Good morning. And welcome to the Old Dominion Freight Line First Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Drew Andersen. Please go ahead.

Thank you. Good morning, and welcome to the first quarter 2023 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 3, 2023, by dialing 1(877) 344-7529, access code 6525435. 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 are not statements of historical fact but may be deemed 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 set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release; 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, we welcome your questions today, but we ask that you limit yourself to one question 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 conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.

Good morning, and welcome to our first quarter conference call. With me on the call today is Marty Freeman, our COO; and Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions. The OD team started this year with first quarter financial results that included revenue of $1.4 billion, an operating ratio of 73.4%, and earnings per diluted share of $2.58. These numbers were slightly below our first quarter results from 2022 and reflect the ongoing softness in the domestic economy and the challenging operating environment. We are also coming off a record year in 2022 where revenue and profits were at an all-time high. As we started this year, we were cautiously optimistic that our business levels would start to improve late in the first quarter and accelerate further in the second quarter. While our volumes stabilized during January and February as expected, we have not seen the acceleration in volumes that was originally anticipated. Our shipments per day have remained consistent on a daily basis so far this year, but on a year-over-year basis, shipments in April are trending down double digits. Fortunately, our market share has remained relatively consistent and our yield continues to improve. We believe the stability with our market share during the first quarter reflects the value of our service offering and the success of our long term strategic plan. The guiding principles of this plan have been in place for many years and have helped us produce a strong track record for long term profitable growth throughout the economic cycle. This plan is centered on our ability to deliver superior service at a fair price to our customers, and we remain committed to providing on-time service and claims-free service as well. We will continue to focus on delivering a value proposition to our customers while also maintaining a disciplined approach to managing the fundamental aspects of our business. This will include making the best decisions to help us navigate through a challenging environment in the short term while also positioning us for future opportunities to produce long term profitable growth. While we like to measure our success over years, we believe it takes winning on a daily, weekly, and monthly basis to add up to long term success. Our consistent focus and successful balance of long term opportunities against short term trends has helped us achieve a 10 year compound average growth rate in revenue and earnings per diluted share of 11.4% and 25%, respectively. I want to close my last earnings call as CEO by saying how incredibly proud I am of the entire OD family of employees, all 23,000 of us, and the track record of success that we have produced together. I am encouraged by the prospects that our team has for future growth. Without any doubt, I stand firm in my belief that OD has the strongest team in the industry, the best service in the industry, and is better positioned than any LTL carrier to continue to win market share while also increasing shareholder value. Thank you for joining us this morning. And now I will turn things over to Marty for further discussion of the first quarter.

