Saia - Q1 2017
April 28, 2017
Transcript
Operator (participant)
Good day, and welcome to the Saia, Inc. First Quarter 2017 Results Conference Call. At this time, I'd like to turn our conference over to Doug Col. Please go ahead, sir.
Doug Col (VP and Treasurer)
Thank you, Evan. Good morning, everyone. Welcome to Saia's First Quarter 2017 Conference Call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Fritz Holzgrefe, 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 the actual results to differ. Now, I'm gonna go ahead and turn the call over to Rick O'Dell.
Rick O'Dell (CEO)
Thank you for joining us to discuss Saia's results. This morning, we announced our first quarter 2017 financial results, with first quarter diluted earnings per share of $0.44, compared to $0.42 in the first quarter of last year. The EPS comparison benefited from lower effective tax rate, which Fritz will discuss in his prepared remarks in a few minutes. Underpinning our first quarter results was the continued improvement we're making on the pricing front. First quarter LTL revenue per hundredweight increased by 7.7% compared to the first quarter of last year, marking the 27th consecutive quarter of year-over-year improvement in our reported LTL yield. The yield comparison obviously benefited from increased fuel surcharges from our customers, but the overall LTL pricing environment remains constructive, and our average agreed-upon contractual renewals increased by 4.2% in the first quarter.
It's worth noting that 321 contracts were renewed in the first quarter of this year, compared to 288 in the year-ago first quarter, and it included some of our largest customers. It's also nice to be able to report that our first quarter trends, in terms of year-over-year change in shipments and tonnage, remain positive for the second quarter in a row. A few of the key operating metrics from the quarter are as follows: LTL shipments per workday rose 3.5%. LTL tonnage per workday rose 2%. Excluding the impact of the shift in Good Friday this year, LTL shipments and tonnage per workday still increased by 2.9% and 1.3%, respectively.
LTL weight per shipment fell by 1.5% to 1,101 pounds, but the revenue per LTL shipment rose by 6.1%. Our cargo claims ratio of 0.77% improved from 0.89% in the first quarter of last year. Claims filed per day fell by 1.5% in spite of the increase in shipments. Improvements reflect the continuous benefits we're seeing from our ongoing quality initiative and investments in our dock tools. Purchased transportation miles in the first quarter were 7.5% of total linehaul miles, compared to 6.6% last year. The increase reflects the opportunity to use purchased transportation in certain longer-haul lanes as volumes grow.
Our maintenance group placed more than 2,350 pieces of equipment in service so far this year, including tractors, trailers, and forklifts, with more than 300 of these in our new Pennsylvania and New Jersey facilities. Finally, we continue to see fuel mileage benefit from operating a newer tractor fleet. In the first quarter, we averaged 6.7 miles per gallon, compared to 6.5 miles per gallon in the first quarter of last year. With that, I'm gonna go ahead and turn the call over to Fritz Holzgrefe to review our financial results in more detail.
Fritz Holzgrefe (VP and CFO)
Thanks, Rick, and good morning, everyone. First quarter revenue of $317 million was 9.4% higher than a year ago, benefiting from positive shipments, tonnage, and yield improvement, as Rick mentioned, and also from higher fuel surcharge revenue. Fuel surcharge revenue was 39% higher than in the first quarter last year. Operating income fell by 0.4% to $17.5 million, compared to $17.6 million earned in the first quarter of 2016. We incurred roughly $800,000 in expenses in the first quarter, directly related to our planned expansion in Pennsylvania and New Jersey.
A few of the key expense items which impacted the first quarter results are as follows: Salary, wages, and benefits rose 6.2% to $180.9 million in the first quarter, reflecting the impact of an average wage increase of 3% last year and incremental labor related to year-over-year shipment growth in the quarter. Fuel expense in the quarter rose 33% over last year. The diesel prices were stable in the first quarter. The average price was approximately 25% above prior year levels. Purchased transportation expense in the first quarter rose by 18.5% to $14.8 million, and was 4.7% of revenue versus 4.3% last year.
Outside maintenance and parts expenses were down 8% in the first quarter compared to last year, as we continue to see savings associated with operating a newer fleet of tractors, trailers, and forklifts. The newer tractor fleet continues to benefit fuel cost. Miles per gallon across our fleet increased by 3.7% in the first quarter to an average of 6.7. Claims and insurance expense in the first quarter increased by 12% over the prior year, driven by higher premiums and the inflationary cost of claims associated with accidents.
