Saia Inc (SAIA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Saia, Inc. fourth-quarter 2014 results conference call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mr. Doug Col. Please go ahead, sir.

Thanks, Greg. Good morning. Welcome into Saia's fourth-quarter 2014 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer; and Fritz Holzgrefe, our Vice President, Finance, and Chief Financial Officer.

Before we begin you, should know that during the 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 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 most recent SEC filings for more information on the exact risk factors that could cause actual results to differ.

Now I'd like to turn the call over to Rick O'Dell.

Well, thank you for joining us to discuss Saia's results. I'm pleased to report that Saia finished off a record year in 2014 with solid fourth-quarter results. To produce both record revenue and earnings in our 90th year of operations is a testament to the hard work and talent of the entire Saia team.

Some highlights from the quarter, compared to the fourth quarter of last year, include the following. Total revenue increased 10.7% to $310 million. LTL revenue increased 10.6%. LTL tonnage rose 4.3%. Purchased transportation as a percentage of total line miles decreased for the second quarter in a row to 12.5%. Our operating ratio of 93.4 improved by 130 basis points. Our operating income grew 40%, and our earnings per share were $0.53 compared to $0.32 a year ago.

In the fourth quarter, we continued to focus on providing best-in-class service to our customers, as demonstrated by our consistent, 98% on-time service performance. Our 6% increase in LTL yield in the fourth quarter was primarily driven by contractual increases, but also benefited from our increased usage of dimensioners across our system and continuous revenue mix management. Yield gains are further evidence that the value proposition offered by Saia continues to resonate with our customers, and this marked the 18th consecutive quarter of improved yield.

Looking back on the full year, I'm pleased that we were able to overcome a number of challenges, including accident severity, service disruptions due to weather, and increasing cost of incremental capacity. We experienced higher-than-expected costs for purchased transportation and labor in a capacity-constrained environment. And while we were willing to add these costs to maintain quality service for our customers, it did serve to reinforce the need to raise prices, and make sure that all of our freight yields an adequate return; particularly, again, in this capacity-challenged environment. I'm sure that you'll note that our yield trends and incremental margins improved materially in the second half of the year.

A few highlights from 2014, which should continue to benefit both service and profitability in 2015, are as follows. LTL tonnage grew 6.3% for the year, indicating our value proposition continues to be recognized and accepted by our customers. Our LTL yield rose 4.4% in 2014 through a combination of contractual rate discussions, which increasingly include a targeted increases on unprofitable lanes, as well as a general rate increase of 4.5% that was implemented on April 1. An increased use of dimensioners in 2014 aided yield improvement. And in 2015, we'll have 30 dimensioners operating in strategic terminals to ensure that freight classification is accurate, and that customers are paying an appropriate rate for what they are shipping.

Our lineaul fleet is now 100% equipped with Logistics Post trailers, and our load average for the year improved by 1.7%. The uniform fleet promotes repetitive loading techniques which should lead to continued improvements in load average and cargo claims experience.

To support our Company-wide commitment to a best-in-class cargo claims ratio, we continue to invest in equipment and training. For example, we have recently implemented airbag systems on the docks at all of our major terminals, and have portable inflation devices on forklifts in the smaller terminals so that airbags can be used in every facility.

We also doubled the number of regional claims managers to ensure that proper loading and unloading techniques are uniform across our network. We have also increased our regional safety staff, giving us more training resources and an increasing opportunity to have daily interaction with our drivers, making full use of all the additional data points available for our in-cab technology to prevent accidents.

Our fuel efficiency improved by 2.5% for the year to 6.6 miles per gallon, driven by our investment in ongoing driver training, new tractors, and in-cab technology. And finally, through the fourth quarter and early into the first quarter of this year, we have increased our field salesforce by 8%, positioning ourselves to continue to seek out customers who value our service proposition.

Furthering our yield enhancement efforts in early January, we implemented a 4.9% general rate increase. We believe that we are competitively positioned to grow our market share. However, I would say we are committed to progressing toward industry-leading margin, and will forsake tonnage growth for the opportunity to improve margins through yield improvement.

Now I'd like to have Fritz Holzgrefe review our fourth-quarter and our full-year results. Fritz?

