Good morning, and welcome to the first quarter 2020 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 1st, 2020, by dialing 719-457-0820. The replay passcode is 1502975. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact 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 a couple of questions 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 call over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.
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. 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 in this 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 initial 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 their 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 have not 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. 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. For the duration of this program, we will provide health benefits for these employees at no cost, and they will also retain their seniority with the company. Other measures to reduce cost 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 was lower than normal this year. We will still incur monthly depreciation cost on 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. We continue to be confident that our business model works up and down the economic cycle. The majority of our costs are variable, and we are doing an excellent job of managing our cost in relation to the drop in revenue. The 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 for 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+% revenue growth.
I am confident that our past experience, existing capacity, and 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 am incredibly proud of our employees for both our performance in the first quarter and their response to this pandemic. Our employees are on the front lines and clocking in every day so that OD can continue helping the world keep promises. Thank you for joining us this morning. 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. The decrease per day was 1.9%. Our operating ratio improved 60 basis points. 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 that 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 per shipment. 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 to 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 pricing 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% as compared to April 2019.
While the loss of revenue will have a de-leveraging effect on our fixed cost, 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. 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 in 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'll be happy to open the floor for questions at this time.
Thank you. If you would like to ask a question, please signal by pressing star followed by the one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question. We'll go first to Jack Atkins with Stephens.
Greg, Adam, good morning, and thanks for taking my questions.
Good morning, Jack.
I guess to start off, Adam, thank you very much for that color there in terms of what you're seeing so far in April. 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, anything like that going on? Or do you feel like market share in general is fairly stable, and are customers at all trying to push back on rates and maybe trying to take advantage 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. 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 has been critically important to supporting the investments that we've made in our service centers and our service. We have no intention of wavering on that in any regard.
At this point, we haven't seen really any competitive behavior that's really any different than what we saw basically in the last half of last year. I think things have been pretty disciplined in this regard thus far. 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. We haven't necessarily seen those types of actions at this point either. In fact, we just saw one other LTL company, at least I saw it yesterday, that will also be announcing, I think, a similar company bonus program like we had. That would suggest that the other companies hopefully will be just as disciplined with respect to their yield management process that we are.
Okay. That's great to hear. I guess for my follow-up question, you guys are coming into this crisis with such a strong balance sheet, lots of liquidity. How are you guys thinking about the opportunity for industry consolidation as we emerge from this over the next couple of years? Even though you're reducing CapEx this morning, does sort of what's going on make you consider perhaps leaning into this to some degree and try to take advantage of what's probably going to be a more consolidated LTL market on the other side of this?
Well, 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 out our terminal network and give us capacity in all the different markets that we service, and particularly the big metro markets that are so crucial 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 and see. 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. Feel good about it. Who knows?
I don't really want to speculate on those kind of things.
Okay. That's understandable. Thanks again for the time.
We'll go next to Chris Wetherbee with Citi.
Yeah. Hey, thanks. Good morning, guys. Appreciate the time. Adam, just a point of clarification. I think it was helpful to give sort of the shipment color relative to where April revenue per day was 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, I just wanted to make sure I understood maybe some puts and takes that could be going on just given the mix shifts that we're seeing.
Yeah. The mix and the businesses that we're seeing that are still open, our 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. Some of that is just respect to which customers remain open and the fact that there's probably more demand for those customers' products. Nevertheless, the comments which were broad and rounded, just to give a sense of direction for you guys, we're down on a revenue per day basis close to 20%. The shipments per day are trending worse than that. Our weight per shipment is up almost 10%.
Tonnage then obviously is going to be trending better, that big increase in the weight per shipment is also having the negative effect on reported yields, like what we had already seen in March. Just changing dynamics and whenever things start to reopen, obviously at some point things will stabilize and you'll get back to more of your normal book of business and so forth. Right now we are seeing much heavier weights per shipment across the board with the freight that we're handling.