Depreciation and amortization expense of $20.1 million compares to $17.2 million in the prior year quarter and reflects our continued investments in tractors, trailers, and forklifts. Our effective tax rate was 31% for the first quarter of 2017, compared to 36.4% in the first quarter of 2016. The lower effective rate in the quarter is related to accounting changes for certain equity-based incentive compensation. First quarter EPS benefited by approximately $0.04 per share from this change, while last year's first quarter EPS benefited by approximately $0.01 per share from the alternative minimum fuel tax credit, which is not in place this year. For the full year, we expect our tax rate will be approximately 36%. At March 31, 2017, total debt was $156.9 million.
Net debt to total capital was 24%. This compares to total debt of $116.4 million, and net debt to total capital of 20.9% as at March 31, 2016. Net capital expenditures in the first quarter were $108.2 million, including equipment acquired with capital leases. This compares to $63.7 million of net capital expenditures in the first quarter of 2016. For the full year of 2017, we expect net capital expenditures will be approximately $220 million, including investments in terminal infrastructure improvements, as well as continued investments made to lower the age of our tractor, trailer, and forklift fleets. Now I'd like to turn the call back to Rick.
Rick O'Dell (CEO)
Okay, as I mentioned in our earnings release this morning, the first quarter was a very busy time for all of us at Saia. I'm very proud of our employees for maintaining their focus on serving our customers. We met our first quarter service, on-time service goal of 98%. Terminals to serve the markets around Pittsburgh, Philadelphia, Harrisburg, and Newark are fully staffed, and equipment is in position for service to kick off this Monday. The early response from customers regarding our expanding service geography has been extremely positive. We were also pleased to announce that we've entered into an exclusive partnership with TST Overland Express to serve both companies' U.S.-Canada cross-border LTL customers. As a result of this partnership, Saia will service TST Overland's LTL freight entering the U.S., and TST Overland will service Saia's LTL freight entering Canada.
The partnership will be effective on May 22nd. Our announced expansion into the Northeast certainly made this partnership more attractive, and the timing of the arrangement should give us a nice boost to our volumes in our newest terminals. We're excited to partner with TST Overland. Our companies share similar service goals for our customers with respect to industry-leading, damage-free, on-time shipments. As mentioned, our total planned capital expenditures in 2017 are now likely to be in the $220 million range, as we were able to opportunistically acquire a terminal in Maryland, which we plan to open in the third quarter. This terminal positions us to serve Baltimore and Washington, D.C., markets. We look forward to providing a further update on our Northeast expansion on our second quarter conference call.
In conclusion, first quarter earnings clearly reflect our investments in infrastructure, equipment, and the costs associated with our Northeast expansion. But in making these investments, we believe we're uniquely positioned for growth in our industry. The combination of geographic expansion, positive shipment trends, our new cross-border partnership, and our ongoing efforts to improve yields give us several opportunities to expand our revenue and create operating leverage in our business. These comments, we're ready to answer your questions.
Operator (participant)
If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one for questions. Our first question comes from Todd Fowler of KeyBanc Capital Markets. Please go ahead.
Todd Fowler (Managing Director)
Great. Thanks. Good morning, everyone. So, second quarter is gonna be a big quarter. Rick, maybe if you could talk a little bit about just how, you know, you expect things to progress post May first, really from a revenue standpoint to maybe a margin standpoint. Is that gonna be something where, you know, from a margin impact here in the second quarter, you're gonna have more costs than what you had in the first quarter? Or now the fact that you're gonna be opening the terminals, are you able to offset some of the incremental costs?
Rick O'Dell (CEO)
Well, there's a little bit of both, right? I mean, especially, you know, during the month of April, you know, we fully staffed the terminals. People went through the training process, et cetera, without any revenue. And then, you know, we have a pipeline of revenue that we're managing for, from a startup perspective, that will start in May. It kind of depends how quickly, you know, that process comes on. But I guess, just in terms of our sequential OR trends, historically have, you know, been in the 2.5 operating point from improvement in 2Q-
Todd Fowler (Managing Director)
Mm-hmm.
Rick O'Dell (CEO)
over 1Q. And, you know, we think that seems reasonable at this point in time. So, you know, we're not, we're not expecting things to it to be a kind of expensive startup or margin and margin impact item over 2Q. And then, you know, with some of the positive shipment trends that we're seeing, we saw kind of through the quarter, which it actually improved a little bit further into April, you know, that's, that's a, that's a positive side.
Todd Fowler (Managing Director)
Okay. That's helpful on the margin comments. So even with the costs incurred during April, you still think that you can achieve the normal sequential OR progression here in the second quarter?
Rick O'Dell (CEO)
Correct.
Todd Fowler (Managing Director)
Okay, good. That helps. And then just to follow up on your last point, you know, do you have what you're experiencing here in April from both a tonnage and a shipment standpoint?
