Saia Inc (SAIA) 2006 Q4 法說會逐字稿

Good morning, my name is Teresa and I will be your conference operator today. At this time, I would like to welcome everyone to the Saia fourth-quarter 2006 earnings conference call. This call is being recorded. 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 INSTRUCTIONS). Thank you. Ms. McKenzie, you may begin your conference.

Thank you, operator. Welcome to Saia's fourth-quarter 2006 earnings call. Hosting Saia call this morning are Rick O'Dell, our President and CEO and Jim Darby, our Vice President of Finance and CFO. 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. These forward-looking statements and all other statements that may be made in 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 earnings release and our most recent SEC filing for more information on the risk factors that could cause actual results to differ. Now I would like to turn the call over to Rick O'Dell.

Good morning, everyone, and thank you for joining us. 2006 was an eventful year for Saia. We completed a strategic repositioning by selling Jevic, which improved our balance sheet and provides us with a single segment focus. We also expanded our footprint with the fourth-quarter acquisition of The Connection Company and we achieved record revenue and results from continuing operations.

Saia's core operating results improved for the fifth consecutive year and this was primarily accomplished by building upon our track record of quality service, growth and margin improvement. Saia's 2006 revenue of $875 million was an increase of 16%. Our operating ratio from continuing operations, excluding real estate gains, restructuring and integration costs, improved to 93.8 from 94.2. Excluding The Connection, LTL tonnage was up 9% and LTL yield was up 6%. Contributing factors to these successes were our focus on safety and cost management, continued growth into and out of the newer Midwest markets and company-specific marketing and service initiatives.

Throughout our 34-state network, Saia continues to deliver a high quality of service which includes our industry-leading Xtreme Guaranteed product. This premium service program provides a money-back guarantee of the total customer satisfaction experience, all the way from pickup through invoicing, and it's available to all customers using Saia's base rate structure and is the most comprehensive program of its kind in the industry. This segment saw growth of more than 20% during the year. We also had a strong contribution from growth with synergy revenue to and from our newer Midwest markets, which grew by $32 million for the year.

Some highlights in the fourth quarter were -- excluding The Connection, our LTL revenue was up 6%, our LTL tonnage was up 2% and our LTL yield was up 4%. Our operating ratio from continuing operations, excluding real estate gains, restructuring and integration-related cost, improved to 94.3 from 94.5. The Connection operated at breakeven during the six weeks that we owned them, which had an unfavorable impact on our operating ratio of 0.2 for the quarter.

In light of recent economic conditions and more difficult comparisons, I was pleased with our marketing success and the fourth quarter revenue growth. While we improved our operating ratio, excluding real estate gains, restructuring and integration charges, our cost performance was challenged by the weaker-than-expected volumes, as well as unfavorable trends in workers compensation and health care expenses.

Geographic expansion remains an important objective for Saia as we continue to selectively evaluate opportunities to expand the network. On November 20, Saia announced the acquisition of The Connection Company for $17.5 million and I'm excited about 2007 as the acquisition of The Connection provides us opportunities for synergy revenue to and from the states of Indiana, Kentucky, Michigan and Ohio. We are on schedule to complete our February 12 integration with improved transit times and synergy lanes that will be opened up in March.

I believe Saia is well positioned to see benefit from improving density in our current territory by capturing share through our high quality service offerings, our value-added offerings, such as our Xtreme Guarantee product, as well as further industry consolidations which may accelerate in a softening volume environment.

I would now like to turn the call over to Jim Darby, who will discuss our full-year 2006 and our fourth-quarter results.

Thanks, Rick, and good morning everyone. As Rick mentioned, full-year revenue from continuing operations was $875 million, which was 16% more than the $754 million in 2005. Operating income from continuing operations for 2006 was $50.0 million. This figure included $4.1 million in restructuring and integration charges. Operating income for 2005 was $50.4 million, which benefited from a $7 million gain on a real estate transaction.

