Saia - Q3 2013
October 30, 2013
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Saia Incorporated Third Quarter 2013 Earnings Results Conference Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I will turn the conference over to Mr. Jim Darby. Please go ahead, sir.
James Darby (CFO)
Thank you, Debbie. Good morning. Welcome to Saia's Third Quarter 2013 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and me, Jim Darby. I'm Vice President, Finance, and Chief Financial Officer. Before we begin, you should know that during this call, we may make some forward-looking statements within the meaning of 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.
Richard O'Dell (CEO)
Well, good morning, and thank you for joining us to discuss Saia's third quarter results. I'm pleased to report that Saia delivered a significant increase in earnings this quarter. Our success is a result of the hard work, talent, and dedication of every member of the Saia team. This strength is particularly evident when you consider that our improvement has been across the board and not in just any one area. Our metrics show that we're continuing to find ways to meet and exceed our customers' expectations in everything from customer service to technology, from claims to safety, and beyond. Let me start by reviewing some highlights from the quarter compared to the third quarter of last year.
We're all on the same page, all per-share data has been adjusted to reflect the company's 3-for-2 stock split that took place in June of this year. Revenue was $293 million, up 5.4%. Earnings per share were $0.51 versus $0.37. Our operating ratio was 92.5, down 1.2 points from 94.1. LTL tonnage per day decreased by 0.1%, and our LTL yield increased 3.8%. Saia continues to advance its value proposition in the marketplace. Under the banner of Quality Matters, our signature quality initiative has led us to large investments in the quality of our products, so that our customers have experienced an even more consistent, superior customer service.
These efforts have fueled another quarter of meaningful yield increase through strong value selling, which, combined with efficiency initiatives, has led us to a 37% increase in our earnings per share. As we previously discussed, in 2013, Saia announced a number of cost-saving initiatives that targeted $20 million of annual savings. Three quarters into the year, we see that the results from these initiatives are providing a substantial offset to inflationary wage and cost pressures. And here are just a few highlights that contribute to the results this quarter. We achieved a 98% on-time service consistently and reliably for the 8th quarter in a row. Our defects in pickup performance were decreased 32%, making this one of the strongest metrics reported in our Customer Service Index. Our fuel efficiency, supported by electronic onboard devices, improved by almost 7%.
Over 81% of Saia drivers are now meeting their progressive shifting targets, which is contributing to this success. Our load average rose 4.4% in the third quarter compared to the same quarter of last year, which led directly to a record revenue per linehaul mile. Just as an example, on flat tonnage, our linehaul miles were actually reduced by 3.9% compared to the same quarter last year. Saia was awarded first place for city drivers and third place for line drivers by the American Trucking Associations, making this the third year in a row that we've earned high honors from the ATA. This does not mean that we're resting on our laurels, as safety remains our number one priority. We're continuing our strong training programs and utilizing in-cab technology to support safe driving techniques.
The dimensioners purchased over the last two years continue to pay dividends. This technology allows us to provide quick, reliable, and accurate density measurements for individual shipments, which aids in accurate pricing and costing as of the freight that we're handling. We recently purchased an additional five dimensioners that will continue to enhance our capabilities in this area. Our training does not stop with our drivers. During the quarter, we've enhanced our operational management and dock training as well, and these increased training investments, coupled with the infusion of new equipment in our system and dock-related technology, has resulted in further improvement in our cargo claims ratio. As we move into the fourth quarter, we're increasing our capital expenditures to invest some additional monies in new equipment that supports our Quality Matters initiative and further improves our fuel economy.
Quality Matters initiative remains the key building blocks for the culture of our company. It permeates the actions that you see every day at Saia, at every terminal, every shop, and every office facility across our network. With our improved operating results, Saia's balance sheet grows stronger. This provides us with the financial ability to make significant investments in our people, equipment, and technology that are making the enhancement of our value proposition possible. Now that we've achieved a couple of quarters below our interim target of a sub 93 OR, we're making an incremental investment in our sales and marketing resources to spur growth in our existing geography. Probably the most meaningful investment is a 10% increase in our sales resources, both management and field sales, which has already started and will be completed prior to the end of this year.
These incremental resources will support our growth objectives in the future, which will come from our quality service offering, consistent cost execution, increased target marketing, and focused pricing discipline, as well as some further enhancements to our business mix management. Now I'd like to turn the call over to Jim Darby.
James Darby (CFO)
Thanks, Rick, and good morning again, everyone. As Rick mentioned, the third quarter of 2013 earnings per share were $0.51, compared to $0.37 in the third quarter of 2012. For the quarter, revenues were $293 million, with an operating income of $21.9 million. This compares to 2012 third quarter revenue of $278 million, and operating income of $16.4 million. Third quarter 2013 did have 1 more workday than third quarter 2012. The LTL yield for third quarter 2013 increased by 3.8%, which primarily reflects the favorable impact of continued pricing action. Continuing our trends from the past several quarters, yield showed steady improvement as we continued to achieve price increases.
Our industrial engineering initiatives and operational effectiveness have maintained our high-quality service while significantly enhancing our fuel utilization and reducing our reliance on purchased transportation. The quarter, however, did include higher costs from wage and benefit increases necessary to compensate our workforce and meet customer requirements as we implemented a 3% wage and salary increase company-wide, effective on July first. This increase will add approximately $13 million in expense on an annualized basis. We anticipate the impact of this wage increase to be partially offset by further productivity and efficiency gains. While we have invested heavily in new tractors and have reduced the age of our fleet, maintenance costs were again impacted by more costly routine maintenance and higher parts costs. These factors increased maintenance expense by $1.3 million compared to the third quarter of 2012.