Fritz Holzgrefe (VP and CFO)
Sure, Todd. So if you take adjusting for a Good Friday, so, tonnage through to date is plus 6.8% versus last year, and then shipments, plus, 7.8%.
Todd Fowler (Managing Director)
Okay. Thanks, Fritz. And then can you talk a little bit about the a little bit more color on the TST Overland arrangement? I'm just curious to how we think about either, you know, tonnage or revenue or the contribution, you know, how that works within your model and some of the benefits that you expect to see as a result of that?
Rick O'Dell (CEO)
Yeah, sure. You know, that cross-border business tends to be attractive from a pricing and a yield standpoint. Obviously, you know, it's a revenue-sharing agreement that we would have. We would expect it to have a positive impact on our revenue growth of somewhere between 1%-1.5% type number.
Todd Fowler (Managing Director)
Okay.
Rick O'Dell (CEO)
And then, you know, we would kind of expect there's some common customers, and, you know, we think there'll be some further opportunities over time.
Todd Fowler (Managing Director)
Rick, anything on the cost side, or you pretty much have the infrastructure in place to handle the cost, and it's really just additional revenue coming through the network at this point?
Rick O'Dell (CEO)
Yeah, it's just additional revenue coming through the network. And, you know, some of it's in the Northeast, right? Which will help us from a startup standpoint, but, you know, there's actually multiple interchange points, and, you know, it should give us some good incremental revenue in some of our existing terminals as well, which should have good margins.
Todd Fowler (Managing Director)
Okay. And then just the last one, maybe for Fritz. Do you have an idea of a depreciation number for the full year at this point, based on the investment that you've been making?
Fritz Holzgrefe (VP and CFO)
Yeah, we haven't necessarily given guidance specifically on that, but what I would say is that we're projecting to spend $220 million for the full year.
Todd Fowler (Managing Director)
Mm-hmm.
Fritz Holzgrefe (VP and CFO)
Half of that is gonna be equipment related, you know, so you've got a sort of depreciating life there of sort of 5-7 years. If you use that, it's probably a reasonable proxy, you know, extending that. And then the rest is gonna be sort of primarily real estate, which is longer life.
Todd Fowler (Managing Director)
Okay. So a ramp from where you were in 1Q, but obviously not depreciating the full $220.
Fritz Holzgrefe (VP and CFO)
Yeah. So we'll in service our, you know, our fleet expenses or our fleet capital, a big chunk of that went on books in the first quarter, and then we'll add some more in April, a little bit in May, but then it'll essentially be in place for the balance of the year. And then we'll, you'll see us more real estate-related investments toward the second half of the year.
Todd Fowler (Managing Director)
Okay. Thanks for the time, and, and good luck this quarter.
Fritz Holzgrefe (VP and CFO)
Thanks.
Operator (participant)
Our next question comes from Jason Seidel from Cowen and Company. Please go ahead.
Matt Elkott (Equity Research Analyst)
Good morning. This is Matt Elkott for Jason. Thanks for taking my question. Rick, I was wondering if the $800,000 in expenses related to the expansion was that right in line with your expectations, or was it above, below?
Rick O'Dell (CEO)
It's probably in line, yeah.
Matt Elkott (Equity Research Analyst)
Okay. And then my next question is on pricing. As you guys, you know, try to solidify your presence in new regions, what's your approach on pricing? Do you think you may have to be a bit more aggressive to gain market share in the new regions?
Rick O'Dell (CEO)
I don't think so. You know, we'll be competitive, looking at market type of rates, but, I mean, we're confident in our service offering, to and from our existing network, and, you know, we're not gonna chase the cheap regional freight in the Northeast, that some, you know, some low-cost carriers are up there, you know, competing with pallet rates and whatnot. You know, we're not gonna play in that. We're gonna leverage our existing customers' relationship and the rest of our network and, you know, sell more into the regional, longer haul, regional, interregional markets.
Matt Elkott (Equity Research Analyst)
Got it. And, you know, staying on the expansion frontier, do you have any visibility on, you know, what's next after, after Maryland?
Rick O'Dell (CEO)
You know, we haven't identified specifically the other site locations. We've got a strategy to kind of look at 4-5 terminals a year, and I think it'll be, you know, based on a combination of the most attractive geography and facility availability, which, in some markets, is difficult, could push your timeline out, so. But, I mean, there's obviously there's plenty of alternatives, right? I mean, we're looking to open in the neighborhood of 15-ish more terminals up there. So, you know, you could kind of, you could skip a little geography and go into another major market, or you can open some kind of fill-in terminals in the nearby area of Pennsylvania as well.