Additionally, the effect of equity-based compensation, which correlates with our stock price performance, was $3 million in expense for 2006 versus $600,000 in 2005. Earnings per share from continuing operations in 2006 was $1.74, which included the impact of $0.17 in restructuring and integration-related costs. This compares favorably to our $1.67 from prior year, which included $0.29 from the real estate gain. The effective equity-based compensation in 2006 was a charge of $0.12 compared to a charge of $0.02 in 2005.

Revenue from continuing operations for the fourth quarter was $219 million, up over 8% from the fourth quarter of 2005. Operating income from continuing operations was $10.5 million, which includes the $2 million of restructuring and integration charges. This compares to the prior-year quarter operating income of $18.2 million, which included the $7 million real estate gain. During the fourth quarter of 2006, the impact of equity-based compensation was a benefit of $900,000 versus a charge of $900,000 in the fourth quarter of 2005. Earnings per share was $0.36, which included the impact of $0.09 in restructuring and integration-related costs, compared to $0.69 per share in the prior-year quarter, which included $0.29 due to the real estate gain. During the quarter, the effect of equity-based compensation was a benefit of $0.04 compared to a charge of $0.04 in 2005.

For continuing operations, our effective tax rate for the quarter was 39.6% and it was 38.4% for the full year. The lower effective rate for the year resulted from non-recurring tax credits which were recognized earlier in the year. Fourth quarter 2005 had an effective tax rate of 36.8% due to the higher pretax income and a net tax benefit of about $400,000, or $0.03 per share, relating to prior tax years. For 2007, we estimate an effective tax rate of approximately 40%.

For the year, net capital expenditures were $91 million and consolidated depreciation was $33 million. Year-end debt, net of our $10.7 million cash position, was $99 million and our net debt to capital ratio was 33%. We anticipate consolidated net capital expenditures for 2007 of approximately $85 million, which includes up to $35 million for real estate.

In November, we announced the authorization of an additional $25 million share buyback program. During the fourth quarter, we completed the previously approved program and repurchased shares under the new program for a total cost of $8.9 million. As Rick mentioned, we are on target for the integration of The Connection Company into Saia in February. Related to the integration, we are anticipating recording additional cost of approximately $1.5 million in 2007.

We continue to focus on improving Saia's financial and operational performance. With our recent acquisition and our goal of expanding geographically to increase market share, we believe Saia has a solid foundation to deliver strong value to both customers and to shareholders.

Now I will turn it back over to Rick to discuss some thoughts on our outlook for 2007.

Thank you, Jim. Our growth and continued profit improvement validates our strategy of focusing on performance and advancing our coverage to develop a service offering that can only be matched by a limited number of competitors. Looking ahead, I expect Saia will continue to gain share in the marketplace, capitalize on the recent acquisition of The Connection and develop opportunities to further expand our network. The economy has softened and we expect 2007 to be a year of slower economic growth. Absent the impact of The Connection acquisition, volume comparisons will be difficult in the first half of the year. We expect the acquisition of The Connection to have a favorable mutli-year impact on our growth rate. In the near-term, we also intend to step up our cost focus to improve profits in spite of a softening environment.

We also expect yield improvement as we continue to see an overall rational pricing environment, as well as the positive impact on yield from the growth of our Xtreme Guaranty program and new synergy revenue opportunities.

This concludes our prepared comments, and we will now open it up for your questions.

(OPERATOR INSTRUCTIONS). Art Hatfield, Morgan Keegan.

Rick, can you talk a little bit about volume trends in the quarter, excluding Connection, if you saw them get precipitously worse as Q4 moved on? Can you talk a little bit too how things have progressed in January?

Sure. I guess it's a little odd in terms of last year where for the quarter, our revenue, excluding fuel surcharge last year in the fourth quarter, was up -- I mean, in '05 in the fourth quarter, it was up about 17%. And it actually -- last year, it accelerated through the quarter, so our comparisons at Saia was not normal seasonality as we saw some real strength moving through the quarter. But our LTL revenue per day was up about 11% in October and then 4% in November and 5% in December. So once we got into more of a -- during that time period I guess, it was pretty flattish. And then I guess in terms of January, we actually saw some continued acceleration last year in January. Our revenue was up about 20%. This year, obviously we had the weather impact and I guess our tonnage comparisons, excluding The Connection, are actually slightly negative for January. We were down about 2%, and our revenue is up in the 1% range. And that 2% is actually mostly a decline in weight per shipment. Our shipments are actually flat year-over-year.

