Saia Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 17 speakers on the call.

Operator

My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q2 2023 Saia Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Doug Cole, Executive Vice President and Chief Financial Officer, you may begin.

Speaker 1

Thanks, Chris. Good morning, everyone. Welcome to Saia's Q2 2023 conference call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Before we begin, you should know that during this call, we may make some forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These forward looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We refer you to our press release and our SEC filings for more information on the exact risk I'll now turn the call over to Fritz for some opening comments.

Speaker 2

Good morning and thank you for joining us to discuss Saia's 2nd Quarter results. While continuing to manage through an ongoing softer economic environment, I'm proud to present What I view is very solid results produced by our team in the Q2 of 2023. On a bright note against easing year over year comparisons, The pace of volume declines moderated each month as we move through the quarter and have actually turned positive so far in July. We believe changing industry dynamics over the last several weeks have played a role in this. Internally, we monitor our customer satisfaction metrics on a daily basis.

Speaker 2

For the quarter, our trends continue to progress favorably as customers are increasingly satisfied with our service both in our legacy facilities as well as the new facilities opened in the last couple of years. It is gratifying to see our team's commitment reflected in the financial results. Despite an overall trade environment down compared to the prior year, we saw solid results in the quarter. Total revenue of $694,600,000 was down only 6.8% compared to last year's record second quarter revenue despite a 3.8% Fewer shipments and the fuel surcharge revenue being down nearly 32%. Our focus on service, Pricing and mix of business has been key to offsetting these factors and our yields excluding fuel surcharge revenue improved by 2.7% compared to last year even with the headwind created by an increase in wafer shipment and a decline in leg to haul.

Speaker 2

We continue to highlight the importance Business mix and freight selectivity and closely monitor our revenue per shipment, a key metric for our team. In the quarter, revenue per shipment excluding fuel surcharge increased by 4.8%, benefiting from a 2.2% increase in average weight per shipment. Industry pricing continues to be resilient in the face of negative tonnage trends and we saw an average contractual renewal increase of 5.3% in the 2nd quarter. Our 2nd quarter operating ratio of 82.7 percent deteriorated 230 basis points compared to our operating ratio of $80,400,000 posted in the Q2 last year. But again, that was a record quarter for both revenue and OR and the industry Industrial economy has changed meaningfully since then.

Speaker 2

I'll now turn the call over to Doug for more details from our Q2 results.

Speaker 1

Thanks, Fritz. 2nd quarter revenue decreased by $50,900,000 to 694,600,000 Yield excluding fuel surcharge improved by 2.7%, while yield decreased by 4.8% including the fuel surcharge. Fuel surcharge revenue decreased by 31.7% and was 15.9% of total revenue compared to 21.7% a year ago. Revenue per shipment ex fuel surcharge increased 4.8 percent to $287,900,000 compared to $274,600,000 in the Q2 2022. Tonnage decreased 1.7% attributable to a 3.8% shipment decline slightly offset by a 2.2 increase in our average weight per shipment, our length of haul decreased 2% to 8.92 miles.

Speaker 1

Shifting to the expense side for a few key items in the quarter. Salaries, wages and benefits increased 5.7% from a combination of our July 2022 wage increase, which averaged 4.3% across our employee base and also the result of our employee headcount having grown by approximately 1.1% year over year to support our network expansion over the last 12 months. Purchased transportation expense decreased by 45.8% compared to the Q2 last year and was 7.2% of total revenue compared to 12.3% in the Q2 of 2022. Truck and rail Purchased transportation models combined were 11.8 percent of our total line haul miles in the quarter compared to 19.3% in the Q2 of 2022. Fuel expense decreased by 25.8% in the quarter in spite of company miles increasing 6.6% year over year.

Speaker 1

The decrease in fuel expense was primarily the result of national average diesel prices decreasing by over 28% on a year over year basis. Claims and insurance expense increased by 19.3% year over year in the quarter and was up 20.6% or $2,900,000 sequentially from the Q1 The increase reflects a combination of premium cost inflation and some expense related to development on older claims. Depreciation expense of $44,700,000 in the quarter was 20.9% higher year over year, primarily due to the acquisition of terminals, tractors and trailers. Our total operating expenses decreased by 4.2% in the quarter and with the year over year revenue decrease of 6.8%, our operating ratio deteriorated to an 82.7% compared to 80.4% a year ago. Our tax rate for the 2nd quarter was 24.7 compared to 24.4 percent in the Q2 last year and our diluted earnings per share were $3.42 compared to $4.10 in the Q2 a year ago.

Speaker 1

I'll now turn the call back over to Fritz for some closing comments.

Speaker 2

Thanks, Doug. So below last year's first half results, Overall, I'm very pleased with our first half financial results. To operate with an OR in the low to mid-80s at this point in the freight cycle is a testament to the improved operating Our customer first focus is yielding tangible results across our organization. A singular focus on the customer is a rallying point for our employees and it's reflected in the record employee engagement survey we completed recently. With a talented and engaged workforce, the value proposition to our customers continues to grow.

Speaker 2

A key component of our market share opportunity Is it closer to the customer and give them a chance to choose Saia for their LTL needs more often? I'm excited about the 5 new terminals we've managed So far this year, we're on track to open 3 to 4 more by the end of the year. At the same time, we continue to develop the markets around the other 20 plus terminals we've opened over the last 2 years. Although we're excited about the early success of these locations, we see considerable runway to continue to penetrate those markets. While our pipeline for terminal openings carries us well into 2025 and beyond, keep in mind that a key benefit of our organic Our business cycle is subject to cyclicality and depending on where we are in the cycle, we may see an opportunity to accelerate or even slow down our terminal expansion activity.

