Saia Inc (SAIA) 2013 Q4 法說會逐字稿

Good day and welcome to the Saia, Inc. fourth quarter 2013 results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Saia's Treasurer, Mr. Doug Col. Please go ahead.

Thank you, Shannon. Good morning. Welcome to Saia's fourth quarter 2013 conference call. Hosting today's call are Rick O'Dell, Saia's President and CEO, and Jim Darby, our 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 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 most recent SEC filings for more information on the exact risk factors that could cause actual results to differ. Now I would like to turn the call over to Rick O'Dell.

Well, good morning and thank you for joining us. I'm pleased to report that Saia's strong performance of 2013 continued through year-end. In the fourth quarter, we delivered a solid increase in year-over-year earnings while making meaningful investments in growth initiatives. The success this past year was built on the hard work and talents of the entire Saia team.

Some highlights from the quarter compared to the fourth quarter of 2012 include the following. Total revenue increased 5.8% to $280 million. LTL revenue increased 5.1%. LTL tonnage rose 2.9%. Our operating ratio of 94.7% improved by 150 basis points, and earnings per share of $0.32 increased 45% from the $0.22 earned in the fourth quarter of last year.

Saia continues to prioritize throughout our organization our commitment to deliver a quality service product to our customers. The fourth quarter represented the ninth consecutive quarter of 98% on-time service. The value proposition is clear: our customers have a need for consistent, on-time, claim-free freight service. As we have success in meeting that need, our yield continues to improve. LTL yield rose 2.3% in the fourth quarter compared to the fourth quarter of last year.

Fourth quarter results are particularly satisfying as we were able to achieve a year-over-year improvement in earnings while simultaneously making investments in equipment and sales talent to drive results in 2014 and beyond. For the full year 2013, Saia achieved a 27% increase in operating income over last year.

A few of the highlights from the past year include the following. Our cargo claims ratio improved to 0.85 versus 0.93 in 2012. Our load average for the year improved 4.3%. Our purchased transportation miles were down 6.9% due to continued impact of our line haul optimization, which selectively directs us to use the most cost efficient transportation mode available in any given lane.

The skill of our professional drivers, coupled with investments in technology and new equipment over the past several years, have driven improvements in miles per gallon. Fuel efficiency improved 3.2% this year to 6.5 miles per gallon. We completed the planned addition of 20 sales professionals in the fourth quarter, which enhances our competitive selling position to achieve future market share gains.

Our improved results have resulted in improved cash flow and a stronger balance sheet. We reduced our interest expense by $1.3 million while making significant investments in our people, facilities, equipment, and technology. Quality matters initiatives remain the cornerstone of Saia's corporate culture. The pursuit of quality is evident in the actions that you see every day at every terminal, every shop, and every office across our network. This investment in quality has supported Saia's industry-leading yield initiatives over the past several years. We expect that our continued focus on quality and our enhanced value proposition will support the combined yield and growth advancements that we seek this year in 2014.

Now I would like to have Jim Darby review our fourth quarter and year-to-date results. Jim?

Thanks, Rick, and good morning, everyone. As Rick mentioned, the fourth quarter 2013 earnings per share were $0.32 compared to $0.22 in the fourth quarter of 2012. For the quarter, revenues were $280 million with operating income of $14.7 million. This compares to 2012 fourth-quarter revenue of $264 million and operating income of $10.1 million. Both periods included 62 workdays.

As Rick mentioned, LTL yield for the fourth quarter 2013 increased by 2.3%, which primarily reflects the favorable impact of continued pricing actions consistent with the trend of the past several quarters. Our industrial engineering initiatives and operational effectiveness have maintained our high quality service while significantly enhancing our light haul effectiveness and fuel utilization.

The quarter, however, did include higher costs in some areas, including: salaries, wages, and benefits rose to $144 million in the fourth quarter, reflecting a midyear wage increase of approximately 3% and improved tonnage trends. Purchase transportation expense for the quarter rose $2.6 million compared to last year. This increase favorably impacted our results due to the effective use of lower-cost rail miles. Depreciation and amortization ran $13.8 million during the quarter versus $12.3 million in the prior year quarter due to our significant capital expenditures for tractors and trailers.

