Saia - Q2 2017
July 28, 2017
Transcript
Operator (participant)
Good day, and welcome to the Saia Incorporated Second Quarter 2017 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to your host, Mr. Doug Col. Please go ahead, sir.
Douglas Col (VP and Treasurer)
Thank you, Paula. Good morning, everyone. This morning, hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Fritz Holzgrefe, our VP 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 the 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'm gonna turn the call over to Rick.
Richard O'Dell (CEO)
Well, good morning, and thank you for joining us. This morning, we announced our second quarter 2017 financial results, with second quarter diluted earnings per share of $0.68, compared to $0.52 in the second quarter of last year. Second quarter results reflect strong volume growth, favorable pricing actions, and solid execution across our network. I'm pleased that we were able to provide quality service in a quarter where industry volumes exceeded expectations, and our own growth initiatives were certainly front and center. Second quarter LTL revenue per hundredweight increased by 7.3%, making the 28th consecutive quarter of year-over-year improvement in our LTL yield. The overall LTL pricing environment remains firm and is further evidenced by the number of GRI announcements by our competitors in the second quarter. Saia implemented a 4.9% general rate increase on July 17th.
Also, in the second quarter, our average agreed-upon pricing with contractual customers increased by 8.2%. We renewed 364 contracts in the quarter, compared to 317 renewed in the second quarter of 2016, as we're taking advantage of a favorable pricing environment and market conditions. A few of the key operating highlights from the quarter are as follows: LTL shipments per workday rose 7.4%. LTL tonnage per workday rose 7.1%. LTL weight per shipment fell by 0.3% to 1,118 lbs, but increased from the 1,101 lbs reported in the first quarter. Length of haul of 806 mi was 2.5% longer than a year ago and was also up sequentially from the first quarter.
Revenue per LTL shipment rose by 7%. Our cargo claims ratio of 0.67% improved from 0.75% in the second quarter of last year. The number of cargo claims filed per day is flat year-over-year, despite the strong shipment growth in the second quarter. Also, the average cost per claim was down 8.5% compared to last year, as our quality initiatives continue to progress and pay dividends. Purchased transportation miles in the first quarter were 12.2% of total line haul miles, compared with 7.9% last year. Additional purchased transportation was needed in the quarter to handle volume growth that exceeded our expectations.
Fuel mileage improvements across our fleet continues to be a positive, as we averaged 6.9 miles per gallon in the second quarter compared to a year ago, which was 6.8. 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 (EVP and CFO)
Thanks, Rick, and good morning, everyone. Second quarter revenue of $358 million was 14.8% higher than a year ago, benefiting from positive shipments, tonnage and yield improvement, as Rick mentioned, and also from higher fuel surcharge revenue. Second quarter operating income rose by 36.8% to $29.7 million, compared to $21.7 million earned in the second quarter of 2016. A few of the key expense items which impacted the second quarter results are as follows: Salary, wages, and benefits rose 11.6% to $196.4 million in the second quarter, reflecting the impact of an average wage increase of 3% last July. Incremental labor related to year-over-year shipment growth in the quarter and our expansion into new markets in Pennsylvania and New Jersey.
Fuel expense rose 13.7% over last year, offset by increased fuel surcharge revenue, which rose 32.4% from a year ago. Fuel surcharge revenue was 11.1% of revenue in the second quarter, compared to 9.7% in the second quarter last year. Purchased transportation expense in the second quarter rose by 56.2% to $22.4 million, and was 6.2% of revenue versus 4.6% of revenue last year. Outside maintenance and parts expense rose 5.3% compared to the second quarter last year. Higher freight volumes made it necessary to run some older equipment to meet service needs, and which would otherwise have been disposed of.
Claims and insurance expense in the second quarter decreased by 4.2 to $10.4 million, compared to $10.9 million last year. Depreciation and amortization expense rose 12.4% to $22.2 million, compared to $19.7 million in the prior year quarter, and reflects our continued infrastructure and equipment investments. Our effective tax rate was 37.3% for the second quarter of 2017, compared to 35.2% in the second quarter of 2016. For the full year, we expect our tax rate will be approximately 36.5%....At June 30, 2017, total debt was $148.4 million. Net debt to total capital was 22.3%.
This compares to total debt of $139.4 million and net debt to total capital of 23.4% at June 30th, 2016. Net capital expenditures in the first half of 2017 were $155.1 million, included equipment, including equipment acquired with capital leases. This compares to $136.2 million of net capital expenditures in the first half of 2016. For the full year 2017, we expect this 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.