Speaker 2

Importantly, we have positioned the company to execute on our organic expansions quickly as opportunities become available. Finally, before opening the call for questions, I would say there's still a lot of uncertainty around the strength of the economy we faced in the second half and beyond. That uncertainty is heightened for the LTL industry through the current well documented disruption. At Saia, we've emphasized the importance of the customer and focusing on things that we can control. So as our industry adjusts to the current disruption and adapts To the evolving economic environment over the coming months, my conviction about the long term prospects of Saia remains steadfast.

Speaker 2

Great employees, great service and a growing footprint, all key to securing our position as a long term share gainer in our industry. With that said, we're now ready to open the line for questions, operator.

Operator

Thank you. The first question is from Jack Atkins with Stephens. Your line is open.

Speaker 3

Okay, great. Good morning and thanks for taking my questions guys. So I guess I'm going to ask the obvious one, would really appreciate maybe if we could get a little update on July tonnage and shipment Trends, Doug,

Operator

I don't know if you

Speaker 3

want to take that or Fritz, but obviously, I would imagine the first half of the month is different than what you've been seeing over the last week to 10 days. So if you could Maybe quantify that a bit. I think that would be helpful as well.

Speaker 1

Sure, Jack. First of all, congrats on your summer activities.

Speaker 3

Thanks. Thanks. Glad to be married. Glad to be married.

Speaker 1

All right, buddy. Happy for you. So June, you guys have April, May numbers. We put that in the out in the early June press release. So the June numbers, our shipments were down 1.8% Year over year, while tonnage was down 2.2%, so weight per shipment dipped in June By 0.4%.

Speaker 1

So kind of mid June, I'd say, we started seeing some lighter weighted shipments. Some of that some of the We were working on over the course of the year and probably some of that already seeing some freight flow into the network from newer customers as Well, so that weight per shipment kind of trend started in June. It's continued here in July in terms of lighter weight. So for July month today through yesterday, shipments are up about 5% and tonnage is up about 2.5%. Again, That average weight per shipments trended down, but it makes sense to us versus what's going on out there.

Speaker 3

Got it. And then in terms of just what you've been seeing in the last couple of Weeks, maybe last week. How does that differ versus that the month to date trends? And I guess kind of bigger picture For my follow-up question, Fritz, as you're sort of thinking about maintaining high levels of service that's critically important to the Saia story and your value proposition. With this disruption in the marketplace broadly, like can you walk us through how you and the team are really trying to make sure that you're

Speaker 2

What I would say is that, 1st on July, July 3 is sort of the hanging holiday right before the That was a Monday if you recall. So that was a little bit of a lighter shipment day. That was a bit challenging from a cost perspective and such. And so Yes, 1st week of July was sort of holiday impacted, but it is every year. And I think we've seen the business levels trend more favorably up In the last 2 weeks, so that's been a positive trend.

Speaker 2

I think the It's been a big contributor to what we're seeing so far in our results in July. But I think the key thing for us is that focus on customer and Maintaining the service levels, picking up the freight, managing our freight or managing our customer base to make sure we understand What it is we're picking up, what the requirements are, what can we execute on that and significantly making sure that the economics work with this. So We feel very strongly that we've got a tremendous service offering. So it is critical to us to maintain that service offering. And it's also critical to us to make sure that we're compensated appropriately for that high level of service.

Speaker 2

Customers, this is a unique opportunity in a disrupted time that we could show customers, hey, this is what you get with Saia And that's differentiated high level of service and we think that if we execute on that well, we can hang on to this or this Well, Ken, this share will come to us over time. It's really been our long term strategy and maybe the disruption here in the last Couple of weeks has helped us accelerate that a bit, but we'll see how it plays out. There's a lot that still could change here in the next Number of weeks, but our focus on customer first, I think is going to lead us through this.

Speaker 3

Okay. Thanks guys. I'll pass it on.

Operator

The next question is from Amit Mehrotra with Deutsche Bank. Your line is open.

Speaker 4

Thanks. Hi, Fritz. Hi, Doug. I guess, maybe I'll just ask a quick one on the operating ratio as we move from 2Q to 3Q. I know you guys probably have a Wage increase in the Q3 that maybe pulls the line, but you've obviously got some momentum on volume, which So Doug, if you can just talk about OR expectations in 3Q?

Speaker 4

And then Fritz, what is what's happening at Yellow due So like the overall price of the book of business, did you guys see contract rate renewals? I know you talked about 5% last quarter, but does this give you an opportunity to kind of Accelerate the narrowing of that revenue per bill to peers that you've been so focused on and just trying to think what the pricing opportunity is on the existing book of business?

Speaker 1

Sure. I'll take that first, Vamed. So yes, you're right. July is kind of annually our time we think about Wage increases and things like that. So that's taken place.

Speaker 1

The average, we'll call it right around 4.5% across the workforce. And historically, I mean, if I'm just thinking about the last 5 years, you got to take out the 2020 COVID year Q2 to Q3 It doesn't make sense. 2021 was a pretty unique year in the back half as we really Saw an opportunity to work on some things and improve things around accessorials and all. We took a really big step up there and there's still opportunity there. We're still Grinding that out each quarter, but that was a kind of a unique quarter.

Speaker 1

But if I look at the other quarters, it's usually meant Something like a mid-one 100 bps kind of deterioration. So I think, look, we've got 1 month and like Fritz said, a lot of uncertainty On the top line, certainly over the next few weeks, but with a month under our belt, 100 basis points to 150 basis points in our view, Q2 to Q3 would be Pretty solid work. So like I said, we're less than a month in our belt. That's what we're comfortable with.

Speaker 2

Yes. Just to, Amit, to answer your question regarding pricing environment, I think that if Yes, under the current sort of disruption, if you have a low price competitor exit the market, I think that The first thing is the customers is that gets shifted around customers that have service expectations naturally, I think would gravitate Towards Saia because we're doing a great job. For us, it doubles down our frankly, our responsibility to make sure that we're Paid for that high level of service, capturing those charges. I think it's because I think customer gets a lot of value for that. So we've got to be Very, very diligent around that.

