Saia - Q1 2013
April 26, 2013
Transcript
Operator (participant)
Welcome to the Saia Inc. quarter, first quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Renee McKenzie. Please go ahead, ma'am.
Renee McKenzie (Director of Financial Planning and Analysis)
Thank you, Lisa. Welcome to Saia's first quarter 2013 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Jim Darby, our Vice President of 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 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.
Rick O'Dell (President and CEO)
Well, good morning, and thank you for joining us to review and discuss Saia's first quarter results. Saia achieved record first quarter earnings that represent the dedication, effort, and contributions from Saia's 8,000 employees. Progress was made on a number of fronts, including the company's effective revenue management, strong cost execution, and attention to quality across our network. Revenue was $274 million, up 2% compared to the first quarter of 2012, and our operating income increased 32% to $14.5 million. We achieved a 120 basis point improvement in our operating ratio by marketing to customers who value quality service and achieving targeted operational efficiencies. I'm pleased that the company's execution in key areas continues to progress margins and our earnings per share.
Some highlights from the quarter compared to the first quarter of last year are: earnings per share were $0.55 compared to $0.34. First quarter 2013 EPS includes $0.06 in tax credits from 2012. Excluding the $0.06 in tax credits, our EPS increased by 44%. Our operating ratio was 94.7 compared to 95.9, a 120 basis point improvement. Our LTL tonnage per workday decreased 2.1%, LTL weight per shipment increased 1.4%, and our LTL yield increased 5.4% due to yield management and higher fuel surcharges. Saia service was consistently 98% on time for the sixth consecutive quarter. This success validates our continued commitment to advancing our value proposition through major investments in equipment and technology that are major drivers of operational efficiencies.
I was particularly pleased that we achieved projected efficiencies in our line haul network in spite of relatively soft tonnage. I believe that Saia's strong overall service, focused pricing discipline, and operational excellence provide a solid foundation for additional long-term profitable growth and increased shareholder value, as well as for our customers. Although there are many areas that contributed to our record quarter, here are a few that deserve mention. Industrial engineering initiatives and corresponding operational efficiencies have reduced purchase transportation costs by an impressive 13%. Fuel efficiency, supported by our Electronic Onboard Devices, the skill of our professional drivers, and now the upcoming installation of trailer skirts, continues to improve our fuel economy. The more granular, targeted approach to pricing and profit management is further institutionalized and continues to materially improve our yields.
Mix improvements are steady, as the marketing efforts aimed at specific products and lanes are playing a leading role in the revenue growth that we're experiencing in our field business, and our inside sales resources are helping to accelerate this favorable mix change as well. We now have 20 dimensioners up and running in our system. They're located in our larger facilities that handle the majority of our dock transfers, and this technology provides us quick, reliable, and accurate density measurements for individual shipments. We've also updated our frame handling technology throughout our system, including the installation of new forklift tablets. These technology investments support both operational excellence and our yield management successes. Saia's Quality Matters initiative continues to drive improvements in every major quality metric that we measure.
Saia's dedicated associates, who, again, delivered 98% on-time service, also achieved a 20% reduction in cargo claims. We also saw improvement in all of our customer service indicators. At Saia, we realize that superior customer service is only achieved through engaged employees who are dedicated to doing a great job. We continue to invest in our employees with the implementation of Dock-to-Driver programs, courses in quality material handling, dock mentoring programs, and our continued commitment in the placement of technology in our equipment to support safe driving techniques. Our commitment can also be seen in the robust employee recognition programs that Saia has designed. To reinforce this commitment to employees, I'm pleased to announce that we'll implement an annual wage and salary increase in early July.
With Saia's commitment to a market-based compensation program, we feel this step is important to reward performance, as well as continue to attract and retain quality employees. As we've previously discussed, we have a number of initiatives underway, targeting $20 million of annual savings that we believe will provide a substantial offset to inflationary wage and benefit, as well as some other cost pressures. As you know, we acquired Robart Transportation last July. We discussed at the time the acquisition supports Saia's strategic goal of diversifying our service portfolio, which will further provide growth opportunities over time. The companies are now rebranded as Saia TL Plus and Saia Logistics Services. We're offering this additional suite of service to Saia's customer base, and we'll see continued cross-selling as we move through 2013.
Saia's balance sheet and cash flow are strong, providing the financial strength to make necessary investments in the people, equipment, and technology that are contributing to the enhancement of our value proposition and our operational efficiencies. I believe that Saia's quality service offering, focused pricing discipline, target marketing, and consistent cost execution provide a well-built foundation for long-term profitable growth and increased shareholder value, as well as customer value moving forward. Now I'd like to have Jim Darby review our first quarter results.
Jim Darby (VP of Finance and CFO)
Thanks, Rick, and good morning, everyone. As Rick mentioned, the first quarter 2013 earnings per share were $0.55, compared to $0.34 in the first quarter of 2012. Again, first quarter 2013 EPS includes $0.06 due to the impact of recording tax credits enacted in 2013, retroactively reinstated to 2012. For the quarter, revenues were $274 million, with operating income of $14.5 million. This compares to 2012 first quarter revenue of $269 million and operating income of $11 million. The LTL yield for the first quarter 2013 increased by 5.4% and was favorably impacted by continued pricing actions and higher fuel surcharges.
While decelerating from the past few quarters, yield showed steady improvement as we continue to achieve price increases and target customers who value the company's high service quality. First quarter results were again adversely impacted by higher costs from healthcare and maintenance. As I have previously mentioned, inflation in healthcare costs and increases in maximum spending limits have continued to increase healthcare expenses. While we have invested heavily in new tractors and have reduced the age of fleet, maintenance costs were impacted by more costly routine maintenance and higher parts costs. These factors increased maintenance expense by $1.7 million compared to the first quarter of 2012. As Rick mentioned, we plan our annual wage and salary increase effective in July. This increase will add approximately $13 million in expense on an annualized basis.
