Saia Inc (SAIA) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Saia Incorporated second quarter 2016 results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Doug Col. Please go ahead, sir.

Thank you, April. Good morning. Welcome to Saia's second quarter 2016 conference call. Hosting today's call are Rick O' Dell, Saia's President and Chief Executive Officer, and Fritz Holsgrefe, our Vice President, Finance, and Chief Financial Officer.

Before we begin, you should know that during this call we may make some forward-looking statements within the meaning of 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. I would like to turn the call over to Rick O'Dell.

Well, good morning, and thank you for joining us to discuss Saia's results. This morning we announced our second quarter 2016 earnings with diluted earnings per share of $0.52 compared to $0.75 for the second quarter of 2015. Financial results in the second quarter of this year are disappointing when compared to last year's record second quarter earnings. The freight environment throughout the quarter was consistent with the lackluster activity we discussed on our first quarter conference call in April.

With that, as the backdrop, I'm pleased with our performance from a service and quality standpoint, as well as our productivity gains. Our strong effort in these areas helped to support our long standing goal of improving our yield. We were able to increase our LTL yield for the 24th consecutive quarter, and our average contractual price increases were 5.4% for the quarter.

A few comparisons of the second quarter results this year, versus last year's second quarter, are as follows. Our LTL yield increased 2%, and as I mentioned earlier, contractual renewals were up an average of 5.4%. LTL yield, excluding fuel surcharges, was up 5.2%. LTL shipments per workday were down 2.6%. Our LTL weight per shipment fell 1.7% to 1,121 pounds, but was up fractionally from the first quarter.

Dock productivity improved 2%, and the second quarter marked the third consecutive quarter of sequential improvement in spite of a soft volume environment. Similarly, P&E productivity improved 1%, and showed sequential improvement for the past two quarters.

Our purchase transportation models per day were down 34% in the second quarter, as our focus on line haul optimization yielded savings. Now I'd like to have Fritz review our second quarter financial results in a little more detail.

Thanks, Rick, and good morning, everyone. Second quarter total revenue of $312 million compares to $323 million in the second quarter last year, a decrease of 3.6%. The decrease resulted primarily from decreased tonnage and fuel surcharges, partially offset by yield management.

Operating income fell by 30.6% to $21.7 [million], compared to $31.3 [million], for the second quarter of 2015. Both periods included 64 work days.

As Rick mentioned, second quarter LTL yield rose 2%, reflecting the positive impact of our continuing pricing actions, offset by lower fuel surcharge contribution. Fuel surcharge revenue was down 24% from last year's second quarter.

I'd like to mention a few key expense items and how they impacted second quarter results on year-over-year basis. Salaries, wages, and benefits rose 3.2%, or $5.5 million, to $175.9 million in the second quarter, reflecting the impact of a 4% general wage increase last July, as well as increased benefit costs particularly in the area of self-insured healthcare costs, which rose by 13% in the quarter.

Purchase transportation expense in the second quarter dropped by $5.9 million to $14.3 million, and was 4.6% of revenue versus 6.2% of revenue last year. Similar to the first quarter results, this comparison benefited from increased utilization of internal assets, favorable truckload carrier rates, and lower fuel costs charged by carriers.

Purchase transportation miles as a percentage of our total line haul miles were 7.9%, compared to 11.5% in the second quarter of 2015. As a result of our continued investment in new equipment, we experienced favorable cost trends around fleet maintenance, outside maintenance, and parts expenses were down 22% in the second quarter.

Fuel efficiency continues to benefit from having a younger fleet of tractors, and that measure improved by 1.6% to 6.87 MPG in the quarter. Unfortunately, yield productivity and cost saving goals that were reached in the second quarter were more than offset by accident expenses and our self-insured healthcare costs reflected in the salaries, wages, and benefits line I mentioned earlier. Volatility around accident expenses drove the $4.5 million year-over-year increase in claims and insurance expense.

While our premium costs are up year-over-year, the large delta versus last year's second quarter is primarily explained by an increase in frequency and severity in the current period and negative development on older claims.

