Saia - Q3 2015
October 28, 2015
Transcript
Operator (participant)
Good day, everyone, and welcome to the Saia, Inc. Third Quarter 2015 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Doug Col. Please go ahead.
Douglas Col (Head of Investor Relations)
Thank you, Anne. Welcome to Saia's Third Quarter 2015 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Fritz Holzgrefe, our 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'd like to turn the call over to Rick O'Dell.
Richard O'Dell (CEO)
Well, good morning, and thank you for joining us. This morning, we released our third quarter results, and I'm disappointed that we were not able to build on the four quarters of record earnings that preceded this quarter. Although this was our 21st consecutive quarter of year-over-year LTL yield improvement, it was not enough to overcome the weak tonnage trends felt throughout the quarter. Our previously announced market-based wage increase was effective July 1st and provided a significant cost headwind into weakening freight trends in what's normally a strong seasonal period. These factors, along with higher costs related to self-insurance, were largely responsible for our 27% year-over-year decline in operating income to $19.8 million.
A few comparisons of the third quarter of this year's results compared to last year include: revenue decreased by 4.6% to $317 million, as LTL tonnage fell 6.7%. LTL revenue per hundredweight increased by 2.2%, despite the negative impact of lower year-over-year fuel surcharges. Operating ratio deteriorated by 190 basis points to 93.7. Our diluted earnings per share of $0.46 compares to $0.64 in the third quarter of last year. LTL tonnage worsened in each month of the quarter against difficult year-over-year comparisons. We've remained diligent in our pricing stance, but I will say that it's a bit more competitive out there, given current industry volume. I'm going to go ahead and turn the call over to Fritz Holzgrefe to review our third quarter results in more detail. Fritz?
Fritz Holzgrefe (EVP and CFO)
Thanks, Rick, and good morning, everyone. As Rick mentioned, the third quarter of 2015 diluted earnings per share were $0.46. Total revenue of $317 million compares to $333 million in the third quarter last year. Operating income of $19.8 million compares to operating income of $27.1 million in last year's third quarter. Both periods included 64 workdays. Third quarter LTL yield rose 2.2%, reflecting the positive impact of our continued pricing actions, partially offset by lower fuel surcharge contribution. Next, I'll mention a few key expense items and how they impacted third quarter results. Salaries, wages, and benefits rose 6.8% to $177.6 million in the third quarter. This figure includes a general wage increase implemented July 1st, which averaged 4% across our employee base.
Within the salary, wages, and benefits expense line, we also experienced a 10% year-over-year increase in healthcare and pharmacy costs, which we self-insure. Purchased transportation declined 30% to $19.3 million, or 6.1% of revenue versus 8.3% of revenue last year. Purchased transportation as a percentage of total line haul miles were 10.7% in the quarter, compared to 14.7% in the third quarter last year. This comparison was affected by lower volumes in the quarter and better management of our own capacity. Also, remember that as we decrease our use of purchased transportation in a given period, there's an increase to the salary, wages, and benefits line as we run those miles with our own equipment and employees.
Depreciation and amortization of $16.8 million compares to $15.3 million last year due to continued investments in tractors and trailers. As our tractor fleet age continues to drop, we benefit from enhanced fuel efficiency. Fuel mileage improved by 1.5% to 6.9 miles per gallon in the quarter. Claims and insurance expense was $9.1 million in the quarter, compared to $7 million in the third quarter last year, or 2.9% of revenue, compared to 2.1% of revenue a year ago. Expense related to accident severity was a negative in the quarter, while cargo claims improved by 22% year-over-year. Our cargo claims ratio of 0.86% compared favorably to 1.06% in the third quarter last year.
Our effective tax rate was 37.2% for the third quarter of 2015, and we believe that 37.5 is a reasonable run rate to use for the remainder of the year. At September 30, 2015, total debt was $81.2 million. Net debt to total capital was 15.6%. This compares to the total debt of $83 million and net debt to capital of 17.7% at December 31, 2014. Net capital expenditures in the first nine months of the year were $92.1 million, including equipment acquired with capital leases and excluding the February 2015 purchase of LinkEx. This compares to $85.5 million of net capital expenditures in the first nine months of 2014.
Full year 2015 net capital expenditures are forecasted to be approximately $125 million, including some additional equipment replacement and ongoing real estate projects during the remainder of the year. Now I'd like to turn the call back to Rick.
