Old Dominion Freight Line Inc (NASDAQ: ODFL) Q1 2020 Earnings Call Transcript

Old Dominion Freight Line Inc (ODFL) Q1 2020 earnings call dated Apr. 23, 2020

Corporate Participants:

Greg C. Gantt — President and Chief Executive Officer

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Analysts:

Jack Lawrence Atkins — Stephens Inc — Analyst

Christian F. Wetherbee — Citigroup — Analyst

Allison M. Landry — Credit Suisse — Analyst

Scott H. Group — Wolfe Research — Analyst

Todd Clark Fowler — KeyBanc Capital Markets — Analyst

Ariel Luis Rosa — BofA Merrill Lynch — Analyst

Ravi Shanker — Morgan Stanley — Analyst

David Griffith Ross — Stifel, Nicolaus — Analyst

Amit Singh Mehrotra — Deutsche Bank — Analyst

Benjamin John Hartford — Robert W. Baird — Analyst

Presentation:

Operator

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 1, 2020, by dialing (719) 457-0820. The replay pass code is one 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 1990 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 yourself 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.

Greg C. Gantt — President and Chief Executive Officer

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 believe 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 address the rapidly changing environment. While no plan will be perfect in these type 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 in 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 base coverings to our employees, increased the cleanings of our facilities, limited nonemployee 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 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. 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 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 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. But 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 new 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 realized that responding to rapid growth can be difficult.

We know this from experience as we have seen many periods with 20-plus percent 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’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 front lines 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.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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%. The 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 head count 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 of 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 solids 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 attempt to balance the number of employees actively working with current freight trends. As a result, our current number of active import employees has decreased approximately 15% as compared to April 2019. While the loss of revenue will have a deleveraging effect on our fixed costs, approximately 2/3 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 carriers 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 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.

Questions and Answers:

Operator

[Operator Instructions] And we’ll go first to Jack Atkins with Stephens.

Jack Lawrence Atkins — Stephens Inc — Analyst

Good morning, and thanks for taking my questions. Greg, Adam. So I guess to start off and Adam, thank you very much for that, 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 or loss in certain markets, anything like that going on? Or do you feel like market share in general is fairly stable. And are customers are 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, 3, four weeks?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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 the rate reduction just by the sense that fuel surcharges are down so much and the significance 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. But 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 investment we’ve made in our service centers and our service. And so we have no intention of wait wavering on that in any regard. And 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. 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, at least I saw it 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 that we are.

Jack Lawrence Atkins — Stephens Inc — Analyst

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, 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? And even though you’re reducing capex this morning, sort of what’s going on that make you consider perhaps leaning into to 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?

Greg C. Gantt — President and Chief Executive Officer

Well, it’s 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 critical to our future growth and what not. I think that’s the correct strategy as we go through this. Where it comes out on the other side, we just have to wait and 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 we’ve our capital expenditure investments will help us on that side, whatever it is. So I feel good about it. Who knows, I don’t really want to speculate on those kind of things.

Jack Lawrence Atkins — Stephens Inc — Analyst

Okay, that’s understandable. But thanks again for the time.

Operator

We’ll go next to Chris Wetherbee with Citi.

Christian F. Wetherbee — Citigroup — Analyst

Hey, thanks. Good morning, guys. I 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. But I 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.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Yes. The mix in the businesses that we’re seeing, that are still open, I mean, 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, 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 were broad and rounded just to give a sense of direction for you guys, but we’re down on a 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 the 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 had already seen in March. So just change in dynamics and whenever things start to reopen, obviously, we at some point, things will stabilize and you’ll get back to more of your normal book of business and so forth. But right now, we are seeing much heavier weights per shipment across the board with the rate that we’re handling.

Christian F. Wetherbee — Citigroup — Analyst

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 the sort of nonessential pieces of the business, your 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 there another further leg down there? I know it’s difficult, but any color you could give would be great.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Yes, certainly difficult to tail 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. We’re 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 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 begin to reopen. So I think there’s 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. It may take some time for us to get there. But certainly, we are already 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.