Claims and insurance expense was $7.4 million in the quarter compared to $6.3 million last year in the same quarter, which was the result of slightly higher accident severity. From the full year, revenues were up 3.7% to $1.1 billion, while operating income of $74.4 million was 27% higher than the $58.7 million posted in 2012. In 2013, net income rose 36% to $43.6 million from $32 million earned the year before. Diluted earnings per share were $1.73 versus $1.29 in 2012.

Our effective tax rate was 38.7% for the fourth quarter of 2000 and 36% for the full year. Excluding the impact of the tax credits recorded during the first quarter of 2013 that were retroactive to 2012, our effective tax rate for 2013 was 37.5%. At December 31, 2013, total debt was $76.9 million. Net debt to total capital was 20.1%. This compares to total debt of $60.7 million and net debt to total capital of 19.2% at the end of 2012.

As previously disclosed, we were able to take delivery of an additional 170 tractors in the fourth quarter and therefore pull forward some of our anticipated 2014 capital expenditures. Net capital expenditures for 2013 were $122 million. This compares to $83 million of net capital expenditures in 2012. In 2014, the Company currently plans net capital expenditures of approximately $85 million. This level of expenditure reflects primarily the replacement of revenue equipment, investments in technology, and real estate projects. Now I would like to turn the call back to Rick.

Okay. The fourth quarter finished with improved margins and increasing tonnage achieved through solid execution across our network. I believe our ongoing investments in technology and quality have set the stage for us to build on these demonstrated results. We remain committed to our core strategy of improving yield, enhancing customer satisfaction, building density, and reducing costs through engineered process improvements and continuous employee training.

We believe this strategy provides a strong foundation for our long-term profitable growth and increased shareholder and customer value going forward. With these comments, we're now ready to answer your questions. Operator?

(Operator Instructions). Brad Delco, Stephens.

Good morning, Jim. Rick, comments in the release about the accelerating tonnage trends in the quarter, it seems as if you've maybe had a little bit quicker success with your growth in your sales force plus the environment was a little bit better. Can you talk about expectations for tonnage growth going forward and maybe provide some details in monthly tonnage throughout the quarter for us?

Yes, I'll have Jim step you through the tonnage trends for the quarter, and then I'll make some comments like you suggested.

Okay. Brad, going through the quarter -- and this is LTL tonnage year-over-year comps -- October was up 0.6%, November was up 2%, and December was up 7.4%. And that gets us to the quarter being up 2.9% over fourth quarter of 2012. So far month to date through January we're trending up 3.2% and that includes obviously all the -- whatever weather impacts that we've had this year. So far in the month, we are up 2.2% LTL tonnage.

Yes, so again, we've completed the additions of our sales force as planned. It was completed throughout the fourth quarter. And obviously we're pretty pleased with the tonnage trends, especially December. And then absent the weather impacted days that we experienced in January, trends were also favorable. I would say probably from a run rate going forward, it's probably somewhere between that 3.5% and the 7%; maybe in the 5% range would be maybe our current expectations.

And then I think the timing of our sales force addition probably proved beneficial to some of the things that are going on in the marketplace out there. Our upper Midwest is growing faster than the rest of our network and there is a competitor that's going through an integration up there that I think we're seeing some benefit from. And I think the economy is a little bit better.

We also enhanced some of our longer haul weigh-ins in November and are having some early success with that, that we would expect to continue to build on. So we're pretty pleased with what we've seeing from a topline perspective. And for the year, we would clearly expect to see some improved tonnage trends going forward.

Great. And then one other one, and Jim, you kind of touched on the weather issue. Clearly we're hearing a lot about that. Can you talk about what is the normal, sequential change in operating ratio from fourth to first? And what weather or maybe some of the costs associated with these newer sales guys may do to what may be the normal, historical, sequential change?

Sure. In the recent years, we look back about four years, and the first quarter has been about 1 point better than the fourth quarter. But this year expectations need to be tempered for the first quarter due to two major factors. One is that we've experienced severe weather already in January and we recognize trucking remains an outdoor sport. Somebody reminded me the other day, and we've had to deal with that, and we're pleased to see that today's the last day of January. We'd like to put January behind us.