Matt Elkott (Equity Research Analyst)
Got it. And so the cost associated with the expansion in the Northeast, do you think that could fluctuate, you know, materially, depending on what type of terminal you acquire in the future?
Rick O'Dell (CEO)
I mean, yes and no, right? I mean, if you open a bigger market, I guess maybe you have a little hard up. A little higher startup cost, but, you know, you also have more incremental revenue opportunity. So, you know, it's and then the smaller markets are less expensive to enter, but, you know, probably wouldn't have as much revenue impact as well.
Matt Elkott (Equity Research Analyst)
Mm-hmm.
Rick O'Dell (CEO)
So I don't think it matters that much one way or the other, kind of which direction we end up going from a margin standpoint. And I think we've commented, you know, near term, you know, margin impacts, you know, and our projections are somewhere in that 0.5 operating point range, would be kind of something maybe to use from an indication standpoint.
Matt Elkott (Equity Research Analyst)
Got it. Thank you very much for your time.
Rick O'Dell (CEO)
Sure.
Operator (participant)
Our next question comes from Scott Group of Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good morning, guys. Rick, I missed that last point. What's the 0.5 point of operating ratio? I'm just not sure what you were trying to say.
Rick O'Dell (CEO)
Just potentially near-term impact of the Northeast expansion.
Scott Group (Managing Director and Senior Analyst)
In terms of a drag on margins?
Rick O'Dell (CEO)
Right.
Scott Group (Managing Director and Senior Analyst)
How long do you think that'll last?
Rick O'Dell (CEO)
It's not very long, right? But then if you turn around and open five more in another eight months, then you kind of have - the other ones are gonna be, the OR drag is gonna go away, and then you may have another small drag. I mean, overall, it's a couple quarters.
Scott Group (Managing Director and Senior Analyst)
Right. But, but you're including that in the, your point earlier, that you think the sequential margins will be in line with history?
Rick O'Dell (CEO)
Yes, I am.
Scott Group (Managing Director and Senior Analyst)
Okay.
Rick O'Dell (CEO)
Yeah.
Scott Group (Managing Director and Senior Analyst)
Can you just go through the monthly tonnage numbers? And then, Fritz, your point about the 6.8 adjusting for Good Friday and Easter, is that, were those operating days this quarter, and that's why you're making that comment about adjusting for them? I'm not sure I follow.
Fritz Holzgrefe (VP and CFO)
Yeah, so Good Friday was in April this year, and it was in March last year, so we tried to adjust for that. So kind of normalize for the impact of that, so you back out Good Friday.
Rick O'Dell (CEO)
Good Friday end up with somewhere between 50% and 60% of a normal revenue day, so it has a fairly big impact on the month, right? Since it flipped from a comp standpoint.
Scott Group (Managing Director and Senior Analyst)
But so it counts as an operating day?
Rick O'Dell (CEO)
Oh, yes-
Fritz Holzgrefe (VP and CFO)
Yeah
Rick O'Dell (CEO)
- it's in the numbers.
Scott Group (Managing Director and Senior Analyst)
Okay, okay. Got it.
Rick O'Dell (CEO)
Then if we were to adjust and say, hey, excluding that day, right? So you just basically pull that comp day out and take the simple average, then that's what the adjusted number is, right?
Scott Group (Managing Director and Senior Analyst)
Okay. Just for the purposes of our model, do you have, I guess, the March number, and then do you have what the April would be if you didn't adjust for Good Friday?
Fritz Holzgrefe (VP and CFO)
Yeah. So, yeah, so you take March was, tonnage was, this is LTL freight, so +3.4, and shipments were +5.6. And in April, tonnage was +4.3, and shipments were +5.4.
Scott Group (Managing Director and Senior Analyst)
Okay, very helpful. And then just last couple of things. Once you get these four or five terminals, call it, running at capacity, however long that takes, what do you think they would add to the tonnage number?
Rick O'Dell (CEO)
Well, the initial ones are kind of bigger markets. I'd have to get you that.
Fritz Holzgrefe (VP and CFO)
I don't have the total.
Rick O'Dell (CEO)
I don't have that in front of me. But I mean, what we basically did is we looked at what our history's been in terms of market share penetration, when we've either acquired someone and then sold, you know, across our network and or inorganic expansion, and we've kind of phased that in over a period of time.
Scott Group (Managing Director and Senior Analyst)
Yeah.
Rick O'Dell (CEO)
A round number, I guess, for the first round would be, it's a multi-year growth rate of somewhere, I would estimate, in the 2% range.