Richard O'Dell (CEO)
...Thank you, Fritz. To summarize the quarter, I'd say that we're obviously dissatisfied with the financial results, but we are not swayed from our belief that success will be measured over the long term, and our improved value proposition and pricing hold great potential. In the quarter, Saia associates achieved our goal of 98% on-time delivery and also successfully lowered our cargo claims ratio. Our focus on pricing may have somewhat exacerbated the decline that we saw in volumes in the short term, but pricing for improved profitability and to reflect our value proposition will remain the cornerstone of our model at Saia. Seasonal volumes did not develop as expected, and we've taken action to rightsize our labor force to match volume levels, which are currently running 3%-4% below what we had expected with normal seasonality just 90 days ago.
We're committed to proactively managing all costs across our network and in our administrative offices in order to maximize margins in a softer freight environment. Though we're disappointed with the results, we'll not stray from our strategy that which requires that we appropriately price our service and value proposition at a rate which provides an adequate return, and what remains an inflationary cost environment. With these comments, we're ready to answer your questions. Operator?
Operator (participant)
If you'd like to ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you have a question at this time, please press star one. We'll pause for a moment to assemble the queue. We'll go first to Tom Albrecht from BB&T Capital Markets.
Thomas Albrecht (Managing Director and Analyst)
Hey, guys. Sorry about that, caught me off guard there. So Rick, I wanted to kind of... Well, let me ask a factual question first. PT miles, what percentage of your miles did PT represent, and how did that compare a year ago?
Richard O'Dell (CEO)
Just a second. It's PT miles, total line haul miles were 10.7%, compared to 14.7% last year.
Thomas Albrecht (Managing Director and Analyst)
Okay. All right, and then, not, I guess, Rick, you know, when I look at salaries, wages, and benefits, the $177 million, obviously, you alluded to the fact that you're in the process of adjusting your workforce. That was up about $7 million sequentially. How quickly can you adjust? I mean, because you had given public updates on July and August tonnage, I'm guessing that September's tonnage was down close to 8%. How much of that SW&B is gonna be fixed because you did raise driver pay and did the sign-on bonuses versus flexibility on the docks and that?
Richard O'Dell (CEO)
You know, I don't know if you are on trucking boards and whatnot, but or you have someone who covers that type of stuff, but, you know, we did a-
Thomas Albrecht (Managing Director and Analyst)
I've looked at it, but not in the last week or so.
Richard O'Dell (CEO)
Yeah, we-
Thomas Albrecht (Managing Director and Analyst)
Go ahead.
Richard O'Dell (CEO)
We actually did a reduction in force to kind of make some corrections from a volume standpoint of what we're seeing today in a reduced outlook. It's approximately 4% of our workforce, and it was done, you know, performance-based. Obviously, we value our employees and quality drivers, but, you know, we had... It was probably over 90%, where, where we had some documented performance issues. So we've made some near-term adjustments, and, you know, in hindsight, we probably could've and should've made some adjustments a little bit sooner. But, you know, when things, you kind of hit a soft patch, I think, you know, the West Coast port thing was kind of booming out there for a little while, and then, you know, it kind of softened up.
At the same time, you know, things appeared to soften up a little bit across the rest of our network, and so we, you know, we probably took that action maybe a little bit later than we could've and could have managed things a little better through the quarter. We did give a larger increase than normal, you know, just to adjust the market. We're committed to investing in our employees and our market-based compensation. Yeah, I think we commented those increases were more in the 5% range versus kind of a 3%-3% historical. So, you know, it was a bigger cost headwind than we would normally see.
Thomas Albrecht (Managing Director and Analyst)
Right. So, you know, historically, your OR from Q3 to Q4 deteriorates, depending on how many years you look at, maybe 170-200 bps. But after what happened here, I don't know if that normal pattern would hold. I mean, it would seem like it could be less if you're getting on top, or maybe it holds because freight is just that much worse. How should we look at that?
Richard O'Dell (CEO)
Yeah, I think your assessment is probably right. I mean, we're going to manage our costs better. You know, our yields didn't step up as kind of linearly during the quarter as what we've been trending. So, you know, compared to kind of our expectations 90 days ago, you know, that was probably a little softer. You know, some of that just really depends on how many contracts you come up for renewals and which ones are, whether they need a material increase or not. So it's not always linear. You know, October's actually been a little bit better yield month for us, but volumes have actually stepped down again a little bit.
So I think your view, you know, kind of as we manage through it at this point in time, that probably history, which, I mean, I would say 150-200 basis points deterioration is probably in the ballpark, you know, as best as we can tell at this point.
Thomas Albrecht (Managing Director and Analyst)
... Okay. And then lastly, and I certainly have other questions, but I just ask one and then jump back in the queue for others. So I missed the first two or three minutes. Did you go through the monthly tons per day, July, August, September, October? I know you're on the record as 5.7 for July and 6.5 for August, but what about September, October?