Depreciation and amortization ran $13.7 million during the quarter versus $12.3 million in the prior year quarter due to our significant capital expenditures for tractors and trailers, which are now in service. Year-to-date, revenues were $859 million, compared to $834 million in the prior year period. In the first nine months of 2013, operating income was $59.7 million, with net income of $35.6 million, compared to operating income of $48.7 million, with net income of $26.6 million in the prior year period. Earnings per share were $1.41, compared to $1.07 in the first nine months of 2012. Our effective tax rate was 36.3% for the third quarter of 2013.
For modeling purposes, we expect our effective tax rate to be approximately 37.5% for the full year of 2013. This rate excludes the impact of the tax credits recorded during the first quarter of 2013 that were retroactive to 2012. At September 30, 2013, total debt was $91.5 million, net of the company's $4.1 million cash balance. Net debt to total capital was 22.9%. This compares to total debt of $81.2 million and net debt to total capital of 24.5% at September 30, 2012. Net capital expenditures for the first nine months of 2013 were $97.7 million.
This compares to $79.3 million of net capital expenditures during the same period in 2012. The company is now planning net capital expenditures in 2013 of approximately $115 million. This level reflects the purchase of replacement tractors and trailers and the company's continued investment in technology. The increased spending in 2013 is primarily for purchase of replacement tractors, which will reduce the age of fleet and allow us to take advantage of pricing and tax benefits while gaining the operational efficiencies of the newer units. Now I'd like to turn the call back to Rick.
Richard O'Dell (CEO)
Thank you, Jim. The third quarter finished with improved margin and profit progress achieved through solid execution across Saia's network. I believe that our ongoing investments in technology and quality have set the stage for us to build on these demonstrated results. We remain committed to our core strategy of improving yield, enhancing customer satisfaction, building density, and reducing costs through engineered process improvements and continuous employee training. This strategy provides the base for long-term profitable growth and increases shareholder and customer value going forward. With these comments, we're now ready to answer your questions. Operator?
Operator (participant)
Thank you. Ladies and gentlemen, the question-and-answer session is conducted electronically. If you have a question, press the star key followed by the digit one on your touchtone phone. If you are using a speakerphone, be sure to disengage your mute function so that your signal will reach our equipment. Again, star one. We'll go first to Brad Delco with Stephens.
Brad Delco (Research Analyst)
Good morning, Rick. Good morning, Jim. How are you guys?
Richard O'Dell (CEO)
Morning, Brad.
James Darby (CFO)
Good morning, Brad.
Brad Delco (Research Analyst)
Rick, I wanted to talk a little bit about the investment you discussed on the sales resources. Can you give us some color as to, is that in any specific geography? And, you know, how long do you think it'll take for this investment to help, you know, drive some top line or some tonnage growth in the network?
Richard O'Dell (CEO)
Sure. Well, normally, your sales kind of lead time, if you add resources, is probably in the 90 days to six-month time period. So we would expect it to have certainly a positive impact as we go into 2014. And, you know, our process for looking at was really benchmarking what our current staffing looks like in certain regions compared to what the market potential is, as well as the number of sales resources that our competitors have in those markets to make sure we kind of aren't being outgunned. And, you know, it's fairly spread across our network, although it's probably wouldn't surprise you, right?
In some of the areas where we have less market penetration, which would be some of our more recently expanded geographies, if you can call 2006 recent, I guess, right?
Brad Delco (Research Analyst)
Yeah.
Richard O'Dell (CEO)
In some of those areas, we were, you know, we're probably outgunned a little bit more, you know, than we are in, let's, you know, say, Texas, where we've been as long and where we have such a significant share. So it's probably more in some of the expanded geographies than others. And then, you know, I think we're also adding to our management to kind of support those incremental sales resources so that we can make sure we get the benefit out of that.
Brad Delco (Research Analyst)
Gotcha. And then, Jim, this question may be for you, and it may pertain to kind of Rick's comments. But looking at the SG&A line, or salaries, wages, and benefits, you know, we expected some increases because of the wage increases you put forth. How much, in terms of dollars, was that year-over-year? And what kind of costs were there in the current quarter related to this, you know, additional management and/or sales resource investment?
James Darby (CFO)
In the third quarter, really not, not much of anything related to the new sales resources. That's really going to come on in fourth quarter. In terms of the wage increase that we gave, which was right at the beginning of the quarter, you know, we've said that it'll have about a twelve-month run rate of about $13 million. So I would suspect that we saw about $3 million worth of impact in the third quarter, year-over-year from that. We would have also had higher health plan costs, because healthcare costs just continue to go up, and it was in line with what we expected. But in that line, I think our health plan, year-over-year, went up about $2 million, $2.3 million.
Brad Delco (Research Analyst)
Okay, that's good color. And then finally, I know you guys don't give guidance. I hate leading a question with that, but the investments in the fleet, it sounds like it's mostly for replacement. You know, that should continue to drive some productivity on fuel economy. When you look out to 2014, you know, you guys identified $20 million of productivity savings this year. Is it out of the question to be thinking about you guys targeting something similar next year? And if so, you know, what areas, in addition to what you've targeted this year, are there for you guys to get more productivity?