Fritz Holzgrefe (VP and CFO)
Yeah, so recall, our assumption around that has been, you know, historically, we've gained 1% market share per year, and we've said for our own planning assumptions that in this case, we'd get, at the end of 12 months from opening, 0.8 market share in the markets that we enter. So Harrisburg, Pittsburgh, Philly, Newark, and then we would kind of grow over time at that kind of a rate.
Scott Group (Managing Director and Senior Analyst)
Okay. Okay, and then last thing on pricing. So the pricing renewals kind of slowed a little bit to 4.2%. Obviously, still a good number, but it's, the trend is decelerating. Should we be reading into anything? Is, is the pricing environment in LTL getting a little bit tougher? Is it just tougher comps? What do you make of the, the 4.2?
Rick O'Dell (CEO)
You know, it's partially a customer mix. So during the quarter, there were some of our larger customers were renewed, and they didn't, they did not require a major adjustment. And then. Yeah, I mean, I think, I don't know what we said, I can't remember what we've said previously. But, you know, I think given the way the company is operating and what some of our growth opportunities are, I mean, our internal target was somewhere around 4.5%. So, I mean, it's still pretty much in line with that. And I know we've been running a little bit over 5%, but-
Fritz Holzgrefe (VP and CFO)
Yeah, it's driven as much by mix, customer mix, quarter-to-quarter.
Rick O'Dell (CEO)
Yeah, and we haven't changed our philosophy or anything.
Scott Group (Managing Director and Senior Analyst)
Okay, makes sense. Thank you, guys.
Rick O'Dell (CEO)
Sure.
Operator (participant)
Our next question comes from David Ross from Stifel. Please go ahead.
Bruce Chan (Director)
Yes, good morning, gentlemen. It's actually Bruce Chan on for David Ross.
Rick O'Dell (CEO)
Hey.
Bruce Chan (Director)
A couple questions here from me, if I may. How's it going?
Rick O'Dell (CEO)
Good.
Bruce Chan (Director)
You know, you had a nice increase on the heavyweight tonnage side, and I'm wondering if that's just, you know, an increase in the existing oil and gas business, and, you know, maybe that's growing again, or was it something else, you know, some sort of targeted effort there?
Rick O'Dell (CEO)
Yeah, that's some of it, and then, you know, we also tweaked and got a little more granular with some of our spot quote pricing to fill some empty capacity. So probably those two items.
Bruce Chan (Director)
Okay, great. And then just, you know, drilling down into the Northeast expansion a little bit, I know, you know, on the higher PT expense side, you mentioned that, you know, it was an increase, you know, in some of the longer haul lanes. You know, is it possible to segment out how much of that was related to the Northeast expansion? And then, you know, what are you expecting, you know, that headwind to be for the rest of the year?
Rick O'Dell (CEO)
Yeah, well, the Northeast expansion hasn't occurred yet, so that, that's not what it is. It's more, you know, if we're gaining some of that longer-haul revenue that tends to move on the rails, tends to be what drives that.
Bruce Chan (Director)
Okay, great. And then as far as the new facilities are concerned, are those all owned, or are you leasing those? And if so, you know, where do those hit on the OpEx?
Fritz Holzgrefe (VP and CFO)
So those are the ones that we're opening with are leased. What will, you know, happen over time that we may move in to purchase a facility, but to start with, they're gonna be operating leases, and they would flow through our income statement in that way, in the operating expenses.
Bruce Chan (Director)
Okay, great. That's it for me. Thanks, gents.
Fritz Holzgrefe (VP and CFO)
Thanks.
Operator (participant)
We'll take our next question from Brad Delco from Stephens. Please go ahead.
Brad Delco (Managing Director)
Good morning, Rick. Good morning, gentlemen. Hear me okay?
Fritz Holzgrefe (VP and CFO)
Morning, Brad.
Brad Delco (Managing Director)
Rick, I think you mentioned in a prior call that West Coast is now one of your bigger regions, and it seems like that area was particularly hit by weather. The question I'm asking, you're posting some of the best yields in the industry, and the incremental margins weren't really there this quarter. I'm just curious, was there a weather impact or something that would help us quantify what happened on the cost side?
Rick O'Dell (CEO)
No, I mean, I mean, if you look at, you know, you know, there's a few three items kind of that are up quite a bit year-over-year. Depreciation, you know, was up, two point eight million. Again, I mean, that's a increase in infrastructure costs in our fleet. Part of that is to kind of prepare for the growth. Obviously, you have to have that ahead of the opportunities. Our BI/PD insurance was up about one point two million, so that was a bit of a headwind, and then you had the eight hundred thousand dollars of cost from the Northeast expansion.