Christian F. Wetherbee — Citigroup — Analyst

Sorry, that’s helpful. I appreciate the time.

Operator

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

Allison M. Landry — Credit Suisse — Analyst

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 pretty meaningful one at that. I mean, do you still expect to see sequential OR improvement? Maybe if you could speak to that?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Yes. I think that typically, the second quarter is where we get the OR improvement, but you’re typically seeing revenue accelerate. Typically, our second quarter revenue is about 10% higher than the first quarter. And I think what happens from a revenue basis, obviously, will drive what happens with the operating ratio. If things stay lower, then we like we mentioned, we have adjusted many of our variable costs at this point, already to this lower environment. But I think that it just remains to be seen where revenue levels in the second quarter be higher than the first or consistent or lower that’s just still the ongoing uncertainty. But what we can say is that a 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. And then it’s been higher than that or on the higher end. Last was back in the recessionary environment of 2009.

So that will be the flex. But within those overhead costs, there are some variable costs there as well that we’ll continue to try to manage. But not all of our direct operating costs are completely variable as well. And 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. So 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 1.5 months ago. So it’s taking 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.

Allison M. Landry — Credit Suisse — Analyst

Okay. That’s really helpful. And then just in terms of capex, 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 or 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, that would be helpful.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Well, in our normal maintenance capex, we kind of say on any annual year would be maybe $200 million to $250 million, but we’re already into this year’s capex plan, which only included $20 million of 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. But on the real estate side, we’re 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. So it’s important for us to in some cases, keep those projects going, so that the capacity is available, and 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 say 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 rate flows later this year, but for the next several years.

But 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 ’08 and ’09, we’ll also look for opportunities. So 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, then we would certainly look at existing service centers and how they might be able to work into our long-term plan.

Allison M. Landry — Credit Suisse — Analyst

Okay, thank you so much. It was great contacts.

Operator

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

Scott H. Group — Wolfe Research — Analyst

Hey, thanks, morning, guys. So Adam, maybe you can offer some help. So we’ve never seen weight per shipment up so much. I don’t think we’re ever we’ve ever seen rev 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, good or bad for does it help decrementals, hurt decrementals? And then maybe just like 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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Yes. I don’t know that there is a rule of thumb. And some of that detail I gave in the prepared comments. It’s just 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. But frankly, it’s 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 was 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. 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. 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. 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 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 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, 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 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 faced. 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 the 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. 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.

Scott H. Group — Wolfe Research — Analyst

Yes. I mean, I guess I’m still not sure of the answer, right? I hear wafer shipment typically is good. You all said maybe there’s more national account business, which I sometimes think is bad OR. So again, any additional thoughts or color on how to how we should think about this translating to the OR would be helpful. And then 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?

Operator

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. 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, too, 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’ve got that balance out right from a pricing standpoint. But right now, if we can hold our own with managing our direct operating cost, which 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 cost, any inflation that we might see in those cost items as a percent of revenue, given the overall big picture of revenue weakness that we’re seeing in April.

Scott H. Group — Wolfe Research — Analyst

Okay, thank you guys.

Operator

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

Todd Clark Fowler — KeyBanc Capital Markets — Analyst

Great. Thanks. And good morning. Adam, I wanted to ask about the 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? And then what’s the right way to think about the the portion of the expense that you’re still keeping, is the health and wealth is the health care cost still about 1/3 of the total expense? Or is it something different than that?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

That year over 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 head count 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. So it had 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 into the network. So we feel good about kind of where we are in that regard. And all 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.

Greg C. Gantt — President and Chief Executive Officer

In regards to the benefits we had kind of said, I think, coming in this year at about 34%. So about 1/3, 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%. And so it’s somewhere around 1/3 to 32% to 34% is probably likely, maybe a little bit higher since we are covering the health care cost of furloughed employees. So that might pick up or be at the higher end of that scale and kind of what our target was coming into this year.

