Old Dominion Freight Line, Inc.

Good morning and welcome to the first quarter of 2020 conference call for Old Dominion Freightline. Today's call is being recorded and will be available for replay beginning today and through May 1, 2020 by dialing -457-0820. The replay passcode is 150-2975. 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 Gant. 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 -in-class service. In terms of how we have responded to the rapid decrease in business levels associated with the -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 .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. 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 shipping accounts. 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 costs 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 costs 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-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 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, and now Adam will discuss our first quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the first quarter of 2020 was $987 million, which was a 0.3 percent decrease from the prior year. The first quarter of 2020 included one extra workday, so the decrease per day was 1.9 percent. 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 percent reduction in LTL times that was partially offset by the 2.6 percent increase in LTL revenue per hundredweight. Excluding fuel surcharges, LTL revenue per hundredweight increased 3.3 percent. While this growth rate was lower than recent periods, our yields were negatively affected by the 1

.3

percent 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 percent 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 56 cent 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 54 cent 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 take count also decreased 5.2 percent as compared to the 5.1 percent decrease in average shipments per day. In regards to our April top-line trends, revenue per day is down close to 20 percent. Our average weight per shipment has increased close to 10 percent 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 percent lower than it was in April 2019. Our actual results have been slightly better than we initially expected when the -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 T&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 percent 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 are fortunate to have the balance sheet strengths to provide us with this flexibility. 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 at $204 million for the second quarter. Our 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 .3% as compared to .1% in the first quarter of 2019. We currently expect our effective tax rate to be .3% for 2020. This concludes our prepared remarks this morning. Operator will 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. And we'll go first to Jack Actins with Stevens.

Greg, Adam, good morning and thanks for taking my questions. Good morning. So I guess to start off, you know, Adam, thank you very much for that color there in terms of what you're seeing so far in April. And it's encouraging to hear that, you know, the competitive environment remains, you know, relatively, you know, rational right now. Could you maybe talk for a moment about, you know, 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 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, you know, call three, four weeks?

Jack, this is Adam. I think customers or certain customers are always pushing back on price regardless of the environment. You know, with that said right now, I think about every customer is getting some form of a rate reduction just by the sense that fuel surcharges are down so much and the significance of the surcharge that it can be on each customer's freight bill. So, you know, that is happening due to the 20% reduction in the cost of diesel fuel right now and the impact, you know, for each customer's freight bill in that regard. But, you know, otherwise for us, just like we said, you know, 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 in our service. And so we have no intention of wavering on that in any regard. And at this point, we haven't seen, you know, really any competitive behavior that's really any different than what we saw, you know, basically in the last half of last year. So I think things have been pretty disciplined and disregarded thus far. And, you know, 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, you know, those types of actions at this point either. And in fact, we just saw one other LPL 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.

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

Well, it's that, 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 whatnot, I think that's the correct strategy as we go through this. And, you know, where it comes out on the other side, we'll 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 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.

Okay. That's understandable. Thanks again for the time.

We'll go next to Chris Weatherby with Citi.

Hey, thanks. Good morning, guys. Appreciate you at the time. And 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 understand maybe some puts and takes that could be going on just given the mixed shifts that we're seeing.

Yeah, you know, the mix and the businesses that we're seeing that are still open, you know, our way for 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, you know, the comments which were broad and rounded just to give a sense of direction for you guys, but, you know, we're down on the revenue per day basis close to 20%. The shipments per day are trending worse than that, but our weight for shipment is up almost 10%. So tonnage then obviously is going to be trending better, but that big increase in the weight for shipment is also having the negative effect on reported yields like what we had already seen in March. So just, you know, changing dynamics and, you know, whenever things start to reopen, you know, obviously 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 freight that we're handling.

Okay. Okay. That's helpful. I guess that sort of leads into the second question, which would just be about the discussions you 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. Or is it too difficult to tell? 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. You know, 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. 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 you know, when we get back to normal and what the new normal means, you know, 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.

Okay. All right. 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 pretty meaningful one at that, would you still expect to see sequential alarm improvement, maybe if you could speak to that?

Yeah, I think that, you know, 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 you know, I think what happens from a revenue basis obviously will drive what happens with the operating ratio. If things stay lower, then, you know, like we mentioned, we have adjusted many of our variable costs at this point already to this lower environment. But you know, 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? You know, that's just still the ongoing uncertainty. But 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. And we're looking to keep those as best we can consistent or maybe even try to generate improvements versus the first quarter. And then it just becomes a function of the overhead costs, which the overhead costs we say typically run 20 to 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. And then it's been higher than that, or on the higher end. You know, 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 you know, 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 on 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 a month and a half ago. So 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 call side that we've been able to see so far in April.

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

Well,

you know, our normal maintenance capbacks, we kind of say on any annual year would be maybe $200 to $250 million. But we're already into this year's capbacks plan, which only included $20 million of related 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, you know, 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 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 rate flows later this year, but for the next several years. But, you know, 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.

Okay, thank you so much. Those were great contacts.

We'll go next to Scott Griff with Wolf Research.

