like the bottom will be or close to the bottom will be, and then maybe we could see some potential customers opening as we move forward through the rest of the quarter or is it too difficult to tell or is another further leg down there? I know, it's difficult but any color you could give would be great.

Yes. Certainly difficult to tell at this point. We're trying to reach out to as many customers as we can. We'd like to think that the worst is behind us. We've kind of gone through this initial period where trying to figure out, which customers are open, which of our customers’ customers are also open, and so that we're not picking up freight that can't be delivered and all of those present operational challenges and communication challenges. But many of our customers, they're not sure what to expect either, as they began to reopen. So, I think there is uncertainty across the board, but if we can continue to see states start a reopening process and then I think we've got to go through the mental process for every American to figure out how they will react once businesses are open. And when we get back to normal and what the new normal means, may take some time for us to get there. But certainly, we are ready and in place. We've got all forms of capacity that are ready to support our customers when their shipping needs increase and somewhat get back to normal.

Just given that this looks to be the first time we'll see a sequential decline in revenues, at least going back 20 years and pretty meaningful like that. Would you still expect to see sequential OR improvement? Maybe if you could speak to that?

Yes, typically we see improvements in the operating ratio in the second quarter, and revenue often accelerates at that time. Historically, our second quarter revenue is about 10% higher than that of the first quarter. The outcome in terms of revenue will significantly influence our operating ratios. We've already adjusted many of our variable costs to adapt to the current lower environment, but there is still some uncertainty regarding whether revenue in the second quarter will be higher, consistent, or lower than the first quarter. What I can say is that we have made cost adjustments and I am optimistic about the trend of our direct operating costs, despite the rapid drop in revenue. We aim to maintain or potentially improve those costs compared to the first quarter. Our overhead costs, which usually account for 20% to 25% of our revenues, have averaged about 22% over the past few years, typically leaning towards the lower end when revenue trends are strong. During challenging periods, like the recession in 2009, those costs increased. Additionally, some variable costs exist within the overheads, and we will continue to manage them. However, not all direct operating costs are fully variable. Maintaining the network incurs significant costs, especially with our 238 service centers. We need to keep our line haul schedules and service metrics high; I'm pleased that our on-time service remains above 99%. We also improved our new claims ratio in the first quarter, which requires substantial effort, particularly during times of significant freight reductions. This involves coordinated efforts between our sales and operations teams, and we are proud of the results and adjustments we've achieved so far in April.

And then just in terms of CapEx. And I know that that's been scaled back. But is there a way to think about maybe an absolute floor just to the extent that conditions are worse for longer? How should we think about maybe just sort of your sort of maintenance CapEx level? But if you could provide some color on that, that would be helpful. Thank you.

Our typical annual maintenance capital expenditures range from $200 million to $250 million. However, we are already implementing this year's capital expenditure plan, which includes only $20 million related to equipment. We are committed to this aspect of the program, and some equipment has already been received. On the real estate front, the investments we are making now are not necessarily meant to support immediate growth expected next year, but rather growth potential we may see over the next five years. It is crucial that we continue with certain projects to ensure capacity in regions where we have been experiencing tight conditions, such as the West Coast, the Northeast, parts of the Midwest, and metropolitan areas where obtaining permits can be challenging. We want to maintain progress so that when volumes increase, particularly if they rebound quickly, we will have the necessary capacity to manage freight flows this year and in the coming years. During our routine planning process, we evaluate each of our service centers to anticipate volumes over the next few years and aim our efforts toward areas where capacity is currently limited. Similar to what we did in 2008 and 2009, we will also explore new opportunities. While the overall number currently reflects some projects we are comfortable postponing, if an opportunity arises in an area where we know we will need capacity in the future, we would certainly consider how existing service centers could fit into our long-term strategy.

So Adam, can you provide some insight? We have never observed such a significant increase in weight per shipment. I don't think we've seen revenue per hundredweight decrease this much either. Can you help us understand what this means for the profitability? Is it beneficial or detrimental for earnings? Does it affect decrementals positively or negatively? Also, could you share any general guidelines on how to interpret this? How does an increase in weight per shipment influence core pricing, and are there any key takeaways on that?