Todd Clark Fowler — KeyBanc Capital Markets — Analyst

Okay. That helps. And then just for my follow-up, as you look out, if we don’t see kind of a significant snapback 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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

We are already making cost adjustments in areas like general supplies and expenses and some of our miscellaneous expense items as well. So we’re making every effort to eliminate costs where we can and where it makes sense. And in terms of just overall kind of revenue levels, and I think Greg mentioned this in his prepared remarks is that the good news is things have kind of settled in, and our revenue levels have been very consistent that certainly helps us from a planning standpoint and makes it 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. So we’ve been pleased to sort of see that stability with the revenue, and we’ll continue to see where we go from here. But 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 begin and talk about reopening. You’d like to think that the worst is behind us and that we’ve hit a floor, but 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.

Todd Clark Fowler — KeyBanc Capital Markets — Analyst

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

Greg C. Gantt — President and Chief Executive Officer

We haven’t talked about that at this point, Todd. So we’ll see where that goes, but we have not discussed that. So see where it goes. Todd, keep in mind, too, a lot of our expenses are down just because of the way we’ve changed, the things that we do on a day-to-day, week-to-week basis like travel entertainment, some of our marketing expenses are down. So we have cut an awful lot of expenses that we’d normally incur when we’re 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.

Todd Clark Fowler — KeyBanc Capital Markets — Analyst

Okay, thanks. Thanks for the time, guys.

Operator

And we’ll go next to Ari Rosa with Bank of America.

Ariel Luis Rosa — BofA Merrill Lynch — Analyst

Great. Good morning, guys. 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 exposure to those end markets, if you could, on a more sustainable basis?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

It’s I would just say the long-term trend has certainly been that we’ve seen more growth in retail-related business. Not any kind of necessary change or any difference in that regard for what we saw in the first quarter. Most of those were trending, somewhat, in line. And what we’ve seen in April, as you can imagine, we’ve got exposure to agricultural on food and food distributors and things like that, that have been good in any type of manufacturing that would go into those types of things or other medical-related and chemical-related type of products as well. So that’s kind of been the areas that have performed and have continued to give us business, if you will, in April. While some other things that if it’s 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. So but 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 move towards having some type of e-commerce type of presence and how that, or the ripple effects of that, throughout the nation supply chain, and 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. And so that’s been a tailwind for our business in recent years and the fact that our service levels helped many of our customers avoid fines and charge backs and things like that, that many retailers are putting in place.

Ariel Luis Rosa — BofA Merrill Lynch — Analyst

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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Sure. In terms of how we entered the recession in ’08 and ’09, it was we sort of eased into it. The fourth quarter of ’08 was down about 5% or 6%, and then we kind of went down to somewhere between 15% 15% to 20% drop in revenue in the first quarter of ’09, and then it kind of got to its worst in the second quarter. And now, obviously, we just faced a sudden drop off in April. And 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. And it may have been a little bit soft, but I think that many customers still had kind of orders in the chain, if you will, and we continue to make some of those deliveries. So we held somewhat steady, if you will, from the middle of March towards the end and just missed the normal kind of end of quarter buildup.

But 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. So 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 and when you think about that, I mean, our miles between stops, those types of things become more challenging when you got some customers that are closed and it just makes that job function that much more difficult and lack of efficiency. But 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 kind of help us plan, but it’s not artificial intelligence, it’s human ingenuity that’s been able to keep our system running in a very efficient manner and we’re really pleased with how quickly the team has adapted to these abrupt changes of just revenue falling off a cliff like the half.

Ariel Luis Rosa — BofA Merrill Lynch — Analyst

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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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 stock 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.

Ariel Luis Rosa — BofA Merrill Lynch — Analyst

That’s great. Thanks for the color.

Operator

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

Ravi Shanker — Morgan Stanley — Analyst

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?

