Saia - Q2 2014
July 30, 2014
Transcript
Operator (participant)
Good day, and welcome to the Saia Incorporated Second Quarter 2014 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Doug Col. Please go ahead.
Doug Col (Head of Investor Relations)
Thank you. Good morning, everyone. Welcome to Saia's Second Quarter 2014 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 the call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, and all other statements that might be made on this call that are not historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially. We refer you to our press release and our most recent SEC filings for more information on the exact risk factors that could cause actual results to differ. Now I would 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 discuss Saia's results. Saia ended the second quarter with very positive tonnage trends and increasing momentum with respect to yield. Despite these and many other positive results, our second quarter clearly did not meet expectations. We were negatively impacted by high claims and insurance expense associated with increased accident severity in the quarter. Despite those challenges, I'm proud of the Saia team for delivering a quality service and value proposition to our customers in an increasingly capacity-constrained transportation market. Some details from the quarter compared to the second quarter of last year include the following: Total revenue increased 12.9% to $330 million. LTL tonnage increased 6.9% on 5.5% more shipments. Our LTL revenue rose 12%.
Our operating ratio of 93.1 deteriorated 110 basis points compared to an OR of 92 in last year's second quarter. Earnings per share of $0.53 compares to $0.54 per share a year ago, and claims and insurance expense was $8.3 million higher than the second quarter of last year, due primarily to accident severity. Saia's 12.9% increase in revenue over 2013 second quarter represents the highest growth for the company in seven years. Our customers continue to respond to our value proposition, which is what supports the strong rise in our LTL yield of 4.9% in the second quarter compared to last year. Looking at the quarter, clearly disappointed that our accident severity did not allow us to bring the top-line trends that we achieved to the bottom line.
We've invested significantly in technology and training in recent years to further enhance a robust commitment to Saia's safety program. Despite this unwavering safety foundation, we're at risk of having volatility due to accident severity, given the many millions of miles that we drive each month. Having said that, I'd like to give you a little color on some of the second quarter successes that we believe will be the foundation of many opportunities moving forward. Pricing on contract renewals ran well above the 3% target that we established early in the year. In fact, it was over 5% on contract renewals during the quarter. Our success in marketing higher-weighted shipments, which performed well in our system, continued in the second quarter and led to a 28% increase in truckload tonnage.
This month, we began taking delivery of a portion of the 800 linehaul trailers that we plan to put into service before the end of the year, which will further enhance our network optimization opportunities. Our operating a newer fleet and utilizing in-cab technology and our as well as our skilled professional drivers helped us achieve a 3.1% increase in miles per gallon versus the second quarter of last year. Our load average continues to rise, and we reduced empty miles by 3.3% compared to last year's second quarter. We've installed 2 new dimensioners in 2014 for a total of 27 now operating across our terminal network, and our early adoption of this technology really puts us in a good position to continue to realize benefits with respect to accurate costing as well as yield enhancements.
Our cargo claims ratio remains less than 1% of revenue. In May, we launched a mobile website, enabling our customers to manage their supply chains from wherever they may be, furthering our value proposition. The investment that we made in our sales force is paying off as we're able to reach more customers and prospects. Finally, I'm pleased to announce that LTL tonnage growth continues in July at a pace that's above the 6.9% rate that we saw in the second quarter. Going forward, we expect that Saia will continue to benefit from building density in our network. With Saia's modern fleet, our market-based compensation program, our Dock-to-Driver training options, and a centralized recruiting function, Saia is well positioned to handle the challenges of a tight driver market.
While we clearly do not have a good safety quarter, we strongly believe our commitment to safety, training, and technology will minimize, over time, these types of unfortunate events. Now I'd like to have Jim Darby review our second quarter results.
Jim Darby (VP of Finance and CFO)
Thanks, Rick, and good morning, everyone. As Rick mentioned, the second quarter of 2014, earnings per share were $0.53, compared to $0.54 in the second quarter of 2013. For the quarter, revenues were $330 million, with operating income of $22.7 million. This compares to 2013 second quarter revenue of $293 million and operating income of $23.3 million. Both periods included 64 workdays. As noted, LTL yields for the second quarter of 2014 increased by 4.9%, primarily reflecting the favorable impact of continued pricing actions, consistent with the trend of the past several quarters.
...During the quarter, we experienced higher costs in some key areas as follows: claims and insurance expense was $14.2 million in the quarter, compared to $5.9 million last year in the same quarter. This increase of expense was primarily due to increased accident severity in the second quarter of 2014, along with some negative development of prior claims. Claims, Salaries, wages, and benefits rose 11% to $160 million in the second quarter, reflecting additional wages associated with the higher tonnage trends and the impact of the mid-2013 wage increase of approximately 3%. In keeping with our market-based compensation philosophy, we have implemented a wage increase averaging approximately 3% across the company in July 2014. Additionally, we have needed to pay hiring bonuses to attract drivers in certain markets.
Healthcare costs increased $1.6 million in the second quarter of 2014 compared to the prior year quarter. Purchase transportation expense for the quarter rose $8.6 million compared to last year. This increase relates to the tonnage growth we experienced, which at times requires the use of less efficient purchased transportation to meet service demands. Depreciation and amortization of $15.1 million was $2.7 million higher than last year, reflecting our significant investment in tractors and trailers over the last twelve months to reduce average age of our fleet. Our cargo claims ratio was 0.99%, a slight uptick from our 0.90% a year ago. Our effective tax rate was 37.2% for the second quarter of 2014.
For modeling purposes, we expect our 2014 effective tax rate to be approximately 38%. At June 30th, 2014, total debt was $95.7 million. Net debt to total capital was 22.1%. This compares to total debt of $99 million and net debt to total capital of 25.5% at the end of last year's second quarter. Net capital expenditures in the first half of 2014 were $66.7 million, compared to $70.8 million spent in the first six months of 2013. We continue to project net capital expenditures in 2014 of approximately $110 million.