Thank you, Greg, and good morning. I want to, first of all, start by thanking Greg for his leadership and significant contributions to OD over his career, while also recognizing each OD employee for their critical role in our success. Together, we have produced remarkable improvement in our financial and operating results over the long term. And I can assure you that OD's team remains focused on continuing our record of strong profitable growth. With respect to our first quarter, we delivered solid financial results, especially when considering the ongoing softness in the domestic economy and decrease in volumes. Although these factors contributed to the first decrease in quarterly revenue and earnings per diluted share since the second quarter of 2020, our market share has remained relatively consistent. As a result, we believe our decrease in volumes was largely due to some shippers simply having fewer shipments than normal due to the economy. Although there have been others that are beginning to emphasize price versus service and choosing lower priced carriers. The operating environment has become more challenging than we anticipated and the expected acceleration in volumes has obviously not occurred. Despite these factors, we have maintained a commitment to our long term strategic plan. We will continue to focus on providing shippers with superior service to support our ability to maintain our price discipline. Our consistent cost-based approach to manage yield and account profitability has been critical to our ability to improve our financial position over time, which has helped us support and continue our investments in technology and service center capacity. While capacity is not currently an industry issue due to the weakness in industry volumes, we believe this will once again become a critical differentiator for us when the economy improves. We believe our long term consistent investment in service center capacity has been and remains a strategic advantage that supports our long term market share goals. During this period of revenue decline, we will also maintain a disciplined approach to managing our variable costs and discretionary spending to protect our profitability. This starts with a commitment to maximizing the operating efficiency of our fleet and network. Some of our productivity measurements in the first quarter were negatively impacted by the general loss of operating density associated with the decrease in our shipments and weight per shipment. This was evidenced by a 4.9% decrease in our linehaul latent load average and a 1% decrease in our P&D shipments per hour. We improved our platform productivity, however, and generated a 5.8% increase in our platform shipments per hour. We also reduced our reliance on purchased transportation as compared to the first quarter of 2022, which allowed us to improve the overall efficiency of our operations. This contributed to the improvement in our variable cost as a percent of revenue during the first quarter. We will also continue to work on improving the efficiency of our operations as we make our way through the balance of this year, which provides an opportunity to generate additional cost savings. While productivity is always a focus, we cannot and we will not allow it to impact our best-in-class service performance. Our team continued to deliver superior service during the first quarter with an on-time service of 99% and a cargo claims ratio of 0.1%. This service performance remains critical to support our yield management strategies. We have said many times before that to produce long-term improvement in our operating ratio will continue to require a balance between operating density and yield management, both of which generally require a favorable macroeconomic environment. As just mentioned, we lost operating density in the quarter in the current environment due to the decline in volumes and the expansion of our network. Our yield has continued to consistently improve, however, and revenue per hundredweight, excluding fuel surcharges, increased 8.6% during the first quarter. We will continue to demonstrate value to our customers by balancing our superior service offering with a consistent cost-based approach to our pricing. The resulting value proposition is unmatched in the LTL industry and will continue to support our ability to increase market share over the long term. As we look forward to remaining quarters of this year, we currently anticipate the softer demand environment will continue. The second quarter is generally the period when volumes begin to accelerate, but we have yet to see an inflection towards growth. Nevertheless, I want to emphasize that we are well-positioned to respond to any acceleration in volumes that might occur if and when the economy improves. Until that time comes, we will continue to focus on managing our costs and delivering value to our customers through our value proposition of on-time, claims-free service at a fair price. Delivering value is a central element of our long term strategic plan and we remain committed to execute on this plan regardless of the economic cycle. As a critical part of this plan, we will also continue to execute our capital expenditure program and, most importantly, invest in the training, education, and development of our OD family of employees. The economy will eventually recover and we are confident that when it does, our team's execution will allow us to achieve further growth and profitability while also increasing our shareholder value. Thanks for joining us today. Adam will now discuss our first quarter financial results in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue decreased 3.7% in the first quarter of 2023 due to an 11.9% decrease in LTL tonnage that was partially offset by a 9.2% increase in LTL revenue per hundredweight. The combination of this decrease in revenue and slight deterioration in our operating ratio contributed to the 0.8% decrease in earnings per diluted share to $2.58 for the quarter. On a sequential basis, revenue per day for the first quarter decreased 7.9% when compared to the fourth quarter of 2022, with the LTL tons per day decreasing 4.3% and LTL shipments per day decreasing 3.4%. For comparison, the 10 year average sequential change for these metrics includes a decrease of 0.6% in revenue per day, a 0.5% decrease in tonnes per day, and a 0.2% increase in shipments per day. The monthly sequential changes in the LTL tonnes per day during the first quarter were as follows. January decreased 1.0% as compared with December, February decreased 0.2% versus January, and March increased 0.7% as compared to February. The 10 year average change for the respective months was an increase of 1.2% in January, an increase of 1.7% in February, and an increase of 5.2% in March. Our shipments per day over these same periods were relatively consistent on a sequential basis and increased slightly each month as we progressed through the first quarter. While there are still a few workdays remaining in April, our month-to-date revenue per day has decreased by approximately 15% when compared to April of 2022. Our LTL tonnage per day has also decreased by approximately 15%, while revenue per hundredweight has increased approximately 1% when including fuel surcharges and increased approximately 7.5% excluding fuel surcharges. Our revenue and shipment counts on a daily basis have been relatively consistent in April when compared to March of this year, except for the Good Friday and Easter holidays. As previously mentioned, however, we had expected to see acceleration in business levels by this point in the year based on customer feedback and our historical planning process. While we would like to see our market share continue to increase again, we believe that it's more important to maintain our price discipline during this period of economic weakness while positioning ourselves to emerge from a slow period with capacity and a better opportunity to produce strong profitable growth over the long term. We have operated in scenarios like this before and we will continue to execute our plan and adjust to this lower-than-expected volume environment until an inflection point happens and we can shift back into growth mode again. Our first quarter operating ratio increased to 73.4% for the first quarter as the improvements in our direct operating costs did not sufficiently offset the increase in overhead cost as a percent of revenue. Many of our fixed cost categories increased as a percent of revenue during the quarter due to the deleveraging effect associated with the decrease in revenue as well as the timing and significance of certain expenditures. In particular, our depreciation and amortization costs increased 80 basis points and general supplies and expenses increased 30 basis points. Within our direct operating costs, our purchase transportation cost as a percent of revenue improved 140 basis points, while our productive labor cost improved 50 basis points. These changes more than offset the 50 basis point increase in operating supplies and expenses that was primarily due to an increase in our maintenance and repair costs. Old Dominion's cash flow from operations totaled $415.4 million for the first quarter and capital expenditures were $234.7 million. We currently anticipate our capital expenditures will be approximately $700 million this year, which is a $100 million decrease from our initial capital expenditure plan. We plan to continue with real estate expansion projects that are already in process and others that we believe will be critical to our long term operating plan. We also plan to continue to purchase new equipment, which we believe will help lower the average age of our fleet and help reduce our maintenance cost per mile. We utilized $141.7 million of cash for our share repurchase program and paid $44.1 million in dividends during the first quarter. Our effective tax rate was 25.8% and 26% for the first quarter of 2023 and 2022 respectively. We currently expect our annual effective tax rate to be 25.6% for the second quarter of 2023. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