We anticipate the impact of this wage increase to be partially offset by further productivity and efficiency gains. Our effective tax rate was 37.6% in the first quarter. This rate excludes the impact of the tax credits recorded during the first quarter 2013, that were retroactive to 2012. For modeling purposes, we expect our 2013 effective tax rate to be approximately 37.5%. At March 31, 2013, total debt was $58.8 million. This compares to total debt of $86.5 million at March 31, 2012. Net debt to total capital was 18.1% at the end of this quarter. Net capital expenditures for the quarter were $6 million. This compares to $39 million of net capital expenditures during the first quarter of 2012.
The timing of the deliveries for the new 2013 revenue equipment is to begin later in the second quarter. As we mentioned previously, the company is planning net capital expenditures in 2013 of approximately $90 million. This level reflects the purchase of replacement tractors and trailers to reduce the average age of our fleet and continued investments in technology. Now I'd like to turn the call back to Rick.
Rick O'Dell (President and CEO)
Thank you, Jim. I'm encouraged with our significant margin and profit progress in the quarter, which was achieved through outstanding execution across our network. I believe our ongoing investments and continued progress have set the stage for us to build upon the momentum from these demonstrated results. In 2013, 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. This strategy provides the base for long-term profitable growth and increased shareholder and customer value moving forward. With these comments, we're now ready to answer your questions. Operator?
Operator (participant)
Thank you, sir. If you'd like to ask a question on the phone lines today, you can press star one on your telephone. Again, everyone, that is star one to ask a question or make a comment. As a reminder, if you are on a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. And again, that is star one. Our first question comes from Jason Seidl with Cowen Securities.
Jason Seidl (Managing Director)
Morning, guys. How are you?
Jim Darby (VP of Finance and CFO)
Morning, Jason.
Rick O'Dell (President and CEO)
Good. How are you, Jason?
Jason Seidl (Managing Director)
Pretty good here. A little bit on the road, but, congratulations on a good quarter, and I don't normally say that because I hate being a suck-up analyst on the call, but it was a great quarter. Question for you guys, I guess a little bit, you know, Jim, you mentioned, you know, about the pricing decelerating a little bit, but are you guys comfortable with the pricing environment that you're seeing in the LTL market right now? That's enough to continue to sustain sort of, you know, year-over-year OR gains for you guys going forward?
Rick O'Dell (President and CEO)
Sure. A couple things. First of all, again, our more granular, sophisticated pricing continues to pay dividends. We're very committed to making sure that we're properly compensated for our quality, our specialized services, as well as lane imbalances. You know, our theoretical model shows that true adjusted yield, adjusted for length of haul and weight per shipment, was up 4.5%. You know, and while volumes are fairly soft, a lot of our significant increases on major accounts that were necessary are behind us. So contract renewals are more in the 3%-4% range, and contract renewals average during the first quarter, just over 3%. And again, aside from those negotiations, we're targeting smaller, more profitable accounts.
So, you know, we would probably expect a third quarter general rate increase, but we're seeing the environment being pretty rational and a lot of good opportunities coming to us, which we're filtering through our process. I think the yield's fine.
Jason Seidl (Managing Director)
3%-4% sounds very fine to me. Rick, you went over some of the efficiencies that you guys are getting from some of these, you know, whether it's the new forklift tablets or whether it's the skirts in your, our trailers. Can you sort of tell us sort of where we are in terms of trying to expect some of that stuff to continue to flow through? Is there another sort of larger step up in regaining some of these efficiencies from some of these projects throughout the year? Or is this gonna be just more steady?
Rick O'Dell (President and CEO)
No, well, I guess here's what I would tell you. You know, we got off to a very good start on a number of our initiatives that we targeted early on, and the biggest one of those was in our line haul operation. In the last four months, we set record load average every month. You know, January and February aren't exactly robust seasonal tonnage months, okay? So that was really significant. I mean, our year-over-year improvement in load average was 5.4%. We think there's additional upside, you know, as we get our new logistics post pups replacing our older trailers, and, you know, those are just starting to come in.
We only had, I think, about 150 of those pups were in operation in the month of March, and they came in at the end of the quarter. So, you know, there's an additional opportunity there. Those trailers should be fully within our network by July, so we would expect some additional second-half benefits. On the fuel economy side, while year-over-year we're up, we're still not at our targeted improvements. And, you know, part of what's gonna drive that, besides some continuous progress we have working on progressive shifting and effective fuel management, are some new tractors, of which we didn't get any, essentially, in the first quarter. I think we had a few team tractors came in at the end of the quarter, but it was immaterial.
Then our trailer skirt retrofit just started in March, and during the month of March, we had about 1,000 of those had been put on. And when you really get the benefit is when the whole system is in and, you know, they project 3%+ of fuel efficiency from having the trailer skirts on. And, you know, again, we'll have between the new trailers plus the retrofit will essentially be completed this quarter, so that's a second-half opportunity. We've targeted some reduced retail fuel. We've got eight bulk fuel locations that really weren't on in the first quarter that we're trying to progress and get taken care of.
And then we put a network in place that for our retail fuel purchase that has some additional benefits versus what we previously had, and really that happened through the first quarter. And then, you know, some of our other initiatives to reduce workers' compensation, target some additional cargo claims. I mean, again, we had a good, good quarter with that, but I think there are some other opportunities there. And then we have a couple other efficiency technology projects underway, such as some real-time dock production systems that we're working on. So, I mean, I, I feel real...
I'm pleased with the jump start that we got in the first quarter, and we probably got some of the benefits earlier than I would have anticipated, but there's still some material, you know, second half opportunities that are still in front of us, and we feel very confident in those.