Richard O'Dell (CEO)
Yeah, I guess, obviously, there's always opportunities to improve. And as you guys are aware, every year we, you know, we set some specific goals and some plans in place and work on those things specifically. I guess I would tell you, you know, obviously, we go through our planning process fairly early. We've been through the targets. You know, we had significant improvement in a couple of buckets, specifically on the fuel efficiency and the linehaul expense this year, which had material contributions and, you know, to, to allow us to kind of hit those $20 million numbers. I guess, what I would tell you is, the initiatives will be a little bit more spread out next year across some different areas, and I don't have as many, you know, large buckets like that, so it, it probably would be less than that.
But it, you know, wouldn't be less than $10 million, probably more in the $10-$15 million range for improvement opportunities. And what I would tell you, I think, you know, as we've approached this, you know, sub-93 operating ratio, to be honest with you, I mean, I didn't really want to grow business at a 95 OR because the return on investment, return on capital, you know, didn't make sense, right? But you start getting down around where we're operating today, and we have double-digit after-tax return on capital, and we're interested in growing the business for the right opportunities. And I think you'll see, going forward, our earnings growth will come from a combination of margin improvement and top-line revenue growth, and, you know, that's kind of what we're focused on as we head into next year.
Brad Delco (Research Analyst)
Rick, that's great color. Appreciate the time, guys, and I'll get back in queue.
Richard O'Dell (CEO)
Thanks, Brad.
Operator (participant)
We'll go next to Jason Seidel with Cowen and Company.
Jason Seidl (Managing Director)
Hey, Rick. Hey, Jim. How are you guys doing this morning?
Richard O'Dell (CEO)
Good morning, Jason.
Jason Seidl (Managing Director)
Just a quick question for you. It's, I guess, a bigger picture one, stepping back. You know, the LTL industry has maintained some terrific pricing discipline in what I would consider sort of a lackluster economic environment. Do you see anything changing that as more people start improving their margins like you do and trying to grow their business, trying to grow their fleet? I guess what I'm asking is, what gives you the confidence that the industry can maintain its discipline heading into 2014 and beyond?
Richard O'Dell (CEO)
...Well, I mean, while the returns have improved, I mean, they're not fantastic or anything, right? And I think you have to look at how much new equipment and technology and some of the requirements we have in our industry cost, and, you know, it just, it doesn't make sense to buy business. I think that we've seen that that's been experienced. And, you know, to be honest with you, I mean, I had, as I said on the last call, I expected our tonnage to turn positive this quarter, and we had one positive month and two negative months to be basically flat to slightly negative for the quarter, right? So I think the market didn't quite develop quite as...
You know, we're maintaining our pricing discipline and some of the most, I would tell you, some of the most price-sensitive accounts that are very immediate in terms of price and volume, for instance, the transactional 3PL. I mean, we're down with them because we took modest price increases, and, you know, that business is transactional, and, you know, we didn't. We lost some share in a market where those guys are taking some share, right? So it's just, to me, it's the right thing to do, and you just have to be disciplined, you know, and be confident in your ability to manage costs and manage as you go forward at the same time.
I mean, I'm confident there are opportunities for us to, you know, to gain share with our value proposition, particularly in some of the markets where we don't have a higher, that high of a market penetration.
Jason Seidl (Managing Director)
Okay. Now, in terms of the business that you do with some of the third-party brokers, what percent of that business is it of yours right now? And sort of, you know, how do you view that going into the future?
Richard O'Dell (CEO)
I mean, obviously, it's a growing trend in the industry. It has been, you know, it's here to stay. You know, you just sort of have to view it as, here's a group of people that are rolling up small accounts into kind of more national account pricing, and you just have to maintain your pricing discipline with it so that, you know, the business that you get, it works. And so you do a lot of analysis, do granular analysis on the business that you're getting and how it operates and what you're doing. And, you know, it's kind of how you have to manage that segment of your business.
Today, for us, that's probably about 20% of our business, and some of that is probably as much as 25%, if you consider some of the 3PLs that do more customer-specific pricing. So, you know, they may be negotiating and paying the bill, but they're not, you know, they're not reselling your price. They're putting your business out for bid, right? Facilitating a bid and a payment process, so.
Jason Seidl (Managing Director)
Do you see that expanding, Rick, or you think that's going to hover right around that 20% level?
Richard O'Dell (CEO)
Depends how rational the pricing is with that, right?
Jason Seidl (Managing Director)
Okay. Talk to me.
Richard O'Dell (CEO)
I mean, if the pricing-
Jason Seidl (Managing Director)
Talk to me a little bit about-
Richard O'Dell (CEO)
I mean, if the business operates well, then we're certainly interested in growing that segment. If cutting my rates were a requirement to grow 3PL business, you know, I don't have—there's not enough margin in that for me to be able to do that, right? So if the 3PLs can grow that business at rates that produce well for me, then I'm interested in partnering with them and growing that business. If they require me to lose money on it for them to make money on it and grow, then I'm not interested in participating.
Jason Seidl (Managing Director)
All right, that makes sense. Talk to me about your own base pricing for your accounts. What are you guys signing contractual business at here in, as we sit here in 4Q?
Richard O'Dell (CEO)
It's in the 3%-4% range, probably a little bit closer to the 3. You know, we were up 3.8% in the quarter. Fuel was actually down a little bit on a comparative percentage basis, right? So we were up a little over 4% in yield. And with us increasing length of haul and a little bit of a decline in weight per shipment, our yield kind of adjusted for mix is up a little over 3%. And you know, that's pretty similar to what we're seeing from a contract renewal standpoint.