Richard O'Dell (CEO)
Thanks. To summarize the year-to-date at Saia, I would say that much has been done, and there's yet much to do. Saia customers have responded well to our Northeast service offering, and revenue so far has certainly exceeded our expectations. The openings were a small headwind to the second quarter operating earnings, but I'd say not as much as might have been expected due to strong initial volumes from our customers. We're currently in the process of readying our next location in Maryland to serve the markets of Baltimore and Washington, D.C., with an early fourth quarter opening. Also, we're in varying stages of completion with respect to securing real estate for our 4-5 planned service center openings in 2018. We're committed to our expansion plans, but continue to work diligently on the pricing opportunity that we believe exists in our current business.
Over the last several years, we've invested over $500 million in properties, equipment, and technology and have raised the quality of our service to customers. To justify these investments, we have an obligation to make sure that we're handling freight at a price that allows us to earn an acceptable return on capital. We're excited about our multiyear growth plan and the opportunity to serve both existing and new customers in our expanding geography, but are mindful of the fact that the expansion is a step-by-step process, and execution is key to our long-term success. Providing quality service for our customers puts us in a position to consider expanding, and we must maintain that as we seek to build our brand reputation in these new markets. With these comments, we're now ready to answer your questions. Operator?
Operator (participant)
Thank you. To signal for a question, please press star one on your touch tone telephone. Also, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is star one at this time for questions, and we'll pause to give everyone the opportunity to signal. Our first question will come from Brad Delco with Stephens.
Brad Delco (Managing Director and Research Analyst)
Good morning, Rick. Good morning, gentlemen.
Richard O'Dell (CEO)
Morning, Brad.
Douglas Col (VP and Treasurer)
Hey, Brad.
Brad Delco (Managing Director and Research Analyst)
Rick, congrats on the numbers. I was gonna see, is there any way you can put into context what type of growth or what part of the tonnage growth you think was generated through the Northeast expansion?
Richard O'Dell (CEO)
We weren't gonna kind of break that out specifically, but I guess if you just want to talk neighborhood-ish, kind of right out the gate, in May, the run rate was about in the 3% neighborhood from a starting standpoint, and it stepped up from there into June. And then, obviously, we commented on the TST Overland relationship, which was a meaningful step up from May into our June tonnage numbers as well.
Brad Delco (Managing Director and Research Analyst)
Gotcha. So if I go back, I think April tonnage was up 4.1, and May was up 7.5. Most of that was attributable to the Northeast expansion.
Richard O'Dell (CEO)
Yeah, but I mean, right out the gate, we kind of started at about a 3% number, just to give you a baseline, I guess.
Brad Delco (Managing Director and Research Analyst)
Then you made a comment about, I guess, the expansion hasn't been as dilutive to margins as you thought, and I think it was a surprise to many last quarter. You said sequentially, your OR could improve in line with normal seasonality, despite what you said would be a 50 basis point headwind because of this expansion. Could you put it into context, maybe if it wasn't 50, was it negligible in terms of being a headwind, or?
Richard O'Dell (CEO)
Yeah, I mean, we had a lot of employees up there in April in training, but then the revenue came on stronger than we expected. I mean, maybe $1 million, ballpark.
Brad Delco (Managing Director and Research Analyst)
Okay. And then.
Richard O'Dell (CEO)
So, yeah, obviously, it was probably half of what we would have guessed.
Brad Delco (Managing Director and Research Analyst)
Maybe my final question, I feel like most of these conference calls, people just sound a little bit better about what they're seeing in the economy. Any general comments you can make that you're seeing in your business, or maybe specifically, is energy or your Houston market seeing a good rebound?
Richard O'Dell (CEO)
Yeah, actually, the Houston market kind of led all of our regions up over 20% in top-line revenue. So that was a nice bounce back. And then the West, we're actually seeing the West, the western half of the United States is for us growing more than the East.
Brad Delco (Managing Director and Research Analyst)
All right. Well, thanks for the time, Rick.
Richard O'Dell (CEO)
Sure.
Operator (participant)
Moving on, we'll go to Scott Group with Wolfe Research.
Scott Group (Managing Director)
Hey, thanks. Morning, guys.
Richard O'Dell (CEO)
Hey, Scott.