Jason Seidl (Managing Director)
Yeah, that's good to hear, and I thought it was pretty impressive in the cargo claims, considering that, you know, you had a tough weather comp last year. One follow-up question, I'll turn it over to everyone else. You know, there obviously was a working day and a quarter disadvantage in 1Q. You know, could you sort of give us a ballpark figure on where you think your OR could have been if you had sort of a flat year-over-year comp in working days? And is there gonna be any bump here heading into Q2 because of the change in the Good Friday comp?
Rick O'Dell (President and CEO)
I don't know. Those things probably kind of get lost in the rounding, and there's potentially some, could have been more favorable in the first quarter and could potentially be more favorable in the second quarter. But I think how the volumes develop and what happens with yield and those things are probably more important than the, you know, Good Friday, half a business day impact, which is basically what it is. On, on that day, we tend to be 50%-60% of a normal volume day, so it's not a really good profit day for us, let's just say that. Like other quasi holidays.
Jason Seidl (Managing Director)
Well, guys, I appreciate the time as always. Thank you.
Renee McKenzie (Director of Financial Planning and Analysis)
Thank you.
Operator (participant)
We'll take our next question from Brad Delco with Stephens.
Brad Delco (Managing Director and Research Analyst)
Morning, Rick, Jim, Renee. Congrats, again, and ditto on, what Jason just said.
Rick O'Dell (President and CEO)
Morning, Brad.
Brad Delco (Managing Director and Research Analyst)
I guess, Rick, the first question, you know, a lot of progress on the productivity initiatives. Is there any way to kind of... and you suggested that you got a little bit more than what you thought, and I know you put out a $20 million productivity target for the year. You know, is there any way to kind of gauge how much you felt like you saw in the first quarter and where you are in terms of, you know, progressing to that number for the full year?
Rick O'Dell (President and CEO)
... Yeah, I mean, obviously, I would tell you we're ahead of that number for the year, and part of that is obviously reflected in our run rate. But, you know, when you achieve a targeted operating efficiency, you kind of just raise the goal and say, let's keep working on it. There's some other opportunities that we have. So, you know, we're not, we're not quitting. And I guess I would also tell you that if I'm publicly telling you my target's $20 million, I probably have initiatives that are greater than that, because we know you, you don't always meet 100% of your targets, right?
Brad Delco (Managing Director and Research Analyst)
Yeah.
Rick O'Dell (President and CEO)
So in this, especially with technology implementations and things, so, you know, as those phase in and where we are, I guess I can just tell you with confidence, I think our organization has become increasingly sophisticated in implementing these technology and process changes. We got good buy-in and commitment from our employee associates, and, you know, we could... I've kind of outlined what the opportunities are and that we've targeted them. I guess I would just express confidence that we would continue to advance those. We've made some early progress on the line haul and the load average things, and I told one of my executives that we obviously set the goal too low because we met it so quickly. And he told me that he's fine with that.
People have been raising his goals his entire career.
Brad Delco (Managing Director and Research Analyst)
No, that makes sense.
Rick O'Dell (President and CEO)
You're never 100% efficient, right? So you just continuously work on those.
Brad Delco (Managing Director and Research Analyst)
No, that makes sense. And then, Rick, as we think about, you know, I think it's safe to say this kind of new Saia, which, you know, clearly seeing a lot of improvement in service metrics, and, you know, obviously very disciplined on price. You know, how do you think about the sale process and kind of selling this new service product from Saia? And I guess where I'm trying to get at is, you know, tonnage was down, but, you know, clearly, the yield initiative is more than offsetting that. I guess, when do we start thinking about, you know, what could really happen with your efficiencies as you get more density, and when do you think that tonnage kind of turns positive as kind of your customers or new customers realize this new service product you're offering?
Rick O'Dell (President and CEO)
Yeah, well, I mean, you know, last year, through the first half of the year, actually through May, you know, we were seeing pretty, pretty strong activity levels. And then in May and June and July, things just stepped down, and our comps have kind of been negative since then. I would obviously, through the... In the first quarter, our comps are less negative than they were in the fourth quarter, and I would certainly expect to see some positive tonnage comps as we get into the second half. I would also tell you that, you know, our whole organization is clearly focused on target marketing and marketing to customers who value our service. And, you know, a lot of our negative tonnage could be, could be, you know, part of our pricing discipline, obviously, particularly lane-based.
A lot of times we don't lose a customer, but we may lose a lane that we've mispriced previously, you know? And so that's actually obviously helped us, you know, kind of rebalance our network and, you know, contributed to some of the efficiencies being more margin improvement. But I would express confidence in our marketing and sales efforts. A few comments there. You know, our inside sales continue to achieve growth, and, you know, we think this is a additional function that should help us, you know, grow profitable, smaller customer segment. And then we also put in place early last year, a CRM system. We've made some additional enhancements to that, that provide our sales force a very robust tool. And, you know, when you put something in the first year, you know, I think there's a learning process to that.
We've made some additional enhancements to that, to give our sales force an improved tool, and, you know, we would—I would expect further benefit from that. And then we've also, you know, started doing some lead purchasing and things like that, so we can make sure that we're, you know, properly prospecting. And, you know, we believe there's some customers out there, too, who don't know us, and we need to get our story out in front of them better. And so we've got some, you know, defined initiatives that should... that we would expect to progress and have some success with over a period of time.
Brad Delco (Managing Director and Research Analyst)
No, that makes sense. And then maybe just finally, one housekeeping question, Jim or Renee, is there any way you can provide us tonnage by month through the quarter, and then any update on April thus far?
Jim Darby (VP of Finance and CFO)
Sure, Brad, I've got that, and I can give it to you by month. January, and then we're talking LTL tonnage comps year-over-year. January was down 2.6%. February was down 1%. March was down 2.3%, and so far, month to date in April, we're down 2.6%.
Brad Delco (Managing Director and Research Analyst)
Okay. Great, guys. Again, congrats on the quarter and look forward to what's to come. Thanks.