Thanks, Rick, and good morning, everyone. As Rick mentioned, the fourth-quarter 2014 earnings per share were $0.53, and include $0.04 related to tax credits for the full year that were not enacted until the fourth quarter. For the quarter, revenues were $310 million, with operating income of $20.6 million. This compares to 2013 fourth-quarter of $280 million, and operating income of $14.7 million. Both periods included 62 work days.

As Rick mentioned, LTL yield for the fourth quarter 2014 increased by 6%, which primarily reflects the favorable impact of continued pricing actions, consistent with the trend of the past several years.

Our industrial engineering initiatives are driving productivity improvements, and our incremental margin improved with the added density in our network.

Now I'd like to mention a few other key expense items in the fourth quarter results. Salaries, wages, and benefits rose 13% to $163 million in the fourth quarter, reflecting additional headcount, at wages associated with maintaining service levels on higher tonnage trends, and also a mid-year wage increase of approximately 3%, as well as ongoing benefit cost inflation.

Purchased transportation expense for the quarter rose $4.3 million compared to last year. But as mentioned earlier, purchased transportation miles as a percent of total linehaul miles was down sequentially from the third quarter. Depreciation and amortization of $14.8 million compares to $13.8 million in the prior-year quarter, due to continued investment in tractors and trailers, resulting in a newer fleet. Claims and insurance expense was $6.9 million in the quarter compared to $7.4 million in the quarter last year.

For the full year, revenues were up 11.7% to $1.3 billion, while operating income of $85.7 million was 15.2% higher than the $74.4 million posted in 2013. In 2014, net income rose 19.2% to $52 million from $43.6 million earned the year before. Diluted earnings per share were $2.04 versus $1.73 in 2013.

Our effective tax rate was 30.8% for the fourth quarter of 2014, and 36% for the full year. At December 31, 2014, total debt was $82.9 million. Net of our $4.4 million cash balance at year-end, our net debt to total capital was 17.6%. This compares to total debt of $76.9 million, and net debt to total capital of 20.1% at the end of 2013.

Interest expense for the full year was $1.9 million, lower than in the prior year. Net capital expenditures for 2014 were $112 million, including equipment acquired with capital leases. This compares to $122 million of net capital expenditures in 2013. In 2015, the Company currently plans net capital expenditures of approximately $125 million. This level of investment reflects primarily the replacement of revenue equipment, several real estate projects, and investments in technology.

Now I'd like to turn the call back to Rick.

Thank you, Fritz. We exited 2014 well-positioned for further margin improvement and earnings growth in the coming year. I believe our ongoing investments in technology and quality will allow us to continue to offer a service level that our customers find to be unique and valuable.

Finally, I believe that this consistent strategy provides a strong foundation for long-term, profitable growth and increased shareholder and customer value.

With these comments, we are now ready to answer your questions.

Operator?

(Operator Instructions). Scott Group, Wolfe Research.

So, Rick, you talked about -- you feel like positioned well for margin improvement and earnings growth. And obviously there's a concern about the impact of lower fuel, and what it means for LTL profitability and earnings. Can you talk to that, and what kind of potential earnings headwind that is, and what you are doing to offset that? And I guess we'll go from there.

Sure. Well, obviously we have a large variety of fuel surcharge programs within our customer base. And historically, you really don't care whether I get a yield out of a fuel surcharge or a base rate, as long as the account makes money. These programs vary price with fluctuating fuel prices, so it's generally fair to customers and the Company over a period of time. But when you have a macro change in fuel prices, or a material change, which has happened recently, some of the programs or accounts really have to be reevaluated to ensure that the combination of base rate and the surcharge of revenue that you are currently generating, versus your costs, are generating adequate margins.

So it really forces us to look at what the impact is on an account-by-account basis; what's going on; and what changes we need to make in base rates, or change the surcharge function to make sure that we didn't -- now, the combination of base rates is too low, because you potentially had some margin in the surcharge.

So the positive side of that is the customer's fuel surcharge is down 4%. He is seeing a reduced cost, so sometimes it's easier to go and get a bigger base rate increase. Let's say, you go to them for 7%. It's really -- net-net, for budgetary purposes, it's only a 3% increase from a cost standpoint. And sometimes that's tolerable for them.