Speaker 2

I think what will happen over time in the industry, I mean, I keep seeing the discipline that across The space, I think that probably continues. I think that to the extent that The underlying costs in this business remain inflationary. I think those factors are still key to all operators, not just Saia. It's going to be Paid for those investments and I think that it's as we look for ways to continue to close the gap to make sure we're getting paid at market or above market Because of the service levels, I think that's an opportunity that we've got to continue to push for and drive for. I think the environment With this disruption that's there now, maybe that helps us that people will have the opportunity to experience what great service is.

Speaker 4

Yes. And I guess just as a follow-up, kind of very big picture, Fritz, because over the last 5 years, the performance the fundamental performance has been So great. And obviously the equity value of the company has responded accordingly. If there are people that are new to Saia today, New to the stock, new to the company, new to you guys. What would you frame kind of the 3, 4, 5 year opportunity to be from a revenue perspective, From a margin perspective, because you guys have accomplished a lot, but you talk about the runway, hoping you can kind of like Help us crystallize that a little bit in terms of what you think the opportunity is.

Speaker 2

Amit, I think the opportunity for Saia is significant. And I think if somebody The industry and you study what the sort of margin opportunities are, what best in class looks like. And you look at our progress over the last couple of years and you look at our performance through a bit of a slower part of the freight cycle right now, we're able to Great. And the sort of low 80s OR, that's a significant executional accomplishment for Saia. Now, and I think in a market where maybe we see a little bit more economic growth, I think the opportunity for Saia to grow this business Well into the 70s OR is meaningful.

Speaker 2

I mean, it's something within our reach. It was critical that and this is I mean we talk about this all the time. It's about taking care of the customer. Customers got to get What they need from Saia and when those customers get that, they understand what that value is. That helps our pricing story, that helps us Close our pricing gap versus the larger players in the industry and I don't see any impediment to us getting into the mid-70s OR or better.

Speaker 2

And we're excited about that opportunity.

Speaker 1

Hey, Amit. Just to close the loop, I know you know this and I know what you're But just for everybody on the call to be clear, Q2 to Q3 OR usually deteriorates a little bit because of that primarily because of that wage Increase we discussed. So when I said 100 basis points to 150 basis points Q2 to Q3, that's a degradation in OR. So thanks, Amit. We got to get on to the next one.

Speaker 4

Yes. Thank you. Bye bye.

Operator

The next question is from Chris Wetherbee with Citi. Your line is open.

Speaker 5

Hey, thanks. Good morning, guys. Maybe just want to pick up on the shipment comments that you're making about the month of July. Just maybe if you could get a little bit more granular. It seems like Was the run rate or the acceleration that you saw somewhere in the 1,000 to 2,000 shipments per day type of level?

Speaker 5

Just wanted to get a sense of maybe what the exit rate was here in the month of July, so you can get a sense of what the sort of market inflection might be looking like?

Speaker 1

Like Fritz said, I mean, really the last Couple of weeks looks a lot different than the 1st couple of weeks of July. But normally, seasonally, we see a little bit of Step down from June July and obviously that hasn't been the case this month. But it's hard to parse everything out the last week of the month should be better And it was. And then you've got some freight going on out there that's coming into us new. So it's been a meaningful step up, We'd probably have to wait till you get the full month trends in early September before we really care to say anymore on it.

Speaker 5

Okay. That's helpful. And then when you think about facility openings and obviously the potential for some assets maybe to be available, I guess, you look out into the back half of the year? Can you give us a sense of what your plans are? Do you have 3Q plans that are specific that you can run through and maybe what the opportunity could be from a footprint expansion

Speaker 2

Yes, it's early to make the call on what the real big It could be. The 3 to 4, I will give you a little bit of color. The 3 to 4 that we're opening the balance of the year, 2 of those were ones that became available to us in the last few months. So this is a pretty fluid environment that we're in, where the assets become available. We feel really good about our ability to identify and purchase facilities, Close and get them into our system.

Speaker 2

So if more opportunities were to become available and I think we can move on those pretty quickly. I think we Integrate those opportunities into our network pretty quickly. I would suspect if there were an influx of Real estate that became available in the second half of the year likely wouldn't get Into the system, if you will, this year probably turns into a next year assets. And the other thing I would point out is that, as we look at our pipeline of We have a number of pins on the map, if you will, that we have identified that maybe it's An opportunity, but if new assets become available, we may switch to something else that gets us into the market sooner or we may have to Pause and say, well, we want to access to a piece of property or a location that is kind of going through transition. It may take us longer to get there Just simply because of administrative challenges or seller challenges, whatever that might be.

Speaker 2

But I think that what's important to take away out of this is that we have the ability to operate Pretty quickly around identifying facilities, opening them, getting them in line with Saia culture and service And pretty well, that's a core competency for us.

Speaker 5

Okay. That's helpful. Thank you. Appreciate it.

Operator

The next question is from Tom Wadewitz with UBS. Your line is open.

Speaker 6

Yes, good morning. Wanted to see if you could Fritz, if you could offer a little bit of more on how you think this transition and the disruption takes place. Do you think that it's some of this flows through brokers And it's kind of a we got to get the freight covered quickly, but then what flow through could shift around again? Or do you think it's like it's really important to lock in these shipments and then they'll kind of be sticky with you And you can maybe show the service and price up a bit over time. I guess the other piece within that is, If we assume this was less service sensitive freight, can you get can you just price it where you want to?

Speaker 6

Or is that Kind of how does that work? I think the assumption is the yellow freight would have been less service sensitive. So I guess that's a couple elements, but just trying to understand how you think about that Processes of freight coming in and the quality of freight?