Scott Group (Managing Director)
So just to follow up on the volume trends, I wasn't sure I understood. You're saying that in April, you had 4 points of volume growth, but 3 points of that was from the Northeast expansion. Is that what you're trying to say?
Richard O'Dell (CEO)
No. So Northeast opened on the first of May. Yeah. So, that would have been. Well, that's where that started. So April would have been our historical footprint.
Scott Group (Managing Director)
Okay. Okay, got it. And then can you just give us the June tonnage number and the July, if I don't think I heard it. Yep.
Richard O'Dell (CEO)
So the July, or sorry, June tonnage number was +9.2%. The June shipments number was +8.1%.
And then month to date, so far, in July, we're tonnage; we see +4.3% in shipments, +4.1%. Now, we have adjusted those figures; they are adjusted for the third of July.
Fritz Holzgrefe (EVP and CFO)
Yeah, and I'll just comment on this. The reason for the kind of step down versus where we were in June is heavily driven by the renewal of a number of our 3PL blanket pricing segment. And this segment, you know, has not been meaningfully adjusted for quite some time, and it had become our worst operating segment behind both our field business and our national accounts. So effective around the first of July, we kind of did a reset for the whole group.
Near term, it's, you know, we've seen a material reduction in this business, totaling about 4% of our company volumes. And, you know, history would say this business will return to us at a better pricing over time due to our value proposition. And, you know, we just, we're not gonna handle business operating at a 100 operating ratio. So, you know, we did a reset on this. You know, it's a... We think the market conditions are favorable for volume. Company has some really good growth opportunities. Our field business is growing, and, you know, we decided to take this step to kind of, to at least temporarily, kind of adjust our business mix.
Scott Group (Managing Director)
Gotcha.So with as you think about the third quarter, losing some tonnage, I'm guessing, but losing some lower margin tonnage and then and less operating day, but maybe less terminal costs. I don't know. When you think about all the moving parts, how do you think about margins sequentially, Q2 to Q3?
Richard O'Dell (CEO)
Yeah. It's a little crazy, like you said, with a lot of moving parts, but I'll try to step you through kind of our thoughts and our outlook. So if you normalize for safety, the OR—the third quarter is about 1 point worse, due primarily to the timing of Saia annual wage increase, which is effective on July the 1st.
This year, like you said, is particularly odd because July 4th was in the middle of the week, so we had about half a normal day's revenue on July 3rd, and then there's one less workday in the quarter. So these two factors, themselves, would normally have an incrementally negative impact of approximately two-thirds of an operating point. And, you know, another negative factor is that the fuel dynamics are really running less favorable in the third quarter than we experienced in the second quarter, and that would have an impact of about a third of an operating point. So in total, we kind of have an unusual set of circumstances that's, that's about a one OR point headwind.
However, given our business mix management, our yield initiatives, including the general rate increase and opportunities to continue to grow our Northeast revenue, we expect to be kind of more in line with historical trends from an OR perspective.
Scott Group (Managing Director)
So just there was a lot there, so I just want to make sure I understood it. You're saying you're normally about a point worse. Given some headwinds, you would have normally then expected to be a point worse than that, so call it two points worse in the second quarter, but you think that based on mix, you'll only be a point worse than the second quarter in line with normal?
Richard O'Dell (CEO)
Correct.
Scott Group (Managing Director)
Okay, great. And then just last question. So the 8%, I think you said, like, 8% pricing renewals, that's a, you know, obviously, a major step up from the 4%-5% you guys have been talking about. That's. I'm guessing that's not a sustainable number, but what's driving that increase? And is there any way to just think about what percent of the business gets impacted by that 8% increase, and if you're keeping that business?
Richard O'Dell (CEO)
Yeah, so here's the thing. That number on the contract renewals is heavily influenced by a double-digit increase on the 3PL, kind of blanket pricing segment. And that is about, runs about 12% of our revenue. But as we commented, you know, 4% of our revenue went away near term, correct?
Scott Group (Managing Director)
Okay. Gotcha.
Richard O'Dell (CEO)
I'm saying so.
It's really a pretty big change in our mix near term, but we also would expect over time, and have seen historically, that business, you know, comes back to us due to our value proposition.
Scott Group (Managing Director)
Right. And you're basically saying that that mix change adds about a point to margin?
Richard O'Dell (CEO)
Between that, the mix and our other yield initiatives and the growth, we expect to continue to step up in the Northeast expansion, right? Which is at, you know, good incremental margins from a fully allocated basis, right?
Scott Group (Managing Director)
Gotcha.