Rick O'Dell (President and CEO)
Hey, one quick comment on those comps, though. I think we all need to remember how strong last year was in February, March, and April. You know, so while, you know, we're not necessarily seeing at this point, things actually from April are a little more negative than what we saw in March, even with the Good Friday impact. But if we look at our modeling, it's really more, it's not as favorable as last year, but it's more in line with what we would say is historical normal seasonality.
Brad Delco (Managing Director and Research Analyst)
... No, that makes sense. That makes sense. All right, guys. Thanks again.
Renee McKenzie (Director of Financial Planning and Analysis)
Thank you.
Operator (participant)
We'll take our next question from Scott Group with Wolfe Trahan.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, everyone.
Rick O'Dell (President and CEO)
Morning.
Scott Group (Managing Director and Senior Analyst)
So, want to start on the yield side and just make sure I'm understanding this right, what you guys are talking about. Should we be thinking about kind of underlying pricing in the 3%-4% range, and then maybe there's some more to go on the mix side on top of that? And I guess the follow-up to that is, when I think about mix, what % of the book at this point have you already gone through in terms of some of the lane-based pricing things?
Rick O'Dell (President and CEO)
Well, we're, we're 100% through it at least once, but that's constantly work in process. And when I say that, you know, we didn't necessarily, on every account, get every lane optimized. We made progress, and you balance, you know, your, your tonnage and business needs and the relationship, you know, as you progress it forward. So I guess my comment to you would be that we need to take much less price risk as we move forward, and obviously, the company's operating much better, but there's still a significant amount of opportunities there.
Scott Group (Managing Director and Senior Analyst)
Do you still think mix can be a positive on top of pricing for the next few quarters at least?
Rick O'Dell (President and CEO)
I do. And then part of mix, too, right, is if your field business grows, let's just say, more than national accounts. I mean, on average, your field business operates better, so that you end up getting potentially a better yield than that. So, I mean, I think there's upside on yield. At the same time, you know, we'd like to obviously see some growth and positive tonnage and, you know, we've got some capacity in our network, and there's other optimization initiatives. And as the margins improve, then, you know, we're certainly willing to grow and invest in the equipment and resources it takes to do that. So, you know, you balance those things, you know, with your needs. So I don't want to handle business at a loss.
At the same time, you know, when the company's margins are improving and there's good opportunities to grow at targeted margins, then, you know, we'll balance those decisions and phase the increases in, you know, over a period of time and balance that with what our tonnage trends look like.
Scott Group (Managing Director and Senior Analyst)
Okay, that makes sense. In terms of the $20 million of savings, is it fair to think about the fuel efficiency as the biggest part of that for this year? And when I think about that $20 million, is it right that that's a 2013 number? So to the extent that some of the fuel stuff is back-half loaded, we'll see kind of an incremental or a full year benefit in 2014.
Rick O'Dell (President and CEO)
Okay, so the largest opportunity is in our load average line haul network, and we're already meeting or exceeding that target on a run rate basis that started in January, basically. Okay? So the biggest bucket was that. The second biggest bucket is the fuel economy, which should be on an annualized basis, which will probably be back, should be back-end loaded. Right? And just to... I mean, it's just math, right? I mean, we spend about $200 million a year on fuel, and if we line haul miles or 60% of our miles, and if you get a 3%, improvement, which should be 3%-5%, is what they say, you know, it's in the neighborhood on a, it's in the neighborhood of $4 million a year, so it's $1 million a quarter.
And that's just the skirts, okay? Beyond that, you know, the new tractors that we're buying are more fuel efficient than the ones we bought previously. We continue to advance our progressive shifting initiatives. So today, 73% of our drivers are meeting our target. That continues to go up. It used to be 50%-60%, right? And so, but that's an additional opportunity for us as well. So, and then we've got, you know, this bulk fuel change that we're trying to enhance that saves us some money. So I mean, there's a number of things in there, but that's the second largest bucket.
Scott Group (Managing Director and Senior Analyst)
Okay, that's really helpful. And then just last two things. One is a near-term question, and how you're thinking about just kind of margin sequentially, better or worse than normal in second quarter. And then longer term, now that we're kind of at new peak margins here, when do you start thinking about growth again and building out the network more?
Rick O'Dell (President and CEO)
Well, first of all, I don't think we're at peak margins, so there's somebody out there-
Scott Group (Managing Director and Senior Analyst)
I meant near peak.
Rick O'Dell (President and CEO)
There's somebody out there who's finding peak margins, and it's not us. So we are continuing to work toward the peak margins that are being achieved in the industry. So first of all, I'll say that, and then just in terms of kind of, we normally make comments about kind of second quarter, and I'd like to consider a couple things on that. First of all, you know, our historical first quarter to second quarter has been about three OR points. And I think given how strong the first quarter was, that really, we got off to a good start in January and February. So I would probably suggest something less than the normal sequential improvement, you know?
I think that being said, when you talk about what we're looking at from a longer term perspective, you know, we expect to have much more significant second half results and improvements year-over-year, as we expect more normal seasonality, progress with yield, continued advancements of the cost initiatives that we've discussed. So, I mean, I would encourage us, let's just not just focus on the second quarter, but also, you know, take a good look at the second half of the year. And we've talked pretty openly about what some of our targets are with yield and efficiency and what some of our inflationary costs are.
So, you know, I think, you know, what we'll see is, you know, less favorable year-over-year comps in 2Q, but I think there's a good opportunity to materially improve over last year's second half, which, given some of the declining tonnage that we saw, and quite frankly, I was disappointed in the second half of last year. And with some of the initiatives and things we have targeted internally, I'm pretty optimistic about the second half of this year.
Scott Group (Managing Director and Senior Analyst)
And on the growth side of the question?