Richard O'Dell (CEO)
So Tom, just to add, September would be—was tonnage was down 8% year-over-year. Shipments for that, for September was down 5.9%. And then if you look at October, it's, tonnage is down 8.5%, and shipments are down 7.7%. And this is all LTL.
Thomas Albrecht (Managing Director and Analyst)
Sure. And then do you have the shipments for July and August per day?
Richard O'Dell (CEO)
Sure. So, the July tonnage, this is LTL, minus 5.7% year-over-year. The related shipments were down 2.6%. Then August was minus 6.5% tonnage, and then the related shipments down 4.0%.
Thomas Albrecht (Managing Director and Analyst)
Okay, thank you. I'll jump back in the queue.
Richard O'Dell (CEO)
Thanks, Tom.
Operator (participant)
We'll go next to Brad Delco with Stephens.
Brad Delco (Managing Director)
Morning, Rick. Morning, Fritz. How you doing?
Richard O'Dell (CEO)
Morning.
Brad Delco (Managing Director)
Rick, you made yeah, it was probably a bad question. I apologize.
Richard O'Dell (CEO)
No, no, it's okay.
Brad Delco (Managing Director)
You made a comment that I think people are probably gonna be pretty concerned about regarding the pricing environment is more competitive. Can you elaborate on that a little bit? It doesn't seem like margins in the industry are healthy enough for us to try to repeat what happened in 2009 or 2010. I just wanna make sure that we have a very clear understanding of kind of what that comment implied.
Richard O'Dell (CEO)
Yeah. I mean, first of all, I totally agree with kind of your return comment. I also, you know, think, you know, we're fighting some headwinds in our industry from a cost perspective. And, you know, the driver market, I think, continues to be tight, so I think that's gonna continue into the future. And, you know, I think it's very important that, you know, this granular pricing, you know, to make sure that customers and shipments are operating properly when your network, you know, remains the cornerstone. So, you know, we're gonna continue to stick and manage through that.
I guess I would just say, you know, we've seen a couple of what you might call early signs of people, you know, cutting some rates with 3PL for volumes, a couple of competitive bids that have come out with, you know, people pricing materially below where we would see things would work for us. You know, they're a little concerning that everyone doesn't necessarily share that philosophy. I would tell you, you know, for us, during the quarter, you know, our contract renewals were up 6% for the quarter, and that compares to up 7% last quarter. So, you know, we've continued to have success kind of moving rates up in lanes and with business that we need to. So, I mean, I don't...
It's not—I don't think you're seeing things kind of fall off the, you know, not, not really crazy things going on out there in the marketplace. And I think there's a large pool of people that are being very rational, but, you know, there's, there may be a little bit of a chink in the armor, you know, with a couple players.
Brad Delco (Managing Director)
Gotcha.
Richard O'Dell (CEO)
That's a good context.
Which I don't understand, because some of the players that you see that with, and they're still paying signing bonuses, you see them, they're still hanging signs out in front of their terminal to pay signing bonuses. I mean, what kind of sense does that make?
Brad Delco (Managing Director)
Well, that, that makes sense to me. And then, Rick, sort of my second question. A lot of people view sort of LTL as having a lot more fixed costs than some other transportation modes. Can you kind of give a view as to what you think in your cost structure is fixed versus variable? And maybe that'll help kind of continue on maybe Tom's line of questioning as to how quickly, if we do need to lower cost, how quickly we can do that and to what extent we could cut.
Richard O'Dell (CEO)
Yeah, you know, a lot of our terminal labor costs from an hourly perspective is variable, and, you know, we have to manage that from a production standpoint. We didn't do a very good job of that in the quarter, quite frankly. We were a little reluctant. We were a little slow to react, and some of our margin deterioration is self-inflicted. But, you know, that, that and some of the self-insurance things from a safety perspective, are, are kind of our near-term opportunities. We've targeted next year about $25 million worth of savings. Half of that probably is on the labor side. We also have, you know, a targeted cargo claim, further cargo claim reduction, which I'm confident that our execution can continue to, to improve in that area with a couple of programs that we have.
Then a portion of it is also a pretty big bucket on the maintenance side. And then, you know, we have kind of daily variable costs, and then, you know, over time, you have kind of semi-fixed costs, too. I mean, we've made some investments in employee relations, safety, some sales resources that you kind of have to reevaluate over a period of time if you're getting a return on those. With our staff adjustments were in the 4% range, and we did reduce some sales resources by about that same 4%, you know, for kind of performance-based. But...