Richard O'Dell (CEO)
There's a lot of moving parts that happened even through the last quarter and now into July. There's another step up with our business mix management. Right.
Scott Group (Managing Director)
Okay. Thank you, guys.
Richard O'Dell (CEO)
Sure.
Operator (participant)
Moving on, we'll go to Todd Fowler with KeyBanc Capital Markets.
Todd Fowler (Managing Director)
Great. Good morning.
Richard O'Dell (CEO)
Good morning.
Todd Fowler (Managing Director)
Good morning. Rick, I don't know if you want to if you care to share this, but based on all the moving parts that you're talking about, we've got the tonnage trends into July. Could you share maybe what a revenue per hundredweight trend looks like now with the pricing actions that you've taken?
Richard O'Dell (CEO)
Okay, so adjusted for mix, meaning weight per shipment and length of haul, we were up over 4.5% in Q2. And that number has stepped up by at least another 1% in our current run rate.
Todd Fowler (Managing Director)
Okay, that, that helps. And then jUst as far as the volume that you're seeing into the Northeast, does it feel like your exit rate at the end of Q2, you're kind of getting the share that you'd expect to see? Or are you going to continue to grow in those terminals as you move through the third quarter? It sounds like in the fourth quarter is when we'll see the Maryland and the Washington, D.C., open. I'm just trying to get a sense of, you know, the incremental tonnage that you started to see in June. Is that kind of the run rate where you'll be, or does that continue to build as you move through the back half of the year?
Richard O'Dell (CEO)
Oh, no, it's still building. Like, I would just, in order of magnitude, it's probably up another 0.5% from where it was just into the July numbers. That segment, right?
Todd Fowler (Managing Director)
Okay. And then can you just talk maybe a little bit anecdotally about, you know, the response? I mean, is that. And I think when you laid out the strategy, it was a lot of this was being driven by your existing customer base. Is that where most of the freight is coming from? Can you just, you know, share with us a little bit about, you know, it sounds like that you're in line, maybe a little bit ahead of your expectations, but the color behind why you're having that success, is it that the timing was very good with the economy? Is it, you know, better success in gaining some share? Maybe just a little bit of color around your experience now that you've got a couple of months underneath your belt.
Richard O'Dell (CEO)
Yeah. Okay. So well, there's two kind of areas, right? So the outbound business from the Northeast, you know, with new salespeople and new customers generally up there, although obviously some of our existing customers that had locations up there moved some business to us. But the outbound side is about 1% of our revenue.
And then the inbound side from Saia's existing network going into the new markets was run about 2% of our revenue, which primarily came from our smaller customers, the field segment. And you tend to see some of the national accounts take a little bit of a wait and see attitude on your opening, and, you know, they tend to be more contractual relationships that they put out for bid once a year, et cetera. And, you know, they're not going to go say, "Oh, you're opening, so I'm going to, you know, leave my existing provider." So, you know, those opportunities are, you know, will continue to stage in, you know, as well as, you know, we'll continue to penetrate the field customers and, you know, over time, you know, the field more as well.
So there's, I think there's opportunities across our business segment, but initially, that kind of probably outlines, you know, again, 2% growth on the inbound side from a revenue perspective and about 1% outbound, which I would call new customers.
Todd Fowler (Managing Director)
Okay, good. And then just the last one I had, sticking with the Northeast, you know, my understanding was, as you ramped up in those markets, you know, you were going to make sure that the staffing levels were adequate and to really, you know, make sure that the service was in line with what your customer expectations would be. I would assume there's some additional costs with that. If that's the case, how long do you hold those costs? I mean, is that something that you're going to wait, you know, till you lap getting into, you know, next year? Or is that something that you can start to taper down, some of the higher costs to maintain the service, you know, in a couple of months?
Richard O'Dell (CEO)
Yeah, I mean, over time, right? I mean, just you look at volumes across our network, including into the Northeast, but, you know, with the tonnage surge that we have, we have some suboptimal purchased transportation that, you know, over time, you know, we get staffed in those markets, and we get over the summer vacation peak. There's an opportunity to reoptimize that. And then, you know, your initial growth, you know, you obviously got to get your people up there, you know, a month ahead of before your terminal opens and get them through their training and whatnot. Well, now, you know, my incremental costs are less negative, right? Because I don't, I don't...