Rick O'Dell (President and CEO)
Over time, you're saying, or in the second
Scott Group (Managing Director and Senior Analyst)
Yeah. No, yeah, I mean, no longer, or when do you start thinking about growth?
Rick O'Dell (President and CEO)
Well, first of all, I mean, I would hope to grow in our existing, you know, geography through the clearly through the second half of the year. We expect we expect favorable comps there. And then I think, you know, with our target marketing and some of the value proposition that we established in the market, and after we've kind of weeded out, let's just say, some unprofitable lanes, etc, which I wouldn't expect us to go through those challenges again, that impacted our tonnage. I mean, we generally target, you know, a couple %, at least over the industry growth, to kind of take market share, and that would be within the existing geography.
And then, you know, obviously, we have the non-asset groups that we're selling that should help us grow some top line and clearly, earnings, as there are good margins on that. And we would look, as I've commented, that, you know, we get to the 93-type OR range, and the company's providing good returns, and we would, you know, evaluate good opportunities for geographic expansion, whether that be through either acquisition or, you know, organic growth into some of the industrial markets that are, you know, toward the northeast of our current network.
Scott Group (Managing Director and Senior Analyst)
All right. Sounds great, thanks, guys.
Rick O'Dell (President and CEO)
The timing of that, obviously, if we achieve, we continue to progress the way I would expect, then we would be evaluating those other opportunities sooner rather than later.
Operator (participant)
I will move on to our next question from David Ross with Stifel Nicolaus.
Dave Ross (Managing Director)
Yes, good morning, everyone.
Rick O'Dell (President and CEO)
Morning, David.
Dave Ross (Managing Director)
Jim, I didn't write fast enough. What were you saying about the wage increase in July? You mentioned some annual basis impact, and I just failed to catch that.
Jim Darby (VP of Finance and CFO)
Yeah, Dave, on an annualized basis, we're expecting that increase to cost us about $13 million.
Dave Ross (Managing Director)
Okay.
Jim Darby (VP of Finance and CFO)
But we expect to have offset from that based on initiatives and more productivity.
Dave Ross (Managing Director)
Yep. And then the operating cash flow in the first quarter declined significantly year-over-year. What were the main drivers of that, and do you expect that to get back to a normal $25+ million in 2Q?
Jim Darby (VP of Finance and CFO)
Right. When you look at it from operations, you got to take into account some of the changes in the working capital items, and that's why it looks negative year-over-year. Obviously, what was provided by earnings was improved.
Rick O'Dell (President and CEO)
But part of that was the payables for the equipment. With so much equipment that we purchased in the first quarter of last year, right, was in accounts payable.
Dave Ross (Managing Director)
Okay.
Rick O'Dell (President and CEO)
So that's, you got to remember, I mean, last year, in the first quarter, what did we spend? $30 million?
Jim Darby (VP of Finance and CFO)
$39 million.
Rick O'Dell (President and CEO)
Yeah, $39 million compared to this year, and part of that equipment had been delivered, and we had, you know, was spending in our AP, right? So that was the primary driver of that. It's just a short timing basis.
Dave Ross (Managing Director)
Okay. That should reverse out in the second quarter? You don't expect another working capital headwind?
Rick O'Dell (President and CEO)
No.
Dave Ross (Managing Director)
And then unless-
Rick O'Dell (President and CEO)
We actually might have, should have a reverse of it as we make significant equipment purchases, we'll probably have some money in payables, right?
Dave Ross (Managing Director)
Yeah, makes sense to me. Rick, on the last call, you said that you were pretty much done with, you know, tractor CapEx in terms of lowering the fleet age, but you still needed, you know, more trailer replacements. Now that kind of the business is getting better, moving along, margins are a little bit higher, is there a reason to maybe look at lowering the average fleet age even further? You kind of had achieved your targeted range, but, you know, what's the kind of cost-benefit analysis of lowering the fleet age further?
Rick O'Dell (President and CEO)
Yeah, actually, that's something we're working on, particularly with some of the maintenance expense challenges that we have. So you know, we're kind of reevaluating right now what the optimal age is. And the other thing that kind of happens here is, you know, if you get in a growth mode, we tend to buy our growth capital tends to be new equipment, and it lowers your average age anyway. So I think the combination of the two, you'll probably see some continued, some decline over time in our average age of our tractor, and we'll be able to further evaluate what benefit that has. And then, you know, on the trailer age, you know, we'll make a lot of progress on that this year, but, you know, there'll be another year, fairly high CapEx there.
The good news is, I think that the linehaul fleet, again, 25% of our pup trailers don't have logistics posts in them, and you know, that'll be taken care of during this quarter right here.
Dave Ross (Managing Director)
And the
Rick O'Dell (President and CEO)
Clearly, some benefits from that.
Dave Ross (Managing Director)
Yeah, and I think, you know, newer fleet with lower maintenance, more fuel efficiency, and better load factors are all good things. On the insurance and claims line, you continue to make progress, you know, on safety initiatives. Should that, you know, barring no accident here or there, be a good run rate to use now, kind of below $6 million a quarter?
Rick O'Dell (President and CEO)
You know, we made some progress with, obviously, with cargo claims that we discussed. Our accident expense was favorable to our historical average. Our frequency was actually better, and we kind of had maybe a little better than our historical average on the severity side. I feel strongly that some of the things we're doing on the safety side are paying some substantial dividends there. That being said, there can be some volatility from a very small number of accidents in that line. So, you know, again, I'm pleased we had a good quarter, but it's about flat with the first quarter of last year. But obviously, we always work to improve that.
I would tell you from an absolute number, Todd, based on our history, from an absolute number, objective, there's probably more opportunity in work comp, you know, which is in the salary, wages, and benefit line than there is in the accident, just because sometimes things happen.
Dave Ross (Managing Director)
Just last question for Jim about the depreciation amortization, dropped sequentially from the fourth quarter. You know, with the new fleet coming in, I would expect it to just continually rise. What happened there?