When does -- for you, just to refresh my memory, you had mentioned first half of the year comps are going to be tougher, but when did things start to get -- go downhill for you guys in '06?

I guess if you look at it, January, for the quarter, the first quarter, our revenue excluding fuel was up 18.9%, and then second quarter, it was up 16%; third quarter it was up 12.2, and then we just reported the fourth quarter at up 6%. So we kind of had a step down and actually even through the quarter last year, again, our LTL revenue was up 20% in January, then 17% in February and 18% in March. So it kind of stepped down through the entire year, and part of that was comparisons to what was going on in the previous time period as well.

Sure, no that is helpful. Just one other thing, and then I will let somebody else ask away. When we look at operating ratio going forward, do you -- I don't want you to give us any specific guidance, but can you give us kind of what you are thinking internally about goals to improve the operating ratio on an annual basis?

Again, we don't provide guidance, so if we gave you our operating ratio projection and you projected the revenue, we would essentially be providing guidance I guess. I will give you this comment. Certainly given our 16% revenue growth in the prior year, I was disappointed that we only improved by 40 basis points and I would expect us to be able to do better. And as I commented in the fourth quarter, we were we did not meet some of our cost objectives, both on the labor side, and then it had a couple of other things that had an impact. So we certainly expect to do better than that. And when you look at where we are versus some of our peer groups, obviously, we trail them. So it was part of my comment I guess that, regardless of the environment, we would expect to manage our costs and improve our margins.

Let me just ask this then as a follow-up to that. Can you talk a little bit about the workers comp and health care issues and how they relate to your cost structure going forward? Were these things that were more onetime in nature, or somewhat unexpected, or is it a trend that should continue going forward?

Well they kind of all bubbled up I guess versus our expectation. Obviously, we have a focus on lost time injury. Your health care expenses have some volatility that's associated with severity and as well correlate with your headcount. As I commented with where we didn't have the normal seasonality in the fourth quarter as we expected. In hindsight, we could have done better in managing our labor costs, given the volume environment that we experienced. I think there are opportunities on a number of fronts to improve our margins. If you look back, on average Saia has improved our operating ratio 7 to 8/10ths in most years, even in a variety of environments, and this year, we had good growth and only took 40 basis points off. We know we can manage our margins better. I guess the offset to that is, if you make acquisition of companies that operate in the high 90s, you have to average that in and improve it over a period of time as well.

Sure. Okay, thank you very much.

Jordan Alliger, Deutsche Bank.

In terms of the integration costs, which I guess in aggregate will I think be about $3 million if I heard you right with this 1.5 plus another 1.5, what actually goes into those integration costs? What are the things that you're doing to drive the integration? I'll leave it at that.

It's a combination of costs, Jordan. It's made up of severance and stay bonuses, and also training costs that we have to train employees in The Connection in our systems and how we move the freight in anticipation of the integration. We're also doing a fair amount of re-logoing of equipment, and then we have marketing programs marketing programs and in getting our base rate updated for the new state. So all of those things are rolled into that.

And so, beginning in March I guess when all of this is done, is that when you start to see some of those revenue synergies come in? Is that when the doors open, so to speak?

Actually, February 12, we're integrating the companies, and then effective around the first of March is when we're actually opening the lanes to our new geography with aggressive market-competitive transit times.

And the thought still is for '07 that the acquisition will be neutral on a profit basis?

That is correct.

Tom Albrecht, Stephens Inc.

A few other questions. Let me get the real simple ones out of the way. I know you gave '07 CapEx. Did you give an '07 depreciation estimate?

No, we did not provide that.

Do you have one?

I really don't have it projected going forward.

Okay. And then the $1.5 million integration cost for TCC, just to make sure, that was all in the first quarter, right, that's not going to be spread out through the first half?