I mean, my management team is scalable, and you're basically adding, you know, drivers and dock workers, and they go through a week's training, and so my incremental costs are less, become an overall smaller portion of the expense, right? I mean, I think it'll be when you look at the revenue per bill going to and from those markets, and obviously gaining some synergies across the rest of the site network, which is already operating at an efficient level, I mean, net-net, it should contribute, you know, at similar, you know, margins to where we're operating today.
Todd Fowler (Managing Director)
Right. Okay. I think that makes sense. You made that comment before. Okay, I appreciate the time. Nice quarter.
Richard O'Dell (CEO)
Oh, thanks.
Fritz Holzgrefe (EVP and CFO)
Thanks, Todd.
Operator (participant)
We'll take our next question from David Ross with Stifel.
David G. Ross (Managing Director)
Hey, good morning, gentlemen.
Richard O'Dell (CEO)
Morning, David.
Morning.
David G. Ross (Managing Director)
Hey, Rick, with all the talk about the expansion, there hasn't been as much talk about just general productivity improvements at, you know, the other roughly 150 facilities you've got, because I know you've made a lot of progress over the past few years on line haul, dock, and P&D. Can you comment on what's going on today? You know, where are you focused on making further improvements on those metrics?
Richard O'Dell (CEO)
Yeah, I mean, I guess I would just comment kind of from an overall perspective, just to give you broad numbers. We're up overall about 7% headcount across our network on, you know, in the month of July, I mean, or June, we were running up 9% from a shipment count standpoint. So, you know, from a staffing standpoint, there's a couple of, you know, about 2% overall leverage within the organization. That kind of gives you order of magnitude. And again, it comes across. Part of that is, obviously, we've got some incremental purchased transportation that'll be reoptimized over a period of time.
And then, and then, you know, I think one of the big synergies, as we commented previously, is, you know, our line haul network actually tends to be historically overbalanced from a East to West standpoint, at least, you know, over to Texas, etc. And then, you know, with, so with a lot of our freight that we got from the inbound to the Northeast is the average length of hauls is in the 1,200-mile, 1,100-1,200-mile range. And so that also is running over a portion of our what used to be our empties on a more balanced. So, you know, there's quite a bit of network synergies within our organization.
David G. Ross (Managing Director)
Now, you mentioned there that, you know, the incremental PT in the quarter will come down over time as the network is reoptimized. Historically, on a tonnage search, how long does that take? Is that something you can get back in balance in a quarter, or is this something that's going to take several quarters?
Richard O'Dell (CEO)
I think we should make good headway late. Well, there's two issues, right? One is, with our, volume adjustments that we made to more of the 3PL blanket. You know, some of that will set with the volume stepping down, we're actually taking some of it out kind of more immediately. And then, and then, you know, when, when some of our heavy vacation periods end, when kind of kids go back to school, so to speak, vacation periods kind of cut down, and we'll have some incremental availability there as well. So I think late Q3 and into Q4 is when you're going to see that come off.
David G. Ross (Managing Director)
Okay. Thank you very much.
Richard O'Dell (CEO)
Sure.
Operator (participant)
And moving on, we'll go to Jason Seidl with Cowen and Company.
Jason Seidl (Managing Director)
Hey, thanks. Hey, guys, morning. Couple quick questions. One, just so I understand, your July mid-day tonnage, 4.3%, that was adjusted for the 4th of July, so the actual number would be a little bit lower than that? Am I reading that correctly?
Richard O'Dell (CEO)
That's actually correct.
Jason Seidl (Managing Director)
Okay, perfect. Second question, on your truckload business that you're getting, do you expect an incremental step up given the tightness that we're seeing and the pending ELD mandate? Should we expect maybe some of those yields in that to increase as we move throughout the year, even more than it has?
Richard O'Dell (CEO)
Yeah. Yeah, I think so. You know, it was an interesting quarter for us, right? Because of the volume growth that we had and the purchase transportation that we put in, you know, our empty miles were kind of at a very low level. And so, you know, some of that spot quote business that we have, we actually kind of became less attractive to us in the way our modeling goes. You know, that segment of the business was actually the transactional business in that segment that we seek for backhaul was actually down.
But I think what we'll see, as you commented, is some of our regular LTL shippers that ship heavier shipments that could be on a truckload stop-off type environment could come back to LTL, right?
Jason Seidl (Managing Director)
Right. That's what I was thinking. Also, if we just turn our attention for my last question to your blanket 3PL pricing, obviously, you're walking away from some of that business because it wasn't as attractive, given, I guess, other business you can put in your trucks now. You said it normally tends to come back, given your high level of service in the industry. Can you talk to us about a timeframe that it typically takes to come back to Saia?