Yes. I don't know that there is a rule of thumb and some of that detail I gave in prepared comments, it's just simply not linear in terms of when you look at changes in the weight per shipment per say and how that might reconcile to revenue per hundredweight. But frankly, we're in a period where we've not seen this type of a change in weight per shipment before. Normally, it would be in an environment where the economy was really strong. The weight per shipment we saw increase kind of in the middle and end of March. I think initially a lot of that was, it seemed like, the truckload world was tightening in some places that was concerned about. Our anecdotal evidence we had was concern for some carriers to drive into a particular market and not be able to get payload out. And so, you had customers that were just trying to use capacity in any way they could. And so, maybe some heavier loads came our way. Some of the stay-at-home orders were put in place, I think that we saw some of our small mom-and-pop accounts that might be closed. And so, probably more of the business that we're handling being larger national accounts, they typically have a higher weight per shipment as well. And then like I mentioned earlier, just the sheer fact that if they are essential goods, there was probably an increased demand for those. And so, there was just more widgets on every shipment that we were picking up in that regard. But, that will settle down in some regard. And in terms of how it affects overall profitability, again it’s just every customer must stand on its own. That's the basis of what our pricing philosophy is. And if each customer, if we know the revenue stream both of the base rates and how we stress test the fuel surcharge, variable component of the revenue, and then we know the cost inputs then that's what we try to look at in terms of managing account-by-account profitability. That said, I mentioned that we've done a good job I think in managing our direct operating costs, and keeping those somewhat consistent as a percent of revenue despite the significant disruption that we face. So all of those cost inputs should be covered and it just becomes a matter of on the big picture level what revenue in total might look like in elements of the overhead like our depreciation in particular, what type of increases we might see there. So overall it's not a bad thing to see the increased weight per shipment, usually on just a per shipment basis. It's a better thing you get a little bit more revenue per shipment when the cost to handle would be the same. But right now it's just obviously very fluid with what we're actually picking up and continuing to work through the system and the network as we speak.

I'm still uncertain about the answer. I understand that weight per shipment is usually favorable. However, there might be some concerns regarding the national account business that I sometimes believe could negatively impact the operating ratio. Any additional insights on how we should interpret this in relation to the operating ratio would be appreciated. Also, regarding fuel, historically lower fuel prices can pose challenges for LTL earnings. Is that still a consideration, or is it no longer relevant?

I think that for the most part, we try to adjust our fuel tables to be able to have the same level or similar level of profitability by account as the fuel prices are higher or lower. So obviously, we're getting lower fuel surcharges right now, but the costs are down as well. And in regards to just the operating ratio, the only thing I can say is that what we've already said we're trying to from a big picture standpoint. And one thing, we don't manage our national accounts any different from our smaller accounts, each should stand on their own from an operating ratio standpoint. So having more of one business is not necessarily a bad thing if we got that balanced out right from a pricing standpoint. But right now, if we can hold our own with managing our direct operating costs, which are typically around 58% to 60% of revenue, if we can keep those flattish, it’s then just trying to minimize any increase in the overhead type of costs, any inflation that we might see in those cost items as a percent of revenue, given the overall big picture revenue weakness that we're seeing in April.

Great. Thanks. And good morning. Adam, I wanted to ask about the headcount. First, I wanted to confirm whether the 15% reduction you mentioned is compared to first quarter levels or is it year-over-year? Also, how should we understand the portion of the expense that you are maintaining? Is healthcare still about a third of the total expense, or is that different now?