No, the vast majority of it will be first quarter. May have a little trailing the rest of the year, but most of it will be first quarter.

And 1.5 is right. I think Jordan said 3.5, but I want to make sure 1.5 is the correct figure.

I think initially, our estimate when we did the purchase was 3.5 in total split between the two years, and we actually recorded $1.5 million in the fourth quarter of '06 and we expect another $1.5 million in '07 for a total of 3.

Okay, thank you. And then on the tonnage, Rick, I know you discussed the revenue per day, I think it was 11.5%, 4% and 5% for the three months.

That was actually revenue.

Yes, but can you explore the tonnage a little bit? Because at the October conference call, at that point, you were up about 5.5%. I'm going to assume October was about that. Can you walk us through November and December's tonnage progression?

Yes. Again, I think we commented though, that last year, October was -- November and December stepped up dramatically from (MULTIPLE SPEAKERS).

Yes, they accelerated up.

The tonnage was -- actually, we were up 5% in October for the month, a little over 5, and then we were actually down 1% in November and then up a little over 1% in December. And then now, like I've commented, we're running down about 2% on tonnage with flat shipment count.

Okay. And then, what percentage of your business renews let's say between March and the end of June? I'm assuming not a whole lot renews in January and February, but --.

Actually, the fourth quarter probably has more renewals than any other quarter, just because a lot of people tie it up to the end of their -- tie their renewals up to the end of the year. You probably have -- maybe 30% gets renewed in the fourth quarter, and the rest of it kind of, it splits through the year. Like you said, probably not as much as in January and February, just because it's a slow time period, but February, March, April, is [for] more kind of a normal, probably anticipate 25% during that time period.

Okay. And then on the workers comp and health care, I know it's very difficult to predict that, but as you see the world right now, do you anticipate any impact to the first quarter? Or, based upon your understanding of claims right now, that was just fourth-quarter impact?

I guess some of that obviously is potentially run rate with the higher health care expenses and our employee count, and probably some of the same with workers compensation. Although I can tell you, we have seen some improvement in our lost time injuries and the number of people we have out or down. But we actually do actuarial studies for workers compensation, and then we modify those based on our current trends to try to true that up on a quarterly basis and not let a whole year go by if you're seeing some change in your experience. And so I guess I would expect a portion of that anyway to be run rate, and then a portion of it also may be severity that you will see mitigate and come back down over a period of time.

You get a little bit of annualization effect for the group experience, because as you are bringing people on during the year, and we were growing quite significantly in the first half of the year, it takes awhile for them to get on the health plan and then start generating claims. So it does get to a higher run rate by the end of the year.

Did you put a dollar figure on the fourth quarter impact, or you just discussed that thematically?

We just discussed that. I guess versus our internal expectations, it was more than half a point for those two items alone. And then, obviously, we have a responsibility as well for the labor cost management that, again, we plan for a normal seasonality and when we don't achieve that, then we don't have our staffing and our labor management the way that we would like to. Obviously, we are getting more aggressive with the cost control with an expectation that the economy is softening.

Now let me ask you this. I think there's more LTL business that renews in the fourth quarter than the truckload guys. Truckload guys, I think generally most of it goes on between March and maybe early September. In that context, why do you think that the LTL industry realized a good set of contract rate renewals in the fourth quarter? Because by October, certainly on into early November, we all knew peak was not what it was supposed to be, and yet you and others were able to get solid base rate increases. I was wondering if you could talk about why that is occurring, even when those shippers knew peak was disappointing and knew things were slowing?

Obviously, we have a value proposition, particularly with our large customers and good relationships with them, and there's a fairly limited number of players that they can select from and they have to pick long-term partners and go through the renewal process. With today's technology environment, etc., you get connected with them with expectations that they have and some specialized requirements as well. So you have some leverage that way. And I think what you end up with in today's environment with a lot of customers, and some are obviously more relationship oriented in terms of having those specialized requirements and you can get your hooks in them a little more than others. But I think that, to the extent that you can do that, what you do is you end up with a range of positive or more positive increases based on the environment, as opposed to just it being an absolute price play and getting people out there chasing volume.