Speaker 2

Yes. So I think what we've mentioned earlier that there's still Yes, we're thinking about revenue for the balance of the quarter. There could be a little bit of flux there as the that displaced freight or disruption kind of plays out because Listen, our view of this is certainly there are accounts that we have today that have approved several LTL providers in that mix. So if one of the providers exits, certainly that freight gets distributed around To others. And that's an opportunity for us to show some you have some pickup economies and opportunity to Provide that service to the customer and sell and earn that business and keep that business.

Speaker 2

So those are certainly possible. There are also a fair amount of that business That has gone through sort of 3PLs and brokerage opportunities. To the extent that Those make sense for us. Maybe that's something that stays with us. So for it's really important for us in this time and this sort of Is to find that freight that makes the most sense for Saia.

Speaker 2

And we're not in the market to chase volume. We're in the market to find profitability and to drive returns. And I think that that will be our focus. And I think what you would see is that as we pick up If we think it makes sense over time, we'll keep it. If we think we need to make adjustments to the rate or make sure that we get all the accessorial charges that are Required, we'll do that.

Speaker 2

And if that works, then I think that benefits us over time.

Speaker 6

Right. Okay. And then I appreciate that. And I guess for the second question would be, it seems like you're From a balance sheet perspective, you have very little debt, you got a lot of cash, that's despite having a pretty strong CapEx program this year. I'm wondering if you said, well, okay, that 2024, they're just a bunch of attractive terminals and we really got to hit the gas on this.

Speaker 6

Would you consider Kind of ramping up further and issuing debt to kind of go beyond what your strong cash generation allows Or how aggressive could you be in terms of being opportunistic on terminals maybe in 2024, not necessarily 2023?

Speaker 2

Tom, that's a great point you bring up. I mean, listen, this balance sheet is positioned to grow, Right. So we generate a fair amount of cash. We have cash position right now. The idea with that is to provide us the sufficient Powder, if you will, to accelerate our growth if we see that opportunity.

Speaker 2

So if the opportunity was attractive enough that it perhaps Awarded leverage, we'd certainly consider that. But at the same time, we're generating cash. We found that We've been able to fund and find facilities and build facilities frankly out of our cash generation. What we have right now is Really an eye to not only the real estate that we have to purchase, but also the equipment that we have to supplement our fleet to be able To match that with growth.

Speaker 6

Okay. Yes, great. It seems like you're really well positioned on this. Thanks for the time.

Speaker 1

Thanks, Tom.

Operator

The next question is from James Monaghan with Wells Fargo. Your line is open.

Speaker 5

Hey, guys. Good morning.

Speaker 7

Just actually wanted to sort of talk about some of the volume trends you'd called out.

Speaker 8

Any idea sort of how much

Speaker 7

of that might have been cyclical versus sort of what is sort of like essentially more of the market driven part of it, with Yealo? And then also, as we sort of like think through the sort of reallocation of share from Yealo, It's been a source of share over the past decade and a half as we think past it. Do you sort of think that the LTL environment will have to Slow its growth a little bit given that there won't be that source of share or are there still sort of opportunities in modal share or other weaker competitors where sort of Volume growth can continue to grow at an impressive rate.

Speaker 1

Yes. I mean, The current environment in terms of the competitive landscape is certainly fuels this pickup we've seen. There's no question. I mean, we've got some internal Saia focused opportunities this year that we think we're starting to materialize in terms of new customers, some different Verticals and we think we're starting to get a foothold. Remember, we've opened 22 terminals in the last 3 years and some of those in middle markets where we've had Selling initiatives that we're gaining traction on.

Speaker 1

So we'd like to think some of our initiatives are starting to fuel The volume we're seeing and kind of offset some of that cyclicality you mentioned, but in terms of green shoots and the economic backdrop We were seeing over the last couple of months, I mean, we haven't been calling out any bright spots on the underlying industrial economy. Now going forward, in terms of how LTL is positioned, we think LTL stands to benefit really over some of the supply chain trends over the next decade and beyond. As you think about near shoring and what That might mean and more cross border moves with Mexico and even Canada and the role LTL will play in Smaller more frequent shipments, we think that bodes well. We think LTL is well positioned to continue to benefit from the growth of Residential deliveries and final mile activities, as consumers have gotten more and more comfortable ordering Things online instead of visiting bricks and mortar retail, for example. Some of those things are heavier weighted and beyond what a parcel So LTL ends up playing a role in that.

Speaker 1

So I think we're well positioned secularly to participate. But In terms of the immediate kind of economic backdrop, we weren't calling out any grain shoots.

Speaker 2

I think to add to Doug's comments, I think if you looked at our relative performance versus the our peers and the rest of the space in the last Quarters or year, you've seen that we've been in a position where our service is differentiated and our performance We probably outperformed some of our peers from a shipments and tonnage perspective. And I think that momentum, I think going forward It's a significant part of what will drive our success. So I think that that's an important distinction as well.

Speaker 9

Got it. Thank you.

Operator

The next question is from Jordan Alliger with Goldman Sachs, your line is open.

Speaker 10

Yes. Hi. So I guess

Speaker 11

a couple of questions. 1, I was wondering if you could maybe give some sense for how your yield ex fuel looked as we move through the quarter and how it feels in July, maybe even especially with that Step up in volume, that would be the first question. Thanks.

Speaker 1

Yes. In terms of yield, I mean, as the weight Per shipment came down, there was a kind of a positive tailwind call it like later in June we started seeing that And on here into July, now that's the weight per shipment coming down, it's a negative right to revenue per shipment. So we have to keep an eye on that and make sure that We're getting properly concentrated. So much of that yield is mix related and that could be weight and length of haul, but it can also be Geography and direction of rates moving and also a lot of things flow into yield. But like Fred said, I mean, what we think about is Pricing environment and that's remained good.