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 the sort of non-essential pieces of the business or 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? Is it too difficult to tell, or is there another further leg down there? I know it's difficult, but any color you could give would be great.
It's certainly difficult to tell at this point, and 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 so that we're not picking up freight that can't be delivered. All of those present operational challenges and communication challenges. Many of our customers, they're not sure what to expect either as they begin to reopen. I think there's uncertainty across the board.
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. When we get back to normal and what the new normal means, it 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.
That's helpful. I appreciate the time. Thanks, guys.
We'll go next to Allison Landry with Credit Suisse.
Good morning. Thank you. Just given that this looks to be the first time you'll see a sequential decline in revenues, at least going back 20 years, and a pretty meaningful one at that, would you still expect to see sequential OR improvement? Maybe if you could speak to that.
Yeah. I think that typically, the second quarter is where we get the OR improvement. You're typically seeing revenue accelerate. Typically, our second quarter revenue is about 10% higher than the first quarter. I think what happens from a revenue basis, obviously, will drive what happens with the operating ratio. If things stay lower, like we mentioned, we have adjusted many of our variable costs at this point already to this lower environment. I think that it just remains to be seen. Will revenue levels in the second quarter be higher than the first, or consistent, or lower? That's just still the ongoing uncertainty. What we can say is that we have made cost adjustments. I feel good about how our direct operating costs are trending already, despite how quickly revenue did drop off.
We're looking to keep those, as best we can, consistent or maybe even try to generate improvements versus the first quarter. Then it just becomes a function of the overhead costs. Which the overhead costs, we say, typically run 20%-25% of our revenue, closer to the 20%. They've averaged probably 22% over the last few years, but closer to that lower end of the spectrum when revenue trends are solid. Then it's been higher than that or on the higher end. Last was back in the recessionary environment of 2009. That will be the flex. Within those overhead costs, there are some variable costs there as well that we'll continue to try to manage. Not all of our direct operating costs are completely variable as well. It takes tremendous cost to keep the network running. We've got 238 service centers today.
We've got to continue to run our line haul schedules and keep our service metrics high. We're really pleased to see that our on-time service remains above 99%, and we did produce a new claims ratio in the first quarter. All of that takes tremendous effort, especially when there's significant freight reduction and challenges in terms of how one service center is operating today versus how it was a month and a half ago. It's taken a coordinated effort between our sales and operations teams. We're really proud of the results that we've produced and the adjustments on the cost side that we've been able to see so far in April.
Okay. That's really helpful. Just in terms of CapEx, I know that that's been scaled back. 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 your sort of maintenance CapEx level, but if you could provide some color on that would be helpful. Thank you.
Well, our normal maintenance CapEx, we say on any annual year, would be maybe $200 million to $250 million. We're already into this year's CapEx plan, which only included $20 million related to equipment. We're already into that part of the program. Those will not be canceled, and some of that equipment has already been delivered as well. On the real estate side, the investments that we're making today really aren't supporting the growth that we would expect to see next year. They're, in many cases, supporting growth that we may see over the next five years. It's important for us to, in some cases, keep those projects going so that the capacity is available. Particularly places where we have been tighter, the West Coast and the Northeast, some parts of the Midwest, some of the metro areas.
It's really tough to get permits and do things, and so we want to keep the process going to make sure when volumes come back, particularly with the chance that they could come back in a very rapid way, that we've got not only the capacity to deal with freight flows later this year, but for the next several years. With that said, our normal annual planning process, we look at each of our service centers, what we think anticipated volumes may be over the next few years, and we focus our efforts on where places are tight. In a slow period, and much like we did in 2008 and 2009, we'll also look for opportunities.
While the gross number today reflected some projects that we felt good about being able to defer, if an opportunity becomes available in an area that we know we need capacity at some point in the future, we would certainly look at existing service centers and how they might be able to work into our long-term plan.
Okay. Thank you so much. That was great context.