The first question comes from Ravi Shanker with Morgan Stanley.

Maybe just a two parter here, one is the uptick in April that didn't materialize. In your conversations with your customers, do you get a sense that this is just a pause while they figure out what's going on with the banking crisis and other things before they resume and their inventory is in a better situation, or do you think the rebound is kind of completely pushed out maybe to '24? And also maybe as a follow-up, can you help us think about kind of fuel surcharge and how we think about that math through the rest of the year?

Certainly, it's been difficult to read the tea leaves this year, and we felt like we've had a lot of good conversations with customers and continue to have them. But certainly, it seemed like the whole banking issue was a bit of cold water on the economy overall. I think that it just continues to be a challenging overall and people question in some cases the direction of the economy and continue to be somewhat conservative as a result. But I think our business, we obviously have been talking about probably since the third quarter of last year, an expectation that we would start seeing an uptick, and it didn't happen. Things have stabilized, we continue to be consistent. We have good conversations though. And I would say within our direct business, having conversations with customers, we're seeing an increase in some of these accounts. When I look through our top 50 accounts, business that's not with the 3PL, we're seeing a good increase. We actually saw an increase in revenue with those accounts during the first quarter. Some of our business with 3PLs is suffering a little more. Like we said in our prepared comments, we're seeing some shippers that are prioritizing price over service right now, but you've got a lot of others. And I think that's why we're seeing the increase in our direct business that continue to think strategically about their supply chain, understand the value that we're delivering and know that this environment will turn again. And we helped many of these customers through challenging times and the pandemic and then the supply chain crisis that followed. So I think it's a mixed bag across the board, but we continue to stay engaged, we're continuing to have favorable conversations. And it's just a matter of when the economy eventually recovers and we're certainly prepared for when that happens. It's just day in and day out. Our shipments per day have just been pretty consistent, pretty much all through the first quarter, and that's continuing into April.

And the fuel surcharge, is there any color that would be great.