So, you know, it seems to be continuing to be a reasonable market, and obviously, I think that's one reason, too, why I think we have a good opportunity with a lot of our business mix management and revenue management and adjusting accounts to where they operate fairly well. Now, there's opportunity for us to stay in a fairly static environment with our existing customer base, which should minimize churn, and the investments in sales resources, sales and marketing resources that we're working on should allow us to generate some positive tonnage comps.
Jason Seidl (Managing Director)
Okay, great. One quick question for Jim, and I'll turn it over to the next guy here. Jim, obviously, your net capital spending, you know, it's the most you've had in your company's history. What does that tell us for 2014? I'm assuming at least directionally, probably down?
James Darby (CFO)
That's correct, Jason. We're really pulling forward some of our tractor purchases from 2014 into the fourth quarter of 2013. So as we float that up by about $20 million, you would expect overall... Now, we haven't announced 2014 CapEx yet, but you would expect it to go down because we're front-loading it into 2013.
Jason Seidl (Managing Director)
So think of it-
Richard O'Dell (CEO)
I was gonna say, the way I look at that, I mean, the units are gonna come in in December instead of January and February, really. And that's what our production slots are coming into the organization. So it's not gonna have a big impact on the fourth quarter from a depreciation standpoint. Have some impact in the first quarter, and then, obviously, we get off to a good jump start from a fuel efficiency perspective, as well as should have some contribution to maintenance savings... in 2014, right? Really, just an acceleration by a month to make sure we get the tax benefits as well as to get some of the other, savings and efficiency opportunities we're seeing from the new units.
Jason Seidl (Managing Director)
Okay. Makes sense to me. Gentlemen, thank you so much for the time. I really appreciate it.
Richard O'Dell (CEO)
Thanks, Jason.
Operator (participant)
We'll take our next question from William Greene with Morgan Stanley.
William Greene (Managing Director)
Hi there. Good morning, guys.
Richard O'Dell (CEO)
Good morning.
William Greene (Managing Director)
You know, Rick and Jim, we've had some pretty big improvements given all of the efficiency gains you've been able to get. Can you talk about some of the puts and takes in fourth quarter as we look at the normal sequential change that we have to keep in mind for modeling purposes? I just don't know how to think about some of the sequential change in margin going to the fourth quarter.
Richard O'Dell (CEO)
Yeah, this is Rick. So third to fourth, historically, is about two operating points worse, you know, particularly because the work days, the holidays, and then December is not a very good month from a volume perspective. What I would say is, given the investment in incremental sales resources that we're making, as well as some self-insurance, unfavorable volatility that we've experienced, it'd probably be a little bit worse than that this year.
William Greene (Managing Director)
Okay, fair enough. As a second question, I'm curious if you can talk a little bit longer term about where you kind of go. Obviously, you've mentioned when you get to the 93 OR, you'll look at potential kind of expansionary plans, whether that's building new terminals or maybe even an acquisition. But is that required for you to continue to improve the margin, or do you feel like the plan you're on right now is enough that this just kind of keeps going along until you see the right opportunity? How do you think about kind of measuring those two and playing them off one another?
Richard O'Dell (CEO)
Yeah, sure, I mean, that is the way that we look at it. In other words, we don't think we have to expand our footprint necessarily to continue to drive margin improvement. We continue to see opportunities, you know, within our existing geography. And, you know, again, the investment in sales resources is one way to focus that, as well as some of the, you know, continued engineered process improvements that we've targeted. But, you know, it's not mutually exclusive for us to look at opportunities. And, you know, we looked at a couple of opportunities this past quarter and decided to pass on both of those. Again, we're not going to reach for something that doesn't make sense. I think you have to have the right opportunity, and I would also comment that the timing can be important on that, too, right?
In terms of, you don't want to do that right ahead of a downturn or when the market's real sluggish. If you get some rising tide in the economy, then those things kind of tend to go better, based on my historical experience. So, you know, we're not in a rush to do it. We'll do careful analysis and make the right decisions. And, you know, I think we have that both in our LTL segment, and then, as I think I've commented in the past, I mean, some of these non-asset related businesses, if you buy them small and pay a reasonable multiple and are able to bring some sales and branding and structure to those to facilitate some growth, can provide some good margins over a period of time as well.
You know, both of those things are on the, certainly on the table for the future.
William Greene (Managing Director)
Yeah. Just as a quick follow-up, though, when you do some benchmarking against some of the other carriers, do you feel like you can't get to industry leading without a much bigger footprint, or do you feel like that's not really a constraint?
Richard O'Dell (CEO)
I don't think it's necessarily a constraint. I mean, if one thing you have, just from an LTL network management, is you always have an end of your network, and generally, just because the middle has more flows in both ways, et cetera, you know, if your footprint's a little bit bigger, you have more middle and fewer ends. So I mean, from that perspective, it could potentially have some difference. But, you know, my analysis to the benchmark performer out there shows that we have opportunities that aren't necessarily related to that constraint, right? In other words, if there's an 8 OR point differential, the network isn't 8 OR points. So there's still plenty of opportunities for us to execute better from a market share, operations, and, you know, business mix management, revenue management objective as well.
William Greene (Managing Director)
That's great. Very helpful. Thank you for the time.
Richard O'Dell (CEO)
All right. Thanks, Bill.
Operator (participant)
We'll take our next question from Scott Group with Wolfe Research.
Scott Group (Managing Director)
Hey, thanks. Morning, guys.
Richard O'Dell (CEO)
Good morning, Scott.
Scott Group (Managing Director)
I missed the number. What % are you growing the sales force?