We'll go next to Scott Group with Wolfe Research.
Hey, thanks, morning guys.
Scott.
Adam, maybe you can offer us some help. We've never seen weight per shipment up so much. I don't think we've ever seen Revenue per hundredweight down so much as it's going to be down. Help us think about what that actually means for the P&L. Is this good or bad for earnings? Does it help decrementals, hurt decrementals? Maybe just any good sort of rule of thumb of how to translate this. How does higher weight per shipment impact core pricing and any good rule of thumb there?
Yeah. I don't know that there is a rule of thumb in some of that detail I gave on prepared comments. It's simply not linear in terms of when you look at changes in the weight per shipment per se and how that might reconcile to revenue per hundredweight. Frankly, we're in a period where we've not seen this type of 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 it increase 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. There was concern 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.
You had customers that were just trying to use capacity in any way they could, and so maybe some heavier loads came our way. As some of the stay-at-home orders were put in place, then I think that we saw some of our smaller mom-and-pop accounts that might be closed. Probably more of the business that we're handling being larger national accounts, they typically have a higher weight per shipment as well. Then like I mentioned earlier, just the sheer fact that if they are essential goods, there was probably an increased demand for those. There was just more widgets on every shipment that we were picking up in that regard. That will settle down in some regard. In terms of how it affects overall profitability, again, every customer must stand on its own.
That's the basis of what our pricing philosophy is. If each customer, if we know the revenue stream both 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. Now, with that said, I mentioned that we've done a good job, I think, in managing our direct operating cost and keeping those somewhat consistent as a percent of revenue despite the significant disruption that we face.
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. 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'd get a little bit more revenue per shipment when the cost to handle would be the same. 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 guess I'm still not sure of the answer. I hear weight per shipment typically is good. You all said maybe there's more national account business, which I sometimes think is bad for OR. Again, any additional thoughts or color on how we should think about this translating to the OR would be helpful. I'll just add to that, how should we think about fuel? Historically, lower fuel can be a headwind for LTL earnings. Is that still the case, or do we not need to think about that anymore?
I think that for the most part, we've tried to adjust our fuel tables to be able to have the same level or similar level of profitability by account if the fuel prices are higher or lower. Obviously we're getting lower fuel surcharges right now, but the costs are down as well. 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, two, we don't manage our national accounts any different from our smaller accounts. Each should stand on their own from an operating ratio standpoint. Having more of one business is not necessarily a bad thing if we've got that balanced out right from a pricing standpoint.
Right now, if we can hold our own with managing our direct operating costs, which typically are around 58%-60% of revenue, if we can keep those flattish, it's then just trying to minimize any increase in the overhead type of cost, any inflation that we might see in those cost items as a % of revenue given the overall big picture revenue weakness that we're seeing in April.
Okay. Thank you, guys.
We'll go next to Todd Fowler with KeyBanc Capital Markets.
Great. Thanks, good morning. Adam, I wanted to ask about the headcount. First, I wanted to make sure the 15% reduction that you talked about, is that from first quarter levels or is that year-over-year? What's the right way to think about the portion of the expense that you're still keeping? Is the healthcare cost still about a third of the total expense, or is it something different than that?
The 15% is a 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 the ending headcount that we finished at December of last year. The headcount had 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. We had drifted down a little bit, but the April number is what reflects the furloughs that were put in place.
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. Feel good about 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 where we are with volumes and revenue and how we're managing our people capacity.
Yeah. Thank you.
Yeah, the benefits. We had 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%. Somewhere around a third to 32%-34% is probably likely, maybe a little bit higher, since we are covering the healthcare cost of furloughed employees. That might tick up or be at the higher end of that scale and what our target was coming into this year.