So, I mean, you can't exclude those things, but, you know, at the same time, obviously, you know, part of that reflects an investment in our fleet on the depreciation side, and some of it is kind of upsizing our network ahead of the Northeast expansion to support some of the growth that we're seeing. But, I mean, I don't disagree with you. I guess I was a bit disappointed in some of our absolute margins. January and February were not. were a little bit below our expectations, and March was better, and, you know, so I think we're, that's part of kind of what's supporting us, you know, in spite of some incremental startup costs that we would expect in 2Q, that we'd be able to support the same type of margins.
Brad Delco (Managing Director)
No, that, yeah, that makes sense. And I was able to adjust 800 per the comments you guys made earlier, but I was curious if there were some other items, and I appreciate that additional color. And then just, Rick, can you give some general comments about what you're seeing with your oil or energy exposure? And do you think that we can attribute some of the pickup you guys are seeing from March and April to that, or is there some other items driving that?
Rick O'Dell (CEO)
I mean, we have a lot of good things going on at the company from a marketing standpoint. You know, our service offering is very good. Our cargo claims ratio continues to come down, so we're getting a good reception from our customers. You know, we've made some incremental investments in inside sales to help us support our prospecting. You know, our field business is growing faster than our national account business, so you know, we're seeing some benefits from that. And I think, you know, the organization has been energized by the announced Northeast expansion, and, you know, we're seeing some incremental opportunities, you know, with both field accounts as well as some of our larger accounts based on that.
And then, you know, I think some of it, the Houston region is up 10% year-over-year, so it's a little bit better than the company from a revenue standpoint, but it's not, I mean, it's not material enough that I would say it would be driving that. All, we have 11, you know, we call sales regions. Ten of them grew, and one was flat. So you know, it's, it's pretty broad in kind of what we're seeing and what we're achieving as an organization.
Brad Delco (Managing Director)
No, that's good to hear and consistent with, I think, what others are saying as well. Rick, maybe last one for you. If you. I don't know if you can look at it on a terminal basis or a door basis, what does the network look like right now in terms of owned doors or terminals versus leased?
Fritz Holzgrefe (VP and CFO)
It is roughly, what, 55% owned?
Rick O'Dell (CEO)
50, yeah, it's 59% of the door capacity, 40% of the terminals are owned.
Brad Delco (Managing Director)
Okay. That's it for me, guys. Thanks so much.
Rick O'Dell (CEO)
Thanks.
Operator (participant)
As a reminder, it is star one if you'd like to ask a question, and our next question comes from Tyler Brown, from Raymond James. Please go ahead.
Tyler Brown (AVP)
Hey, good morning, guys.
Rick O'Dell (CEO)
Morning.
Tyler Brown (AVP)
Hey, Rick, I'm just curious, but today, do you have an interline agreement into the Northeast with an interline partner? And I'm just curious if there's any measurable or material amount?
Rick O'Dell (CEO)
Yeah, we do have a partner up there to provide coverage. It's not a particularly meaningful amount.
Tyler Brown (AVP)
Okay.
Rick O'Dell (CEO)
So, you know, they, obviously, we don't make any pickups there, so it's all on the inbound side. I mean, it's like neighborhood-ish for the four terminals we're opening is about $150 a day, would be-
Tyler Brown (AVP)
Okay
Rick O'Dell (CEO)
Kind of our, you know, baseline, which is, obviously isn't very much. Revenue per bill on that, I mean, it's split today, but it would be higher than our average. And then, I think the total number would be maybe double that. So obviously, these four, four are a pretty big portion of the markets.
Tyler Brown (AVP)
Right. Okay. No, that's helpful. I'm just interested in the, the 320 contracts that you renewed in the quarter. Was that just on existing freight, or did those renewals include some new lanes in and out of the Northeast?
Rick O'Dell (CEO)
Well, okay, so we've put rates in place to and from the Northeast with all of our 3PLs. We've been through about our top 40 customers, and then, you know, the field customers have submitted and provided some direct pricing to that as well. So we've been through a process, and I mean, that's kind of how we've identified our pipeline, right? Is we put pricing in place and said, "All right, how much business do you have? And if we, you know, commit these pricing parameters, what's the business commitment?" And then we'll monitor our close rate associated with that. So I mean, we're prepared into the Northeast, you know, from a direct pricing standpoint to modify the pricing.
Because obviously, you know, when you're doing an interline split, you can't price the same way as you can, you know, if you're providing direct through service.
Tyler Brown (AVP)
Right. Okay. And then maybe Fritz, coming at the Northeastern expansion maybe a different way, have you guys thought about a target OR that you're looking for on that freight as it comes in?
Fritz Holzgrefe (VP and CFO)
For all the new business?
Tyler Brown (AVP)
Yeah.