This level of investment allows for the expansion of the line haul trailer fleet, as Rick mentioned, and the continued investment in the replacement of revenue equipment, as well as investments in technology and real estate projects. Now, I'd like to turn the call back to Rick.
Rick O'Dell (President and CEO)
Well, thank you, Jim. As most of you have probably already heard, earlier this month, Saia announced the planned retirement of our CFO, Jim Darby, and I would like to publicly thank Jim for his years of diligent service to Saia. Jim led our finance group through a period of dramatic growth for Saia, and also guided us through the trying times of the financial markets in 2008 and 2009. And I'm sure, as you guys are all aware, that was a very long couple of years for the CFO of an LTL carrier. So we clearly wish Jim well in his retirement. I'm very appreciative of the strong team that he leaves in place.
Before we open up for questions, I'd like to reiterate that while our absolute results were clearly disappointing, we're very encouraged by the gains we've made with increases to our revenue and the opportunity that we see going forward. I feel strongly that Saia is really well positioned to capitalize on the unique supply-demand environment that we're currently experiencing in the marketplace. With that said, we're now ready to take questions. Operator?
Operator (participant)
Thank you. If you would 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, press star one to ask a question, and we'll take our first question from Brad Delco with Stephens.
Brad Delco (Managing Director and Research Analyst)
Gentlemen, and Jim, congratulations.
Rick O'Dell (President and CEO)
Thanks, Brad. Good morning.
Brad Delco (Managing Director and Research Analyst)
Jim, one of your, I guess, favorite numbers to give out is the monthly tonnage throughout the quarter. I may have jumped on late if you hadn't already given that. Do you mind repeating it?
Jim Darby (VP of Finance and CFO)
I haven't repeated it, Brad, and I'll be glad to walk you through it. So as, as reported, the LTL tonnage for the quarter is up 6.9%. An unadjusted April was up 5.7%. Adjusting it for Good Friday, on a run rate basis, it would really be up about 7.5%, as we've discussed before.
Brad Delco (Managing Director and Research Analyst)
Yep.
Jim Darby (VP of Finance and CFO)
May is up 7.7%, and June is up 7.5%. And as, and as we've gone, part of the way through July at this point, July is running up 9.4%, but I would tell you that there's a similar effect to what we have with Good Friday, and that last year's July fifth day was on a Friday after the holiday, and it was very weak. So adjusting for that weekday that was in last year, our trend, we think, is running up about 7.8%, pretty consistent with the last couple of months.
Brad Delco (Managing Director and Research Analyst)
... Great. That's, that's good color. And then just focusing on the insurance and claim line, clearly, some unfortunate events, obviously, in the quarter with the severity. What sort of lasting impact would you expect on, on that going forward, if any?
Jim Darby (VP of Finance and CFO)
Well, Brad, with those types of accidents, when we try to capture all the expense in the quarter in which the accident occurs. So, we don't expect this to necessarily have any effect going forward. We're always subject to volatility on that line, but we don't expect it to go forward. And that line is up $8.3 million compared to second quarter of last year. And second quarter last year, accidents vary, was fairly light. So what we would say is, on that line, that we're probably about $7 million over what would be a normal or expected amount for that line.
Brad Delco (Managing Director and Research Analyst)
Okay. And then last one for me, and I'll get back in queue. The purchase transportation increase, I kind of understand that, given, you know, the strong growth you saw in the quarter. How would -- how should we expect that line to trend, taking into account, you know, the 800 tractors coming online? You know, should we see a pretty immediate reduction? Or, I mean, given the growth in July, plus maybe, I heard, driver bonuses, you know, is it partially offset in other areas of business? I guess, overall, how do you expect the fluidity of the network to trend going forward and the impact on expenses?
Jim Darby (VP of Finance and CFO)
Well, it's 800 logistics post trailers that we'll be adding now, starting in July, and that will add capacity for us. Rick, you want to comment on PT?
Rick O'Dell (President and CEO)
Yeah. You know, I guess I would tell you this, you know, our purchase transportation of our line haul expense, right, is running about 15% of our miles, whereas, you know, at, at at kind of what we would consider an optimal level, we were down around 9-10. You know, this is a capacity challenge in market. I would tell you, we're also, you know, growing in some long-haul lanes, which is effectively, we can use the rail in some of that. So some of that may be in our, in our run rates going forward. But, you know, the rates on our purchase transportation, absent the impact of fuel, which is kind of the way we look at it, is actually up about 9.5%.
And so we are incurring some higher costs to take care of our customers in the near term, particularly on the purchase transportation side and the staffing side. And what our plan is, obviously, to look for the opportunities to optimize that, as well as to make sure that we're properly compensated for our customers with our pricing programs over time, kind of by lane, by market. So, you know, particularly in the markets where we're having a lot of driver demand challenges, or it's difficult to get truckload capacity, so you're paying high cost, you know, one-way, go-away type things and head haul lanes, you know, we just need to make sure that we get priced properly for that.
So over time, I think there's an opportunity to optimize that line, but if, you know, you might see that line stay where it is, and the yields will have to go up, right?
Brad Delco (Managing Director and Research Analyst)
Yeah.
Rick O'Dell (President and CEO)
Now, we handle and use purchase transportation, but somebody has to pay for it, right?
Brad Delco (Managing Director and Research Analyst)
Yeah.
Rick O'Dell (President and CEO)
Whoever's generating the load.
Brad Delco (Managing Director and Research Analyst)
Got you. So you guys will keep chipping away at it. Could persist a little bit, but the idea is you might be compensated, or you will be compensated for it on the pricing side.
Rick O'Dell (President and CEO)
Correct.
Brad Delco (Managing Director and Research Analyst)
Okay. Well, great, guys. Thanks for the time. Appreciate it.
Rick O'Dell (President and CEO)
Thanks, Brad.