Okay. That helps. Just for my follow-up. As you look out, if we don't see a significant snapback in volumes or tonnage going forward, are there other levers that you can pull within the network to adjust some of the costs? 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 already making cost adjustments in areas like general supplies and expenses and some of our miscellaneous expense items as well. We're making every effort to eliminate costs where we can and where it makes sense. In terms of just overall revenue levels, and I think Greg mentioned this in his prepared remarks, is the good news is things have settled in, and our revenue levels have been very consistent. That certainly helps us from a planning standpoint. It's not easy, but it makes it a little bit easier versus if the revenue on each day of the week was very inconsistent and choppy. We've been pleased to see that stability with the revenue, and we'll continue to see where we go from here.
Again, to our earlier comments, I feel like that we're getting to the point where we're well into this pandemic, and now that it seems like some of it's coming under control and some markets are beginning to talk about reopening. You'd like to think that the worst is behind us and that we've hit a floor. That's something that we look at each and every day and we'll continue to stay on top of, and we're going to manage our costs to whatever the revenue level trends are.
Can you share any thoughts on additional bonuses? If you don't want to, I understand.
We haven't talked about that at this point, Todd, so we'll see where that goes, but we have not discussed that. See where this goes.
Okay. Fair.
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. Some of our marketing expenses are down. We have cut an awful lot of expenses that we'd normally incur when we're in business as usual. There's a lot of things that are turned off that certainly will help our bottom line when it's all said and done.
Yours and mine both, Greg. Okay. Thanks for the time, guys.
Thanks.
We'll go next to Ariel Rosa with Bank of America.
Great. Good morning, guys. For my first question, I just wanted to get a little more clarity there, and I know Scott was hitting on this. 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 retail and essential goods? I presume it is. Then is there an ability or even a desire on your guys' part to increase exposure to those end markets if you could on a more sustainable basis?
I would just say the long-term trend has certainly been that we've seen more growth in retail-related business. Not any necessary change or any difference in that regard from what we saw in the first quarter. Most of those are trending somewhat in line. What we've seen in April, as you can imagine, we've got exposure to agricultural and food and food distributors and things like that that have been good, and any type of manufacturing that would go into those types of things or other medical-related and chemical-related type of products as well. That's been the areas that have performed and have continued to give us business, if you will, in April. You can just sort of think about the basics and the places that are continuing to be open for business in terms of what products might be moving or not.
Not any kind of wholesale change, but long term, as we've said multiple times, we think there will continue to be more of a change with respect to retail supply chains and a move towards having some type of e-commerce type of presence and how that or the ripple effects of that throughout the nation's supply chain. We'll be in place where much of the focus on the retailers that are making those types of changes has been on carriers that offer higher service levels. That's been a tailwind for our business in recent years, and the fact that our service levels help many of our customers avoid fines and chargebacks and things like that many retailers are putting in place.
Great. That's great color. Just for my follow-up, maybe you could talk about how you think this compares to kind of the 2008, 2009 period. 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. With pricing down on the truckload side, how elastic is the pricing for LTL carriers as a whole?
In terms of how we entered the recession in 2008 and 2009, we sort of eased into it. The fourth quarter of 2008 was down about 5% or 6%, and then we kind of went down to somewhere between 15%-20% drop in revenue in the first quarter of 2009, and then it kind of got to its worst in the second quarter. Now obviously we just faced a sudden drop-off in April. Really at the end of March, we didn't necessarily see a drop-off in freight levels at the end of March. It was lower than what we expected, but really it was we didn't get the end of quarter buildup that we typically see.
It may have been a little bit soft, but I think that many customers still had orders in the chain, if you will, and we continued to make some of those deliveries. We held somewhat steady, if you will, from the middle of March toward the end and just missed the normal kind of end of quarter buildup. Now, and kind of as we anticipated, we saw the rapid drop-off in April, and it's obviously much harder to respond to that type of change and to be able to keep the network of 238 service centers remaining fluid and our service metrics high. I've been really impressed with the operations team and how they've made these adjustments, cutting out costs, minimizing empty miles. Our dock productivity is up. P&D productivity is looking good as well.