Depreciation and amortization of $19.7 million compares to $16.6 million in the prior year quarter and reflects our continued investment in tractors, trailers and forklifts. Our effective tax rate was 35.2% for the second quarter of 2016, though we still expect full-year tax rate will be 36.5%.

At June 30, 2016, total debt was $139.4 million, and net debt to total capital was 23.4%. This compares to total debt of $108 million, and net debt to total capital of 20.7% at June 30, 2015.

Net capital expenditures in the first half of 2016 were $136.2 million, including equipment acquired with capital leases. This compares to $73.3 million of net capital expenditures in the first half of 2015. Full-year 2016 net capital expenditures are forecast to be approximately $140 million. Now, I'd like to turn the call back to Rick.

Thanks, Fritz. To continue on the capital expenditure topic for a moment, I'm very pleased with the effect our younger fleet of tractors, trailers, and forklifts is having on our results. The return is seen in the maintenance savings, increased reliability, and in fuel savings.

The newest tractors in our fleet average 7.5 miles per gallon in June, and this should get better as the tractors are broken in. We'll continue to invest heavily in our business to maintain fleet age and terminal efficiency.

To summarize on the first half of the year, I would say while the environment remains challenging, we continue to have success with our core strategy of creating a value proposition in the marketplace that supports our desire to improve yields. In an inflationary cost environment, we believe it's critical to execute on our efficiency efforts and stand firm on pricing to support the ultimate goal of improving margins, earnings and returns for shareholders. With these comments, we're now ready to answer your questions.

Thank you.

(Operator Instructions)

We'll first hear from David Ross of Stifel.

Yes, good morning, gentlemen.

Good morning, David.

Rick or Fritz, could you just first take us through the tonnage trends in the quarter? You know, what you were seeing as we progressed through April, May, June and where you are in July?

Sure. So April/May/June, actual was minus 3.8%, April; May was minus 4.9%; June was minus 4.4%. Full quarter was 4.3% down. Adjusting for Good Friday, that April number would have been minus 5.8%, full quarter, minus 5%. Month-to-date through July so far, down 3.8% year over year.

And then given the rig count appears to be bottoming or coming up a little bit off the bottom. Do you see any signs of life in your oil field services energy business?

Not much, to be honest with you.

And then, you know, you talked about CapEx for the year being $140 million, but year-to-date it's about $136 million. Does that mean that there's not going to be a lot of new equipment coming on board in the second half of the year? Can you talk a little bit more about why that's getting cut off so much?

Sure, I think as we entered the year with our plan, we took the revenue equipment primarily in the first six months of the year. So I don't anticipate any -- maybe one or two -- for the balance, but nothing there. We've made our opportunistic real estate investments that we had planned. If something were to change between now and the end of year, that might happen in the real estate area. But it's just more about how we've executed against our operating plan so far this year. And it's not a reflection of, you know, any change in our business mode.

And if you look at use of cash, --I'm going to kind of come back to that CapEx -- where do you see the biggest returns in investing your cash right now? Is it in the new trucks because of the maintenance and fuel economy savings? Is it in some kind of terminal capacity expansion? Is it in safety investments to help with insurance and claims? Technology to improve productivity, buying back stock? Where do you see the biggest bang for your buck in terms of investing the cash?

The way we look at it, I think there are opportunities. Rick pointed out in his notes and we've seen the returns on the investment in new equipment. The equipment that we bring on and invest in, we typically are trying to buy the latest and most current safety technology. So we see that as always an opportunity for reasonable return on capital. I think as we have done in the last couple of years -- and I think you'll see this going forward -- is that we'll invest in locations that are strategic. We like to own those; and as those opportunities come up, we'll advance that investment.

And then we added a terminal this year in the northern suburbs of Chicago. We viewed that as a positive investment for us, just to provide better service at a second terminal in the Chicago market. We tend to be focused on where the technology areas -- those are always opportunities for us to enhance our back office, so we make those investments.

I think, broadly, we don't see areas that are not attractive to invest around revenue, opportunistic real estate and technology. Those are all positives for us. And I think you'll continue to see us going forward making those sorts of investments.