Speaker 1

And is the yield up as much as the GRI or as our contract For renewals are running? No, but pricing is positive and that's what we're bringing to the bottom line. So, Yes, I'd say you got to watch that like wait for shipment for example, if that continues to trend negative in the quarter like we've seen in July That helps your reporting yield.

Speaker 11

Right. And then sort of the second question is, you mentioned sort of the normal Degradation on OR 2Q to 3Q, but just curious what could make it or I would think there's a chance for it to do potentially A decent amount better as there's this sudden volume step up and I imagine at least some floor on price given potentially Uplifting prices maybe a competitor kind of goes away. So curious your thoughts on the variability around that normal OR trajectory? Thanks.

Speaker 2

Yes, that's a fair point. I think I would one of the things we're pretty early into this, but certainly there's a path to beat that, right? I mean, if we Continue our core execution, continue to manage mix, keep our costs in line. I certainly think there's an opportunity we could beat that. Our shipments and tonnage trends, we kind of keep that in perspective in the right place.

Speaker 2

I feel pretty good that we could. On the other hand, it is because it's a period of disruption, we've got to be real careful about What the mix of business looks like and what the relative profitability of any freight that we pick up or new customers are, That's pretty significant to our value proposition is that we match those customers with they understand what that service level is and What that means from a sort of pricing perspective. So yes, I think there's a possibility we could beat it and it's but it's not we still got to go execute it.

Speaker 9

Thank you.

Operator

The next question is from Ken Hoexter with Bank of America. Your line is open.

Speaker 5

Hey, great. Good morning, Fritz and Doug. And congrats on great results and working through this process here. Do you still feel like you have 20% excess capacity? Is that kind of after adding the 5 service centers and looking at more?

Speaker 5

Maybe just talk about the capacity ability to grow here.

Speaker 1

Hey, real quick, Ken. Apologies on that pronunciation. We all know it's Hector, but you weren't in the queue early, so I didn't give a chance to give Chris

Speaker 10

the heads up. I apologize.

Speaker 5

I've heard all different I

Speaker 4

know, buddy.

Speaker 1

That's on me.

Speaker 10

All right.

Speaker 2

If we think about it right now, we probably got around 15% capacity across the entire network. And Ken, I think what's important to Focus on there because of where we are in our sort of network maturity, there are some facilities in there that might be At lower capacity levels and we've got some that have been open in the last 2 years. They have 60% capacity. So The opportunity right now for us is to continue to fully utilize the facilities that we've got in place that we've invested in. And that's a great opportunity for us to differentiate in a market and For find that new customer.

Speaker 2

So that's there for us. And then it's in the larger areas in the network where We're fully utilizing those assets. We're approaching full utilization. We've got investments in place that we'll upgrade some of those facilities even this year. We feel pretty good about where we are.

Speaker 2

In a disrupted environment like this, the challenge and this is Not unlike what we've experienced over the last several years, which is that you don't always know where the freight is going to come from. So if I give you That network capacity number, that's an average across a bunch and in some places we might say, you know what, we're going to have to manage The capacity in other places will say, let's go get the freight.

Speaker 5

So I guess I want to follow-up on an earlier question, right, which is Really some business gets assigned right away and maybe from your experience and how long does it really take to settle in, right? Because there's this chaos that needs to be assigned right away and then freight gets distributed? And maybe talk about how much business is on, I don't know, multiyear contracts versus How quick you can move that pricing in the base?

Speaker 2

Yes. So some of this, There are obviously existing customers and everybody in our book, I mean, by and large, everybody is on a 1 year sort of pricing agreement. So I think that we've got to make sure that the pricing that's in place, we feel good about it. But as we pick up The revenue on an account, we may not have had the account earlier or larger percentage of the business because we didn't have the pricing that was maybe attractive to the customer. Now they've moved the shift of freight to us.

Speaker 2

That's our pricing and we're satisfied with it. So The other piece and that's probably more like the national account type business, but then the other the new customer or the customer we've done a little business with or maybe we've Opened up new lanes with a customer. Those are the ones that you got to keep an eye on to make sure you understand What it is the freight characteristics look like? What the freight you're handling? What that customer looks like?

Speaker 2

And in that case, you might manage that out or try to manage it differently in the short term. So I think it's as we go through the industry goes Through a settling process around this disruption and freight kind of moves around the other competitors or to us, I think you'll see a fair amount of, I don't know if I'd say churn, but some movement over the next several weeks.

Speaker 5

Great. Thanks for the thoughts, guys. Appreciate it.

Speaker 1

Thanks, Ken.

Operator

The next question is from Jon Chappell with Evercore ISI, your line is open.

Speaker 12

Thank you and good morning. Fritz, to your answer for the previous question about capacity being different in different locations, Most of these new terminals that you brought on, there's been a lot of them haven't been running at the profitability of the entirety of the network and there was a thought process that over time It would ramp to that. Does this what's going on in the market today accelerate kind of the marking to market of the profitability across the new terminals? Or is

Speaker 2

It is dependent on both, but Fact of the matter is that this the opportunity to grow the business more on an accelerated pace right now that helps us drive that Leveraging those investments, building the density around our line haul network or pickup economies, all those sorts of things. So yes, the Additional well managed growth here is a potentially a real adder for us.

Speaker 12

Okay. And then my second one, kind of mixing the short term with the long term, the word disruption has been thrown around a lot. I'd imagine you're going to flex PT, as you get this acceleration of shipments, but as you think about more permanent resourcing, whether that be headcount, equipment, etcetera, How are you thinking about what's been happening over the last couple of weeks and how you're investing above and beyond just the terminal expansion that's been on the radar for some time?