When you think about that, I mean, our miles between stops, those types of things become more challenging when you've got some customers that are closed, and it just makes that job function that much more difficult and lack of efficiency. It all goes back to the fact that over the years and the experience that our team has, we've got a lot of experience, and we've got a lot of technology in place to help us plan. It's not artificial intelligence, it's human ingenuity that's been able to keep our system running in very efficient manner. We're really pleased with how quickly the team has adapted to these abrupt changes of just revenue falling off a cliff like they have.
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 believed that LTL would continue to be disciplined. Just the sheer 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 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. 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. 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. 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 ride sharing before ride sharing 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. Even when they try to dip down and do multi-stop, their network is not really conducive to doing that, their equipment's not, and their drivers aren't paid to make multiple stops like ours are. I think the industry remains strong, and we'll continue to be disciplined with respect to price, relatively speaking.
That's great. Thanks for the color.
We'll go next to Ravi Shanker with Morgan Stanley.
Thanks. Morning, Greg and Adam. You guys referenced this a little bit in your commentary, are you able to quantify what percentage of your customer base is SMB versus large customers and maybe essential versus non-essential?
We've got about 60% of our customers are contract-type customers, and those are just going to be larger in nature. In terms of essential versus non-essential, to a certain degree, about everyone's essential. Certainly, we've got some smaller mom-and-pop accounts that are closed for business right now. Overall, we're seeing if we're down about 20%, then I'd say probably 80% is essential, if you will, because that's, for the most part, about all that's moving right now.
Got you. Just to clarify, you're saying 80% of your customers would be essential, obviously not from your perspective, but from a government perspective. 80% of your 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. 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. We don't know exactly if everything that we haul is essential or not.
Got it. Just lastly, again, referring back to some of the commentary about share shifts and comparing them to 2008 and such. Obviously, a big focus for 2020, coming into the year pre-COVID-19, was the kind of supply side catalysts on the TL side, but maybe some spillover effect on the LTL side. Are you hearing of any accelerated bankruptcies with mom-and-pop carriers, just given some of the supply side restrictions on the, whether it's driver clearing house or the insurance costs, which obviously will impact LTLs as well, that's made worse by the volume at the moment?
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 thousand that had closed. As you know, most on the truckload side, there's thousands and thousands that are less than 10 drivers. We know some of those have closed and gone away, but certainly haven't seen that on the LTL side.
Okay. Thank you.
We'll go next to David Ross with Stifel.
Yes, good morning, guys.
Morning, David.
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. Adam, you talked about it not being the normal downturn where you see it down 5%, then maybe it gets a little bit worse over the weeks and months. 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? 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, David. 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 a normal end of the month, end of the quarter. We saw it coming. We weren't completely in the dark. Obviously, as you 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. We had some information, and trust me, we were preparing to deal with it well ahead of time.
Obviously, we couldn't make all the adjustments that we wanted to at the snap of a finger, but we were well prepared to do it at the first of the month. A lot of the adjustments that we made were at the first of the month. We've made some since. We'll continue to do so if need be. We've got a lot of information out there that we look at and measure and the customers closing and all that kind of thing. There was a lot of information flowing in and out that helped us make decisions.
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, the shipments tonnage, all those things. We look at it on a company level and a region level as well. 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 2008, 2009, and similar downturns, smaller downturns through the years. It's a little different, but obviously, we've got to do it. Not fun, I can tell you that.
Yeah. Well, unlike the other ride-sharing companies, you guys at least make money through the ups and downs. Congratulations.
Thanks. 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. Everybody's on board with what we're doing. We've had numerous conference calls and numerous meetings within the walls of the building, and been a lot going on.
We'll go next to Amit Mehrotra with Deutsche Bank.