Jim Darby (VP of Finance and CFO)
No, absolutely. We took some units, aged them off. We didn't do a lot of CapEx in the first quarter. That'll ramp back up strongly in second quarter. So I think, you know, we've been asked in the past about what we expect depreciation to be for the full year, and we were projecting somewhere in the range of $54 million. I would tell you, with the deliveries being pushed into second quarter, that's probably more like $52 million for the full year.
Dave Ross (Managing Director)
Excellent. Thank you very much.
Rick O'Dell (President and CEO)
Thanks, David.
Operator (participant)
We'll take our next question from William Greene with Morgan Stanley.
William Greene (Managing Director and Senior Transportation Analyst)
Hi there. Good morning.You know, Rick, I just want to refer back to a comment you kind of made earlier, which is when you, when you work with some of the pricing, it, it's more that you lose business in a specific lane rather than lose it kind of en masse from a customer. When you look at the overall dynamics of that outcome, do you feel like there are - there's undercutting going on, where other carriers are willing to take that business at a price point that you just find unsatisfactory now? Or what's kind of the dynamic there?
Rick O'Dell (President and CEO)
Well, I don't know if I'd call it undercutting, but maybe their lane balances and their pricing are different. I'm talking about the competitor standpoint, or, you know, maybe they make mistakes in the sophistication of their model. I mean, I don't really know, right? I just know from our perspective, we believe we mispriced the lane, and so we are making the necessary adjustments. And sometimes, even though sometimes we make material adjustments, sometimes we keep those lanes, and sometimes they have a better option, and they, and they move on. And I guess what I would tell you is, generally, most customers, while they don't necessarily like it because we're doing a good job in the lane, etc, they, you know, they make their business decision based on what their alternatives are, and they've, they're generally agreeable to a more sophisticated lane-based pricing model.
We're seeing a pretty high level of acceptance with that, especially if they have another alternative. I mean, we tell them it doesn't work for us, and the alternative for us is to take a higher across the board. You know, they're better if we say, "Well, no, we'll accept a 3.5% on the base of your business, but this one lane, I need 27% on or 15%, or these two lanes," whatever it is, right? And then, they have to make a decision, and we don't put our entire relationship at risk, and we get the account corrected.
William Greene (Managing Director and Senior Transportation Analyst)
No, that makes, that makes sense. So basically, what you're saying is that often when you find the business goes away, it's more you feel like your action caused them to react rather than a customer... I mean, sorry, a competitor came in and chose to undercut you on a lane.
Rick O'Dell (President and CEO)
I agree with that.
William Greene (Managing Director and Senior Transportation Analyst)
Yeah. Okay, that makes sense.
Rick O'Dell (President and CEO)
I would also comment, just likewise-
William Greene (Managing Director and Senior Transportation Analyst)
Sorry
Rick O'Dell (President and CEO)
... as other people get more sophisticated with their pricing and do things, you know, we're seeing some of those opportunities come to us, and we have to evaluate whether it works for us or not.
William Greene (Managing Director and Senior Transportation Analyst)
Oh, interesting. Yeah.
Rick O'Dell (President and CEO)
Yeah. Right? Because, I mean, everybody's kind of, I would think, based on public comments, they're figuring this out and moving through their customer base. And I think, again, from our tonnage perspective, that activity is kind of behind us. So to the extent that, you know, we're seeing some opportunities from other people's actions as they take their corrective actions.
William Greene (Managing Director and Senior Transportation Analyst)
Yeah. Have you seen any-
Rick O'Dell (President and CEO)
Evaluate and make sure it works for us?
William Greene (Managing Director and Senior Transportation Analyst)
Yeah, of course. Of course. Have you seen any opportunities that have come from any of the labor negotiations? Can you tell if you've won any share in that regard?
Rick O'Dell (President and CEO)
Can't tell.
William Greene (Managing Director and Senior Transportation Analyst)
Yeah.
Rick O'Dell (President and CEO)
Nothing material or visible, I would say.
William Greene (Managing Director and Senior Transportation Analyst)
Okay. And then just the last question, and this one is a little bit more on balance sheet. And that is, when you kind of look at getting toward your target of a 93 OR and thinking about kind of ramping up growth, do you feel like you've got the cash on hand to do that? Or does it make sense to sort of think about maybe coming to market from a secondary perspective for the equity? It would help with float, but it also could kind of give you a nice war chest to do something bigger if you wanted. How do you think about managing that aspect of the balance sheet?
Jim Darby (VP of Finance and CFO)
... We have plenty of borrowing capacity. So if we decide to expand, as Rick mentioned, growth would be after we attain the OR that we're shooting for, and we have plenty of borrowing capacity available.
Rick O'Dell (President and CEO)
Yeah, our leverage is low. Like, our leverage is low as a company, and, you know, we would obviously evaluate if there was a material strategic opportunity that caused us to look at things differently, we would, we would look at that. But, you know, we think from the cash flow of the company and our available credit capacity, that, you know, we think we can fund some growth opportunities over a period of time through those resources.
William Greene (Managing Director and Senior Transportation Analyst)
Yeah. So, flow considerations aren't something that comes into the equation for you?
Rick O'Dell (President and CEO)
Not right now.
Jim Darby (VP of Finance and CFO)
No.
William Greene (Managing Director and Senior Transportation Analyst)
Yeah. Okay, great. Thank you for the time.
Rick O'Dell (President and CEO)
Thanks.
Jim Darby (VP of Finance and CFO)
Thanks, Bill.
Operator (participant)
Our next question comes from Chaz Jones with Wunderlich Securities.
Nick Bender (VP of Equity Research)
Hey, good morning, guys. It's, Nick Bender on for Chaz this morning. How are you?
Rick O'Dell (President and CEO)
Good. Good.