Hey, thanks. Morning, guys. So, Adam, maybe you can offer us some help. So we've never seen weight per shipment up so much. I don't think we've ever seen rev per hundred weight 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, you know, how does higher weight per shipment impact, you know, core pricing and, you know, 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 the paired 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 hundred weight. But, you know, 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. You know, the weight per shipment, we saw it increase kind of in the middle and end of March. I think initially a lot of that was it seemed like the truckload world was tightening in some places. That was concern about our anecdotal evidence we had was concerned 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. You know, as some of the -at-home orders were put in place, then I think that we saw some of our small -the-pop accounts that might be closed. And so, you know, probably more of the business that we're handling being larger national accounts, they typically have a higher weight per shipment as well. And then like I mentioned earlier, just the sheer fact that if they are essential goods, there was probably an increased demand for those. And so there was just more widgets on every shipment that we were picking up in that regard.

But, you know, that will

settle down in some regard. And, you know, in terms of how it affects overall profitability, you know, again, it's just every customer must stand on its own. That's the basis of what our pricing philosophy is. And, you know, 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 -by-account profitability. Now, with that said, I mentioned that, you know, we've done a good job, I think, in managing our direct operating costs and keeping those somewhat consistent as a percent of revenue despite the significant disruption that we face. So, you know, 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, you know, 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 for shipment. Usually on just the per-shipment basis, it's a better thing. You get a little bit more revenue per shipment when the cost to handle would be the same. But right now, it's just obviously very fluid with what we're actually picking up and continuing to work through the system and the network as we speak.

Yeah, I mean, I guess. I'm still not sure of the answer, right? You know, I hear weight per shipment typically is good. You also said maybe there's more national account business, which I sometimes think is bad for OR. So, you know, again, any additional thoughts or color on how we should think about this translating to the OR would be helpful. And then I'll just add to that, you know, how should we think about fuel? You know, 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. So obviously, we're getting lower fuel surcharges right now, but the costs are down as well. And, you know, in regards to just the operating ratio, the only thing I can say is that, you know, 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 balanced out right from a pricing standpoint. But, you know, right now, if we can hold her on with managing our direct operating costs, which typically are around 58 to 60% of revenue, if we can keep those flat, 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.

Okay. Thank you,

guys. We'll go next to Todd Fowler with KeyBank Capital Markets.

Great. Thanks and 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? And then what's the right way to think about the portion of the expense that you're still keeping? Is the health and wealth, 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 kind of the ending headcount that we finished in 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. So we did drift it down a little bit, but the April number is what reflects the furloughs that were put in place. So that's down not quite as much, obviously, as the number of shipments. But certainly we want to make sure we've got people capacity in place in the event that things turn back on and we continue to see volumes come in the network. So feel good about kind of where we are in that regard and we'll continue to move forward and just evaluate on a -by-day and -by-week basis kind of where we are with volumes and revenue and how we're managing our people capacity.

In regards to the

benefits, we had kind of said I think coming in this year that about 34%, so about a third as you said, as a percent of salaries and wages was the target. We did a little bit better than that in the first quarter. That number in the first quarter was about 32.5%. So somewhere around a third, a 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.

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

We are already

making cost adjustments in areas like general supplies and expenses and some of our miscellaneous expense items as well. So we are 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 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, you know, 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, you know, 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. But that's something that, you know, 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.

And can you share any thoughts on, you know, additional bonuses? And 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. Okay, sure. 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 -to-day, -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, you know, 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. Yours and mine both, Greg. Okay, thanks for the time, guys. Thanks.

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

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 for shipment. Is that more tilted towards kind of retail and essential goods? You know, I presume it is. And then, you know, 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?

It's, you know, 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, you know, somewhat in line. You know, 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, you know, those types of things or other medical-related and chemical-related type of products as well. So, you know, 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, you know, 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, you know, long-term, as we've said multiple times, we think that 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's 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 in the fact that our service levels help many of our customers avoid fines and chargebacks and things like that that many retailers are putting in place.

Great. That's great color. And then just, you know, for my follow-up, maybe you could talk about how you think this compares to kind of the 2008-2009 period. And then, you know, 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. You know, it seems like typically when you see higher weight for shipment, that's some truckload movements flowing into the LTL side, but with pricing down on the truckload side, you know, how elastic is the pricing for LTL carriers as a whole?

In terms of how we entered the recession in 2008 and 2009, it was, you know, 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 -20% drop in revenue in the first quarter of 2009, and then, you know, it kind of got to its worst in the second quarter. And, you know, 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 -of-quarter build-up that we typically see. 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 continued 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 -of-quarter build-up. But, you know, 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 their service metrics high. So, you know, 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've 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, you know, 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 they have.

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

I think that as we've seen in recent years and even going back to when we were slower in 2016, we 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 per volume. In fact, it's probably better to go out and try to implement more of an increase to try to shore up the profit levels. So we felt like that LTL pricing would stay more consistent and it's held fairly steady. You know, 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, you know, 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, you know, there's still a benefit of moving freight by LTL. You know, 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. And even when they try to dip down and do multi-stop, their 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 will continue to be disciplined with respect to price relatively speaking.