And furthermore, don't forget that most customers' TL spend just dwarfs their LTL spend, and those surcharges have come down even more than that. So to the extent they have a transportation budget, they have a way favorable variance that we can -- if we need to make some adjustments because the account is no longer profitable because of some change, or it isn't generating appropriate margins, we're in a position to go do that. And sometimes they have a better budget tolerance.

So, it's the pros and cons of this. I think when you -- it's fair. And, generally, it works, particularly at the increment. But when you see a macro shift with us, sometimes you have to go back and look at these mechanisms because they are all a little different.

So, is what you're saying is it's an issue, but the pricing is good enough right now where we can actually put in more pricing than we were thinking, and make ourselves whole?

Well, we kind of changed our targeted pricing philosophy in the second half of last year because we felt margins weren't adequate, given some of the capacity constraint cost that we were seeing. So we've been getting some substantially increased yields during that time period, and we would expect to continue that. And if that needs to step up a little bit because an account doesn't operate because of the fuel surcharge function, then we'll change the targets again.

Okay. So maybe just the last question for me. I think you guys have talked about trying to get to a low 90s, maybe even a high 80s operating ratio over the next couple of years, year or two. Does this lower fuel environment change, any of that, and make it tougher, easier? Is that still the goal?

I don't ever remember this business being easy, or anything about it, necessarily. But maybe that part, I have just forgotten or something. You always have your challenges. And I think what I would say is we're familiar with the pricing fundamentals of our accounts. We have a good profitability management model and we have a history of managing for yield effectively, and we're going to continue to do that. It hasn't changed my opinion on that opportunity. Fuel prices declined in the fourth quarter, and I thought our margins were pretty good in the fourth quarter.

Yes. Okay. All right, thank you. I'll pass it along.

Brad Delco, Stephens.

Rick, I wanted to ask you, one of the data points that came out in the results was weight per shipment. It was down 2.7% year-over-year, but looks like it was roughly flat sequentially. Can you talk about the drivers of that? And is there any concern that you're seeing less shipments from your customers, that they are signs of slowing economy?

I don't know, to be honest with you. We've been pushing so much on the yield over the second half of the year. And I could tell you that I personally think it's more business mix. But until you saw everyone's results, you might be able to get something out of the marketplace. Obviously I think we're the first LTL company to announce.

But I would tell you, specifically, in the middle of the second quarter when we were really having some pretty serious capacity constraints and incurring a lot of high-cost purchased transportation, we changed our spot quoting for pricing dramatically. And that volume for us was down pretty significantly, and there's a lot of those shipments. They average about 8,000 pounds. And there was a lot of shipments in that 5,000 to 10,000 pound category that impacted our weight per shipment when we changed our pricing philosophy on that.

It was about 1% of our revenue, but it was a much higher percentage of our tonnage. And my philosophy was, there's no reason to discount my LTL rates in a time when you're capacity-challenged. So we quit doing that spot quoting to the degree that we were, or actually dramatically changed our pricing, and the revenue in that segment got cut in half.

And then, secondarily, I think we're re-pricing very aggressively hazardous material shipments. And those chemical shippers and people tend to be much higher -- industrial shipments tend to be your higher-weighted shipments. And we've seen some decline in our shipment count due to that re-pricing. And obviously in a challenged driver market, truckload hazmat capacity is more challenging to get than what it used to be. And we think those guys have to pay their fair share for us handling those hazardous materials. So I think that has had some impact on some of those heavier-weighted shipments as well.

No, that's good color. And then maybe just one more, quickly, on the yields. Yield is up 6%. I think we are well above, or they were well above our expectations. Can you quantify us what the impacts were of maybe mix, length of haul, and then also fuel? Because I would imagine fuel coming down would have pressured that, so it could make those yields look even better.

Yes. Again, we have that theoretical model that adjusts for length of haul and weight per shipment and fuel surcharge, and we show that our yields were up over 5%. That's for weight per shipment and length of haul. Both our length of haul and weight per shipment went up. And I think that same comparable number from the third quarter was 4%, so our true yield trends went up 1%. And contract renewals were very favorable in the quarter, and we would expect that yield momentum to continue, if not to continue to accelerate.