The 15% is year-over-year, so that's compared to April of last year. Really didn't have any kind of material action in the first quarter. The 5% decrease really was just a function of kind of the ending headcount that we finished in December of last year. The headcount drifted down a little bit, but we had talked on the last quarter's call about the fact that we felt like we could handle growth, and we were just letting some natural attrition continue to take place. So it drifted down a little bit, but the April number is what reflects the furloughs that were put in place. So that's down, not quite as much, obviously as the number of shipments. But certainly we want to make sure we've got people capacity in place in the event that things turn back on and we continue to see volumes come in the network. So, feel good about kind of where we are in that regard and we'll continue to move forward and just evaluate on a day-by-day and week-by-week basis kind of where we are with volumes and revenue and how we’re managing our people capacity. In regards to the benefits, we had kind of said I think coming into this year that about 34%, so about a third as you said, as a percent of salaries and wages was the target. We did a little bit better than that in the first quarter. That number in the first quarter was about 32.5%. So, it’s somewhere around of a third to 32% to 34% is probably likely, maybe a little bit higher, since we are covering the healthcare cost of furloughed employees. So, that might tick up albeit at the higher end of that scale, and kind of what our target was coming into this year.

Okay. That helps. And then just for my follow-up, as you look out, if we don't see kind of a significant snap back in volumes or tonnage going forward, are there other levers that you can pull within the network to kind of adjust some of the costs? And then kind of along the same lines, would your expectation be that you might have to pay some additional retention bonuses similar to what you did in 1Q for the work that your employees are doing? Thanks.

We are actively making adjustments to our costs in areas such as general supplies and various miscellaneous expenses. We are committed to eliminating costs wherever feasible and sensible. Regarding our overall revenue levels, as Greg noted in his remarks, the positive news is that things have stabilized and our revenue has remained consistent. This consistency is beneficial for our planning and does simplify our operations compared to a situation with erratic daily revenue. We are pleased to observe this stability and will continue to assess our situation moving forward. Considering our previous comments, it seems we are moving further into this pandemic, and with some markets discussing potential reopening, we hope that the most challenging times are behind us and we have reached a stable point. However, we will monitor this situation daily and adjust our cost management in line with revenue trends.

And can you share any thoughts on additional bonuses? And if you don't want to, I understand.

We haven't talked about that at this point in time. So, we'll see where that goes. But we have not discussed that so. Todd, keep in mind too, a lot of our expenses are down just because of the way we've changed and things that we do on a day-to-day, week-to-week basis like travel, entertainment, and some of our marketing expenses are down. So we have covered a lot of expenses that we normally incur in business as usual. But there's a lot of things that are turned off that certainly will help our bottom-line when it’s all said and done.

So for my first question, I just wanted to get a little more clarity there. And I know Scott was kind of hitting on this. But just maybe if you could talk a little more about the mix of business that's driving up the weight per shipment. Is that more tilted towards kind of retail and essential goods? I presume it is. And then is there an ability or even a desire on your guys part to increase the exposure to those end markets, if you could, on a more sustainable basis?

I would say that the long-term trend has clearly shown more growth in retail-related business. There hasn't been any significant change compared to what we observed in the first quarter; most areas were trending similarly. In April, we've maintained our engagement with agricultural sectors, food distributors, and related areas, which have been performing well, along with manufacturing linked to these sectors and medical or chemical products. These areas have continued to provide us with business in April. While some aspects may be considered basic and dependent on what products remain in demand, there haven't been any wholesale changes. However, as we've mentioned before, we anticipate ongoing shifts in retail supply chains, particularly a move toward establishing an e-commerce presence and the subsequent effects on the national supply chain. Our focus has predominantly been on retailers making these changes, especially those that require carriers offering higher service levels, which has benefitted our business in recent years. Additionally, our service standards have helped many customers avoid fines and chargebacks imposed by retailers.

Great. That's great color. And then just for my follow-up, maybe you could talk about how you think this compares to kind of the 2008-2009 period? And then, you said that you're seeing kind of rationality still in pricing among the LTL carriers. But maybe you could talk about the extent to which you think there's kind of elasticity on pricing for LTL as an industry if pricing is collapsing on the truckload side. It seems like typically, when you see higher weight per shipment, that's some truckload movements flowing into the LTL side. But with pricing down on the truckload side, how elastic is the pricing for LTL carriers as a whole?