So with the free cash flow expected in the back half of the year, what's your leverage ratio or kind of target balance sheet comfort in terms of adding debt to the business? Is it you want to get it back below 20% net debt to cap first? Or could we see maybe a further reduction in average fleet age -- you know, it just accelerates in 2017 purchases in the back half and maybe take that number up?

I think what you'll see us do is to continue to kind of move along the strategy that we've had, which is continue to keep our financial flexibility. Pay down debt, be in a position that we can make the real estate investments into 2017, equipment investments in 2017 that we feel drive value in the business. So I think that we'll continue to manage the balance sheet conservatively and be in a position that we can execute on those sorts of investments in 2017. And I think that kind of the run rate numbers that you see this year, I would expect to spend that at least next year.

Excellent. Thank you very much.

Hello, David. I would just comment further. The strategy we have taking the equipment early in the year really allows us to flex our fleet size up through the seasonal peak period. And then we do our trade-outs kind of on the back end. So net-net, it can effective deployment of capital because you're not permanently upsizing your fleet for a seasonal peak. Hopefully, we'll see some more seasonal peaks, right?

That would be good.

Next we'll hear from Ravi Shanker of Morgan Stanley.

Hello, good morning. It's actually Alex Vecchio in here for Ravi.

Rick, so the last few years you've been getting some pretty solid contractual rate increases, well ahead of the broader industry. And I think that's been largely a function of the fact that you believed a lot of your lanes were basically underpriced versus peers. Can you kind of help us think about what inning are we in, in that process? And how much more do you have left to go? Any type of quantification as to what percentage of your lanes do you think are underpriced versus the market that still need to be addressed there?

It's probably 10%.

You're 10% of the way through or you've got 10% left?

About 10% of our revenue still needs to be repriced.

Okay. Got you.

And obviously, the pace at which that can move is kind of -- you have to balance price and volume in a network business. And we're very disciplined with it. But you have to be prudent with respect to that. So we continue to step that through.

And it's kind of a perpetual thing, too. I mean if you're growing business outbound from the Upper Midwest -- let's just call it Chicago-land -- and your business from your Lower Midwest, Texas, is down because of the oil fields for instance. Then you've actually created a larger imbalance that you need to be compensated for because you're running more empty.

So there are kind of more than normal amount of changes and lane imbalances that are kind of going on in today's environment. But that's always something that you have to deal with.

Okay. That makes sense.

And then you typically provide some color on how to think about the OR in the third quarter. Naturally the insurance line was a bit higher than normal this quarter. How should we think about 3Q OR from a sequential basis?

Well, 2Q to 3Q has been volatile. But it's kind of averaged about a one point decline due to kind of seasonality, plus our July 1, 2016, wage increase. So should we be able to achieve a more normal accident expense, I think a flattish-type OR from 2Q to 3Q would look reasonable at this point.

Okay. Got it. All right. That's all I had. Thanks for the time.

Sure.

Next we'll hear from Brad Delco of Stephens.

Good morning, Rick.

Good morning, Fritz and Doug.

Good morning, Brad.

Maybe going on that free cash flow question again, Rick, can you comment at all about what the M&A environment is like? Is there any interest in looking at expanding your geography through M&A? Or is that sort of on the back burner, given the kind of environment we're in today?

You know, I think we would consider the right opportunity. I think that we believe there's value in Saia's current network. But we think our customers would -- and they come to us and ask us to kind of expand our network to accommodate some of their requirements. So we continue to evaluate that.

And I would say probably the most likely scenario is maybe some combination of organic expansion and maybe some smaller tuck-in acquisitions.

That's still possible in this type of environment?

Yes. I think so.

And then kind of focusing on a similar yield question, I know there's been so much focus on improving price. I feel like a while ago, you kind of discussed the profitability dynamics between your 3PL contractual and tariff customers. Is there any way you can provide just a high-level comparison of what that was, say, three or four years ago, versus where it is today, to kind of see how that pricing focus has changed that dynamic?