Jim Darby (VP of Finance and CFO)
Thanks.
Operator (participant)
We'll take our next question from Scott Group with Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good morning, guys.
Rick O'Dell (President and CEO)
Morning, Scott.
Jim Darby (VP of Finance and CFO)
Morning, Scott.
Scott Group (Managing Director and Senior Analyst)
So, Rick, your comments on the contract renewal up 5%, that sounds good. But I know second quarter had the the earlier GRI. How should we think about yields and pricing in the third quarter and rest of the year?
Rick O'Dell (President and CEO)
I mean, you know, we're obviously in a capacity-constrained environment. I mean, quite frankly, you know, I've never seen it like this in my entire career in LTL. And, you know, the truckload markets are very tight when we move a certain amount of our tonnage, you know, via truckload. Customers are having challenges from a capacity standpoint. In some ways, they're giving us some of their heavier marks that we're having to move. And, you know, I would tell you that, you know, we have a very analytical, disciplined pricing model that continues to pay dividends. We show that our theoretical yield model, which show that we're up about 4.5% when you adjust for length of haul and weight per shipment and take out the fuel surcharge.
You know, about 1% of that is kind of the GRI impact. So, you know, we're running up 3.5% on contract renewals, and I guess what I would tell you is where, you know, at the beginning of the year, we said, you know, we'll benefit from some tonnage improvements and kind of target a more normalized yield. Well, with today's kind of cost environment that we're seeing, I mean, that's kind of out the window. So, you know, I think the yield increases that we're going to get will be more material than the targets that we've that we saw. And as I commented, you know, contract renewals were up over 5%. In this quarter, we've already...
You know, we made some adjustments to our to our pricing programs and the targets that we have, and we're going to continue to do that. I mean, you know, there's no reason to pay $5,000 signing bonus and a bunch of recruiting money to hire drivers and not be compensated for the freight that you're handling in that marketplace. I mean, it just doesn't make any sense at all, and we're very focused on the margins and the details of our pricing programs.
Scott Group (Managing Director and Senior Analyst)
So even without the GRI, can yields be better than the 4.9% they were up in the second quarter?
Rick O'Dell (President and CEO)
I think, I think they can. I mean, over time, they have to be. I mean, the situation that you have is it's not a one- the yield, the yield opportunities aren't a one-quarter story, right? So basically, 70% of our business comes up through contract renewal. So we do them one contract at a time, and there's kind of the average increase on the business that operates okay, and then the markets that aren't paying their way, you know, we make some, in some cases, some very significant adjustments in some of those lanes. And I would assume that there are going to be some. With this environment that we're operating in, and tonnage up in the 8% range, and we're gonna take, we're gonna take price risk.
I mean, we're going to take care of our customers' freight and incur the higher costs, and then we're going to make sure that we're being compensated for it.
Scott Group (Managing Director and Senior Analyst)
Okay, that makes sense. In terms of the operating ratio, you usually give some kind of color insight on how you think the next quarter is going to play out. You have some thoughts there, Rick?
Rick O'Dell (President and CEO)
Sure. I mean, there's a lot of moving parts this quarter, probably more than than we've seen in the past. So maybe this might be the easiest way to kind of step through it. In recent years, the third quarter has been about 1 point worse than the 2Q, due primarily to our annual wage increase. You know, if you were to adjust accident severity to be more in line with size, historical results, which is a number that Jim has given, then the second quarter OR would be about 91. But I would say, you know, given the volume and pricing momentum that we're experiencing, we're currently targeting to do a little better than the historical 1 point OR decline, kind of in spite of the fact we don't have the GRI.
Scott Group (Managing Director and Senior Analyst)
Gotcha. Okay. That's good. And just last thing, you know, longer term, you know, PT was, you know, an issue this quarter, and I think we understand why. Is the goal over time, as you think about trying to get into an eighties operating ratio, to materially reduce that PT spend, like Old Dominion's done?
Rick O'Dell (President and CEO)
The goal is to optimize our line haul cost, which is primarily what drives that. And again, there's some optimal PT in there, primarily being rail, and then places where you're, you know, you have a significantly overbalanced lane, and you can get cost-effective PT. I mean, you know, I'd rather pay $1.70 a mile instead of running round trip at my cost, right? Because that other guy may be able to find a load back, and I'd be running back empty. That being said, you know, we have staffed up and hired a lot of drivers during this time period. We've we've used what I would call sub-optimal purchase transportation to take care of our customers in this capacity-constrained environment, and I would I can assure you there are opportunities to reoptimize the purchase transportation.
So I think over time, that will come down to come back down as a percentage of revenue. Just given given the tight driver market and the strength of our tonnage that we're seeing, you know, we're we're incurring the cost to take care of our customers, which is clearly our number one priority.
Scott Group (Managing Director and Senior Analyst)
Okay, great. I'll pass it off to someone else. Thanks, guys.
Rick O'Dell (President and CEO)
All right, good.
Operator (participant)
We'll take our next question from Art Hatfield with Raymond James.
Art Hatfield (Senior Equity Analyst)
Hey, hey. Morning, everyone, and congrats.
Rick O'Dell (President and CEO)
Morning, Art.
Art Hatfield (Senior Equity Analyst)
Jim, on a well-deserved retirement. Rick, I will say, next, your next CFO should have a better driving record than Jim.
Rick O'Dell (President and CEO)
Is that right?
Art Hatfield (Senior Equity Analyst)
Just a couple of things, and I wanna get a little bit ahead here. I appreciate your comments on how you think about Q3 OR, and I know it's early to talk about Q4 OR movements, but can you tell us what historically that has done for you, Q3 to Q4 historically has done?
Rick O'Dell (President and CEO)
Boy, Art, I don't have that in front of me. I mean, fourth quarter is usually pretty weak. If you give us a call afterwards, I'll be glad to go through that with you offline.