Greg C. Gantt — President and Chief Executive Officer

Well, we’ve got about 60% of our customers are contract type customers, and those are just going to be larger in nature. And in terms of essential versus nonessential, I mean, to a certain degree, about everyone’s essential. And but certainly, we’ve got some smaller mom-and-pop accounts that are closed for business right now. But overall, we’re seeing for down about 20%. And then I’d say probably 80% is essential, if you will. That’s, for the most part, about all of it’s moving right now.

Ravi Shanker — Morgan Stanley — Analyst

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?

Greg C. Gantt — President and Chief Executive Officer

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 house essential or not.

Ravi Shanker — Morgan Stanley — Analyst

Got it. And just lastly, again, referring back to some of the commentary about share shifts and comparison to ’08 and such. Obviously, a big focus for 2020 coming into the year pre COVID while the kind of supply side catalysts on the TL side with maybe some spillover effect on the LTL side, are you sharing 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 even impact LTLs as well. That’s made worse by the environment?

Greg C. Gantt — President and Chief Executive Officer

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.

Ravi Shanker — Morgan Stanley — Analyst

Okay, thank you.

Operator

And we’ll go next to David Ross with Stifel.

David Griffith Ross — Stifel, Nicolaus — Analyst

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?

Greg C. Gantt — President and Chief Executive Officer

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.

David Griffith Ross — Stifel, Nicolaus — Analyst

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

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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 region 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.

David Griffith Ross — Stifel, Nicolaus — Analyst

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

Greg C. Gantt — President and Chief Executive Officer

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’s 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.

Operator

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

Amit Singh Mehrotra — Deutsche Bank — Analyst

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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Sure. The April, on a shipments per day basis, April shipments are typically a 0.9% higher than March, and May is 3.2% higher than April, and June is 1.8% higher than May.

Amit Singh Mehrotra — Deutsche Bank — Analyst

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

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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.

Amit Singh Mehrotra — Deutsche Bank — Analyst

Okay. That’s helpful. 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.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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.

Amit Singh Mehrotra — Deutsche Bank — Analyst

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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Obviously, load factor is something that we manage and watch on a daily basis. Unfortunately, so far, month to day, 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.

Amit Singh Mehrotra — Deutsche Bank — Analyst

And is that is that the best is that an effective proxy for margins? Or are there just so many other moving parts that load factor is one piece of it, but I’m just trying to understand, is that effective proxy for like the overall margin trends?

Greg C. Gantt — President and Chief Executive Officer

I think you have to look at all different aspects of linehaul 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.

Amit Singh Mehrotra — Deutsche Bank — Analyst

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.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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.

Amit Singh Mehrotra — Deutsche Bank — Analyst

Okay, very good. Thanks for taking my questions.

Operator

We’ll go next to Ben Hartford with Baird.

Benjamin John Hartford — Robert W. Baird — Analyst

Hey, guys, thanks for giving me in. Adam, just real quick. You mentioned 2/3 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?

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

Well, over time, our 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. 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 cost 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.

Benjamin John Hartford — Robert W. Baird — Analyst

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

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

A variable cost?

Benjamin John Hartford — Robert W. Baird — Analyst

Yes.

Adam N. Satterfield — Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary

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.

Benjamin John Hartford — Robert W. Baird — Analyst

Okay. Just on the customer set, the 3PL customers that you do 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?

Greg C. Gantt — President and Chief Executive Officer

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.

Benjamin John Hartford — Robert W. Baird — Analyst

Okay. Understood

Operator

And we’ll go next to Scott Group with Wolfe Research.

Scott H. Group — Wolfe Research — Analyst

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?

Greg C. Gantt — President and Chief Executive Officer

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, come on back soon than losing a competitor. So we’ll see what happens with that. But we really don’t want to speculate on that.

Operator

And there are no further questions in queue. I’d like to turn it back over to Mr. Gantt for any additional or closing remarks.

Greg C. Gantt — President and Chief Executive Officer

Thank you all for your participation today. We appreciate your questions and please feel free to give us a call if you have anything further. Thanks, and I hope you all have a great day.

Operator

[Operator Closing Remarks]