Sure. When we entered the recession in 2008 and 2009, it was a gradual process. In the fourth quarter of 2008, we experienced a decline of about 5% or 6%, followed by a revenue drop of between 15% to 20% in the first quarter of 2009, reaching its lowest point in the second quarter. Now, we faced a sudden decline in April. At the end of March, we didn’t notice a significant drop in freight levels, although they were lower than expected. We also didn’t experience the usual end-of-quarter buildup, which may have been somewhat softer. Many customers still had orders in the pipeline, allowing us to maintain steady deliveries from mid-March to the end, but we missed the typical buildup. As anticipated, April saw a rapid decline, which made it more challenging to keep our 238 service centers operating smoothly and our service metrics high. I have been really impressed with the operations team’s ability to adapt, cutting costs and reducing empty miles. Our dock productivity has improved, and P&D productivity is also strong. However, it has become more difficult to manage miles between stops with some customers closed, leading to lower efficiency. The experience our team has gained over the years, along with our technology, helps us plan effectively. It’s not artificial intelligence at work here, but rather human ingenuity that has kept our system functioning efficiently, and I’m pleased with how quickly the team has adapted to these sudden changes in revenue.

And could you guys touch maybe on the ability of the LTL industry as a whole to protect pricing if it's collapsing on the truckload side?

I think that as we've seen in recent years and even going back to when we were slower in 2016, we believe that LTL would continue to be disciplined. Just this year, in fact, that it's so consolidated with 80% of the revenue being in the top 10 carriers. And then when you look at many of the carriers' margins, it's not really in a position to really go out and try to trade price for volume. In fact, it's probably better to go out and try to implement more of an increase to try to shore up their profit levels. So we felt like that LTL pricing would stay more consistent, and it's held fairly steady. We faced some spotty issues last year and dealt with those. And we'll always continue to see spotty issues, and that happens even in good times. So we believe that pricing is critically important. It's obviously been very supportive to us over the years to make sure that we're getting price increases to offset our cost inflation and to support the investments that frankly customers are demanding of us to continue to support technology investments and support capacity infrastructure as well. So we believe that we'll continue to see relative discipline out of the group, and there's still a benefit of moving freight by LTL. We were like ridesharing before ridesharing was cool. And you're sharing every customer is sharing the cost of the freight. And it's cheaper to move shipments that are less than 10,000 pounds by riding on the truck with some other customer versus the truckload world. And even when they try to dip down and do multi-stop network is not really conducive to doing that. Their equipment is not and their drivers aren't paid to make multiple stops like ours are. So I think the industry remains strong, and we'll continue to be disciplined with respect to price, relatively speaking.

Thanks. So good morning, Greg. You guys referenced this a little bit in your commentary, but are you able to quantify what percentage of your customer base is SMB versus large customers and maybe essential versus nonessential?

About 60% of our customers are contract type customers, which tend to be larger. Regarding essential versus non-essential, almost all customers are considered essential to some degree. However, we do have some smaller mom-and-pop accounts that are currently closed for business. Overall, we are experiencing a 20% decline, but I would estimate that roughly 80% of our business is still considered essential. Most of our operations are continuing as usual.

Got it. So Greg, you're saying 80% of your customers would be essential, obviously, not from your perspective, but from a government perspective. And so 80% of our customers are actually moving stuff right now?

That's roughly the case. We cannot accurately measure everything that we haul, whether it's essential or not. But we've got a lot of different measures that we've got in place. And it's something that we're actively working on trying to determine just exactly what groups they all fall into. But we don't know exactly if everything that we haul is essential or not.

Lastly, in light of earlier comments about market shifts and comparisons to 2008, a significant concern for 2020 before COVID was the supply side influences on the truckload sector, which may have also impacted the less-than-truckload sector. Are you seeing any increase in bankruptcies among small carriers due to supply side challenges, such as driver clearing house regulations or rising insurance costs, which are also affecting LTL carriers, particularly in this current environment?

We know of a lot of truckload carriers that have bankrupted or just closed, whatever. I'm not exactly sure how many that is. I read some article this week. There were a couple of thousand that had closed. But as you know, most on the truckload side, there's thousands and thousands that are like less than 10 drivers. So we know some of those have closed and gone away, but certainly haven't seen that on the LTL side.