Art Hatfield (Senior Equity Analyst)
Okay.
Rick O'Dell (President and CEO)
I just don't have it in front of me right now.
Art Hatfield (Senior Equity Analyst)
Not a problem. I'll follow up. Just the other thing, and you've helped out a lot, Rick, on the PT thing. Can you... How much of your PT right now is on the rail?
Rick O'Dell (President and CEO)
I'd have to get it. I mean, I think it's about, I think about 50% of that, of the, of the miles are on the rail, and it's a lower percentage of cost, as you would expect.
Art Hatfield (Senior Equity Analyst)
Okay. And then finally, just to follow up on your comment about PT earlier, you had mentioned you think it should stay at this level going forward. Were you referring to absolute dollars or as a % of revenue?
Rick O'Dell (President and CEO)
Oh, you and that, your question was on purchase transportation?
Art Hatfield (Senior Equity Analyst)
Yeah, yeah.
Rick O'Dell (President and CEO)
Oh, I think it'll stay at a higher level, but I think there's an opportunity on our percentage of revenue to improve it, and it'll be-
Art Hatfield (Senior Equity Analyst)
Okay
Rick O'Dell (President and CEO)
It'll be through a combination of yield improvements and/or, you know, reoptimizing the PT that's suboptimal in our network today.
Art Hatfield (Senior Equity Analyst)
Okay.
Rick O'Dell (President and CEO)
And then there will be some combination, whereas, you know, quite frankly, and if I've got a customer who's not paying his way and he's generating high-cost PT, if I whether he pays whether he pays or whether that business goes away because it's not paying its way, right, then I still improve my margins.
Art Hatfield (Senior Equity Analyst)
Right. Right. Now, understood. But the dollar dollar amount really shouldn't decline much from here, is, I guess, what you're saying, in the near term?
Rick O'Dell (President and CEO)
No, I don't think it's not an immediate quarter-to-quarter thing. But I do think there'll be some improvement as we head into the third quarter because of the staffing that we've done during the quarter, as well as, you know, the vacation period for our own drivers is high in the summertime.
Art Hatfield (Senior Equity Analyst)
I got you.
Rick O'Dell (President and CEO)
And when kids go back to school and those types of things happen, we get a lot of our driver availability increases, and so we'll be able to take out some of the suboptimal PT in the quarter.
Art Hatfield (Senior Equity Analyst)
Perfect. Well, that, that's helpful. Thank you. Thanks for your time.
Rick O'Dell (President and CEO)
All right. Thanks, Art.
Operator (participant)
We'll take our next question from Jason Seidl with Cowen and Company.
Jason Seidl (Managing Director)
Hey, gentlemen, and congratulations, Jim. Quick question: Rick, when you're looking at sort of the demand, how much of this demand you think is coming from the fact that truckload's so tight? Is there any way to parcel that out?
Rick O'Dell (President and CEO)
You know, to me, that's kind of the over 10,000-pound shipments, which, you know, our average weight in that group, I think, is around 13,000 pounds, so it's not really truckload. I mean, quite frankly, the only kind of even heavy truckload that we participate in very much is kind of more in a spot quote market or with some some quoted lanes that we have for certain customers that fill backhaul. You know, so I think there is some, you know, quite frankly, particularly, you got some large accounts that where we have a drop trailer pool. If they, if their truckload carrier no-shows them or they don't have anything, they may split up two shipments and give them to us and somebody else. You see what I'm saying?
Because my trailer's sitting there and gets it off their dock. So we are seeing some more of that, but, I mean, given that our average weight per shipment, you know, was only up modestly, we're not seeing a ton of that. I mean, we're just not. We don't price competitively in that marketplace. But I-
Jason Seidl (Managing Director)
Yeah.
Rick O'Dell (President and CEO)
There's some there's some spillover at the margin, right?
Jason Seidl (Managing Director)
Yep.
Rick O'Dell (President and CEO)
And the more truckload carriers have, you know, have capacity challenges and have options, you know, they don't do truckload stop-off. They'd rather, you know, fill their truck up and get full, you know, get a full load from origin to destination, free their driver up again. So, you know, I think we would say right at the margin, there's some impact there.
Jason Seidl (Managing Director)
Okay. Well, that's a good color. And when you look at... You said you're in some areas, you're paying bonuses to drivers. You know, if you listened in or read some of the notes around, most of the truckload carriers are saying the driver environment is likely to get worse, not better. So should we sort of expect the same for you, that the environment to attract and retain drivers gets a little bit worse from here on out?
Rick O'Dell (President and CEO)
I mean, it's clearly a capacity-constrained environment, and I think there'll be some cost challenges associated with that. I guess what I would comment is, you know, I think we have a strong foundation around our recruiting, our market-based compensation. We have the lowest average age of a tractor that we've ever had at Saia. You know, we're very focused on being a good place to work, and we think that Saia's value proposition is attractive in the marketplace, and we'll make the investments to staff, you know, to handle some incremental business. And then, you know, I mean, quite frankly, the costs are going to have to go up, right? I mean, I'm not overly pleased with where our operating ratio is.
I mean, there's an opportunity to improve and get returns, and there's a segment of our business that, you know, my analytics would show, you know, aren't, aren't really paying their way, and now the, now the cost increases are going up. So when you look at regulation, the cost of equipment, the technology, and now the driver availability and, you know, purchase transportation cost per mile is up 9.5% during the quarter. I mean, somebody has to pay for that. I can't get 3% rate increases and have 9% increases in PT cost per mile. So we're just gonna. We're, you know, we're very focused on the segments of business that people that care about service and quality and understand the, the market dynamics.
And you know, quite frankly, I think the costs are just gonna have to, I mean, the pricing is gonna have to improve.