Thanks, operator. Hi, everybody. Thanks for taking my question. I got disconnected mid-call, so just let me know if my question's already been asked, and I'll just go back to the transcript. Adam, I was hoping that you could provide the typical sequential shipment trends from April to May to June. I know this year it's completely crazy, but it would just be helpful to understand the normal sequential seasonality in the shipments as you see it historically.
Sure. On a shipments per day basis, April shipments are typically 0.9% higher than March, and May is 3.2% higher than April, and June is 1.8% higher than May.
That down 20% year-over-year. Oh, sorry, that was in shipments. What is the normal seasonality sequentially in April that you've seen so far versus that number that you just talked about?
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.
Okay. That's helpful. 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 maybe inflates wages per employee. Just something that we should be thinking about for the second quarter.
Not on the wage side. We did talk about the fact that we are covering the cost of the benefits, though. The fringe benefit will likely be a little bit higher or at the higher end of our normal range, if you will, as a percentage of salaries and wages.
Okay. Obviously, you guys have a great reputation of running an incredibly efficient network. That's a great track record. One thing I want to understand is as I measure the line haul efficiency, is there any way you can help us think about how full the trucks are on any given period or typical period? I'm just trying to understand the potential change in load factors as you move from Q1 to Q2 , given I assume those numbers are pretty high and partly reflects the efficiency of the network. Any help around load factors and how we think about that?
Obviously, load factor is something that we manage and watch on a daily basis. Fortunately, so far, month to date, our load factors have actually improved some. You 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. We do measure that, manage that very closely, and again, fortunately, month to date, our load factors have shown some improvement.
Thanks, Greg. Is that an effective proxy for margins, or are there just so many other moving parts that load factor is one piece of it? I'm just trying to understand, is that an effective proxy for the overall margin trends?
I think you have to look at all different aspects of line haul, our miles, empty miles, and those kind of things. I think load factor is the biggest thing that we can manage by.
Okay.
We certainly look at cube factor and that kind of thing as well. So far, it looks okay.
Okay. 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. I just want to isolate for weight per shipment is really the question. Obviously you guys manage expenses on a shipment basis, and that obviously makes sense. If we were to keep everything equal, specifically pricing equal. Do 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. Does that higher revenue come with disproportionate margins because you're managing the expenses on shipments? I'm just trying to really conceptually isolate weight per shipment and how to think about the drop-through from the revenue associated with that.
Yeah. I talked around that earlier in the call, so I'll point you back to the transcript, or either we can follow up later.
Okay. All right, very good. Thanks for taking my questions.
We'll go next to Ben Hartford with Baird.
Hey, guys. Thanks for getting me in. 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? 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?
Yeah, well, over time, at 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. We've gotten improvement over the years, and our overhead costs have stayed relatively consistent as a percentage of revenue. 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 cost as a percentage of revenue. 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.
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. 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. 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?
Variable cost?
Yeah.
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.
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, so it's probably a little too soon to tell if they've had a significant change or not.
Sure. Okay. Understood. Thanks for the time, guys.
We'll go next to Scott Group with Wolfe Research.
Thanks for the quick follow-up. Greg, you made a comment earlier about something to the effect of if we lose a competitor. I guess I'm curious if you think that you're gaining any share from that competitor right now or any sort of outside share given potential concerns there. Maybe if you'd just share any sort of thoughts or on contingency plans you guys have in place or anything like that.
Well, I'm not sure I want to say any more than I said prior in relation to that. 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. Couldn't begin to say if we've gained share from anybody at this point. We just don't know. Again, I'll only 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.
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. We'll see what happens with that, but we really don't want to speculate on that.
All right. Appreciate the follow-up. Thank you, guys.
There are no further questions in queue. I'd like to turn it back over to Mr. Gantt for any additional or closing remarks.
Well, thank you all for your participation today. We appreciate your questions. Please feel free to give us a call if you have anything further. Thanks. I hope you all have a great day.
That concludes today's conference. Thank you for your participation.