Yes, with some of our continuous efforts on the more detailed lane-based pricing, both the national accounts and 3PLs have improved pretty materially from where we were three years ago. And I guess I would say the other side of that is the small customer, on average, has probably deteriorated a little bit. It would be our most profitable segment, but the overall yields on that probably haven't -- you can't maintain those kind of like you used to because of a variety of things in the market dynamics.

Effectively, you force them into the 3PL channel anyway, right?

That's what can happen. If you keep trying to keep a lot of margin in there, it gets taken away, right?

That's right.

And then what, what percentage of the freight is 3PL today versus maybe a year ago? Do you have that number?

The blanket 3PL, which is just the basic resell of some rates that we provide, has gone from a little over 10% to -- I think it's up year over year about 5%. So it's gone from 10% to 10.5%.

And then the kind of customer-specific pricing that's managed through a 3PL is about another 10% of our business, and that's probably fairly consistent. So we're in -- the neighborhood is 21%.

And then, Fritz, just a quick point of clarification. Did you say that fuel surcharge revenue was down 24% year over year?

Yes.

Okay. All right. That's it for me. Thank you for the time.

Sure.

Next we'll hear from Jason Seidl of Cowen.

Thank you, Operator.

Hello, good morning.

Good morning, Jason.

I want to talk a little bit about the accident numbers in the quarter, and when you think that might hit some actuarial adjustments. Should we be thinking maybe that's in 4Q at best for you? In other words, could that increase some of your going forward costs if there's an adjustment?

Jason, could you repeat your question? You're breaking up a little bit, and I didn't quite get all the elements of it.

I'm sorry, can you hear me now better?

A little bit. You're kind of breaking in and out, but let's give it a shot.

I was asking if the accident costs in the quarter -- because there were both severity and frequency increases -- is going to impact any actuarial adjustments before the end of the year so that it might increase your go-forward costs?

No, the process we go through for our BIPD expenses, we essentially review each and every claim and establish a reserve and any development basis each claim. So it's not an actuarial -- the calculated number, say, is like a workers' comp number might be.

Okay.

I would say this, though, Jason. I think we're seeing an increasingly litigious society. And we keep seeing these lawsuits. They'll drag out and come out of the woodwork from an accident that happened three years ago that would appear to have some minor injuries. And so a fairly large portion was from unfavorable development of older cases, which is probably going to cause us to reserve at a higher rate in anticipation of that being kind of an ongoing challenge.

Yes.

So what we'll probably see is kind of higher ongoing but hopefully less volatility by trying to do a better job of anticipating that.

Okay. Perfect. No, that's good, good clarity.

You also said that about 10% of the business is left to be repriced. And you said you're going to try to balance on when that gets repriced based on your need for volume and how the market is. But is it fair to say that over the course of the next year or so that stuff will get repriced to market value?

Yes. I think that's true.

Okay. That's fair enough. That's all I have. I appreciate it.

What I'd tell you is sometimes we can see and get halfway there and come back at a later date. Do you know what I'm saying?

Right, right.

If I had a lane that needed 14, I might have to concede and take 8 and say we'll see you 12 months, right?

Some of the way there is better than none of the way there.

Yes. Right.

Exactly. All right, appreciate it.

All right. Thanks.

Next, we'll hear from Todd Fowler of KeyBanc Capital Markets.

Great, thanks, good morning. Thanks for taking the question.

I jumped on a little bit late, and I apologize if you talked about this. Just on the wage inflation side, where do you think your core wage inflation is running? And is there any expectation for wage increases for the rest of the year in the second half at this point?

Todd, yes, so we typically -- our plan is or each year we give our wage increases in July; so we've executed on that this year. And that was roughly a 3% increase. And that's driven by market.

Some categories of employees or locations, maybe drivers in certain markets, might get a little higher. Our admin folks are 2.5. So we're very transparent with our employees in that process. So we kind of keep that on a schedule of first of July every year.

Got it. Okay.

So, Fritz, in your expectation for the flat OR sequentially, that obviously had that incorporated in there, and that wouldn't be anything that would vary from what you've seen historically?

Right. That's part of the sequential cost that we're challenged with, but we plan for that.