Got you. Well, I appreciate that. Thanks, Rick, and appreciate the time.

Bill Greene, Morgan Stanley.

Rick, I wanted to ask you a little bit for some color on how to think about what all these moving parts -- the efforts on yield, the fuel surcharges, and how those are changing, and of course the mix effects -- typically we think about the OR in the first quarter would be a little bit worse than the fourth quarter. But can you offer any color there about how to think about these moving pieces and how it could affect it?

Well, we think because of our yield momentum we would expect our OR to improve from 4Q to 1Q, even though 4Q was pretty good. Historically, you tend to have a lot of swings between first quarter and fourth quarter, and it depends on certain dynamics in the quarter, particularly it can be impacted by weather. We were fortunate to avoid a lot of weather issues in the fourth quarter and had good -- shipment counts were up 7% range. It was a pretty favorable quarter for us. But due to the yield momentum that we have, there's a general rate increase in 1 January, and the favorable contract renewals that we have. Our outlook is to improve the OR from that in the first quarter.

Good. How does the tonnage growth --? I might've missed that. You might have said how January tonnage was.

Fritz will answer that.

If you look at year-to-date through January shipments, we're up modestly. But one trend we do see so far in January, we see weight per shipment down, so overall tonnage is down modestly year-on-year. But I think you've got to keep that in the context of what Rick described around all of our emphasis on yield and the January GRI.

Yes. Now, let me just clarify one thing, then. So, Rick, in your comments, you sort of said, hey, look, we're willing to forgo some tonnage insofar as we're becoming more profitable in the tonnage that we keep and whatnot, because of the yield focus. So is there a level where we'd worry about demand? Does the operating leverage of the business start to kick in at a -- I don't know, down 2 or 3 tonnage, or something like that? Or are we so far from this because of the yield environment we don't have to yet worry?

Yes, I don't -- to me, flat shipments to down a couple percent, if you can get mid- or high-single-digit rate increases, would have a meaningful improvement on our operating ratio, particularly with some of the efficiency initiatives that we have at the Company. So I think it's -- we're pretty focused on getting to this 80s operating ratio as opposed to just growing. We grew significantly last year, and I wasn't very happy with our margins, so we have changed our focus to a pricing and yield management story. And at this point, the demand environment seems solid enough that we've been able to be pretty successful getting rate increases.

And what we tend to see, we go to customers for a meaningful increase, there's a segment of their business that operates okay, and then there's a segment of their business that operates very poorly. We don't just take 5% on the account overall. We're taking 5% in one; and then some lanes it might be 15%, 20%. And then we're going to find out whether we get that business re-priced. Or if not, it comes out, it's operating in head haul lane out of Chicago; then the costs come out. It's part of what we're seeing is a combination of effective yield management and effective linehaul network optimization that some of the sub-optimal costs that we saw last year get re-optimized and/or the business gets re-optimized as well.

Makes a lot of sense. All right, listen, thank you for the time and insights. Appreciate it.

Art Hatfield, Raymond James.

As I think about the big picture and I think about 2015, I looked back the past couple years, I go back to 2013, you had a modest growth. No tonnage growth, but you had good yield improvement, and you had good improvement in the OR. In 2014, you had great top-line growth but the OR didn't move that much. Can you help -- you have talked around this -- but can you talk more specifically about how you think about that balance in 2015 and beyond for the Company?

Well, there's always a balance. We wouldn't do well down 7%, 8% in tonnage. And you'll see obviously we're investing in sales resources, particularly in field sales. But there's a segment of our national account business that we see a big opportunity in, where we still don't have the pricing right, particularly in today's higher cost environment. And I think we're going to see some inflationary cost pressure from driver wages. And we all know that, absent fuel, the truckload market is increasing costs, and think there's no signs that the rails are going to back off on the intermodal service, a portion of our linehaul costs.