And, number two, also is we've had unfavorable accident self-insurance experience already in the month of January. And, as a reminder, our self-insurance retention is $2 million per incident. And while our frequency and our fundamental safety programs at Saia are very good, as we've stated before, we are subject to earnings volatility from accident severity and we're not going to have a good safety quarter due to what's happened already in January. And our results are going to be unfavorable from normal expectations from a safety by more than 1 operating point.

So, that being said, we now expect [LOR] to be more flattish from the fourth quarter as opposed to the improving trend we've experienced over the past few years. So, again, it's early in January. We've experienced some unfavorable items. Obviously the best months of the quarter are ahead of us and obviously the remaining 11 months of the year are ahead of us, too, and we like the fundamental things we're seeing, but we've had some bad experiences with weather and accident severity.

Okay, got it. Thanks for the time.

Jason Seidl, Cowen and Company.

Hello, guys. Good morning. A couple quick things here. Talk about pricing and what you guys are seeing in the renewals. Obviously we had a very good pricing year for the LTL market. What is built into your expectations for 2014?

Contract renewals in the fourth quarter were again greater than 3%, so again, where we've had greater increases in that the last two years -- I think last year we were up 4.2%, I believe, for the year. And then the prior year was even better than that. But I think as we stated, a lot of our corrective action pricing is behind us. We expect to be at a more normal level. Obviously we price account by account, lane by lane. And our analytical, disciplined pricing continues to pay dividends, but we think the market is pretty good.

For the quarter, our yield was up 2.3%; fuel surcharge had a negative impact of about 1%; so our yield was up, adjusted for mix and fuel surcharge, a little over 3%. And that's in line with what our expectations are and what we stated, and our target is to continue to achieve something in that range going forward and we think the environment is conducive to that so far.

Okay, that's great color, thank you, Rick. And when we look at some of your expectations for tonnage, I believe you said somewhere at the midpoint of that 3.5% to 7% range. I guess weather is mucking up the underlying demand here right now to January. How much of that 5% tonnage expectation do you think is coming from the economy? And how much do you think might be coming from some competitor that are a little struggling right now?

I don't know. We have such a diverse customer base it's hard to see where your volumes are coming from. We're one of the early reporters out there from a tonnage perspective and trends. I guess my comment would be we expect to get our fair share plus some with some of the investments and the way the Company is operating and having a very good value proposition out there, so hard to say. I mean obviously there's multiple factors that go into that, but I would tell you I think we are well positioned to capitalize on it. And if we can get a 5% type LTL tonnage and a 3% type rate increase, I think we'll be in a good position to have some good results again this year.

Right, and when you start thinking about that top line and hopefully bringing it to the bottom line in 2014, your CapEx is going to be reduced in 2014 and probably not going to be back to prior-year levels. Any plans going forward on the balance sheet side? You guys seem a little under levered at your net debt to cap. How's the market for maybe potential acquisitions looking?

Yes, we stated, we get to a 93 type operating ratio, then returns are better in the business and we would look for opportunities to continue to invest in not only the LTL product offering but as well some asset-light opportunities. So, again, we think there are good opportunities to improve margins and returns within our existing businesses, but we would also look outside of that for the right opportunities, provided that they don't detract from the priority that we see and the opportunity that we see within our existing business.

So, yes, we -- and I guess the market, it seems like there are some deals and opportunities out there, particularly in the asset-light type models. A lot of people are seeking those businesses and if we could find some that's priced reasonably, that had some good synergies and opportunities for growth, then we would certainly seek those out as well.

All right. Well, listen, I appreciate the time as always, guys. I'll turn it over to somebody else.

David Ross, Stifel.

Hello. Good morning, gentlemen. Rick, can you talk about any e-commerce activity that may have helped drive that December tonnage number? Is that something that you're seeing more of in Saia?

I don't think so, particularly. A lot of that obviously is residential type traffic and I think while we see some more of that -- people doing business out of their homes, as well as consumer goods being delivered to us to our homes as we intend to order more over the Internet, I don't think that's a major factor at all.