Jason Seidl (Managing Director)
Nope, that's that's clearly what seems to be the case out there. And I guess the last thing on pricing, there's obviously been a lot of talk about a potential for second round of GRIs, and I'm not going to ask you whether Saia plans to do it or not, because I know you won't answer that. However, would it surprise you if another carrier were to announce a second general rate increase here in the fall?
Rick O'Dell (President and CEO)
I mean, probably not. I know there's a lot of talk about it. I guess, here, here's my position on that, okay? We tend to follow the market with a general rate increase and, you know, those customers that are on that pricing. That way, our tariffs are kind of generally in alignment with the competitors out there, you know, when we're doing pricing and competing effectively. I would tell you that if I look at the business that doesn't operate well and needs to pay more, it tends to more be the national accounts than the 3PLs.
Jason Seidl (Managing Director)
Right.
Rick O'Dell (President and CEO)
And so, you know, I think regardless of whether there's a second GRI or not, you know, we're focused on being properly compensated for the cost and increasingly on a by-lane, by-shipment basis, because, you know, the customers and the 3PLs are increasingly sophisticated, and if you misprice in a lane or a location across them, then they're gonna reoptimize you. Right? So-
Jason Seidl (Managing Director)
Well, that was, well, that was going to be my next question, right? Like, if you, if you look at the GRI business, that tends to be better rated business for the LTLs, and, and I guess I was gonna ask, is, are they putting themselves in danger of losing some of that business if they, if they push the GRIs too hard?
Rick O'Dell (President and CEO)
I mean, you know, small customers have a choice of going to 3PL, and they're taking, you know, a portion of the markup. And so, you know, we're very sensitive to that and making sure that we're pricing across our entire customer base fairly, right? That being said, you know, I mean, national accounts have more pricing power than a small customer does, and, you know, there are some synergies associated with a bigger book of business in some cases. But, yeah I mean, I think you'll see, we kind of tended to go at the lower end of the market with our last general rate increase, and I would just say we're sensitive to the options that the small customer has, and we like to continue to foster, you know, those relationships with those customers.
Jason Seidl (Managing Director)
Okay. Well, gentlemen, thank you for the time. As always, it's much appreciated.
Rick O'Dell (President and CEO)
Thanks, Jason.
Operator (participant)
We'll take our next question from Bill Greene with Morgan Stanley.
Bill Greene (Managing Director)
Hi. Yeah, thanks for taking the question. Can I ask a question about the dimensioners? As you roll those out more and more, is there a big opportunity on yield there, sort of a, if you will, almost a non-pricing opportunity, but a, but a more of an optimization opportunity?
Rick O'Dell (President and CEO)
Yeah, I mean, I think we're running a pretty high percentage of our shipments through the dimensioners. And, you know, I guess the biggest enhancement that we have now is they've actually enhanced the ones that we have to where it can take a larger shipment or footprint in there, and we think that'll actually allow us to increase about 6% more of our shipments will be able to be automatically run through the dimensioner. So there's an opportunity there, not only from a yield management perspective, but obviously to make sure that we're doing accurate costing and pricing. And, you know, I think the big opportunity that we have there is, you know, today, we have some competitors that are doing little or none of this.
And so you have customers that are probably taking advantage of them, where they don't really know what the dims are. And, you know, I think the opportunity will be, as others embrace this technology and find out what value it has, then, you know, you got these customers that are taking advantage of that will no longer be available, and I think it'll have an impact on yield overall across the industry.
Bill Greene (Managing Director)
Yeah. Right. No, I agree. What, Rick, when you think about the industry's capacity response to what you're seeing, is there much that you think the industry can do to increase capacity? If things are as tight as they are in truckload, and now they're actually getting tight in less than truckload, as you mentioned in your remarks, do you think there's something that the industry can do to add the capacity, or is it this just all gonna result in much higher prices?
Rick O'Dell (President and CEO)
I mean, we can adapt our capacity, right, where it makes sense, and if the, you know, if the margins are adequate, right, right, we're interested in growing at a sub-90-type operating ratio, right? So, you know, I think it's—I think there'll be both. I mean, you know, and let's just compare it to the truckload market. I mean, our jobs are still better compensation package and a better lifestyle. So, you know, over time, you know, we should be able to enhance capacity from a driver market perspective, you know, through our recruiting efforts. It's a good place to work. Our compensation programs are good. Our benefit program is, you know, at or above the marketplace. And so, you know, I think we can expand capacity. It just, it's just near-term, it costs more, right?
When you to bring a driver on, you're paying bonuses. And I mean, in the month of June, we incurred record recruiting, advertising expense. So it's just, it's... You know, we're, we're gonna adapt to the capacity to take advantage of, of the fundamentals that are available in the marketplace.
Bill Greene (Managing Director)
Sure. And what's your latest thinking on either sort of an organic expansion in the markets you don't serve or an acquisition? Is this, is this kind of environment making that a tougher way to go? Just because I assume that anyone who's a seller would say, "Well, I should be worth more today.
Rick O'Dell (President and CEO)
Yeah, I guess what I would tell you with that, I mean, given today, the opportunities that we see in today's market to generate growth and margin enhancement, I mean, we're very focused on that. And while we wouldn't—while we would look at opportunities to expand our geography, we would have to be very selective and opportunistic about that, and we're very focused on the growth and margin improvement opportunity we see internally. So I would tell you that geographic expansion, either organic or acquisition, would be very low on our priority list.
Bill Greene (Managing Director)
Okay, great. Thank you for the insights, and good luck, Jim. Take care.
Jim Darby (VP of Finance and CFO)
Thanks, Bill.
Operator (participant)
We'll take our next question from David Ross with Stifel.
David Ross (Managing Director)
Yes, good morning, all.
Rick O'Dell (President and CEO)
Morning, David.
Jim Darby (VP of Finance and CFO)
Morning.
David Ross (Managing Director)
Question on the tonnage growth at Saia. Are you seeing that largely come from existing customers or new business? I mean, as you know, new sales hires go out, are they picking up a lot of new accounts, or are you able to kind of go back to your old customers and give them a little bit more attention to get more business?