Richard O'Dell (CEO)
Yeah, I mean, usually it's three months.
Jason Seidl (Managing Director)
Okay, so we should see some of that already before the end of the year, then?
Richard O'Dell (CEO)
Yes.
Jason Seidl (Managing Director)
Okay, perfect. That's all I have, gentlemen. Thank you so much for the time, as always.
Richard O'Dell (CEO)
Great. Thanks.
Operator (participant)
And we'll take our next question from Tyler Brown with Raymond James.
Tyler Brown (Managing Director and Equity Research)
Hey, good morning, guys.
Richard O'Dell (CEO)
Morning.
Tyler Brown (Managing Director and Equity Research)
Hey, Rick, can you give a little more color on the TST Overland interline agreement? It sounds like that's up and running. Is that running maybe a little bit better than you had originally expected?
Richard O'Dell (CEO)
No, we knew kind of what how meaningful it was, and it was, yeah, it's going. It's going great, kind of in line with our expectations initially.
Tyler Brown (Managing Director and Equity Research)
Okay. Okay, good. And then, super interesting data about the inbound versus outbound mix on the Northeast expansion. I guess maybe I'm a little surprised the inbound side is so strong. I mean, if I think back to Clark Bros., you know, building that inbound market took maybe two years. But I guess my question is, one, I'm curious if that inbound mix has surprised you to the upside. And two, you know, do you think that that's a real key driver in keeping the cost impact down, just given the line haul and balance benefit?
Richard O'Dell (CEO)
Yeah, yeah, yeah, so the margin benefit is good, right? And, and, you know, it's, it's kind of a 2-to-1 inbound market overall up there, so that didn't surprise us as much. And then from our perspective, you know, where we have good, you know, we have better customer relationships, long term, kind of within our existing geography. So, you know, those are the, the people that, you know, brought the business to us right out the gate. So it, it was, I, I think just the absolute volumes probably exceeded our expectations a bit, but the balance ratio to me wasn't a big surprise.
Tyler Brown (Managing Director and Equity Research)
Okay. Okay, no, that's, that's helpful. And then, Fritz, just on the PT, you know, obviously using a lot more now, it sounds like maybe there's some additional fleet investments becoming necessary. Curious to hear your thoughts on that. And then I know it's early, but any thoughts about 2018 CapEx?
Fritz Holzgrefe (EVP and CFO)
Yeah. So, we actually did buy, change the mix of our capital that we'd spend this year. We added some additional equipment this year. So, our total for the year, as I mentioned, is gonna be around $220 million, but it's a little bit more weighted around new equipment as compared to real estate initially. It's just kind of timing on the real estate. Next year, you know, I think that it's still going through our planning stages on the Northeast, on specifically what the real estate requirements will be. But, you know, I think order of magnitude, we're looking at numbers kind of where we are now, up, up from here, in all likelihood, maybe up to $235 million-$240 million. But we'll be better positioned to communicate that down the road.
But it, it will be at these kind of elevated levels for now to keep that fleet current, deal with the capacity, and then also make these all-important, terminal investments where we need to.
Tyler Brown (Managing Director and Equity Research)
Okay. Okay, that's good. And then just last one. Rick, can you remind us on your tariff mix applicable for the GRI?
Richard O'Dell (CEO)
About 25%.
Tyler Brown (Managing Director and Equity Research)
Okay. All right. Thanks, guys.
Richard O'Dell (CEO)
Great.
Operator (participant)
Moving on, we'll go to Ravi Shanker with Morgan Stanley.
Ravi Shanker (Managing Director)
Thanks. Morning, guys. Just a couple follow-ups here. The cargo claims decline that you saw, I think you said it was driver of some of your quality focus. I mean, can you just elaborate on that a little bit more on kind of how sustainable that would be?
Richard O'Dell (CEO)
Oh, yeah, sure. I mean, this has been a multi-year effort for us. We put some very stringent process discipline around, you know, loading the trailers and handling the freight and using tools of straps, bars, and airbags, with some very rigid kind of rules and standards. You know, we've been successful in implementing that across our network. You know, set some specific goals. You know, our dock supervisors have some incentives based on attaining their targeted cargo claims ratio, which is some targeted improvements. And, you know, it's just blocking and tackling out there on the dock every day.