So you guys don't have a ton of liftgates on the trailers and aren't gearing towards that business for any reason?

We have probably more than our fair share of that, but we tend to be more at the strip mall as opposed to at your driveway.

Okay. That driveway can be rather expensive for you all to operate, so it's probably better that way (laughter). And then, Jim, on the operating taxes and licenses part, it was down year-over-year, which is a good thing, because it's been in that $9 million to $10 million a quarter range for the past four years. Was there anything one time there, like a year-end true up to drive it lower? And what's your expectation for that line item going forward?

I would think -- David, if you look at the year over year we're down slightly. I mean I would trend that forward. I don't know there was any big one-time thing in the fourth quarter that impacted that.

It just seems a little odd with more trucks that you would have lower taxes and licenses expense, so I didn't know if there's anything I was missing.

What line was that again?

Operating taxes.

Operating taxes and licenses.

Yes, a lot of that is fuel, though. With the fuel economy improving and our line haul effectiveness -- is impacting it. That's what that is.

Yes, the fuel and the miles per gallon. And miles per gallon being up, lower burn of fuel takes the taxes down. That's correct.

Oh, got it. Okay, (multiple speakers).

You'll also see that our purchased transportation was up a little bit year over year and just the way the holiday fell and the weather that we experienced in December, as well as some of the long-haul lanes that we're seeing some growth in. Our length of haul is up. We used more cost effective use of rail. That takes down your miles and your fuel consumption.

Yes. And when you talked about in November enhancing some of the longer haul lanes, that was driven around basically figuring out how to work some intermodal into your network?

Probably not incremental intermodal. Really just looking at transit times that we have and maybe one day a week you can't run it on the rail to make some more aggressive cross-country transit times. But if you're growing the lane, right, you might be running it one more day over the road. But when you have the weekend, you may put it on the rail, right? So you're seeing the growth of the rail over all as well and then, again, just the way the holidays fell, you had some more opportunities to run more rail during the week.

Excellent. Thank you very much.

Scott Group, Wolfe Research.

Thanks. Good morning, guys. So, I wanted to get your view on how we should think about incremental margins going forward. So they've been obviously really good the past couple of years when it was about pricing and a lot of internal things, but as we get a little bit more balanced with tonnage and yield -- maybe better even tonnage than yields -- how do you think incremental margins should look going forward? And I understand the first quarter issues. I was thinking more over the course of the year.

We think there are good opportunities to improve margins. We have a few cost headwinds, but they're kind of normal. You're talking depreciation from the incremental equipment, healthcare, wage and benefit increases, probably in the neighborhood of $35 million, $36 million in total. If you get a 3% yield increase, that basically covers that, so then you've got the benefits from incremental tonnage as well as our engineered cost savings project that we have that's in the $10 million to $12 million range. So we think there's -- you do the math on that, right? Absent accident severity and weather type things, we would be seeing good OR improvements for the year.

That's helpful, and we can do the math on that. So, Rick, what was the cost saving number you just gave? And is that the total way you're thinking about cost saves this year? You given some good color in the past on what you guys were targeting.

Yes, I guess what I would say, that's more in the $10 million to $12 million range. Our target is probably -- obviously we have little bit more than that, and you don't get 100% effectiveness, so probably in the $12 million range. And it's a little different where as in last year -- couple of years, actually -- we've had some big buckets. Like this last year, we had tens of millions of dollars in both just fuel and line haul, in those two items.

So I don't have those big opportunities this much. It's more of an accumulation of smaller $2 million and $3 million projects that we are targeting, so we probably won't have as much color to provide in terms of the detail on project success. But there's still a number of projects that are well-outlined and we're confident in our ability to execute. And some of those things -- whether it be load average, city production, dock production -- then you also get some help from that from a tonnage perspective. So incremental margins on tonnage with our fixed costs and some efficiencies can be positive there too. More in the 25% range.

Yes. Yes, no. That sounds good. And then, just last thing, I know it's a small part of the business but the truckload volumes were very good in the quarter. I don't know if that's an easy comp or something changing the business. Do you have any perspective there?