Richard O'Dell (CEO)
Ten percent.
Scott Group (Managing Director)
Should we think about volume or tonnage on a linear basis with that? Is that a fair way to think about it in terms of what you're targeting?
Richard O'Dell (CEO)
Yeah, I don't think so. Some territories are split, et cetera. So, I mean, I think we should generate some growth from it, but I don't think—I don't necessarily think it'll be linear.
Scott Group (Managing Director)
Okay. How do you think about the incremental margin going forward as we have a bit more of a balance between tonnage and yield and productivity now?
Richard O'Dell (CEO)
Sure. Yeah, the operation is executing very well, but I think, there's some excess capacity in our network, and I think that there's some further improvements in our operational execution that, you know, would benefit from some incremental tonnage. So I think you know, margins on incremental business could be in the 25% range, you know, with a fixed cost network that we have, 25 somewhere between 20 and 30. So let's just say 25 for, for those purposes. So if you could grow tonnage 4%, we could improve an OR point there, and then, you know, you got that, you have that as well as, you know, what, what happens with yield and your cost savings offsets and inflationary pressure.
As you know, in the network management business that we're in, and business mix management, there's a lot of moving parts, but I think that's one way to kind of look at the tonnage growth opportunities.
Scott Group (Managing Director)
Right. So, so if, if we add up the pieces of it, if you can grow tonnage 4% and get a point of OR there and get, still get a little bit of, of, call it, keep that 3% pricing and get some productivity, it's reasonable to be thinking about 150 plus basis points of margin next year?
Richard O'Dell (CEO)
Yeah, I really don't want, don't wanna put a number on the table at this point that way. And, you know, I would say, you know, I don't think we're gonna go from our current flattish type tonnage to 4% in a, you know, between now and January, right? It's gonna be a gradual curve and step up, but I believe there are opportunities that we can identify and achieve over time that are, you know, that are greater than one operating point, right? Let's just say that. I mean, if you look at us versus the benchmark, there's 8 OR points target, so I don't... We don't necessarily wanna do it at 0.8 OR points at a time. That would be unfulfilling, in my view, anyway.
Scott Group (Managing Director)
Yeah. I hear you. That, that's great. Just, just last thing, how, how much growth do you think you can handle before we need to start thinking about growth, CapEx, excluding acquisitions or, or regional expansion?
Richard O'Dell (CEO)
You know, probably 3% or so.
Scott Group (Managing Director)
Okay, great.
Richard O'Dell (CEO)
Somewhere in the 3%-5%. Then we'd have... When you say, when I say growth cap, I'm talking about revenue equipment, and we've got plenty of capacity in our network, right? So-
Scott Group (Managing Director)
Right.
Richard O'Dell (CEO)
You know, and we would expect if we were growing at 4%, to have some pretty significant production improvements in both our linehaul and our P&D network that wouldn't require one-to-one anyway, right?
Scott Group (Managing Director)
Yep.
Richard O'Dell (CEO)
So if you're growing, let's just say, for argument's sake, you were growing at 5%, you might need somewhere in the 2%-3% more equipment and, you know, and get 3% productivity improvement, let's say, right?
Scott Group (Managing Director)
Yep, that makes sense. All right. Thanks a lot, guys. Appreciate it.
Richard O'Dell (CEO)
Bye.
James Darby (CFO)
Thanks, Scott.
Operator (participant)
We'll take our next question from David Ross with Stifel.
David Ross (Managing Director)
Morning, gentlemen.
Richard O'Dell (CEO)
Morning, David.
David Ross (Managing Director)
Rick, looking at the length of haul, hasn't changed much sequentially, essentially flat from 2Q, but certainly a step up over last year. Can you talk about, you know, kind of what's going on with the customer mix that might have driven that length of haul up, from the 720s to the 740s?
Richard O'Dell (CEO)
Yeah, I mean, some of it is, I would call it kind of strategic on our part, right? I mean, you have some very good... In some of our regions, we have some very good regional players that are focused on that regional business with a lot of density and a good cost structure, and they tend to wanna handle that business at rates that don't appear to be compensatory to us, with our cost structure and network. So we've elected, in some cases, to market outside of that more regional business, and it's led to some, you know, to leverage our network and handle business that operates well. And we've seen, you know, some migration over time of our length of haul going up, and I don't think there's anything wrong with that. I think it's, as long as it operates well, it's fine.
David Ross (Managing Director)
As long as the operating ratio is going in the right direction.
Richard O'Dell (CEO)
Right.
David Ross (Managing Director)
Um-
Richard O'Dell (CEO)
I mean, the right, you mean you like to have both, right? I mean, I really don't care what the length of haul is, as long as the business operates well and revenue per bill is compensatory and, you know, we're kind of over time building some tonnage and contributing to our fixed cost network with, with good, reasonable compensation, then it, it makes sense for us.
David Ross (Managing Director)
Exactly. But it wasn't a conscious effort to grow the kind of synergy business or interregional lanes that you talked about a few years ago?
Richard O'Dell (CEO)
Probably was a little bit. Actually, that's one of the ways we're building density in those geographies. I mean, it, it is a conscious thing. And, you know, we, we're showing our sales organization, you know, here's where, here's where lanes operate well for us, and this, we can, you can win we can price, you know, aggressively and provide a good value proposition in these lanes. And if you're coming up against XYZ regional carrier who's doing dirt cheap pricing, then sell outside of their coverage area, right? So I mean, I don't know if you call that strategic or not, but smart, right?