Rick O'Dell (President and CEO)
... I would tell you it's both, and, you know, kind of if we-- so the new sales force is allowing us to get more touches kind of with existing customers, as well as more touches from a prospecting perspective. And then if I kind of dissect our LTL tonnage growth, field business is growing the fastest, 3PL business is second, and national account business is third. And that's probably partially because we're increasingly selective on the margins we're looking for from a national account perspective, and the investment in sales resources have been in the field.
And then, you know, geographically, it's the kind of the same story we've been, we've been seeing, where the Upper Midwest is growing faster than the rest of the, of our geo- of our geography, and that's where we added the most sales resources. And then you also have, you know, a merger of, of the Vitran sale deal that went on up there, and I think some of that business obviously got dispersed across the marketplace.
David Ross (Managing Director)
Are there specific industry segments where you're seeing more growth, whether it be, you know, retail, industrial?
Rick O'Dell (President and CEO)
You know, since the higher growth areas are kind of more on the field side, it's such a diverse group of customers that I don't, I don't think we're seeing anything specific-
David Ross (Managing Director)
Okay, and then-
Rick O'Dell (President and CEO)
that we can glean from what we're seeing.
David Ross (Managing Director)
Then on the dimensioner side, again, you said that you had two more installed, you know, bringing your total up to 27. Is there a target number you're looking to get to in the network? You know, 30, 35, 40?
Rick O'Dell (President and CEO)
You know, I think it's kind of return oriented as well as, you know, that as long as we have capacity to, you know, get enough of a sample from, let's say, a large account, and generally, it's what you might expect, that, you know, we have a couple at most of our large break operations, and then, the smaller kind of mid-sized terminals almost all have one. So, you know, I think we're think we're somewhat saturated with it, but we continue to analyze lanes and places where, and if we have a high volume lane, where we don't have an ability to go through the dimensioner, then, you know, we would look to add those selectively. But I would, at this point, it's probably a handful or so, as opposed to 10 more or something.
David Ross (Managing Director)
Okay. And then, you know, lastly, just on the comments you made about driver recruiting and, you know, TL capacity, could you comment on, you know, what markets are toughest right now to find drivers? And then, what markets are toughest to find TL capacity?
Rick O'Dell (President and CEO)
Well, I guess there's a couple things. What is kind of these, this oil field fracking market is having an impact on certain locations in Colorado, Iowa, and Texas. You know, for us, for some reason, Minnesota, so Minneapolis, Denver is a growing market, and it's a tough market to recruit drivers in from a city perspective there. And then it's a little odd, historically, you know, the Southeast was a pretty easy purchase transportation market from a truckload perspective, and we've had some times where there's been shortages in, like, Atlanta and Nashville. Texas is tough at times. You know what?
The way we've kind of addressed that, David, which is, you know, in a loose market in truckload, you know, you can kind of get an ad hoc load if you need it. And what we've kind of had to do is because, you know, we need the capacity is, you know, that is, the truckload guys will give us because, you know, we're a good customer to them. And they'll give us capacity, but we need to commit to it three days a week or five days a week, or whatever the case is. So what we've done is kind of pre-committed, so we can secure availability at somewhat of a reasonable price, but at least you have the availability.
And then, you know, we look to kind of staff over a period of time to reoptimize that and/or if that's at a higher cost than what we're paying, you know, then those lanes need to be repriced with the customers that are driving that.
David Ross (Managing Director)
Excellent. Well, very helpful. Thank you.
Rick O'Dell (President and CEO)
All right, Dave.
Operator (participant)
We'll take our next question from Nick Bender with Wunderlich Securities.
Nick Bender (VP and Research Analyst)
Yeah, good morning, everyone.
Rick O'Dell (President and CEO)
Morning. Nick. Morning.
Nick Bender (VP and Research Analyst)
Congratulations, Jim. Rick, I kind of wanted to go back, you touched on a second ago as far as the new sales hires from last year. Can you give us some sense of, you know, how up to speed and how ramped those sales force additions are? And whether or not, you know, as you look at some markets, either where capacity is higher or where you feel like you've got some opportunity, do you think about any additional large sales force increases here in the back half of the year?
Rick O'Dell (President and CEO)
Yeah, I mean, I think, you know, we, we're doing the analytics on a kind of by territory basis to kind of see what, what we think the return is and how much of it was kind of due to, let's just say, you know, a company-specific thing or a market condition there. But our analytics would show, compared to some of the best-in-class folks out there, that we're still underrepresented in some markets. So we would analyze that as we go into our planning period for next year, and assuming we're getting good returns where we are, that we would make some incremental investments. And, you know, this field business operates well, and, you know, it's probably not. It's not just coincidental that the field business is growing.
The way that it is, and, you know, when we talk about the yield opportunities out there, part of that yield opportunity is to what I call reoptimized business mix, right? Meaning if you grow higher yielding field business, you know, and maybe some of the national account business, the people that are just more price players, you know, decide to go elsewhere, and that's an upgrade in the yield and a better utilization of our capacity, you know, in a capacity-constrained environment. So, you know, I think it makes sense. And as we approach next year, I mean, we're taking a hard look at that right now. Now, ramp-up wise, they've been in for basically the whole year, so the expense is in from a run rate basis.
Nick Bender (VP and Research Analyst)
Right. Right. You touched on, I was thinking more of an actual tonnage generation. But the other question, I guess, sort of following up on that is, you know, we have a lot of discussion in sort of the tonnage versus yield trade-off, but it sounds like a lot of the way you guys are thinking about it is grow tonnage, but with those accounts where, you know, some more attractive yield is sort of baked into it just by virtue of the mix.