So we see that we need to be properly compensated for what we do, and I'm not very satisfied with where our margins are. So it's always a balance, but we are working diligently on business mix management in conjunction with our cost initiatives. And I think the environment is pretty good for that. With the wage increases people are doing, and with some of these other external factors that are going to be inflationary, I think the rates are going to have to go up. And we think our rates, compared to our value proposition at a certain segment of our customer mix, needs to be re-priced. And we're prepared to do that and we think the environment is good for that.

Right, that's helpful. Just one other question. Obviously the term of the day is energy exposure. I know that's two words but -- is energy exposure. So, can you talk about a little bit about what maybe your exposure is to the energy industry -- one? And two, if we do see a reduction in production in that environment, is there anything in there that could help you on the cost side, i.e., a little bit less pressure on the labor side?

Obviously some of the oilfield markets have driven up a demand for drivers. And we were in some of those places like Odessa, Texas, and paying signing bonuses and things like that. That should mitigate some of those types of things from a driver availability standpoint.

And then just from an exposure standpoint, if you just look at it off of -- Sipco has figured out what the customer mix is. We have about 8% exposure to energy overall. And I think the other comment that we all have to look at when you talk about the economy is, with the fuel prices coming down, a lot of people's disposable income is going up dramatically, too. I guess no one wants to talk about that.

Apparently not, but I think you're on the right track with that. I appreciate the time today, Rick.

Jason Seidl, Cowen and Company.

Kind of sticking with that on the exposure side, what's the breakdown for you guys between industrial, manufacturing, and retail right now?

We show about -- it's about 40% retail, 40% industrial, and kind of 20% is distribution. I don't know which category you put the distribution side into. But that is kind of the mix that we have had for some time.

All right. And the decline into January on the weight per shipment, do you think -- have you seen a drop off in -- on the industrial shipment side, because of the strong dollar? I know I've had a couple clients asking about that.

I don't know. The majority of our decline in weight per shipment is purely in this 5,000 to 10,000 pound segment. So, again, I don't know how much of that is --.

Any chance that's from hazardous materials?

It's because of our hazmat pricing and/or because of our -- and/or because of the spot quote pricing change that we made.

Okay, that's fair enough. And I guess my next question is on the dimensional equipment. You said -- I think you said 30% by the end of the year is where you guys are going to be. I'm just looking for some clarification on that.

No, we went from 27% at the end -- in the fourth quarter of last year, to 30%. They've actually all been installed. Additional three have been installed in January. And we were just looking at there are some lanes that freight travels through, and didn't have the opportunity to put through a dimensioner. But your other number is actually right, as well. We currently run about 30% of our shipments go through the dimensioners.

Okay. And you said that probably had a positive impact on your revenue per hundred weight, but it was just hard to pull out, correct?

It does. Obviously, as we get the more accurate class over a period of time, and the density, in some cases you can change the build depending upon the customer's pricing program. And in other cases, we have a more accurate measurement of the density to apply to the profitability model. And we go to them and say, we've historically thought your density was 9 pounds per cubic foot and it's really 11; therefore, there's a 20% change in your linehaul costs, and we need to be compensated for that.

Okay. Perfect. That's all I have for today. Thanks for your time as always, guys. I appreciate it.

Tom Albrecht, BB&T Capital.

Can you walk through the LTL tons per day, October-November-December? And then I wanted to follow up on Fritz's January comment.

Sure. If you look at our LTL tonnage year-over-year, October through November-December, you would see up 6.4% in October, 3.9% November, 2.7% in December. So for the quarter, those are the elements.

Yes, and just for clarity, though, if everyone remembers, it was a year ago when the VIATrans/Central Transport merger took place in December, and we saw a significant step-up in tonnage from mid-December into January of last year. So the comps get more difficult. I don't know that this -- what we have saw through the quarter was actually -- I thought December was stronger than I would have thought that it would have been, given where we were in 2Q.

Okay. And then just to make sure I understood what you were saying earlier, Fritz, were you saying that tons were down about 2% in January, and shipments are up 1%?

Shipments were up a little north of 1%, and then adjusted for the January 2 quasi-holiday there. And then you look at the tonnage, we're down right around 1%, 1.5%. So, net-net, you kind of -- shipments up, tons down, so the weight per shipment is down.

Right. And then what was your fuel surcharge as a percentage of revenues? I know you give that every quarter in the quarterly filings.