David Ross (Managing Director)
Yeah, no need, no need to compete on the pallet rates, certainly.
Richard O'Dell (CEO)
Yeah, right.
David Ross (Managing Director)
On the tonnage trend side, you know, Jim, can you just talk about how we progressed through the quarter, you know, July, August, September, and then where we are October year to date?
James Darby (CFO)
Sure, Dave. And this is LTL tonnage, and this is through the quarter. And on a per day basis for the quarter, we were down 0.1% versus the third quarter of last year. As we went through the quarter, in July, we were down 0.4%. In August, we were up 1.1%, and then in September, we were disappointed, and we were actually down 1.2% on LTL tonnage versus September a year ago. So far, month to date in October, we're up 0.3%.
David Ross (Managing Director)
... It'll be back in positive territory?
Richard O'Dell (CEO)
Yes.
David Ross (Managing Director)
And then any comment on, you know, regional strength or industry strength throughout your network in the quarter?
Richard O'Dell (CEO)
Kind of the Upper Midwest was our strongest in revenue and tonnage comparison, so that was kind of the strongest area we had. You know, industry-wise, we have such a diverse customer base, wouldn't necessarily comment on any one industry other than I would tell you we're actually down a little bit, as I'd commented, with some of the blanket 3PLs.
David Ross (Managing Director)
And then on the, you know, customer inventory levels, you know, do they seem to be running in line or any of them getting too lean yet from your discussions?
Richard O'Dell (CEO)
We probably don't have any commentary that would be that meaningful for that.
David Ross (Managing Director)
Excellent. Thank you very much.
Richard O'Dell (CEO)
All right, thanks.
James Darby (CFO)
Thanks, Dave.
Operator (participant)
We'll take our next question from Tom Albrecht with BB&T.
Thomas Albrecht (Managing Director)
Hey, guys. Good morning.
Richard O'Dell (CEO)
Morning, Tom.
Thomas Albrecht (Managing Director)
Wanted to get a couple of numerical figures first and then ask a question beyond that. So Rick, what was your load factor in the quarter, and what was that approximately a year ago?
Richard O'Dell (CEO)
We commented it was up 4.4%. It was in the, this mid-20s, right?
Thomas Albrecht (Managing Director)
Okay.
Richard O'Dell (CEO)
We're up over 1,000 pounds.
Thomas Albrecht (Managing Director)
All right. Yeah, I missed the first 10 minutes. I had a call run over from 10 o'clock. And cargo claims, did you disclose that?
Richard O'Dell (CEO)
We didn't. We said it was improved, and it was. We've been sub 1% for quite some time now, probably five, six quarters in a row, and we were at 0.85.
Thomas Albrecht (Managing Director)
Okay. So that's really probably another opportunity over 2-3 years to get down maybe 30+ basis points, I would think.
Richard O'Dell (CEO)
Yeah.
Thomas Albrecht (Managing Director)
Um-
Richard O'Dell (CEO)
Here, here would be my comment with that: Just, you know, there's a—as you, as you get a higher length of haul and a more, and a higher revenue per shipment, you know, you basically handle a shipment almost the same number of times, whether it goes 750 miles or 1,000 miles.
Thomas Albrecht (Managing Director)
Right.
Richard O'Dell (CEO)
But your revenue per shipment is substantially higher. So, you know, if you, you can have the same damage rate, right? But if your revenue per bill is lower, your cargo claims ratio is gonna be a little bit higher. But part of that, you know, some of the people that report the lowest cargo claims ratios tend to have some of the higher, length, average length of hauls. So what I would tell you is, while I certainly believe there are opportunities for that, unless our length of haul materially goes up, you know, it seems like it'd be hard for us to get to 0.4 or 0.5, right? Now, we think there are clearly reasons, opportunities for improvement, but I would, I would, I would say, given...
If you compare our cargo claims ratio to other companies that have a 740-mile length of haul, I would think we might be the benchmark.
Thomas Albrecht (Managing Director)
I think that's a fair statement, yeah. And then on the sales growth, that's all outside sales, and would, so 10% would be, what? 25 people? Are those correct assumptions?
Richard O'Dell (CEO)
That's about right.
Thomas Albrecht (Managing Director)
All right. You'll continue to grow the inside sales effort, or is that staffed at a level where you don't need to add to it right now?
Richard O'Dell (CEO)
We're growing it a little bit, the combination of the two. So if you look at the total headcount growth, it's probably in the 30 range, you know. And again, there are some management, sales, field sales reps, as well as some inside sales that we have in there.
Thomas Albrecht (Managing Director)
Okay. And then maybe this was in the opening remarks, but you alluded to on the change from Q3 to Q4 in the OR, one of the negatives this year is the unfavorable development of insurance claims. So, was that new accidents or just older claims adversely developing, primarily?
Richard O'Dell (CEO)
You're talking about 3Q to 4Q comment?
Thomas Albrecht (Managing Director)
Well, yeah, it seemed like you were-
Richard O'Dell (CEO)
OR
Thomas Albrecht (Managing Director)
... implying that some of the insurance was gonna continue to be a drag on in the Q4.
Richard O'Dell (CEO)
Yeah. What we said is we've, we've asked on the, on the unfavorable side, we've had a little bit of accident severity.
Thomas Albrecht (Managing Director)
Okay.
Richard O'Dell (CEO)
So-
Thomas Albrecht (Managing Director)
More recently, you're talking about?
Richard O'Dell (CEO)
Correct.
Thomas Albrecht (Managing Director)
Correct.