Fritz Holzgrefe (VP and CFO)
Yeah, I mean, obviously, it's got to be accretive to our total book of business. So we apply the same OR targets that we have for our company that we would into the Northeast. That's not a. it's kind of a. You know, we've got some target costing you got to use in that case, right? So you say, "All right, what's the start-up cost?" Obviously, you're not as efficient as you'd like to be, but in the end, you want to get to a place where it's accretive to the whole book of business. That's really the math for us.
Tyler Brown (AVP)
Sure. And where I'm going with-
Fritz Holzgrefe (VP and CFO)
Well-
Tyler Brown (AVP)
Sorry, go ahead.
Rick O'Dell (CEO)
I just wanted to comment, you know, one of the reasons we're going there also is because it should leverage some of our, the fixed costs-
Tyler Brown (AVP)
Sure
Rick O'Dell (CEO)
That are our network. And, you know, we -- round number is that somewhere in the 8%-10% range. So, you know, for argument's sake, right, you price it at a 90, the incremental margins to the organization would really be somewhere in the 18%-20% range.
Tyler Brown (AVP)
Right.
Rick O'Dell (CEO)
That's the magnitude of the opportunity that we're targeting.
Tyler Brown (AVP)
Yeah, no, that was exactly what with where I was going with that. So you should be able to. Because that 90 OR, whatever you may be targeting, is saddled with G&A, but in theory, that G&A just won't come on.
Fritz Holzgrefe (VP and CFO)
Absolutely.
Tyler Brown (AVP)
Right. Okay.
Rick O'Dell (CEO)
And I think the other thing you'll see is, you know, like on the initial phase that we talked about, I made some comments earlier about the next phase of opening 5 terminals. It's kind of interesting, right? Because today, you go up there and you do your startup, and, you know, it's a new region for us, so we have region leadership and operations sales, regional safety person, regional HR person, regional maintenance personnel, regional claims prevention personnel, to start with 4 terminals and the revenue associated with that. So when we open our next 5 terminals, I'm not adding that overhead, right? I just have the-
Tyler Brown (AVP)
Right
Rick O'Dell (CEO)
Facility operational costs. And then I think it's also interesting is, you know, we'll have to see. It's a little bit difficult to model, but, you know, of the incremental business coming to and from our existing network, while you have the incremental costs in the Northeast and the incremental fixed costs, you're actually leveraging your fixed costs as well as, for instance, your pickup and delivery network. Especially on the pickup side, if you're going there picking up three bills from a customer today, and you get four or five, I mean, there's minimal incremental cost there. So, you know, like I said, it's a little bit hard for us to model that, but it's.
We would expect the margins over a period of time, I think are, you know, incremental more in that 15%-20% range, I would say, as opposed to 7%-10%, right?
Tyler Brown (AVP)
Right. Yeah, no, that's extremely, extremely helpful color. And then the last one here, Doug, just a quick housekeeping item, but do you have what the end of period headcount was? And maybe, if you can, give how many people were included in the Northeastern rollout.
Doug Col (VP and Treasurer)
Yeah, we haven't included the folks from the Northeastern rollout yet. I'll probably get back to you on the end-
Tyler Brown (AVP)
Okay
Doug Col (VP and Treasurer)
Of Q1 headcount.
Tyler Brown (AVP)
Okay. No, that's helpful. Thanks, guys.
Rick O'Dell (CEO)
Yeah, I would just comment, through March, I mean, we basically had the sales and operations leadership positions, meaning terminal managers, sales reps, regional, those regional personnel were kind of staffed, and then we didn't hire the, you know, the hourly personnel and the line drivers, et cetera, came on, didn't come on until April.
Tyler Brown (AVP)
Okay. Okay, thank you.
Operator (participant)
Our next question comes from, Ravi Shanker of Morgan Stanley. Please go ahead.
Ravi Shanker (Managing Director)
Ah, thanks. Morning, everyone. Can you just remind us what your customer end market exposure is currently, and do you expect that to change materially with the Northeast expansion?
Fritz Holzgrefe (VP and CFO)
Yeah, we haven't broken out, Ravi, the end market exposure because we've got such a diverse group of business. I mean, I think that what you would see in the Northeast is gonna be pretty representative of what the rest of our book of business looks like. And I think it's proven true as we've seen new customer opportunities so far. It's actually pretty similar.
Ravi Shanker (Managing Director)
Got it, but just overall, kind of, as if we just look at industrial customers versus consumer-driven, kind of, what's that split right now, and do you expect that to move?