That's great. Thanks for the call.

Thank you. We'll go next to Ravi Shankar with Morgan Stanley.

Thanks. Morning, Greg and Adam. 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 non-essential?

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

Greg, just to clarify, you were saying 80% of your customers would be essential, obviously not from your perspective, but from a government perspective. And so 80% of your customers are actually moving stuff right now.

That's roughly the case. You know, we cannot accurately measure everything, can we how, 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, you know, just exactly what groups they all fall into. But we don't know exactly if everything that we haul is essential or not.

Garda, just lastly again, referring back to some of the commentary about, you know, share shifts and comparing them to ORIID and such. Obviously a big focus for 2020, you know, coming into the year pre-COVID was the kind of supply side catalysts on the TL side, you know, but maybe some spillover effect on the LTL side. Are you sharing of any accelerated bankruptcies with mom and pop carriers, just given some of those supply side restrictions on the, you know, whether it's driver clearing house or the insurance costs, which obviously will impact LTLs as well. That's made worse by the volume of 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. 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 that closed and gone away, but certainly haven't seen that on the LTL side.

Okay, thank you.

And we'll go next to David Roth with Stiefel.

Yes. Good morning, guys. 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% and 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 days, how do you react to that? I mean, Greg, what are you seeing in the network with the volumes and then what do you do in terms of shifting things around in such a short period of time?

Well, good question, Dave. We could see it to some degree that it was coming because, as Adam mentioned before, we did not get the normal end of the month, end of the quarter like we would typically get. It was off, I'm not sure, maybe 15, 20% versus a normal end of the month, end of the quarter. So we saw it coming. We weren't completely in the dark. And obviously, as you kept hearing about all these -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 preparing to deal with it well ahead of time. So 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. And a lot of the adjustments that we made were at the first of the month. We've made some sense 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 and the customer's closing and all that kind of thing. And there was a lot of information flowing in and out that helped us make decisions.

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. 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 years. It's a little different, but obviously we've got to do it. So it's not fun, I can tell you that.

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

I think again, as Adam mentioned earlier, it's a tribute to the team. 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, numerous conference calls and numerous meetings within the walls of the building. There's 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. But Adam, I was hoping that you could kind of provide the typical sequential shipment trends from April to May, May to June. I know this year it's completely crazy, but it would just be helpful to understand kind of the normal sequential seasonality in the shipments as you see it historically.

Sure. The April, on a -per-day basis, April shipments are typically .9% higher than March, and May is .2% higher than April, and June is .8% higher than May.

And then that down 20% year over year, sorry, that wasn't shipments. But what is the normal seasonality sequentially in April that you've seen so far versus that number that you just talked about?

Well, you know, obviously if things are down about 20%, I hadn't really calculated necessarily for how it looks into a sequential, but that would put it down about somewhere in the neighborhood of 15% or so versus shipment levels for March. 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 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 they will, we are covering the cost of the benefits though, so the fringe benefit will likely be a little bit higher or at the higher end of our normal range, if you will, as a percent of salaries and wages.

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

Obviously load factor is something that we manage and watch on a daily basis. Unfortunately, so far month to day, our 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 measure that, manage that very closely, and again, forcibly, month to day our load factors have shown some improvement. And is

that, thanks Greg, 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 an effective proxy for like the overall margin trends? I

think you have to look at all different aspects of the line haul, you know, our 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 cube factor and that kind of thing as well, but so far it looks okay.

Okay, and then the last question I have very quickly is, Adam, there's a lot of questions around weight for 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 for shipment is really the question. So, you know, obviously you guys, you know, manage expenses on a shipment basis, and that obviously makes sense, but if we were to keep everything equal, specifically pricing equal, do changes in weight for shipment, you know, 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 for shipment and kind of 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 where we can follow up later. Okay,

all right, very good. Thanks for taking my questions.

We'll go next to Ben Hartford with Bayard.

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 ten years ago? Has that number, that proportion risen over time, and if so, why? Is it density? Is it internal initiatives to variableized costs? Can you provide a little bit of perspective just over time, how that's trended?

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

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

though? A variable cost.

Yeah.

You know, 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 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. I understand. Thanks for the time, guys.

And we'll go next to Scott Group with Wolf Research.

Thanks for the quick follow-up. So, Greg, you made a comment earlier about something to the effect of if we lose a competitor. And 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, and then maybe if you just share any sort of thoughts or 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, 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'll only say from the standpoint of being prepared to gain share, to gain additional business, should something happen, I think we have done the right things over the last several years. I think you all are well aware of the capital expenditures that we've made in our real estate over the last several years in particular. We're continuing to make investments this year in our real estate, so I think we're doing the right things to be as prepared as we could possibly be. We're more concerned about our business hopefully coming back soon than losing a competitor, so we'll see what happens with that, but we really don't want to speculate on that.

All right. Appreciate the follow-up. Thank you,

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

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.

And that concludes today's conference. Thank you for your participation.