Jim Darby (VP of Finance and CFO)
Morning.
Nick Bender (VP of Equity Research)
Just a sort of a follow-up in terms of the business that you've seen come up, you know, in certain lanes, either that has gone away from you based on your pricing conditions or that has come into you as you sort of reevaluate it. Has there been any trend or consistency in terms of either geographically or with certain end markets where you're seeing that business shift one way or another?
Rick O'Dell (President and CEO)
I mean, not really. I mean, it, it periodically happens, but, you know, I wouldn't say there's a player out there we see being regularly aggressive. You know, we know who some of the carriers are, that for some reason, something works for them that doesn't work for us, and we see them. They like minimum shipments. We may or may not, depending upon what kind of synergies we see with that customer. So I mean, there's some things like that that we know we see regularly. I guess what I would tell you is, I don't see one or two or anybody really out there being particularly irrational, that they just price the way that works for their model, and there's not really any surprising activity out there.
Nick Bender (VP of Equity Research)
Gotcha. No, that makes sense. Can you discuss a little bit your business with the 3PL players and how that's progressed, sort of the direction that you feel that business is going?
Rick O'Dell (President and CEO)
Yeah, I mean, most of those guys continue to take some share, and that business grows, and there's apparently some customers who like that. You know, we do business with them like we do other customers, to the extent that it makes sense for us. You know, there was a time when, you know, we maybe mistakenly chased tonnage with them from a pricing perspective, and, you know, we don't really do that as long as it works for us, and we're okay with that. So that's, you know, they're an element, you know, in the industry that's pretty significant at this time, and I think you, as you would expect, we do business with all of them to varying degrees.
Nick Bender (VP of Equity Research)
Right. And I'll follow up just on the last question here. At Saia LTL Plus, you know, you guys have talked about a $0.06-$0.08 contribution to EPS this year. Is that sort of still a target, or can we think of potentially some, you know, some upside there in coming quarters as you more fully embrace the cross-selling opportunity?
Rick O'Dell (President and CEO)
I mean, it could be better, but it was a little over $0.01 in the first quarter, and when you consider the goodwill amortization, the contribution, you know, from a cash flow was better than that. But it's been thus far, it's in line with our expectations. And then what I would tell you is, there's a significant growth opportunity available to us there. We're just staging that in and making sure that operationally and service-wise, that we're that we can meet customer expectations and, you know, not overwhelm them. So our initial thing, right, is to really set up the infrastructure so that we can service the customers the way that we want, because it was a fairly small company, and so we're staging that in.
I mean, at this point in time, we have 65 of our 250 sales resources are marketing it, and we're achieving our goals. So, you know, I would expect it to grow over a period of time. We're probably being conservative with the contribution there, but it's not all that material either at this point.
Nick Bender (VP of Equity Research)
Right. No. Gotcha. Any thought to augmenting that with additional acquisition in the space, or are you happy with how it's growing right now?
Rick O'Dell (President and CEO)
Yeah, potentially. I mean, we think there's a good opportunity to leverage this through our existing customer base, so we don't feel like we really need to buy, you know, additional market share and pay some of the premiums that those businesses, you know, require. But that being said, you know, if there was a right opportunity and there were synergies there, and, you know, it was easy and the price was okay, I mean, we would look at that. And obviously, I like the business. Not that I don't like our trucks, but it's an interesting business with good margins and not very capital intensive.
Nick Bender (VP of Equity Research)
Right. Right. Fair enough. Thanks for the time. Great quarter, guys.
Rick O'Dell (President and CEO)
All right. Thanks.
Operator (participant)
As a reminder, everyone, that is star one to ask a question on the phone lines today. We'll take our next question from Art Hatfield with Raymond James.
Art Hatfield (Senior Equity Analyst)
Hey, morning, everyone.
Rick O'Dell (President and CEO)
Morning, Art. How are you?
Art Hatfield (Senior Equity Analyst)
I'm doing good. Hey, Rick, I want to go back to your comment that you made about the OR and cautioning everybody on Q2, with regards to, you know, the historical Q1 to Q2 improvement. When we look back last year, you had a phenomenally good second quarter, and given what volumes have done, do you think it's feasible that we should be thinking about the possibility that OR could deteriorate year-over-year, just given the strength of a year ago and how volumes have trended over the last twelve months?
Rick O'Dell (President and CEO)
Well, I would say that's not our expectation.
Art Hatfield (Senior Equity Analyst)
Okay.
Rick O'Dell (President and CEO)
You know, we, we would—if we got some surprise in self-insurance or something, that could potentially happen or something else happen that's not expected.
Art Hatfield (Senior Equity Analyst)
But just as you-
Rick O'Dell (President and CEO)
But that's not-
Art Hatfield (Senior Equity Analyst)
In this business today, you could perform better than you did a year ago without surprises.
Rick O'Dell (President and CEO)
Our target is to improve.
Art Hatfield (Senior Equity Analyst)
Got it.
Rick O'Dell (President and CEO)
It's just not the kind of improvement that, yeah, I would certainly expect to see in the second half. I guess.
Art Hatfield (Senior Equity Analyst)
Under-
Rick O'Dell (President and CEO)
So I think we made our comments about the second quarter. I'll be happy to clarify that further. You know, but I would say, I mean, not that it couldn't be three OR points, but given the trends that we're seeing and as good as last year was, we would say it will probably be less than that, even though our historical average has been three. And part of that is just because the first quarter was so good, and we got off to a really good start in January and February, were really good months for us, and it contributed to the quarter.