Fritz Holzgrefe (VP and CFO)
Yeah, we have not broken that out typically, just because of the-
Ravi Shanker (Managing Director)
Okay
Fritz Holzgrefe (VP and CFO)
Diverse nature of that. And typically, what we've pointed to, and I think it's probably a pretty good indication, if we have you know, we move a fair amount of paint, and that goes through a home goods store or a home improvement store, is that retail or is that industrial? So for us, that would be, you know, that, how do you break that out? It's very similar to us, so it, I don't know how meaningful it would be.
Ravi Shanker (Managing Director)
Okay, got it. Apologies if I missed it earlier in the call, but the average weight per shipment was down sequentially. Can you just talk about why or what the drivers were there and kind of what sends that up again?
Rick O'Dell (CEO)
Yeah, I don't know. You know, it's down, what, 1.5%?
Fritz Holzgrefe (VP and CFO)
Yeah.
Rick O'Dell (CEO)
I mean, it's such a small number. I mean, I could. We, we dissected some of our account base. I mean, we're growing a couple of specific accounts that are, you know, have an average weight per shipment in the 600-pound range. But, I mean, that doesn't materially change the entire number, so I don't-
Fritz Holzgrefe (VP and CFO)
Yeah.
Rick O'Dell (CEO)
So I would call it average mix change.
Fritz Holzgrefe (VP and CFO)
Yeah.
Ravi Shanker (Managing Director)
Okay. No worries. Thank you.
Operator (participant)
We'll take a follow-up question from Scott Group of Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks for the follow-up. Just a couple things. So, I think during one of the other questions, you mentioned something about using some more spot pricing, and I wasn't sure I followed kind of what you were trying to say.
Rick O'Dell (CEO)
Oh, yeah. So, you know, within that over 10,000-pound segment, there's a portion of that that's more spot quote related business. So we'll, you know, we'll give a 12,000-pound or a pup load type rate in some of our backhaul lanes, to move for certain customers. And we actually got a little more granular with our spot quote opportunities and seen some incremental closure rate on those. It's not a lot of business, but it had some impact. And then in between that and the oil field picking back up, I think are probably the two biggest factors in that.
Scott Group (Managing Director and Senior Analyst)
Does that increase spot? Does that help or hurt your rev per hundredweight going forward?
Rick O'Dell (CEO)
I mean, it's just. That's just in the over 10,000 pounds. So it would impact our total weight per shipment, but, you know, we break that out separately and our LTL revenue per hundredweight has kind of been our focus from a yield management standpoint.
Scott Group (Managing Director and Senior Analyst)
Okay. Rick, what do you think, just if you exclude fuel, what do you think yields were up in the quarter?
Rick O'Dell (CEO)
Okay, so if you exclude fuel and adjust for weight per shipment, length of haul, we have a theoretical model, you know, that we use for that using some regression analysis, and our numbers show it's up about 4%.
Scott Group (Managing Director and Senior Analyst)
Okay. Then, I think last quarter you talked about you thought that you'd have full year margin improvement in 2017, and down a little bit first quarter, and then second quarter, kind of, you're kind of saying flattish. Do you still think you'll get full year margin improvement this year?
Rick O'Dell (CEO)
I think. Okay, so we said that, that our sequential quarter improvement from 1Q to 2Q would be 2.5 operating points.
Scott Group (Managing Director and Senior Analyst)
Yeah.
Rick O'Dell (CEO)
Yeah, that's a pretty meaningful increase over prior year.
Scott Group (Managing Director and Senior Analyst)
That's right. Okay. And so I guess because that, you think you'll get full year OR improvement, you still feel good about that?
Rick O'Dell (CEO)
Correct.
Scott Group (Managing Director and Senior Analyst)
Okay. Sounds good.
Rick O'Dell (CEO)
All right.
Scott Group (Managing Director and Senior Analyst)
Thank you.
Rick O'Dell (CEO)
Thank you.
Operator (participant)
As a reminder, star one, and we'll take our next question from David Ross of Stifel.
Bruce Chan (Director)
Hi there, it's Bruce Chan again. Just a quick follow-up on that fuel comment. You know, I know you talked about you know, fuel being up on the cost side, and maybe I missed this, but you know, with the fuel surcharge, did it end up being a net positive or a net negative in the quarter for OR?
Rick O'Dell (CEO)
It was a modest positive.
Bruce Chan (Director)
Great. Thank you. Have a great weekend.
Rick O'Dell (CEO)
Sure.
Operator (participant)
There appear to be no other questions at this time.
Rick O'Dell (CEO)
All right, well, as I commented, the entire organization is very energized by our expansion into the Northeast. We look forward to giving you guys an update on the next call. Thanks.
Operator (participant)
This does conclude our presentation for today. Thank you for your participation. You may disconnect.