Certainly, the fuel surcharge, this is the quarter we talked about. It actually happened in March. In March, the average price per gallon was down about 18%. Right now with fuel being $4.10 somewhere in that range, fuel prices are down about 25%. So certainly, we'll see a bigger decrease on a year-over-year basis of fuel surcharges. That's the end of the April number that we put out. Already, fuel in April is down about 20%. And so that's driving some of that 15% decrease that we're seeing in our April revenues on a year-over-year basis. But I think the impact is evident in our yield metrics. We're continuing to see good yield increases. As we're going through bids and whatnot, we're continuing to talk about our cost plus increases that are necessary. But when we look at April and kind of where things are, the revenue per hundredweight continues to be solid. And we would expect to see a sequential increase in the second quarter over the first quarter. That number should naturally start to trend back closer to what our longer-term averages have been from just a core yield increase standpoint, but the revenue per hundredweight with the fuel is reflecting that change now in fuel prices and the fuel surcharge. So that is starting to flatten out, if you will, just like the numbers that we talked about for what we've seen month-to-date for April.

The next question comes from Jack Atkins with Stephens.

So I guess, I'd love to, Adam, get your thoughts on operating ratio progression sequentially. Obviously, this is not a normal second quarter, at least it's not starting off as a normal second quarter in terms of how April is trending. Any way to kind of help us think about the puts and takes in terms of the OR progression first quarter to second quarter relative to normal seasonality?

This quarter is certainly unusual, as you pointed out. Tonnage is down around 15%, which we haven't seen since 2009, or possibly the second quarter of 2020 during the pandemic. We've been adjusting to this change and anticipated that the comparisons for the second quarter would be more difficult this year given how the quarters would fall. The growth we expected in March didn't materialize, as most of the growth occurred in the first quarter. Typically, March sees a decent increase in shipments per day, which should be around 5%. Currently, we're maintaining a steady rate of approximately 47,000 shipments per day. April will be affected by the holidays, specifically Good Friday and Easter, which caused a half-day loss. We're not consistently hitting the same 47,000 daily shipments; there are fluctuations where some accounts show increases and others show declines. If we don't see any further growth, we might expect to see improvement in May as we recover from the holiday effects. Overall, if the environment remains stagnant, revenues for the second quarter may be flat compared to the first quarter instead of the usual 10% growth. In that case, operating ratios may align more closely with the first quarter and could experience slight deterioration. Our main challenge will be managing direct variable costs like productive labor and operating supplies. In this relatively stable shipments per day context, it will be crucial to keep those costs flat, potentially with some slight improvement as a percentage of revenue. These costs represented about 54% of revenue in the first quarter, with overhead costs at about 19.5%. We also expect increases in depreciation and other overhead, which may further elevate those costs as a percentage of revenue. It’s a challenging situation, but our teams are focused on scrutinizing costs, enhancing productivity, and adjusting fleet sizes daily to save wherever possible. We are committed to taking the right measures to emerge from this downturn stronger. Historically, during slower macro periods, our market share remains stable due to our pricing discipline, and when recovery occurs, we often outperform the industry in volume growth. We will continue to follow the strategic plan that has guided us thus far, and I believe we will emerge from this situation even stronger.

The next question comes from Scott Group with Wolfe Research.

I just want to clarify something before my actual question. Adam, when you mentioned that OR might be flat from Q1 to Q2, are you saying that's without considering the usual seasonal increase in May and June? Is that correct?

Assuming a slight natural increase, our May volumes should be around the current range of 47,000, which would mark a small rise from April due to its being affected by the half day for Good Friday and Easter. You're right that if we remain stagnant without any growth or decline, it will be a continuous flat situation. We hope to see an increase in volumes, and we've observed some positive trends recently. However, we must be cautious about our current situation and recognize there's no economic improvement just yet. During our mid-quarter update, we will reassess. If growth eventually occurs, we are prepared for it, and then we can consider discussing potential improvements compared to the first quarter. For now, revenue and shipments have remained consistent on a daily basis.

And then when you talk about volume down the most since '09, I guess I just want to understand like the pricing is holding up for you really, really well. At what point does that get tougher, are you seeing any signs of competitive pressure, just given the market continuing to get worse right now from a volume standpoint?