You know, our, our benchmarks show that we're still a little bit underrepresented in the marketplace, and, you know, over time, obviously, we're committed to our market share and selling our value proposition, so you don't want to be particularly short-sighted with that either.
Brad Delco (Managing Director)
No, that makes sense. If I were to try to just put big numbers around that, would you say fixed and variable is 50/50 overall for the business model, or you think it's 60/40? Any kind of way to put it in that terminology?
Richard O'Dell (CEO)
About fifty-fifty.
Brad Delco (Managing Director)
Okay.
Richard O'Dell (CEO)
You know, you do have some challenges, right? I mean, if you run a network and, you know, your bill count goes down, you can manage your load average in your big, heavy type lanes. But, you know, it's hard to make up when you lose 3 bills in 3 and 4 bills in Savannah, you're still gonna run those schedules, right? So I could adjust my variable labor costs around the terminal, but you're still gonna incur some line haul costs. You get in a bigger terminal, and it becomes more variable. But, I mean, that's one of the challenges that you have from managing a network like this, right?
Brad Delco (Managing Director)
No, no, exactly. I definitely understand that. Well, that's great color. I appreciate the time, Rick. Thanks very much.
Richard O'Dell (CEO)
Okay.
Operator (participant)
We'll go next to Jason Seidl from Cowen and Company.
Jason Seidl (Managing Director)
Thank you, operator. Hey, Rick. Hey, guys. Sticking on the pricing theme, you were kind enough to give us your contractual pricing in the quarter. You know, given some of the, let's say, unreasonable pricing practices you described here recently by some of your competition, do you think that 6% is gonna fall even further in the fourth quarter?
Richard O'Dell (CEO)
Probably a little bit. I don't know. It'll be interesting. I mean, our comps get tougher because if you remember, in last year, we weren't very satisfied with our margins, and we began to take a more aggressive pricing stance, and so we're overlapping, you know, some quarters that have some higher absolute numbers in them. But I mean, October sequentially was a good step-up month for us, so from a base period, we're kind of off to a good start. Better than any month I had in the last quarter, so, you know, part of that's just the magnitude of contract renewals, and then also, the fourth quarter is the largest quarter that we have in contract renewals. They're a little bit heavier weighted to 4Q, so, you know, that could be some opportunity as well.
Jason Seidl (Managing Director)
Now, has this price aggressiveness been sort of across the board, or has it been focused more on 3PL freight?
Richard O'Dell (CEO)
I mean, I just said there's been a couple of examples with people going to 3PLs for volume, which to me, that's kind of the first sign of kind of a crack in the armor, so to speak, but it could also just be somebody's strategy, too, right? I mean, could be an isolated incident.
Jason Seidl (Managing Director)
How should we look at CapEx for next year? I know you guys don't have a number out there yet, but what should we be thinking about in the model? I'm assuming probably down somewhat from this year.
Richard O'Dell (CEO)
Yeah, for next year, pricing, you're talking about?
Fritz Holzgrefe (EVP and CFO)
Capital.
Jason Seidl (Managing Director)
Yeah, no.
Richard O'Dell (CEO)
Oh, capital?
Jason Seidl (Managing Director)
CapEx.
Richard O'Dell (CEO)
Oh. You know, we see value in continuing to lower our fleet age and having some and having some cost benefits for that. So, you know, we'll probably make some investments in the same ballpark as this year.
Fritz Holzgrefe (EVP and CFO)
Yeah, I mean, you, you've got the two primary returns out of the fleet investment are obviously maintenance costs and fuel... Well, three actually, maintenance, fuel efficiency and, you know, safety. The latest, you know, bring even more current safety equipment. So, you know, there, I think there's a continued focus on those sorts of investments that give us a pretty quick return.
Richard O'Dell (CEO)
And then we just have to look at it over a period of time. I mean, it depends kind of what the outlook is. You know, we, we have good cash flow, strong balance sheet, and we think we continue to make prudent investments. And then, you know, if we need to. If we were to need to make adjustments to our fleet size, we just take out the old stuff, which is the most costly and less efficient as well, right?
Jason Seidl (Managing Director)
Yep, that makes sense. I guess the last question I'll have. I was having a back and forth with a client this morning over sort of the state of the economy, and his contention was that we're probably in a recession just based on what the transports are seeing right now. I'd love your feel for, you know, what you believe the economy is doing right now.