Rick O'Dell (President and CEO)
I mean, that's true. Then I would also comment to you that I have some tonnage based on my analytics on a by-lane, by-shipment basis. There is some tonnage that clearly isn't paying its way today, and those lanes are going to be repriced over a period of time, and as you might expect, it's primarily national accounts and 3PLs.
Nick Bender (VP and Research Analyst)
Sure. Okay, that's, that's helpful. Let me pivot over to truckload real quick. You know, obviously, you guys have done a lot of work, you know, sort of seeking out freight that helps to, you know, help you build density a little bit, fill some backhaul, things of that nature. Is that really primarily still the strategy there, or is there at any point or within any lanes where you feel like you can turn the screws and sort of focus more on more on rate within some denser lanes?
Rick O'Dell (President and CEO)
Yeah, I guess one thing I would tell you is we've actually... The portion of that that's driven by spot quotes, you know, you can tweak that real easily, and we've actually gotten much more, much more price sensitive on that, just because of the capacity environment. So, you know, in some markets, even, even if it filled backhaul and contributed a little bit, if at the delivery, you got to take half a trailer load out and you, and you got two city driver openings, that doesn't really make sense. So we've been a little tighter with that. And then our analytics on the, you know, greater than 10,000 pound shipments, I mean, I would tell you, we're more sensitive to that now because of the line haul capacity constraints and the costs that we're seeing, both in the truckload and the rail markets.
So we're making sure that we're repricing, you know, those lanes to make sure that we're being properly compensated.
Nick Bender (VP and Research Analyst)
Gotcha. The last question I wanted to touch on, you know, you've got a good chunk of trailer deliveries coming in the second half year. And we've heard some commentary that, you know, capacity in the trailer market is a little bit tight, meaning new equipment deliveries. You don't expect any delays or anything like that in the back half of the year with those deliveries, everything looks to be on schedule?
Rick O'Dell (President and CEO)
Yeah, no, they're actually, the delivery started and, you know, we're in line in queue in the manufacturing process. But I think your point is valid in that as we look at next year's orders, in order to get first quarter delivery, we would have to, we would have to order right now. So, I mean, that is, that's kind of unusual, you know, in the trailer market.
Nick Bender (VP and Research Analyst)
Sure. All right. Fair enough. Well, thanks a lot, guys. I appreciate it.
Rick O'Dell (President and CEO)
Thanks, Nick.
Operator (participant)
We'll take our next question from Willard Milby with BB&T Capital Markets.
Willard D. Milby (Financial Analyst)
Hey, good morning, guys.
Rick O'Dell (President and CEO)
Good morning.
Willard D. Milby (Financial Analyst)
Just want to start off with operating supplies and expenses. You're down 200 basis points year-over-year as a percentage of revenue there. How much of that was due to increased PT versus higher MPGs and lower maintenance on new tractors?
Jim Darby (VP of Finance and CFO)
That's very perceptive. That is why it doesn't trend up with the tonnage, because, we've run more miles PT, so our fuel usage, which is in that line, is not anywhere near up what the tonnage is.
Rick O'Dell (President and CEO)
As well as the improvement in miles per gallon of 3%.
Willard D. Milby (Financial Analyst)
Is there, is there a way to kind of, you know, parse those two out from each other, at all? How much is the, the new trucks versus how much is just reduced or increased PT from fuel?
Jim Darby (VP of Finance and CFO)
3% improvement in miles per gallon. Overall fuel usage, overall gallons purchases only up somewhere in the range of 4% on product cost in that line, and our tonnage is up 7%.
Willard D. Milby (Financial Analyst)
Okay. All right, can I shift over to the sales force? Can I get a headcount at the end of thirteen, and just for a refresher of how many exactly you added in Q4?
Jim Darby (VP of Finance and CFO)
We increased our sales force by about 10% during the fourth quarter, and gets us to 250 or so, I think now.
Rick O'Dell (President and CEO)
Yeah, we're at about 250 sales resources.
Willard D. Milby (Financial Analyst)
All right.
Rick O'Dell (President and CEO)
Plus some plus some inside sales. Go ahead, I'm sorry.
Willard D. Milby (Financial Analyst)
I'm sorry. Have you added any in the first half of this year, and do you have a, a year-end kind of headcount target in mind for sales?
Rick O'Dell (President and CEO)
No, I think I commented earlier, we're analyzing that opportunity and the returns that we've gotten now, because, you know, it takes 6-9 months for a salesperson to generally come in and have an impact and see what their territory is, you know, what impact they can have. So we just now kind of have the analytics on that, and then we will, you know, we'll when we get through those this quarter, and as we set up our plan for next year, you know, we'll evaluate what addition, what additions we should, we should do.
But I would tell you that, you know, if we benchmark against some of the other carriers that have a combination of good tonnage and good yield improvements, they have a larger, I mean, sales force per, let's call it, per freight bill or per amount of millions of dollars of revenue than we do. So we think it continues to be an opportunity for us going forward.
Willard D. Milby (Financial Analyst)
All right. So it sounds like you're not exactly comfortable with where it is now, but you just want to be, you know, tactical on where you add. Is that fair to say?
Rick O'Dell (President and CEO)
That's correct. And, you know, we do a lot of analytics on everything. We want to make sure that our analytics are right, and that we're getting the type of returns for the investment that we make. And, you know, quite frankly, we've had some challenges adapting to the capacity-constrained environment that we have today. We also want to make sure that we're ready for that and that the yields that we can get on incremental business will support, you know, our targeted margins.
Willard D. Milby (Financial Analyst)
All right. Just one, one last thing. I'm going to go back to purchase trends here. Would you say that's more a shortage of equipment or a shortage of manpower issue, as you look at this, this particular quarter and going forward?
Rick O'Dell (President and CEO)
I mean, I think everything you look at is, you know, it's a very capacity-constrained driver environment out there. And, you know, the regulatory challenges, you know, for the whole industry, truckload and LTL, continue to be an incremental burden. So I mean, I think it's driver driven, you know, based on the data that I've seen.