Yes, Greg, I guess when you guys mentioned, you didn't see a drop-off in March, and you got into April and things just fell off a cliff. And Adam, you talked about it not being a normal downturn where you see it down 5%, then maybe it gets a little bit worse over the weeks and months. But when you see it go from flat or down a few percent to down 20% in the span of 24 hours or a couple of days, how do you react to that? I mean, Greg, what are you seeing in the network with the volumes? And then what do you do in terms of shifting things around in such a short period of time?

Well, good question, Dave. We could see it to some degree that it was coming because, as Adam mentioned before, we did not get the normal end of the month, end of the quarter like we would typically get. It was off. I'm not sure, maybe 15%, 20% versus normal end of the month, end of the quarter. So we saw it coming, we weren't completely in the dark. And obviously, as we kept hearing about all these shelter-in-place orders that were issued. I think at that time, it covered about 37, 38 states, something like that. Certainly, all the major markets in the country had gone to that. So we had some information, and trust me, we were prepared to deal with it well ahead of time. So obviously, we couldn't make all the adjustments that we wanted to with the snap of a finger, but we were well prepared to do it at the first of the month. And a lot of the adjustments that we made were at the first of the month. We've made some since and we'll continue to do so if need be. But we've got a lot of information out there that we look at and measure, the customers closing and all that kind of thing. And there is a lot of information flowing in and out that helped us make decisions.

What are the one or two I guess, what are the one or two things that you look at first when you wake up in the morning, Greg? What do you focus on in terms of managing through this and the volume variability?

We obviously have all the different shipment measures, the revenue levels shipments tonnage, all those things, we look at it on a company level and a region level as well. But we'll measure all those things, see where we are. Obviously, you've got to try to somehow compare the workforce to the business levels. We've done it before. So it's not fun, but it's not anything new. We managed through it in '08, '09 and similar downturns, smaller downturns through the year. So it's a little different, but obviously, we got to do it. So not fun, I can tell you that.

Well, unlike the other ridesharing companies, you guys at least make money through the ups and downs. So congratulations.

Thanks. So I think, again, as Adam mentioned earlier, it's a tribute to the team. And I can tell you, we've worked extremely close over the last month or so, particularly, and everybody is on board with what we're doing. We've had numerous, numerous conference calls and numerous meetings within the walls of the building and a lot going on.

I got disconnected mid-call. So just let me know if my question has already been asked, and I'll just go back to the transcript. But Adam, I was hoping that you could kind of provide the typical sequential shipment trends from April to May, May to June? I know this year, it's completely crazy, but it would just be helpful to understand kind of the normal sequential seasonality in the shipments as you see it historically?

Sure. April shipments are typically 0.9% higher than March, May is 3.2% higher than April, and June is 1.8% higher than May.

And then that down 20% year-over-year, sorry, that was in shipment. But what is the normal seasonality sequentially in April that you've seen so far versus that number you just talked about?

Well, obviously, if things are down about 20%, I hadn't really calculated necessarily for how it looks into a sequential, but that would put us down about somewhere in the neighborhood of 15% or so versus shipment levels for March.

And then the other little nuance point I wanted to ask on the headcount, the furlough program. Is there any impact to the comp and wages per employee? I'm not sure if that program impacts the population mix that may be inflates wages per employee, just something that we should be thinking about in the second quarter.

Not on the wage side, we did talk about the fact that they will we are covering the cost of the benefits those so the fringe benefit will likely be a little bit higher right at the higher end of our normal range, if you will, as a percent of salaries and wages.

Okay. And then obviously, you guys have a great reputation of running an incredibly efficient network. And that's a great track record. And one thing I want to understand is, as I measure kind of the line haul efficiency, is there any way you can help us think about how full the trucks are on any given period or a typical period? I'm just trying to understand like the change the potential change in load factors as you move from 1Q to 2Q, given kind of, I assume those numbers are pretty high and partly reflects the efficiency of the network. But any help around kind of load factors and how we think about that?

Obviously, load factor is something that we manage and watch on a daily basis. Unfortunately, so far, month to date, the load factors have actually improved some. You've got to keep in mind that we have multiple schedules in all of our lanes. And in a lot of cases, you just end up reducing those schedules in cases where we're down. But we do manage that very closely. And again, fortunately, month-to-date, our load factors have shown some improvement.