Yes, the comparison is a bit tougher, but we expect it to improve as we move through the year. Even if our numbers remain flat, we should start to see some gradual improvements. However, the overall market remains quite soft. We have shown significant value to our customers and continue to emphasize that in our discussions with them. Our costs are rising, and we require price increases. Over the past decade, we have invested around $4.5 billion in capital expenditures to develop our service center network, ensuring we have the necessary capacity, fleet, and team to deliver value. We plan to keep investing, which does not alter our conversations with shippers. However, due to the economic situation and internal pressures, some shippers are forced to seek lower-priced carriers. As a premium service provider, our prices tend to be higher. We occasionally receive feedback from shippers making short-term decisions to meet internal budgets, indicating they intend to return the volume to us later. We are currently experiencing a slight loss in transactional volume within our 3PL business, which represents about a third of our total revenue for the first quarter. The 3PL sector has shown a larger decline compared to our overall revenue change, so we remain cautious about that. This situation can fluctuate with the economy. Our approach is to have a plan and remain disciplined while focusing on service delivery, which entails fixed costs associated with sustaining our linehaul network and P&D operations. It's during times like this that service breakdowns can occur in the industry when there is a strong focus on cost reduction. We believe we are in a stronger position than other carriers. However, emphasizing cost-cutting in a challenging environment can lead to longer trailer utilization times, declining on-time service, increasing claims, and other unfavorable outcomes. In our experience, this often results in a widening gap in service performance between us and the industry. We anticipate this trend will recur. As the economy begins to recover, managing the situation day-to-day can be difficult, but we expect to regain our market share. Our long-term outlook regarding market share potential and operating ratio goals remains unchanged; it will simply depend on when we can start to grow our market share again.

The next question comes from Jon Chappell with Evercore ISI.

Marty, you mentioned in your prepared remarks, and Adam, you've kind of addressed it in a couple of your answers as well. But customers choosing price over service, have you seen any kind of significant cracks in the pricing dynamic, given just the complete weakness in the volume side? And how would you compare kind of the pricing environment today versus other periods of recessionary volume backdrop?

I've been through this a few times in my 40 years in transportation. And I think the worst I've ever seen was 2009 and we're nowhere near that. But there is some challenging pricing out there as there always is during low freight levels. Most of it we see is transactional mom-and-pop type shippers and inbound customers. So yes, it can be challenging out there but it's not anything we haven't seen before and it's not anything we can't work through and manage through.

The next question comes from Tom Wadewitz with UBS.

I may have mentioned this in the last call, but if not, congratulations, Greg, on your retirement and the great career you've had. I would like to ask about the changes happening with the OD team since you're retiring and someone from the team has moved to a competitor. How do you think this might impact what you're doing at OD? Are there any risks associated with this transition? Might the new person adjust your successful approach? I realize this is speculative, but I would appreciate your thoughts on the management changes that have occurred or will occur with your retirement.

I don't mind addressing that at all. I appreciate the question. But fortunately, Tom, we've got a tremendously strong team here at OD. The folks replacing me have merely as many years in some cases in the industry as I do. They are all 20 plus year veterans, they've been through everything since we started executing this plan many years ago. They've been through the thick and thin, the good times, the bad times, and they know who we are and they know what's made us successful. They understand our plan going forward. And I think we're in a great position to continue to execute on that plan. So Tom, there's always risk. Anytime you lose good people, certainly, there's risk. But I feel extremely good about where we are. We'll make the replacement and continue to move forward. Again, thankfully, we had a plan, a plan to execute on my exit, if you will, and promoted the folks that certainly are capable of continuing to drive our results forward. So again, I feel good about it. I'm not concerned about that far at all. These guys know what to do and, hey, I feel extremely good about it. We got a great team. You can see that in the results. It's not me, it's not just the folks here. But I think everybody truly understands what we're trying to do and how we're supposed to execute and handle customers' business on a daily basis, and that's not going to change just because I'm out the door or any other one person left. Those fundamental things that we know how to do much better than our competitors, that's not going to change any time soon. So I think we're in a good spot. And hey, I look forward to a whole lot of success down the road for OD.

The next question comes from Allison Poliniak with Wells Fargo.

Let me revisit your earlier comment about the accounts. You mentioned that some are showing improvement. Can you provide any insights into the specific verticals that are contributing to this improvement? Additionally, regarding the stabilization of larger customers, do you think we can expect that to hold, even if we don’t have clarity on a potential inflection point? Any information on this would be appreciated.