Willard D. Milby (Financial Analyst)
Okay, fair enough. Any aspects of that from maybe additional dock workers needed? Are you okay in that particular, I guess, classification?
Jim Darby (VP of Finance and CFO)
Yes. I mean, the most of the capacity constraint from our perspective is on the driver side. So we've spent a fair amount with the incremental tonnage. We've spent a fair amount of money recruiting and training. It's more on the training side for dock workers. So there's some incremental costs involved in that as the business levels have stepped up. But and we also kind of, over time, you know, are making more of the dock workers full-time, which has some incremental costs in our network. But at this point in time, from an availability standpoint, you know, we're not having a lot of issues finding dock workers. It's not the same as the city driver market.
Willard D. Milby (Financial Analyst)
All right. Thanks very much. Thanks for the time.
Jim Darby (VP of Finance and CFO)
Thanks, Willard.
Operator (participant)
We'll take our next question from Scott Group with Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Thanks for taking the follow-up. I was hoping to be the last one to wish Jim the best.
Jim Darby (VP of Finance and CFO)
Thanks.
Scott Group (Managing Director and Senior Analyst)
Two quick things. You know, first, you mentioned that there's still, you know, freight that you think is moving at unacceptable margins. What % of the business do you still think has margins that you want to call out, and where were you at, like, a year ago on that metric?
Rick O'Dell (President and CEO)
Well, I mean, I think I'd rather not say, and there's two points to that I'd like to make, right? One is, I mean, call out isn't necessarily my, my term, right? I just want to be properly compensated for it. And, you know, it's a business relationship, and if the customer decides that they have a better option from somebody else who wants to handle that lane, then, you know, we understand that.
You know, we know what our costs are, and you know, I've been in this business and kind of played it for density, and you know, I guess what I've learned, and it's clearly paid some dividends for the company, is the more sophisticated we can be from a pricing standpoint. We know what our costs are, and we believe that, you know, we believe that we have a very efficient network and that I don't think there's a lot of other players out there that want to handle business that's not operating very well in this market. And you know, it's our network, and we have somewhat unique lane imbalances, et cetera, although you know, there's markets that are perennially imbalanced, and some of those markets are some of the most difficult to recruit drivers in.
So, you know, those lanes are going to. You know, they, they need to be repriced. So I would just tell you that it's, if, if, if you, depends where you set your target on returns and how much you, you know, then how much business, you know, would, would, would qualify in there. But it's, it's not, it's not immaterial. And, you know, we think we have a good value proposition, and some of our data analysis shows that in some places, we think we're underpriced, and we, we, we're convinced we have a good value proposition. We're going to go through and reprice that, and we'll kind of find out what happens. I, I think we'll get the yield increases, and the tonnage will continue to come on.
Scott Group (Managing Director and Senior Analyst)
Okay. And then just, can you put the driver stuff in perspective? You know, and we're used to hearing it from the truckload guys, not from the LTLs, but starting to hear it more from LTL. Did you have these issues back in 2004, 2005, 2006, when truckload drivers became a huge issue, or is this kind of brand new, and if it's brand new, should we be thinking that 3% is not the right way to model LTL labor inflation, and we gotta start raising that, like we're starting to raise that in truckload models?
Jim Darby (VP of Finance and CFO)
You know, it's new for us. I mean, I, I've never seen this before. A couple things, you know, I think the significant tonnage increases in this, that it happened so fast, I mean, you need to get staffed up for that. So again, we're kind of dealing with it with a signing bonus thing to get people to come to Saia. And then once you get it staffed, I mean, our retention rates have actually... Our turnover rates have actually declined. So I mean, whether it's a permanent thing or not, I, I don't really know. And then I would tell you that in terms of wage scales, et cetera, I mean, the drivers are going up more than some of our other employees from a demand standpoint.
And then it's also, it's some of the locations where you're having driver issues are very isolated, meaning, you know, let's just say, and I have 147 terminals, I mean, I may be paying signing bonuses in 20 terminals. And then, you know, once they're staffed and I'm get into a normal, more normal environment, then, you know, you're back to where you're doing okay. So I think there will be some incremental pressure, and then I also on the wages, and I also think, you know, work environment, benefit plans, quality of your equipment. There's a lot of other things that make the way you treat people. There's a lot of other things that besides just how much you make per hour or per mile that impacts whether you work there or not. I would tell you that we're very focused on those things as well.
Scott Group (Managing Director and Senior Analyst)
Gotcha. All right, thanks, guys.
Jim Darby (VP of Finance and CFO)
Thanks, Scott.
Operator (participant)
We'll take our final question from Jason Seidl with Cowen and Company.
Jason Seidl (Managing Director)
Hey, guys. Thanks for taking the follow-up. Just wanted to clarify some of your comments on the third quarter in terms of the OR. You were saying that you are looking at sort of 2Q as more of like a 91-ish, when you sort of adjust for your claims, and that you said there should be normally a 1-point move. You meant a 1-point deterioration in operating ratio, not an improvement, correct?
Rick O'Dell (President and CEO)
That's correct.
Jim Darby (VP of Finance and CFO)
Yes.
Jason Seidl (Managing Director)
Okay. That's all I was asking.
Rick O'Dell (President and CEO)
So-
Jason Seidl (Managing Director)
Thanks again, guys.
Rick O'Dell (President and CEO)
Yeah, so normally there's a 1-point deterioration driven by the wage, and we said we'd target or expect to do slightly better than that because of some of the yield and volume momentum that we're seeing.
Jason Seidl (Managing Director)
Thank you, guys. I appreciate it.
Operator (participant)
And with no further questions, I'd like to turn the call back over to Rick O'Dell for any additional or closing remarks.
Rick O'Dell (President and CEO)
All right. Thank you for your interest in Saia, and we look forward to staying in contact with you guys.
Operator (participant)
And this does conclude-