Is that an effective proxy for margins? Or are there so many other moving parts that load factor is just one piece of it? I'm trying to understand if that is an effective proxy for the overall margin trends.

I think you have to look at all different aspects of line haul or miles, empty miles and those kind of things. But I think load factor is the biggest thing that we can manage by. We certainly look at a key factor and that kind of thing as well. But so far, it looks okay.

Okay. And then the last question I have very quickly is, Adam, there's a lot of questions around weight per shipment and how should we think about it in the context of margins and fixed cost absorption? And I just want to isolate for weight per shipment is really the question. So obviously, you guys manage expenses on a shipment basis, and that obviously makes sense. But if we were to keep everything equal, specifically pricing equal, the changes in weight per shipment, obviously, will translate to revenue per shipment, higher weight per shipment will translate to revenue per shipment higher, all else equal. But does that higher revenue come with disproportionate margins because you're managing the expenses on shipments? And so I'm just trying to really conceptually isolate weight per shipment, how to think about the drop-through from the revenue associated with that.

Yes. I talked around that earlier in the call. So I'll point you back to the transcript or either we can follow-up later.

Adam, just real quick. You mentioned two-thirds cost being variable or semi-variable. What would that figure have roughly looked like say five and 10 years ago? Has that number, that proportion risen over time? And if so, why is it density? Is it internal initiatives to variabilize costs? Can you provide a little bit of perspective just over time, how that's trended?

Well, over time, the operating ratio level that we've improved, most of the improvement has come in those direct operating costs, which most of which are variable. So we've got an improvement over the years, and our overhead costs have stayed relatively consistent as a percent of revenue. But we've always, in our history, tried to work on operating efficiencies, and we have a continuous improvement process that focuses on quality and we've always made efforts through technology improvements and just general process improvement to try to optimize mainly labor costs as a percent of revenue. And so that's just that's been a focus. It will continue to be a focus. And we feel like that's an area where you've got the ongoing opportunity for operating ratio improvement. But it takes the ingredients for long-term operating ratio improvement are density, which obviously we don't have right now. And then a yield improvement process that tries to cover our cost inflation. And so over time, we've been able to leverage the additional density through the network. That too drives operating efficiencies and OR improvement. And then just having that yield contribution there. Both of those require the macroeconomic support, though. But that, it's definitely improved. Our direct operating costs have been the biggest area of improvement over the long run.

Is it fair to say that as density has built over the past decade that, that proportion has risen, though?

I don't know that it's risen. It's certainly an area where we've been able to get improvement, though, in those costs as a percent of revenue.

Okay. Just on the customer set, the 3PL customers that you do business with, has that proportion changed meaningfully over the course of the past month or two, have you seen 3PLs more active as a percent of your total business or less?

It's probably a little early to tell. We haven't even completed one month of this. It's probably a little too soon to tell if they've had a significant change or not.

So Greg, you made a comment earlier about something to the effect of if we lose a competitor. And I guess I'm curious just if you think that you're gaining any share from that competitor right now or any sort of outsized share given potential concerns there? And then maybe if you could just share any sort of thoughts or on contingency plans you guys have in place or anything like that?

No, I'm not sure I want to say any more than I said prior in relation to that. But certainly, we can't tell if we're gaining any share from anybody at this point. Again, we've been through some three weeks of this pandemic so far. Obviously, our business is down, as I suspect most of our competitors' business is down, similarly to ours. But I couldn't begin to say if we've gained share from anybody at this point. We just don't know. Again, I always say from a standpoint of being prepared to gain share, to gain additional business should something happen, I think we have done the right things over the last several years. I think you all are well aware of the capital expenditures that we've made in our real estate over the last several years, in particular. We're continuing to make investments this year in our real estate. So I think we're doing the right things to be as prepared as we could possibly be. We're more concerned about our business, hopefully, coming back soon than losing a competitor. So we'll see what happens with that. But we really don't want to speculate on that.

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 I hope you all have a great day.