Well, we've -- some of our targeted marketing and sales efforts have been on some of the heavier-weighted shipments where they make sense for us, particularly to fill backhaul lanes. So we have executed what I think is fairly well in that area with some changes in some targets that we have looked to achieve. Yes, it's been a good, successful efforts over the past six months or so that's contributed to our total tonnage and our over 10,000 pound shipments.

Are you seeing any spillover from tighter truckload into the network, do you think?

Maybe some. As truckload tightens up a little bit, some of these truckload stop-off type shipments would come back to LTL and I think, again, given we've targeted some of these opportunities, we tend to -- we call it truckload because it's over 10,000 pounds -- but our shipments in that area weigh around 14,000 pounds is the average shipment in our over 10,000-pound size. And it's really more partial uploads, so to speak, right? So that's the market that we are playing in. And particularly -- that's not a primary thing we're looking for, and you'll probably see we won't handle much of that outbound out of Chicago or some big head-haul lane. But in backhaul lanes, those partial truckloads make a lot of sense for us.

Good stuff. Thanks, guys.

(Operator Instructions) Bill Greene, Morgan Stanley.

Hello. Thanks for taking the question. Rick, just in regards to the last comment in terms of spillover, do you feel like hours of service has played any role? Because I feel like the last time we had an hours of service change for truckload it did affect LTL. Can you tease that out at all, or it's just not -- you can't see it?

I don't know, you know. Our thing is we look at this segment as it has good contribution margins for us and how can we grow this upload type of segment or larger shipment segments? And so we looked at our pricing and our marketing mechanisms to target certain segments of this business and have been successful with it. (multiple speakers) it's hard for me to see.

Yes, I actually more meant to the LTL network. So, as things tightened up in the truckload market, does that sort of spillover and create this strength for you in some of your tonnage trends in LTL?

Well, I think it does some. We've seen that every time before. I think it has an impact and, to be honest with you, we even see it where people break up a truckload shipment into two LTLs and give them to us two days in a row, going to the same place. Obviously they're recognizing that and they don't have capacity, so they're sneaking it on us. So we -- sometimes that -- we have a pricing and it pays well for that. And sometimes it doesn't, so we have to address that.

But we are actually seeing some of that, so I think your point is valid. So there's two segments of that. One is there's probably some spillover from a tighter truckload market and then, second, is probably this targeting opportunity that we have to feel backhaul lanes for us.

Okay. Make sense. I want to come back as well to the CapEx Question. What you've long said is -- you mentioned earlier, just when you get to the target OR, start thinking about expansion again. And so a lot of us have said that will probably mean an acquisition. Why wouldn't you look to more organically expand the network into territories where you maybe aren't yet? You can build new terminals, that sort of thing? Or is that just not an attractive strategy?

No, I think it is. I think a phased in organic is clearly an opportunity for us. And if there's -- the acquisition side, it gets you an immediate network. You come with some revenue and tonnage opportunities and get a framework. The negative side of that is you usually have a transition when you buy a smaller company to make that work for you. And then maybe the right answer is a combination, where you organically expand into a few major markets and then make an acquisition to fill out your coverage in some more rural areas.

So I think those opportunities to do one or the other, and we continue to evaluate those opportunities going forward. And I think with where we are from a cash flow, balance sheet, and the way the business is operating, I think that either one of those is certainly viable. And I think -- the other comment I would make is where historically organic expansion was somewhat difficult, where you made all the investments and you started with zero revenue, obviously we've got a lot of national account relationships.

And I would also comment that with the 3PL business being a bigger portion of your business, you can go into these new markets and get some immediate revenue through these 3PL relationships that we already have as well. Clearly it's a -- I think it's clearly a viable strategy when the timing is right.

Yes, that's great. Thank you so much for your time and insight.

And there are no further questions in the queue at this time. I will turn the call back to Rick O'Dell for any additional remarks.

All right, thank you for your interest in Saia. We appreciate it, and we'll talk to you guys soon.

That does conclude today's conference. Thank you for your participation.