We actually also require pictures to be taken of each load, you know, a couple times in the trailer, and, you know, give, give us an opportunity to review the quality, at, at each one of the facilities and the opportunities for both quality as well as load average. So I mean, that, that's kind of the, the process that we've put in place, and it's been. It's continuing to be institutionalized across our organization. And I think particularly, you know, when you see the growth that we had in some of the newer terminals, to be able to continue to make headway from a quality perspective, it says, says a lot about our operating team.
Ravi Shanker (Managing Director)
Got it. Understood. And just a follow-up to some of your pricing comments. Kind of just given the focus and the commentary in the release and also on the call about, you know, freight having to meet profitability criteria and such, I just want to confirm if that's just a function of your kind of changing mix of the 3PL business, and not some broader commentary on just changing pricing dynamics in the LTL space as a whole?
Richard O'Dell (CEO)
Well, I think it's a favorable environment in which to, you know, take advantage if you have segments of your business that aren't operating well, whether it be lanes or customer specific. And, you know, we just I mean, we look at the profitability of all of our all of our customers, and then I mean, to me, we just looked at a segment that has, you know, not kept, I guess, pace with what the market, what's happening with market conditions, over a period of time. And it was meaning the segment was growing from an on a meaningful level, within our organization and wasn't, you know, was again, was the worst operating segment that we had, if you compare it to both national accounts and field.
So, you know, it's not a change in our philosophy, but we looked at it, that it had actually, you know, deteriorated a bit from an operating margin basis, just because we continue to make investments in the company and in our quality processes. And, you know, the rates in that segment, we hadn't kept pace with the investments that we made, so we just need to make a step up.
Ravi Shanker (Managing Director)
Understood. Thank you.
Richard O'Dell (CEO)
Okay.
Operator (participant)
Once again, it is star one at this time if you do have a question. Next, we'll take a follow-up from Scott Group with Wolfe Research.
Scott Group (Managing Director)
Hey, thanks, guys. I appreciate it. Can you just let us know what the annual employee increase was this year for July versus a year ago?
Richard O'Dell (CEO)
Roughly about almost 3.5% across the whole employee population.
Scott Group (Managing Director)
And what was last year?
Richard O'Dell (CEO)
Right around 3
Scott Group (Managing Director)
Okay, so a little bit higher.
Richard O'Dell (CEO)
The driver number last year was higher than that, so it's, it's overall, it's probably in a similar
Fritz Holzgrefe (EVP and CFO)
Similar, yeah, yeah.
Richard O'Dell (CEO)
In a similar range.
Scott Group (Managing Director)
Okay, and then-
Richard O'Dell (CEO)
Last year, there was a bigger step up for our over-the-road drivers, and this year, we had some city markets that we needed to address at a higher level. So I think it came in at a similar number.
Scott Group (Managing Director)
Okay. And then you talked about, I think, the Houston area up, like, 20%. Are you seeing any signs of softening or, or slowing there? Is the, the rig count starting to flatten out?
Richard O'Dell (CEO)
To be honest with you, I didn't look at that into July, where we're running, and then, you know, some of that 3PL segment we had would have been impacted there. I'd have to look at it by segment and kind of get back to you and isolate that.
Scott Group (Managing Director)
Okay. And then just last question, just bigger picture. If I think back a couple of years ago, the story was very much a, you know, we feel like we're heading towards an operating ratio in the 80s, and then the economy happened. Now that we've got this growth story, should we be thinking that it's top line and not yet so much margin? Or do you think that there's still kind of a visibility to a sub-90 operating ratio? And, and if you have it, what's a realistic timeline to get there?
Richard O'Dell (CEO)
Three years.
Scott Group (Managing Director)
Okay.
Richard O'Dell (CEO)
I mean, and, and again, that assumes we get even just a normal economy at whatever, 2% GDP type growth. We, we have a roadmap to get there, and our organization is very focused on that, and we think that, you know, the expansion into the Northeast, while it provides a growth opportunity, it also, as we commented previously, you know, it's a-- the total incremental market available to us would be $7 billion. And while we have... We'll have some incremental cost to that, there's also in the 9%-10% range of company fixed cost leverage. So you know, if you price business even at a 93 or something, right, which isn't our target, is more around 90-ish or something, right?