Got it. Okay. And then how do we think about depreciation with the pull-forward of the CapEx? Should depreciation step up a little bit more still into the third quarter, just on the timing of when you put the rolling stock into service? But then it levels off in the fourth quarter and then into 2017? Is that the right way to think about the run rate for depreciation?

Yes, it's probably reasonable.

Okay. And then just one last big-picture question. Brad earlier was talking about, or asking about, the amount of freight that's coming through the 3PL channel. A lot of brokers that have been reporting over the last several quarters have really been increasing their volumes on the LTL side.

Rick, maybe this is for you. I know that you've a good relationship with the 3PLs. But can you talk a little bit about longer-term maybe how you see that playing out, and how that either helps or hurts your business relative to some of your competitors in the margins? Just the dynamic where it seemed like the brokers really are focused in taking some share. I just want to make sure we're thinking about it the right way.

Yes, obviously there are two segments of business. One is customer-specific that they manage for the customer. I mean, they're taking some margin on that, right? So net-net, we have to make sure that margin doesn't come out of us necessarily; but that's a continued challenge.

And then on some of their business, obviously, they're rolling up small customers into a book of business and presenting it to us and causing us to kind of bid on it as if it were a national account. And net-net that doesn't have as good a margin. So it's a challenge for us.

We just have to be disciplined with respect to mining that data for business that works for us within our network. What we're kind of doing is work with them from a partnership perspective to say -- and they're transparent in showing us their book of business. And we mine it in a very sophisticated manner to find the segments of that that work best for us in our network. And we're increasingly doing that more frequently.

So instead of looking at their book of business one time per year, we might look at it three times per year. Because their book of business kind of changes, and other carriers adjust their price more frequently. So those are kind of the dynamics with which we work with them. I don't disagree that it probably will continue to be a dynamic from that perspective.

And I think what that really says to us is all of our business has to pay its way for us to be able to get the kind of margins that we've targeted. And so your bigger accounts that may be fully allocated used to operate at 102% or something, you need them at 92% if you want to operate in the 80%s -- or at least 95%, right? You can't rationalize handling an account at 98% or 100%.

That's kind of how we're working, not only with them but with our other major national accounts, to make sure that we're being compensated for the service that we provide. Because I don't have this big group of accumulated small customers that operate well that can carry the operating ratio to the types of levels we've targeted.

Rick, actually that was very helpful and I appreciate that. That makes sense. And so basically it's maybe if there's some pressure or working more closely with the brokers at one level, it's also addressing your other national accounts where you maybe have some opportunity on the margin side as well to kind of get the balance that you need from a return perspective?

Absolutely.

Good. Okay. Thanks for the help this morning and have a good weekend.

All right. Thanks.

(Operator Instructions)

Next we'll hear from Scott Group of Wolfe Research.

Hello, morning. Just a few quick things.

Can you share revenue per hundred weight year over year in July month-to-date?

It's kind of up in the neighborhood of where we were for the quarter. Yes. It's 5% kind of ex fuel, 2%-ish with fuel

Okay. And then given the pace of renewals, you think that 5% ex fuel is a sustainable number?

Yes. I think so. I mean, we've --

Good.

I don't know if you remember, but I think we reported last quarter we were at 5.3% on renewals. And that was down from 6%, so we had a little bit of a step down. And then we were basically flattish, right at 5.4% on contract renewals this quarter. The market appears to remain pretty rational. And again, we've been pretty diligent in mining our data for the things that make sense for us. And if you look at our tonnage trends, they're kind of in line with what most other people have kind of reported.

I do think that about 1% of our decline is probably due to the oil field, based on some analysis that we've done on the oil field and surrounding geographies associated with that. So I think we're holding our own both from a volume and, I think, leading from a pricing standpoint as we continue to be dedicated to that.

Yes, makes sense.

I had in my model one fewer operating day in the third quarter. I don't know if that's right. But if it is, you're factoring that in as you think about your comments on margins sequentially 2Q to 3Q?

Correct.

Okay. Good.

Usually a day would be about one-half an operating point. Probably not that much -- maybe one-third. It's about $1 million of profit for a workday difference.