Speaker 2

Yes. So this is where I think that our ability to manage our line haul cost It is important. It's an advantage for us. We feel pretty good and very comfortable flexing our PT up and down as we need to meet the service requirements of our customers. If you recall if you followed us over the last couple of quarters, you saw us In source as many miles as we could as we saw volume declines in the sort of the Q3, Q4 into Q1 period.

Speaker 2

And now As you ramp back out of the kind of more of the growth mode, you've got to be able to scale that line haul network. And That means you've got to fully utilize the drivers that you have. You add drivers in markets because now if we're at these growth rates with these new markets, we have the opportunity to Scale that and add drivers, so that's good. But in the interim, we're going to meet service where we need to utilizing our purchase transportation partners. And but the key part of that model is that it's got to make sense to meeting customer expectations And it's got to be cost effective.

Speaker 2

And those we put those two things together, we feel pretty good with our ability to flex up And then we'll continue to supplement that with adding more of our own drivers.

Speaker 13

Got it. Thank you, Fred.

Operator

The next question is from Eric Morgan with Barclays. Your line is open.

Speaker 14

Hey, good morning. Thanks for taking my question.

Speaker 6

I wanted to come back

Speaker 14

to your comment on closing the pricing gap to the peer group. Just Curious how big of a focus that is for you right now? And can some of this disruption going on be a catalyst to get there to parity Faster than you might have thought otherwise. Not saying really near term or anything, more as the dust settles. Is that an opportunity?

Speaker 14

Or is it Going to be kind of a steady approach over time.

Speaker 2

Well, listen, we think about The service that we provide to our customers on a daily basis. And as a result, we think about making sure that we get paid for that service on a daily basis. Now, If you're following us closely, we know that we have our organic expansion that's going on. We're adding terminals, providing greater, which is really about providing higher levels of service to Sure. Moving closer to the customer, providing that hitting those touch points and those pickup at delivery times that are important to the customer and making their transit times.

Speaker 2

When you do all that, you have the opportunity to get paid for it. And as we continue to grow, we become closer and closer at closer parity to our larger National peers. We see what their average revenue per bill is and we look at our service levels. We know what it looks like with So the opportunity for us to continue to drive closing that gap is it's critical. I mean, that's part of the value proposition of what we're doing.

Speaker 2

So if anything, this environment, I would expect that we'll double down on that effort. I would expect our peers will also do that. And I think the environment will Continue with what we've seen here in the last number of quarters, even as things have slowed down, we've seen the discipline around The competitive set around pricing and I think that's important.

Speaker 5

Thank you.

Operator

The next question is from Jason Seidl with TD Cowen. Your line is open.

Speaker 13

Thank you, operator. Hey, Doug. Hey, Fritz. Doug, I wanted to make sure I understood what you said about the OR on a sequential basis. You're coming up with 100 to 150 basis points of degradation.

Speaker 13

That is the typical OR that you see or that's what You guys are assuming and if that's the assumption, does that include more freight from a yellow bankruptcy?

Speaker 1

It's pretty typical. Like I said, if you go back and you want an average, you got to start taking a couple of things out. That's what I tried to do. I think the math of it says it's been 150 to 200 worse if you adjust and take out the COVID year in 2021. But Yes, just based on what we've seen in July, we have very little clarity on where this goes over the next few weeks actually.

Speaker 1

But Based on what we've seen, we think we can do that. So maybe 100 basis points to 150 basis points makes sense. I mean, we Maybe it's a little better than the historical average, but like I said, that average is kind of our math because we take out a couple of things. But Driven, we know the wage increase has been in place. We're starting to use some driver hiring bonuses.

Speaker 1

Again, we haven't used in a few quarters. So Factoring in what we know now month to date in July, we think 100 basis points to 150 basis points is doable given what happens on revenue is still Not clear to us.

Speaker 13

Okay. I appreciate the clarification. And follow-up on pricing, we were hearing Back in June that LTL carriers were sort of pushing off some of the negotiations with customers based on the fact that they thought there could

Speaker 2

be an issue with Yellow. Was this

Speaker 13

the case and has that borne any fruits on a pushback?

Speaker 2

We weren't pushing anything back. I mean, listen, our view of this is that we've got to get the pricing in place. I don't know that we had there may be some anecdotes out there, but we haven't seen anything like that. I know that there were customers that Maybe saw some of the disruption and we're looking to secure their capacity. And certainly, we were part of that and Making sure that that was all to the extent that it made sense for us.

Speaker 2

We were we negotiated those opportunities.

Speaker 13

Okay. Makes sense. Appreciate the time as always, gentlemen.

Speaker 1

See you, Jason.

Operator

The next question is from Ravi Shanker with Morgan Stanley. Your line is open.

Speaker 8

That's Niravi, 1. Doug and Fred, obviously, this is a potentially fairly large business opportunity for everybody And maybe kind of jump ball right now. Obviously, you guys are staying pretty disciplined on your price and returns. But are you seeing any other players in the space are like fairly aggressively going after this business or do you think everyone sort of waiting for it to settle in?

Speaker 2

Yes, I don't have a call out there for you. I would tell you that I think We're probably still early innings on how things shake out. But I think the one thing is fundamental for all LTL providers Regardless of where you position in the market, this is an inflationary business and volume does not generate Incremental return unless you get the appropriate pricing with it. I think we've seen how the industry has played out over the last few quarters As volumes have declined, you see a lot of discipline around that. And I think it's because of the underlying sort of basis of the business.

Speaker 2

So I don't anticipate any Price led sort of volume chase, if you will.

Speaker 8

Got it. And maybe kind of switching gears and talking about the cycle, you guys have been hinted that you're not seeing too much out there in terms of just cyclical improvement.

Speaker 15

Can you just give

Speaker 8

us some goalposts like what are you going to be looking for? What are your Customers telling you in terms of inventory level, kind of when do you think kind of the pure kind of cycle driven core business grows well?