We don't break out fuel surcharge separately.

Okay. And then where did healthcare finish, 2014?

Total healthcare costs? Hang on a second. That would've been right around $20 million for the quarter, and the full year would have been a little north of $80 million.

All right. And then what about -- Rick, on the contract renewals, I know you said that they were favorable and strong, and all that. But about -- can you talk a little bit about specifically what kind of contract renewal rates you are experiencing?

Yes, they are high-single-digits, so 8% to 9% range.

Okay.

And, again, we started that in the third quarter of last year, and it continued to gain some momentum through those contract renewals. We raised our standards from a profitability management standpoint by lane.

And I guess the other question I had is your salesforce; you've increased that. I would expect, though, that you would still have expectations of tonnage growth if you are bringing on 8% more field sales agents. What is your outlook after we get past maybe this unusual first-quarter comparison? Would you expect tonnage to grow, given the increase in the salesforce?

I think it just depends -- I think we really should grow field business, which operates well and has a better yield component. But we may trade off national account business in lanes that aren't paying their way.

Okay. All right. I guess the last question. On the fuel surcharge I asked, but in the third quarter your 10-Q said that it was 16.7% of revenues. If we just look at the change in diesel fuel prices from the beginning to the end -- or maybe from the third quarter to the fourth quarter, down about 7%. Would that be an appropriate way to try to think about what may have happened to your surcharge revenues?

I think that's probably right.

Okay. All right, that's all I had. Thank you.

I think during the quarter, the surcharges came down a little more slowly. (multiple speakers) of a lag effect, right? And I'm sorry, I just didn't -- we only report those numbers in the Q, and so I didn't bring them with me. I apologize.

That's okay. Thank you.

(Operator Instructions). David Ross, Stifel.

Rick, can you talk a little bit about any impact you guys saw, positive or negative, from the West Coast for congestion issues over the past quarter?

I think there's been some higher, at times, truckload rates out there, particularly on the expedited side. I don't know any other specific items. Our West Coast shipment count growth has probably been similar with -- to our Company. So I don't know that we've seen a specific dynamic with respect to the LTL volume growth out there, other than some sporadic spikes in your spot market out there.

And then you talked about intermodal rates still going higher from the rails for some of your linehaul miles. Can you comment on service levels? Has service gotten better in the intermodal lanes?

Yes, I think service is a little better. And availability is obviously, clearly, better than it was last year when they had the disruptions. But there's a couple lanes where we are still being limited on trailer availability.

Excellent. Well, thank you very much.

Scott Group, Wolfe Research.

So, I'm not sure if this came up, so just wanted just follow up. In terms of the tonnage trend, do you think that this is some of the LTL spillover from truckload starting to reverse at all? Are you seeing any signs of that?

Our weight per shipment decline really happened after -- at the end of the first half of 2014. So if you really look at when our weight per shipment declined, was middle of last year. And then since then, there have been some slight declines in it since then, but nothing -- no major move. In other words, so, we're down, what? 30 pounds year-over-year, but it really happened at the end up 2Q of last year, which was a time when the truckload market was starting to get back to normal, and the rail service availability was improved. And then you combine that with our pricing actions on the spot side, and with some of these major industrial customers, I think that probably has happened. But I think it's been going on for seven months. It's not something that just happened in December.

Okay. No, that makes sense. Thank you, guys. Appreciate it.

Tom Albrecht, BB&T.

Rick, now you know why they call analysts anal; so just want to explore something. So, on the 6% yield improvement, when I look at the positive inputs to that -- pounds per shipment and length of haul -- they both tally a little over 6%. Now, I realize it's not one-for-one, so those two would offset.

And then the surcharge -- or they would be aged to yield. And then the surcharge as a percentage of revenues may have dropped 5% to 7% sequentially. And then the base renewals, upper-single-digit, that's ultimately how you settle on what you think is a mix-adjusted 5% increase (multiple speakers).

That's correct.

All right, so -- okay. I just wanted to make sure I was looking at it correctly.

Okay, yes. That's right.

Okay, thank you.

Well, it doesn't appear as if there's any other questions, so we'd certainly like to express our appreciation for your interest in Saia. Thanks for joining us.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.