The performance between our retail and industrial customer base was fairly consistent during the quarter, with revenue levels being similar for both sectors. However, there has been a noticeable decline in business managed by third-party logistics providers, which is typical in a softer market and not entirely unexpected. On a daily basis, we've observed a steady trend of around 47,000 shipments, without signs of a significant change occurring. Historically, we expect to see an increase from May to June, but looking back, we experienced a decline starting last April. March of last year was the last month with a positive sequential increase, following a 5% growth in February and a 3% rise in March. Since then, the shipments have remained flat or slightly decreased each month, with only a minor increase of less than 1% monthly. April's performance was consistent, barring the two holiday-impacted days, but currently, we are down about 2.5% in daily shipments compared to March. We're hopeful for growth in May, which should ideally show some improvement if we maintain the 47,000 shipments level. We are optimistic for June as well but remain cautious due to previous conversations that reflected positivity three months ago. Our focus is on cost management in response to the lower shipment levels, and we plan to maintain productivity while addressing the challenges within our fleet. We aim for balance during this stable period, which hasn't shown any significant growth. As for April shipment volumes, they generally align with our year-to-date averages, which we monitor closely from a planning perspective, continuously following our established plans that include baseline, bull, and bear scenarios. This year aligns more with our bear case plan as we execute our strategies.

The next question comes from Amit Mehrotra with Deutsche Bank.

Quick question. When was the last time shipments in 2Q were worse than 1Q? I don't know or I don't think there's ever been a time that that's been the case. But if you can just help me with that? And then when does the drawdown on weights abate, we're at 1,550 now. Are we at the point where we stabilize at these levels? So those two points. And then Adam, historically, you've lost lanes in past downturns to high-quality regional players or maybe lower cost. I don't think that's happened maybe up until now. But if you can talk about kind of what the customers are doing from a trade down effect to some of the regional, maybe equally or as high quality players?

From a second quarter to first quarter perspective, aside from the second quarter of 2020 when the world shut down, we haven't really seen a decline in shipments. Even in weaker years like 2009, 2016, and 2019, we still experienced slight improvements in shipments during the second quarter compared to the first. Currently, that trend seems flat. We are waiting to see how things develop for the rest of the period, and there might be some growth. As we prepare our mid-quarter update, we will include the final update for April in our 10-Q. If we observe continued acceleration this week, it will be reflected in our numbers, but we are not witnessing a significant change like we did in 2017, which drove growth into 2018, or the acceleration from late 2020 into 2021. We are still anticipating that change, but it does not seem imminent, so we are managing our current situation. This is a challenge we face, and it's part of why our revenues in the second quarter usually see a 9% to 10% increase, leading to margin improvement during this time. Regarding customer retention, we aren’t seeing major losses apart from some issues with the 3PL sector, which can leverage their carrier relationships to move freight and engage in transactional business. Customers have approached us indicating they must make adjustments to meet their internal cost-saving goals. Generally, when freight is lost, it tends to be due to pricing, but we typically regain that freight over time due to our service quality and capacity. We believe this trend will continue, and any freight lost will eventually return to us, although it seems that recovery is being delayed compared to our initial expectations for this spring.

What about weight?

Yes, the weight per shipment is down slightly. I think we're reaching a stabilization point, with the current weight in April being around 1,525 pounds. Historically, during lower periods, it would drop to about 1,550 pounds. As you may remember, we made some strategic decisions in 2021 to exit some heavier spot shipments, like those weighing 8,000 to 10,000 pounds, which significantly reduced our overall weight per shipment. Despite the current market weakness, we're not attempting to bring in freight that doesn’t align with our long-term network. With the economy's ongoing challenges, we've seen a further decrease in weight per shipment to 1,525 pounds, which is slightly worse than usual. April typically sees a decrease of about 0.5% to 1% compared to March due in part to March's end-of-quarter buildup, but we're down a bit more than that. I believe that 1,525 to 1,530 pounds might be our lowest point in this softer economy, and it appears that we are moving toward stabilization.