I don't disagree with you philosophically, it just seems like everybody suddenly has a value proposition, and that's a little different than history. And I think maybe that points as much to the consolidation perhaps the industry has undergone.

Some of the things we've tried to do too, Tom, is on these large customers, instead of making it an every year renewal, do your thing, let's sit down at the table each 12 months, sometimes we will say, let's do a two-year agreement, we'll agree to a moderate increase for a two-year environment. And that way, you kind of help smooth out some of these swings that you go through. Sometimes that works out well, and quite frankly, other times, guys will call you back up and say, I still got a better offer, you have to lower your prices. But it is a strategy that we've kind of used to try to foster the relationship and not make it be a price discussion every 12 months and put it out for bid.

Lastly, Jim, do you have the average length of haul for both fourth quarters?

Yes, I do. The fourth quarter length of haul for 2005 was 605 miles, and for fourth quarter 2006, it was 623 miles. It's up 3%.

Okay, that is all I had, guys. Thank you for the time.

(OPERATOR INSTRUCTIONS). Jason Seidl, Credit Suisse.

A couple of quick questions. Rick, you mentioned the tonnage tracking -- 5% in October, minus 1% in November, 1% in December, down about 2% in January, but you said shipments are down as well. How did weight per shipment track from October to January?

It's kind of interesting. I guess in October it was down 1%, November it was down 1.5%, December it was down 2.3%, and again in January we're running down about 2%. But you compare that and this really tells the story where in the first quarter we were up 1%, second quarter up 1%, and then flat in the third and then went negative in the fourth by almost 2%, 1.6% was the average, and then now we're down 2%.

That's definitely signs of a little bit of softening in the economy. When you -- you made comments, Rick, that you have a lot of confidence in growing the OR this year, and I know you're not going to make any forecasts, I don't to get you to. But given the softness currently going on, should we expect that to be more back-end loaded on the OR improvement?

Yes, that would be my anticipation. Even the economic outlook says it's going to improve. Obviously, January has been a tough month with the weather disruptions. So, yes, it would be back-end loaded.

So you're going to have tougher comps -- or year-over-year --.

Sure.

In the first quarter -- okay, not a problem.

Even for us, as we said, I consider the fourth quarter to be from an absolute margin standpoint, I thought it was disappointing. So I would expect to do better this year.

I know you had a nice yield in the quarter, but how has the pricing environment been? Is it holding up? Are you seeing chinks in the armor at all, given the decline, the deceleration in demand?

I think it's holding up okay. I think, as I commented, I think one of the things we're seeing is instead of being able to get let's say on a contract renewal in the 2% to 4% range or more in the 1% to 3%, and some people are requiring a freeze for some period of time. So it has softened, but it has not -- I think it's still pretty rational, given the current environment.

That's good to hear. Jim, I know you made some comments about CapEx being $85 million in '07. Is that a net or a gross number?

That would be net.

Okay. What should we look for on a gross level? Because I know you might have some assets sales with some older equipment that The Connection Company has.

Hang on one second. We have that on one of these sheets here, just let me find it for a minute.

While you're looking for that, Rick, in terms of the share repurchase, is this going to be opportunistic, is this going to be sort of steady throughout the year?

I think it would be opportunistic.

My last one, and I'll let somebody else have at it. When you're looking at sort of a slowing environment here in the first half, do you think that is going to create any opportunities for you guys to look at smaller companies, some little add-ons to maybe gain a region or two?

Yes, we'd like to look at that, as well as some potential opportunities to do what I would call fill-in some states where we don't have full state coverage of the terminal network that we would like as well.

Okay, perfect. I will turn over to somebody else. I appreciate the time as always, guys.

Here's your CapEx number before you go. Sorry, it took me a minute to get it. I would use about $90 million gross.

$90 million gross, fantastic.

$85 million net.

There are no further questions at this time.

Thank you for joining us today. We appreciate your interest.

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