Richard O'Dell (CEO)
In other words, in the first month of the quarter.
Thomas Albrecht (Managing Director)
Yep.
Richard O'Dell (CEO)
So, you know, but we actually, year to date, we're very favorable. We expect to have a good year overall, but we've already had a little bit of severity, not a catastrophic type case, but some severity in the quarter that will have some impact on our self-insurance, so.
Thomas Albrecht (Managing Director)
Okay, that, I mean, that's helpful.
Richard O'Dell (CEO)
Other things are normal, probably just a little bit worse.
Thomas Albrecht (Managing Director)
And then, two last questions. Jim, depreciation, will it grow from the third quarter level?
James Darby (CFO)
Yes, it will. And overall, we've been kind of all over the place with our projection for the year because initially, our units, our tractors came in a little bit slower in the second and third quarter.
Thomas Albrecht (Managing Director)
Yep.
James Darby (CFO)
And now, with the additional units we're buying in fourth quarter, Tom, I think we're gonna hit the year at about a total close to $52 million for depreciation.
Thomas Albrecht (Managing Director)
Okay, that's helpful. And then lastly, Rick, back to you. Always funny what you forget in the middle of an earnings season, but with EOBRs, you know, a lot of the truckload guys are advanced. I know you've talked about that. Can you refresh my memory? Are you fully installed? And if you are, how much of a productivity tool has that become, especially for things like driver behavior?
Richard O'Dell (CEO)
Yeah, two things. Yeah, we're fully installed with electronic onboard devices. It's been very effective in assisting us with fuel management, since we have, you know, miles per gallon by drive, by unit, and even within the unit, by driver, like, while they're in there, right? We're measuring progressive shifting. And then there's a lot of recording technology in there in terms of, examples would be hard braking incidents and fast accelerations and things like that, that would indicate, you know, behavior that would not really support defensive driving. You also are seeing things of following too close.
We actually have piloted some technology that records if you have a hard braking incident, it takes the video of the activity that took place in front of you, and it'll email that to us so we can review it and see whether our driver was doing inappropriate driving techniques, or if, obviously, if someone pulled in front of you and you had to make an evasive maneuver and back off quickly, right, then that's kind of not your fault type scenario. So we've reviewed that, and actually, we're installing, we're gonna install those units on retrofit some of our older units that are capable of that, and install those on all the new units that we're using.
Actually, it's interesting, too, because our drivers have been very supportive of that because they feel, you know, in many scenarios, obviously, they're doing defensive driving, and you can actually get a recording of the inappropriate behavior of the other driver. So the tools like that have been very, very good for us.
Thomas Albrecht (Managing Director)
That's good. Great to hear. Thank you again for all of that.
Richard O'Dell (CEO)
Sure.
Operator (participant)
We'll take our next question from Art Hatfield with Raymond James.
Derek Rabe (Senior Associate Analyst)
Good morning. This is Derek Rabe for Art.
Richard O'Dell (CEO)
Morning, Derek.
Derek Rabe (Senior Associate Analyst)
Morning. I came on to the call a little bit late, so I do apologize if this was asked and answered, pretty much all my questions have been. But, I wanted to look at purchased transportation. You know, we didn't see that come down sequentially as much as we expected. And I realize, you know, some of that's due to just growth across certain lanes. But any additional color that you could provide on maybe, linehaul optimization, progress there, and then, you know, how quickly do you see getting above, load average, north of 29? And then finally, how much rail are you currently using?
James Darby (CFO)
Well, the purchased transportation, Derek, if you go back and look at what we were accomplishing a year ago, we were showing year-over-year improvement, reducing it by about 22% quarter-over-quarter. So we think we've hit kind of a run rate, which is reasonable, so that's why when you look at it, third versus third, it's very close. And, you know, as far as managing it well, we've actually reduced our purchased transportation miles slightly in the third quarter of this year, and the reason it ends up balancing out is we have a little bit of increase in the cost per mile in purchased transportation.
Derek Rabe (Senior Associate Analyst)
Okay.
Richard O'Dell (CEO)
Yeah, so-
Derek Rabe (Senior Associate Analyst)
And any color on the rail?
Richard O'Dell (CEO)
So just a brief comment, right, is to reinforce that we actually ran between purchased transportation and internal miles, we ran 3.9% less miles on basically flat tonnage. Right? So we had some good efficiency in our linehaul network. The PT that we're using is primarily rail, as well as effective, what we call, one-way tow-aways and headhaul lanes, which would save the empty miles. So again, we've made a lot of optimization in that. We always continue to look for opportunities and reoptimize your network, but, you know, given a kind of a flat tonnage environment, I think we did a good job of managing the linehaul expense. The PT spend that we have more than-
Derek Rabe (Senior Associate Analyst)
No, that's, that's perfect color. I'm sorry?
Richard O'Dell (CEO)
So, and then just the other comment, the other question you had, I believe, was, you know, what do we kind of expect to get over 29? And I guess what I would tell you is, you know, part of that, obviously, it depends on, you know, where you go grow, right? Because in other words, out of our breakbulk operations, as you would expect, you know, we're way north of 30,000 pounds out of breakbulks. But in some of our smaller terminals, you know, we're, you know, we have obviously much lower load average. So if we grow tonnage in the small terminals, then that kind of rides for free to the breaks, and then the breaks would come at a higher average as we rehandle it and shipped it on, unless it were 100% backhaul.