You're saying even with that half point of OR, you still think you can be flat sequentially?

Yes.

Okay. Good. What's a good tax rate to use going forward?

I'd continue to use the 36.5%.

Okay. And just lastly, kind of just big-picture stuff, if you kind of take the margin, the guidance for 3Q, it implies we are getting back to year-over-year margin improvement. Is the idea here that kind of we've weathered the storm? And assuming tonnage doesn't get any worse from where it is, we're going to be back to an improving margin environment going forward? Is that how you're thinking about it?

I think so. If we could get to even a flattish to positive tonnage as we head into 2017 with our yield initiatives and executing pretty well on the cost side, that would be our plan. While it would be an improvement over last year -- last year's 3Q was disappointing. And we obviously have some targets to improve our margins and aren't looking to -- it's not a strategy to shrink the Company.

At the same time, like I said, we're going to be disciplined. If someone has a 108% OR or 100% OR and it's in a head haul, and I'm generating empties coming back, you know I'm not going to do that. It just doesn't make sense, right?

Yes. Makes sense. Thank you.

Sure.

Next we'll hear from Tyler Brown of Raymond James.

Hello, good morning.

Good morning.

Fritz, just a couple quick housekeeping items here. Do you by chance have an ending headcount for Q2 and Q1 -- if you have it, even just roughly? And then what was the facility count?

Okay. So facility count at the end was what -- 148?

Okay.

Headcount numbers -- let's see if I've got them handy. Can I get back to you on that one?

Sure.

I don't have that one with me.

Sure. No problem.

And then, Rick, you mentioned productivity on the dock and in the PND network. Can you talk about the drivers there? Despite the tonnage in two, were you able to improve load average as you internalized more?

Yes, I mean our load average in our head haul lanes continues to improve, which is kind of what our focus has been. So we're making some headway there. But our actual load average is actually down a little bit just because the weight per shipment is down. So we've been able to be consistent with the number of shipments on an average trailer. But because of the weight being down, we've actually lost a little bit from a load average perspective.

Okay. Can you talk --

And.

Yes, sorry.

And just from production, we've got, we've been very disciplined with some of our manpower planning and seeking out some efficiency efforts, both on the dock as well as from a city perspective -- which you just kind of obviously have to do that all the time. But particularly when you're dealing with the challenging volume environment.

Yes. Okay. No, that makes sense.

You have had a pretty healthy CapEx spend over the last few years, including this one. But I'm just curious if you can talk about the age of the tractors, the trailers, even the forklift fleet? I have mean at this point, do you feel pretty good about the age? And can you give us an update on where those are?

So I think we continue to push to drive down on that fleet age. The average age of a tractor by the end of this year will be roughly around five years. And you know, we pointed out earlier that we see continued nice returns on those sort of investments around fuel economy and then around maintenance savings.

The forklift, we've continued to invest in the forklift fleet, driving that average age down. I don't have that age handy; but it's a similar math, right? The maintenance cost of maintaining a 5- or 7-year forklift is substantial. So those returns on that kind of investments are good. So we continue to push that average age down.

So we feel pretty good about it. But going forward, to maintain that sort of average age, maybe creep it a little bit lower, it's going to require to have continued investment in that area.

Right. I think I heard you mention that 2017 CapEx might be flat year on year?

Somewhere, yes.

So is this kind of the right maintenance CapEx level?

Yes.

And then is 2017 a little more real estate-focused or no? Is it more towards tractors and trailers?

They are going to be strategic real estate projects in there, which we're still kind of scoping. But, yes, I think that's kind of an appropriate sort of spending at this stage.

Okay. That's great. Thanks.

Tyler, while I -- I did drag out the headcount.

Okay.

Sequentially, Q1 to Q2 is up 2%. And that's pretty typical around seasonal trend and so forth.

Okay. Great. Thanks.

And that does conclude today's question and answer session. I would like to turn the conference back over to Mr. Col for any additional or closing comments.

This is Rick. Thank you for joining us today. We appreciate your interest in Saia.

And that does conclude today's conference, Thank you all for your participation. You may now disconnect.