Art Hatfield (Senior Equity Analyst)
No, I-
Rick O'Dell (President and CEO)
That being said, here's my thing: I want to make sure we ... The second half really needs to be evaluated, in my opinion, because, you know, if we talk about 3% yield increases and $20 million of cost savings, that's a $55 million improvement. And then we have some inflationary things that are in the $30 million-$35 million range, and that gets us to about 2 OR points for the year, right? Well, we only improved 1.2 in the first quarter. We're telling you the second quarter will be difficult comps. I mean, our expectation with targeting some things, and if we get normal seasonality, the back half of the year is where we would expect comps to be favorable again.
Art Hatfield (Senior Equity Analyst)
I appreciate that.
Rick O'Dell (President and CEO)
Right.
Art Hatfield (Senior Equity Analyst)
I think I win the gold star because that's the most guidance you've given in the history of the company.
Rick O'Dell (President and CEO)
We don't give guidance. I'm just doing math.
Art Hatfield (Senior Equity Analyst)
I understand. I understand.
Rick O'Dell (President and CEO)
Right?
Art Hatfield (Senior Equity Analyst)
Oh, no, I got you. No, that, that, that is extremely helpful. I appreciate that. I want to, I want to take... Following up on Bill's question about doing an equity offering, I want to take the other side of that and say, you know, given that you do expect to grow, say, over the next five years, do you at all think about maybe going out into the market and taking down some, maybe some five-year paper, given where interest rates are today, to maybe get ahead of, of moving interest rates as things, in the economy, say, improve over the next couple of years?
Rick O'Dell (President and CEO)
Yes.
Art Hatfield (Senior Equity Analyst)
Okay.
Rick O'Dell (President and CEO)
Obviously, the debt markets are pretty attractive right now. You know, we have some fixed rate debt at much higher rates than today's opportunities are that is amortizing off pretty quickly, you know, through 2017. And of our... Was it $50 million?
Operator (participant)
50.
Rick O'Dell (President and CEO)
$50 million. $22 million will be paid down this year, you know, June 30th and December 31st. So yes, we're interested in, in taking a look at that. That being said, you know, we're projecting good cash flow, and, you know, we don't have a big need right now, but to even refinance the debt that we have at a much lower rate with a longer term, you know, given, like you said, some of the strategic and/or growth opportunities that should come before us in the future, we, we clearly would consider that.
Art Hatfield (Senior Equity Analyst)
Thank you for that. And then just final, final thoughts on, you know, you have been focused on, you know, getting your... Maybe I'm saying this wrong and you'll - I'm sure you'll correct me if I am, but focused on getting pricing up. But obviously, there's a balance between price and volume, right? So maybe some, as you mentioned, some of your competitors can take lower price business because it fits, it balances better within their lanes. Do you think about that much, or is the focus on moving price up, or are you doing kind of what I'm saying some of your competitors are doing? You're willing to take a little bit less price if, in fact, it fits within your network well.
Rick O'Dell (President and CEO)
I mean, you know, if it works for us and we make good margin on it, that's how we're evaluating business, right?
Art Hatfield (Senior Equity Analyst)
Right.
Rick O'Dell (President and CEO)
And we understand sometimes there may be a regional competitor, and for whatever reason, business works for us. The positive that we have is with our current network in 34 states, we've got broader coverage than they do, and we can just sell outside of their network if it works for them and doesn't work for us. Like, we don't have to play that game, right?
Art Hatfield (Senior Equity Analyst)
Right.
Rick O'Dell (President and CEO)
You know, I think that's the other opportunity as we look at geographic expansion, then it creates other opportunities to do that. If somebody's in a region is, either has a different cost structure or has different targeted margins, then you can work around that and still market, grow, be in with the customer. Part of what happens is, if you're in with a customer in a lane and, you know, and you could be in a, in a couple small lanes, and something may happen with their other provider, be it, you know, they have a bad service experience, their claims ratio goes out, etc. Then, you know, they, you build a relationship with them, and sometimes you get, over time, either some or all of their business at your price.
You know, that's, that's just what we, what we have to look at. I mean, our costs are our costs, and if we didn't learn anything else, I mean, you can't rationalize your way into the fact that I need density at bad price. That clearly doesn't work.
Art Hatfield (Senior Equity Analyst)
Got it. No, that's very helpful clarification. Thanks for your time.
Rick O'Dell (President and CEO)
Sure.
Operator (participant)
And we have a follow-up question from Jason Seidl with Cowen Securities.
Jason Seidl (Managing Director)
Hey, guys. Really quickly, you know, Rick, you were talking about how your frequency of accidents looks a lot better, and I know anything can happen, but, you know, if this continues, if this trend continues, should we look for an actual actuarial adjustment at some point this year?
Rick O'Dell (President and CEO)
No, not on the accident side. That would be on the work comp side. You know, at the accident expense, while we have a reserve out there, those tend to be settled in a fairly short time period, and they're pretty, pretty defined, and, you know, they really don't, don't, change that much. Whereas we really use the actuarial study more on our work comp, which actually work comp expense is higher than accident expense for our company. And so that's potentially where, over time, we could see some benefits by improvements in our, on our injury prevention and case management processes, which we're clearly working on.
I think as we commented, another reason to kind of look at the second half of this year, that could potentially be a favorable versus last year, because we had some unfavorable work comp true-up type of adjustments, both in 2011 and 2012, both in the second half. I would be surprised if we had that again, given the material adjustments that we've made.
Jason Seidl (Managing Director)
Okay, good enough. Thanks for the call, guys. I appreciate it.
Rick O'Dell (President and CEO)
Sure.
Operator (participant)
That concludes today's question and answer session. I would like to turn the conference back over to Mr. Rick O'Dell for any additional or closing remarks.
Rick O'Dell (President and CEO)
Sure. Thank you for your interest in Saia, and, you know, I'd really like to congratulate Saia's 8,000 employees for the job that they're doing and the contributions that they're making. I think as a company, we've never performed better, and I think the foundation is solid for us to continue to advance on the initiatives and the focus that we have. Thanks again for your interest.
Operator (participant)
That concludes today's teleconference.