Speaker 2

Well, I think the underlying growth that we have in our business before kind of this sort of last few weeks Has been on our own competitive differentiation. So I think that's been positive. I think that as we look at the more Sort of macro indicators are out there. As you know, I think the GDP numbers look it's probably favorable right now. And I think if we see that develop in the second half The year, I think that's probably the green shoots that folks are looking for.

Speaker 2

I think that our customer set, We don't hear anything particularly new one way or the other. It's more of sort of a tempered environment. I don't think they It's a recessionary environment or anything like that. I think it's just a tempered environment versus the prior year kind of where we were. So Yes.

Speaker 2

I don't think we have anything new to report there. But I think as the second half develops, I mean, if we keep the recent sort of economic trends, I think it's positive.

Speaker 8

Understood. Thank you.

Operator

The next question is from Bascome Majors with Susquehanna. Your line is open.

Speaker 16

Fritz, Doug, you've probably spoken about Yellow situation with investors in every meeting since the beginning of June. You've heard what we're asking on conference calls this quarter, both within LTL and outside of it. I'm curious from your perspective, What is the investment community getting right on how this situation could and may impact your business? And Are there places where we're kind of missing the forest for the trees on short term, mid term, long term impacts from the way you see it? Thank you.

Speaker 2

Well, I think at the highest level in the industry, when you have a potential top 3 player exiting, Potentially, I'm still waiting for the final kind of verdict there. But I think that obviously that is that freight is going to go elsewhere in the business that it's going to go It's going to find its way not necessarily evenly to everybody. It's going to go to it's going to match the service requirement of the customer. And I think maybe there's a player that's got a lower service level, they maybe they take an outsized percentage of that business potentially, Maybe it displaces a customer that has a bit higher expectation around service and then that kind of makes its way around to other Players in the market, but I think generally people understand that if you displace the disrupt the large player, it's going to get redistributed in the industry. I think the key thing to understand is that whatever the fundamental value proposition is of the remaining players, I think that That will match to where the freight ends up.

Speaker 2

And I think for Saia, I think the fundamentals for Saia are quite straightforward. We have an opportunity to continue to maintain high levels of service, continue to get the pricing and margin structure right in the business. There's a significant growth opportunity for us. In this environment, there's probably an opportunity for us to grow at a bit faster rate than what we have been.

Speaker 16

You've been so adamant in mentioning service and revenue quality and all of your answers to this situation. I mean, is the message that You'd probably rather take less than more of your pro rata share initially and hope some of that comes back when they're not satisfied with the service Getting it Brand X. Is that really what we should take away here?

Speaker 2

I think that if you follow Saia Over time, I think the fundamentals of our business, we have never been one that are in business to chase market share Or volume, our focus has been on generating returns in this business. And so we talk

Speaker 5

a lot

Speaker 2

about Or internally around how we're managing profitability. So this is exactly the same sort of scenario. Maintain that high level of service, Customers expect that and the customers expect that we'll be willing to pay for that service and that's the winning proposition for us. So it's not necessarily Who can get to be biggest, fastest? It's about generating those returns and we see and it's pretty apparent.

Speaker 2

You look at the other sort of public Peers that are out there, you see what that level of performance looks like and that there's no reason for us not to try to pursue that. And that's where we think the big value is in our business.

Speaker 16

Thank you, Fred.

Operator

The next question is from Stephanie Moore with Jefferies. Your line is open.

Speaker 15

Hi, good morning. Thank you. I wanted to touch on actually the OR performance for the 2nd quarter. I was hoping that maybe you could give a little bit more color on just the I think just given the weak top line environment And it seems like you certainly exceeded our expectations, but I think a little bit better than you probably called out back in 1Q2 with The performance falling more in line with the historical seasonal average. So maybe if you could touch a little bit on the dynamics or levers that you guys Hold or what happened to kind of be more in line with seasonal trends despite what kind of continued to be a weak top line?

Speaker 15

Thanks.

Speaker 1

Yes, I mean, I'd say primarily we're really pleased with how we To the extent we could, how we control mix and revenue per shipment came in real positive. The ex fuel revenue per shipment number up 4.8 in the quarter was really solid. I think we had Solid May and then like I said, the back half of June, you normally get that month end quarter end kind of step up, but It was solid and we might not have baked that into our expectations. So to the extent that you got some more of that volume and Some additional from more shipments that pick up from customers, things like that, give you some opportunities to be a

Speaker 13

little more productive. I mean,

Speaker 1

you get some cost economies in the network when you do things like that. So You get some favorability here and there on some things, but I think it primarily was just Probably a little bit better activity and operational success than we might have seen 4 weeks into The quarter.

Speaker 15

Great. That's helpful. And then just a quick follow-up. You talked a lot Today, it's just about the ability to be opportunistic with terminal expansion here in the coming months. Any change in strategy or opportunity between your To lease or buy additional terminals?

Speaker 2

No. Our first priority is if we find a market that we want to be in or An opportunity we would like to own of it if it's a strategic facility, it's got sort of a maybe a 10 year life. We think about volume trends over 10 years when we make a decision to buy an asset. If for whatever reason we can't buy the asset, There's an opportunity to get an attractive lease. We're willing to do that.

Speaker 2

It's not our preference, but if we're willing to do that And attractive lease would be something that we can kind of we've got a view as to what the longer term costs are and we can kind of build a business around it. The strategic assets for sure, we want to buy those. Maybe one is in an end of the line market, maybe it's a little It's not available for sale. The investor would like to hold on to it. In that case, we're fine at the least, so long as the economics work.

Speaker 15

Great. Thank you so much.

Operator

The next question is from Bruce Chan with Stifel. Your line is open.