And then you pick up the fixed cost leverage on that growth. Another, you know, the incremental margin should be in the 20% range. So it... I think the expansion actually, you know, contributes to our opportunities to operate in the 80s. And it's a good pricing market up there. While there are some competitive regional players, we tend to play more in the interregional market going up there, leveraging, you know, the investment we have on our existing network. And, you know, then you're playing more against the national players that have a better yield profile. So, you know, we feel strongly that the opportunity is there to both, you know, generate growth and drive margin improvement.
Scott Group (Managing Director)
Okay, and not to be nitpicky, three years, meaning by 2019 or 2020?
Richard O'Dell (CEO)
'20.
Scott Group (Managing Director)
Gotcha.
Richard O'Dell (CEO)
Yeah, there's. We got less than half of this year left, but if you kind of model out too, you know, you get pretty far into the Northeast expansion at that point in time, too. So, you know, the terminals that we've opened already and will open next year will be more mature and have more share. And, you know, there's more of your terminal efficiencies that we'll be able to gain up there, you know, through density. So it's a combination of factors that contribute once you get out a little bit.
Scott Group (Managing Director)
Okay. Thank you, guys.
Richard O'Dell (CEO)
Sure.
Operator (participant)
Moving on, we'll go to Rhem Wood with Seaport Global.
Rhem Wood (SVP)
Hey, good morning.
Richard O'Dell (CEO)
Morning.
Fritz Holzgrefe (EVP and CFO)
Morning.
Rhem Wood (SVP)
Can you just... Rick, can you talk a little bit about just, you know, your success in finding this new real estate, maybe the size of the facilities you're looking for, and then the timing of opening those? Has that moved up at all? Thank you.
Richard O'Dell (CEO)
Well, you know, we found a Baltimore Terminal, so, you know, we've made an acquisition there and went ahead, and as soon as the facility's available, we're ready to open it. The facilities that we've sought out for the next openings, you know, we have four facilities that are, you know, of adequate size to go up there and get open. I would comment, you know, one of the facilities that we moved into initially, actually, we moved into two facilities that initially are temporary. One of them, we have another terminal coming available in the first quarter of next year that's gonna be much larger, and one of the major competitors, you know, built a bigger facility and moved out of it, and that came available.
And then we're gonna actually build a breakbulk up there. Today we're in a what will ultimately be too small to service all the Northeast, but it's adequate today at, like, 65 doors, and we're building a 120-door breakbulk that would be expandable. So, and then in some of the next markets that we move into, some of them are a little bit smaller markets in Pennsylvania, and you're getting more in the 30-40 door size terminals that are similar to what some other players have in some of those markets. So while it's not, you know, it's not gonna last us long term, we'll just lease those, and it'll last us for quite a while.
Rhem Wood (SVP)
Okay, thanks. And then the ability - can you talk a little bit just about the, you know, how the success of hiring drivers and how that's going as well? Thank you.
Richard O'Dell (CEO)
You know, it's a, it's a tight driver market out there. Are you talking about the Northeast or across the network? I don't-
Rhem Wood (SVP)
Yeah, really, I was talking about the Northeast, but if you could comment on both, that'd be great. Thank you.
Richard O'Dell (CEO)
Yeah, sure. No, we had a good initial reception for drivers up there. You know, put a lot of new equipment into the market. I think people are excited about, you know, drivers see the benefit of coming over to a company that has a good wage and benefit program. And, you know, you're, you know, first drivers in, obviously, with the growth that we're gonna see, they're gonna move up the seniority rankings quickly and have, you know, good run selections and start times. And so we're, we've been seeing a good initial reception up there. We've actually doubled the initial group of drivers that we've hired. We've actually doubled the number already since we originally opened up there. Continue to seek additional drivers.
And then in, it's just a tight driver market. There's a bunch of markets where, you know, we're paying $5,000 and $7,500 signing bonuses in some of the tight markets to attract people. So, you know, summertime's hard. People have vacations planned, et cetera. And, you know, I think the willingness of people to kind of change, you know, will probably improve over the next, the back half of the year and into March of next year. So that's just kind of the way it. That's kind of just the timing of it and the way it works, right? If you don't get staffed up in the first five months of the year, people have plans, and unless they're out of work for some reason, right?
It's kind of harder to make a step up in your staffing at that point in time.
Operator (participant)
There are no further questions at this time.
Richard O'Dell (CEO)
All right, great. Thanks for your interest in Saia. Got a lot of great things going on at the company, and the market seems conducive to our initiatives for growth and yield management. So, we're full speed ahead with all those initiatives. Thank you.
Operator (participant)
That does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.