The next question comes from Chris Wetherbee with Citi.

Adam, just kind of curious how you think about headcount going forward here? Obviously, a lack of seasonality might influence this, but you've been bringing it down sequentially the last few quarters. Just want to get a sense maybe how much more room you have in terms of rightsizing that labor force? And maybe is there a line where you feel like you don't necessarily want to go beyond?

Yes, it's continued to drift lower on a sequential basis. The average was down about 3.5% in the first quarter versus the fourth quarter. But our peak, if you will, for full-time headcount was in May of last year. And through normal attrition and just some places making other decisions, if you will, just balancing our number of employees with the freight volumes that exist, we've had to work through those on a case-by-case basis throughout our 255 locations. But I expect that, that will continue to drift a little bit lower as attrition continues to happen from where we are today through the end of June. And we're getting to a point, I think, that if you kind of compare where we are, if we continue to drift maybe 1% or 2% lower as we progress through the second quarter to where the year-over-year change by the end of June maybe in that 9% to 10% type of range, and then that's coming back into balance. We've always talked about the change in headcount typically reconciles with the overall change in shipment count as well. And so you know if we're looking at that, I think by the end of June, that change in shipments on a month-over-month basis, those two numbers may start coming back into payer team with one another. That is the change in full-time employees and the change in our shipments on a year-over-year basis.

The next question comes from Bascome Majors with Susquehanna.

You've been pretty open about some of the share and pricing challenges with the 3PL business. Can you walk us through a little bit on how that emerges. Are you seeing larger carriers reduce their rates across the board with 3PLs and losing business that way, or is this more targeted dynamic pricing? And just if that cyclical dynamic, which I'm sure has been around before, if that is evolving any differently this cycle than last cycle, we'd love to hear more about it?

Yes, I think it's hard for us to say. We don't always know the reasons behind. I mean the feedback we get is that someone's cheaper. We don't know necessarily that variance or that reason why. I think that we're obviously one of the first carriers to report and just continue to watch what the others are doing, what their numbers are looking like and hear what the others have to say. I think others have said that they've got price discipline, but we've seen one carrier's yield flatten out. So I think all we can do is just continue to sort of watch and see what others are doing, but that doesn't impact what we do. We've got a plan, we stay committed to it, and we know what value we deliver and we just got to stay disciplined, and that's what we'll do. So it's never good to kind of live through it in a moment and we've done this time and time again. But like I said, it's not totally unexpected to see some of that business just given the softness in the economic environment and cost challenges that people are facing in general to be looking at ways they might be able to save on price in the current term. But what we always say is price doesn't equal cost. We deliver value to our customers. And when you consider total cost of transportation, when you deliver 99% on time and have a claims ratio of 0.1% and you save money by shipping with Old Dominion and that's what our position continues to be, demonstrate value. We’ve got to continue to maintain our service metrics, and we will, that is certainly a focus for us, and we'll manage through this. But like we said before and I think it's played out when you look at our numbers and the long term improvement that we've made with respect to our margins and the cash from operations that we generate and are able to reinvest back in our business on behalf of our customers, we've got to maintain our disciplined approach. And I think that it's proven itself out in the long run and is a key difference why our numbers look a lot different from some of the others.

But when you look back to 2019 or 2016, does the rising competitiveness on price and share of the 3PL channel feel different this time? Just curious if this all rhymes or something feels like it's changed here?

It's maybe a little bit different basket, but not wholly and completely. And just to add a little color to what Adam said, generally speaking with our 3PLs, we're not losing contractual business. Some of those contractual accounts may be down just because the general economy is slower, they may possibly be down but that's not where we're losing. And the transactional stuff, as Adam talked about before, that's where we're seeing a deterioration in our revenue with those specific 3PLs. They all have a large piece of business that's transactional, that customers may ship once, twice, whatever a week, smaller type accounts and that's where we're seeing the losses from our standpoint. So it's just business that they can price on the fly. And we're never going to be the low-cost guy on the fly, if you will. So anyway, that's more of what we've seen. It's not losing business by any stretch.

The next question comes from Ken Hoexter with Bank of America.