So again, it's a moving dynamic. I guess what I would tell you is, you know, if we can grow tonnage in the 3%-4% range, we would expect to see some increase, further increase in our load average and linehaul efficiency. And, you know, we wouldn't grow line miles at the same, you know, correlate with the tonnage. So that's kind of our big opportunity, is to, you know, grow 3%-4% more tonnage and, you know, put another 500-600 pound average on the trailer, right?
Derek Rabe (Senior Associate Analyst)
Yeah. No, that, that's great color. Appreciate the time, guys.
Richard O'Dell (CEO)
All right, thanks.
James Darby (CFO)
Thanks.
Operator (participant)
We'll take our next question from Robert Dunn with Sidoti.
Robert Dunn (Senior Equity Research Analyst)
Good morning.
Richard O'Dell (CEO)
Good morning.
James Darby (CFO)
Good morning.
Robert Dunn (Senior Equity Research Analyst)
Good, I was wondering, did you mention what the revenue at Robart was for the quarter?
James Darby (CFO)
We didn't. About $3 million or so, I think... significant. We book a net of the purchased transportation for them.
Robert Dunn (Senior Equity Research Analyst)
Was that up for about a million last year?
James Darby (CFO)
I think it's up slightly. It's in line with what we had thought for the year.
Richard O'Dell (CEO)
It's up about 30%. What I would tell you is, we think there are opportunities to grow that further. And, you know, as we look at next year, the margins are good on that business. As we approach next year, we would target some incremental growth from that business segment as well. But it contributed kind of in line with our expectations from an earnings standpoint. I would, I think we would have targeted some higher growth objectives in that segment as well.
Robert Dunn (Senior Equity Research Analyst)
Okay. On the equipment side, what's the average age of the tractors now? And is there a target age that you're going to try to get to with the CapEx programs?
James Darby (CFO)
Our tractor fleet is currently at 4.6 years. And again, what we look at is, we like to run our linehaul miles with units that are less than five years old, and we're pretty much there at this point. And the additional units we're buying in the fourth quarter, really, as we talked a little bit, is, that's really front-ending the spend that we would have in 2014 to take advantage of the efficiencies, the fuel, and then also get some tax benefits from that.
Robert Dunn (Senior Equity Research Analyst)
Okay, great. And lastly, there was an article in the Journal today about natural gas engines and some increased testing amongst some of the truckers. Do you have any thoughts on the attractiveness and/or the pace of adoption of that kind of technology?
Richard O'Dell (CEO)
We're kind of at the early stages. Obviously, we're following what's going on in the industry. We have not made any acquisitions at this point in time. You know, with kind of current spreads, the technology looks fairly attractive, but it's a long payback and a huge upfront capital. So, you know, you're not sure the spreads will stay where they are today. Today, for a variety of reasons, it doesn't appear all that attractive. And if they can kind of get the cost down from the, which comes from the fueling systems themselves, then it would become increasingly attractive. But it's, it's certainly something that we're watching, and we would expect in 2014 to get some experience with a, with a group of those tractors as well.
But not a big conversion, but for us to kind of get in the game, get some experience.
Robert Dunn (Senior Equity Research Analyst)
Yeah. So, you know, I mean, maybe, you know, a 5- or 10-year type of time horizon, not a 1- or 3-year time horizon.
Richard O'Dell (CEO)
Yeah, and it, well, let me just give you an example. One thing that kind of makes sense, right, is if you know your fuel savings are significant in the, at today's spreads, then we could buy a unit and put them in a line, we call it a line share opportunity, where it was running, you know, 500 miles in, one 12-hour period and 600 miles in the other 12-hour period, right? And you're running 1,100 miles a day. So then you could get you could get your payback faster, right? Whereas our average unit might only run 500 miles a day, then it puts you at a long time payback for the fuel savings on the capital cost. So there are some opportunities that, especially for us, may, may, may work in certain situations.
You know, we're going to evaluate that and get some experience with the technology this year.
Robert Dunn (Senior Equity Research Analyst)
Very interesting. Thanks a lot.
Richard O'Dell (CEO)
All right. Thanks.
James Darby (CFO)
Thanks, Rob.
Operator (participant)
Our next question is a follow-up from Jason Seidel with Cowen and Company.
Jason Seidl (Managing Director)
Hey, guys. Quickly, about the fourth quarter, working days in the quarter, how does it comp to last year?
James Darby (CFO)
Working days this year is 62. I don't recall the number from last year.
Jason Seidl (Managing Director)
Okay. And Jim, just another nitpicky modeling question. You said 37.5% for the full year for your tax rate, excluding some of the benefits that you guys saw in 1Q. In dollar amount, what was the tax benefit in 1Q?
James Darby (CFO)
The tax benefit of the retroactive piece that was, as you recall, we had to book it in first quarter of this year, but the retroactive piece for last year was about $1 million. And so the-
Jason Seidl (Managing Director)
About 1 million.
James Darby (CFO)
5 excludes that $1 million. But the alternative fuel tax credits are also effective for this year, and that is factored in the 37.5. But the rest-
Jason Seidl (Managing Director)
Okay, so just back 1 million on calculating it.
James Darby (CFO)
Okay.
Jason Seidl (Managing Director)
Fantastic. I appreciate it, guys. Thank you.
James Darby (CFO)
Thanks.
Richard O'Dell (CEO)
Thanks.
Operator (participant)
Mr. O'Dell, with no other questions in queue at this time, I'll turn it back to you for closing remarks.
Richard O'Dell (CEO)
Sure. Thank you for your continued interest in Saia. We appreciate it.