Speaker 10

Hey, Fritz, Doug. Good morning and congrats on the result here. Just want to follow-up on an earlier comment where you mentioned the National Accounts business. And I'm just curious on that topic. Are you seeing any more, I guess, early activity or early demand on the national account side, on the Field account side or the 3PL side or is it all been pretty balanced so far?

Speaker 2

I think that it's A little bit of color there is, if we're in an account that maybe we share across multiple providers, those maybe we saw That volume come maybe a little bit more sooner. If it's a field account, maybe that those accounts maybe don't have Multiple providers, I think we're probably still seeing where that's going to develop. So it's still early on that. So we're only 2 weeks or 3 weeks into

Speaker 6

Okay. That makes a lot

Speaker 10

of sense. But when everything kind of settles out and the dust clears, you wouldn't expect any outside share gain in any one of those categories necessarily?

Speaker 2

It's way too early for me to make a call on something like

Speaker 10

that. Okay, fair enough. And then just a quick follow-up here. You brought up the near shoring opportunity and you also talked about planning for 10 year volume trends. And you also talked about planning for 10 year volume trends.

Speaker 10

As we think about near shoring and potential expansion beyond your current plan, Can you talk about maybe what kind of cross border presence you have and whether there's any appetite to ramp that up?

Speaker 2

We do have a cross border presence. It's particularly south, it's smaller than where we'd like. I think over time there's an opportunity for us to grow that. That's part of the long term strategy for sure.

Speaker 10

Okay, great. Thanks for the time.

Operator

The next question is from Christopher Goon with The Benchmark Company. Your line is open.

Speaker 11

Yes. Good morning. Hey, Chris. Hey, Doug. Thanks for getting me in here.

Speaker 11

Just, Doug, you and I have talked about Your focus on increasing weight revenue per shipment, some of this newer volume is lower weight and lower revenue per shipment. So how do you balance that with So your longer term strategy and your ability to manage profitability?

Speaker 1

Yes. I mean, our weight is still up quite a bit over the last couple of years. And like you I mean some of that was really driven by focus on that good industrial weighted freight as we call it. But we've increasingly have National account customers that may be in retail, for example, that see the quality and the service we provide With maybe some limited choices on folks that can handle increasing volumes with that kind of service, they're asking us To do more and more from them and sometimes that's lighter weighted shipments. So it's not that it's dramatically lighter weighted in terms of move than the average, but Like Fred said, I mean, we're going to haul the business form, but it needs to be at the appropriate rate.

Speaker 1

So, I don't I think weight in itself is the sole factor in that negotiation. It's the mix of business. It's the volume you get when you show up to pick up a shipment. If they're lighter weight, but you can get 2 or 3 of them, that's usually pretty good business. So a lot of things factor into it.

Speaker 4

Okay. Thanks.

Operator

The next question is from Tyler Brown with Raymond James. Your line is open.

Speaker 1

Hey, good morning guys.

Operator

Hey, Tyler.

Speaker 9

Hey, Chris, curious on what the labor markets Look like right now, how tight are they? And then given all the work that you've done from a cultural perspective over the last couple of years, how do you feel as an employer of choice? And do you think you can add human capital quickly?

Speaker 2

Yes, good question, Tyler. I think the certainly the Labor market around drivers and such is competitive and I don't know that that's changed the demographics aren't necessarily in our favor. But I would tell you that I think one of the things that Saia has done a pretty good job of over the last several years is that Yes, the success kind of compounds a little bit and people see kind of what the opportunity is and what our trajectory is. So around Being able to recruit people, that's been helpful. We've also made a pretty substantial investment in our human resources and recruiting effort And really sought to professionalize that and to give us the opportunity to scale the business.

Speaker 2

And those have been important investments. And then the emphasis the key thing is that throughout all this, employees want to be able to see We can talk about values and those sorts of things, but they want to see values in action. And that I think we've done a good job with that and that's helped us in the Recruiting front, people know that what they're going to get when they come here and I think that that's been positive and I think that's going to help us through. This will be a challenging time as we grow volume through this disruption that being able to replicate that's going to be important.

Speaker 9

Yes, absolutely. It's been a good story. But hey, real quick, I want to you kind of touched on this and this is a bit of a technical question. But again, you guys have put so much work into the network and line haul design over the last couple of years. I'm just curious how much flexibility you and Patrick Sugar think there really is if market conditions Change quickly.

Speaker 9

You mentioned excess capacity in some markets, tightness in others. Do you feel like you can tack and maybe add breaks in less I call it traditional markets. Basically what I'm asking is can you create additional capacity maybe with what you have if you supplement that with PT At least in the

Speaker 10

near term?

Speaker 2

Absolutely. I mean, we absolutely are doing that as we speak. So this is where I think This is a little bit of the Saia secret sauce here. Our line haul team and we know how to scale this. We know how to place the PT.

Speaker 2

We know how to The data advanced sort of data analytics we put in place to be able to handle this. Hey, this is challenging for that team, But it's well within our tool set to be able to adapt to this. I mean there was a time 5, 6, 7 years If you had something an event like this happen, I don't think we would be able to operate through it. And as you saw during the pandemic and even all the way through now, Our ability to adjust up and down and match what demand patterns is that's allowed us to be successful and meet those customer expectations. So I think that that's what's going to help us get through this.

Speaker 2

So I'm excited about us deploying those skills and kind of Adapting our line haul network to our customers' need.

Speaker 9

Yes, love it. All right, thank you.

Speaker 1

Thanks, Tyler.

Operator

We have no further questions at this time. I'll turn it back to the presenters for any closing remarks.

Speaker 2

Terrific. Thank you everyone for calling in and Taking the opportunity to hear about the Saia story. We're really excited about the next couple of chapters in this story and look forward to giving everybody an update at the end of the next Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Saia Q2 2023
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