Greg, good luck in retirement and maybe you might be giving you a call soon…

I'm not sure that with me being on this board and that one…

I want to confirm that I heard you correctly. Did you say that this pricing situation is typical for this stage of the cycle? My question for Adam or Greg is about managing costs. You've mentioned that your fixed cost structure in the less-than-truckload market makes you different from others, and OD is committed to retaining staff. How do you approach cost adjustments, especially with volumes down by 15%? I understand you aim to maintain 25% capacity, but what are your thoughts on costs and their impact on the operating ratio?

This situation is typical in this economic environment. Some competitors believe that offering lower prices will retain customers; however, that is often not the case, as customers prioritize timely and damage-free delivery. We've gained that insight over the years. Therefore, it's normal for us to tighten our expenses and manage our workforce. When the downturn ends, we will be well-positioned to reduce our operating ratio. It’s common to see lower prices from any company in any environment, and we have experienced this before. This trend will eventually pass, as it always does.

I would say that we've shifted to a cost structure where around 70% or more of our expenses are variable. We have a significant fixed cost base, which is contributing to the loss leverage as revenue declines. Additionally, the rise in overhead costs during the first quarter is partly due to a different schedule regarding our equipment plan. We received equipment deliveries in the fourth and first quarters, which is atypical and has affected our anticipated depreciation costs as a percentage of revenue. The challenges with our fleet are influencing some of these costs, including maintenance and repair expenses. We're observing an increase in cost per mile, influenced by general inflation in parts and repairs, along with our schedule for new equipment deliveries. We've retained equipment longer through 2021 and 2022, resulting in an average fleet age of about five and a half years, while we prefer it to be closer to four years. We'll work on balancing this by phasing out older equipment and adjusting our fleet in response to lower shipment levels, which should improve both costs and efficiency. The majority of our costs are related to salaries, wages, benefits, and operational supplies, with linehaul being a significant component. Therefore, we need to maintain discipline, particularly as our linehaul load factor has declined. Improving this area is essential as it relates to both labor costs and the miles we cover. We need to enhance our efficiency while also making necessary adjustments to our fleet to manage depreciation and maintenance costs. However, many variable costs become somewhat fixed in the short run if we want to continue providing service, and we need to manage both aspects effectively. We're focused on maintaining service quality while identifying areas for improvement, which is a daily priority for our team. Historically, we've managed to improve direct operating costs, even during slower periods, such as in 2009, and this remains a challenge for us. In the second quarter, my goal is to keep our costs around 54%, just slightly above the 53% seen in the same quarter last year. We do anticipate some headwinds but must work on reducing these costs as we advance through the year, which will be our operational challenge.

The last question today will come from Bruce Chan with Stifel.

I want to approach the volume question from a different perspective. Some of your competitors have been involved in labor negotiations this year, and one is undergoing a significant operational change. Do you anticipate any volume entering the network as a result of these events, or maybe in expectation of them? Also, Adam, as a quick housekeeping note, you provided great insight on the fleet age. How long do you expect it will take to return to your target of four years?

I would say that we should make a lot of progress this year. We've got a fair amount of equipment right now that we've got identified that we want to be able to move out of the system, but that takes a fair amount of time to happen. It's not just an overnight thing where you're selling a used car and you posted on a website. So it's going to take us a little bit of time to kind of work through that, but we've got a plan. We've met several times recently talking about kind of the needs there and we'll continue to work through it. So I think that we'll end up by the end of this year making pretty steady progress on working that number much lower than where it was at the end of last year, kind of working both ends of the spectrum, if you will.

And then just on the volume side, any discernible share wins from any of those union competitors?

It's kind of hard to say, Bruce. We get reports from our national account folks on a regular basis. And we have wins on business from those folks as well as others. So I don't know that you can really point to contract negotiations or whatever the case as any reason that we're getting business. We haven't really seen that.

This concludes our question-and-answer session. I would like to turn the conference back over to Greg C. Gantt for any closing remarks.

Well, thanks, everybody, for your participation today. We appreciate your questions. Feel free to give us a call if you have anything further. I hope you have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.