Richard O'Dell (CEO)
I mean, it feels like it's softened up, obviously, quite a bit over the last 60-90 days. I mean, to me, a pretty big change in our outlook, and I think, you know, once you kind of get the rest of the LTLs out there, we'll see kind of what their tonnage trends look like, and then we'll have to figure out if it's a soft patch versus something a little more serious. These guys talked about inventory build. You had some, maybe, you know, some of the West Coast port activity was a backlog, and we got a little, probably a little benefit there. I mean, I don't know. It might be a little early to get a big read on it, but it does feel soft. I don't disagree with you.
Jason Seidl (Managing Director)
Okay, fantastic. Gentlemen, thank you for the time, as always.
Operator (participant)
We'll go next to David Ross with Stifel.
David Ross (Managing Director)
Yes, good morning, gentlemen.
Richard O'Dell (CEO)
Good morning.
Fritz Holzgrefe (EVP and CFO)
Morning.
David Ross (Managing Director)
Rick, can you talk a little bit about dimensioners and how you're currently looking, you know, to roll those out in the network and what benefit they may bring?
Richard O'Dell (CEO)
Yeah, I mean, we, we have pretty good coverage across our network. We run about. We have 27 of them. We run about 30% of our freight, you know, in a week through the network through the network of dimensioners. You know, we use those that, you know, are misclassified. You know, we can-- there's a certain percentage of those you can kind of adjust pricing on. And then, you know, to the extent you have FAKs or a range of pricing, you can adjust immediately on those, but you, you know what the dims are, and you reflect it in your costing activities and your pricing over a period of time.
So we have a pretty sophisticated network set up, where we periodically run customers through there, and if it's generating adjustments and whatnot, then we will keep running their freight through there. And if their freight's properly classified, and we're not having an issue, we quit taking it over to the machine. So, you know, it's obviously not only do you have the tool, right? You kind of have the system and network built around it, and those are two key things that we do.
David Ross (Managing Director)
Is there any, you know, estimation as to what the yield benefit may have been over the past year with increasing the use of the dimensioners? You know, kind of like how, when forklift scales became more prevalent, and, yeah, there was, you know, the increased weight and inspection and chargebacks to the customers. Has the dimensioners seen anything similar?
Richard O'Dell (CEO)
Yeah, I mean, our average class is up. I guess I'd have to look at it and see how much of it it is. I mean, over a two-year time period, it would—the number would be much larger than just last year, right? Because we, well, we added, I think, 10% last year, but it, it's a pretty mean. I would tell you, just the rate adjustments that we're doing alone is a very meaningful percentage of our revenue from, from the dimensioning machines. It's greater than 1%.
David Ross (Managing Director)
Yeah, and then on-
Richard O'Dell (CEO)
Probably 1, probably 1.5% every day.
David Ross (Managing Director)
But it's
Richard O'Dell (CEO)
If somebody's not using that, that's not very smart.
David Ross (Managing Director)
Certainly some I think we're going to see more, you know, folks roll out, and let's hope that buoys the pricing environment a little bit. Switching over to the expense side, you know, insurance and claims over the years has been, you know, kind of a thorn in your side as it comes to kind of quarterly reporting. Is there any reevaluation being done of the self-insured retention level and, and, you know, where it makes sense to fall out on the, you know, premium versus, you know, self-insurance?
Richard O'Dell (CEO)
We always look at that and where that runs in. Unfortunately, you know, historically, when we've looked at that, the opportunity to reduce the volatility basically assures you one of the worst years you've ever had. So I don't, you know, think it makes a whole lot of sense, right? And while this quarter was... I think part of the reason this quarter feels pretty-- it's not a good quarter, but it feels particularly bad because it compares against a very good quarter last year. So the year-over-year delta is-
Fritz Holzgrefe (EVP and CFO)
That's, if you add in all the self-insurance, it's up, up to, you know, $0.10-$0.15 a share.
Richard O'Dell (CEO)
Yeah, and again, we had some, you know, healthcare expenses, which is largely, for us, was a pharmaceutical issue, primarily with a new, very expensive drug that came out and is available to people. So hopefully that bubble is may go. It's supposed to be a cure for significant disease, but it's very expensive on a monthly basis for a 3-6 month.
Fritz Holzgrefe (EVP and CFO)
Yeah.
Richard O'Dell (CEO)
And so we're seeing some inflation related to that, where people are, you know, coming out and taking advantage of that. Over time, if it helps with the disease, that's a plus, but near term, that's, that's created a challenge for us as well.
David Ross (Managing Director)
Okay. Thank you very much.
Richard O'Dell (CEO)
Thanks, David.
Operator (participant)
We'll go next to Art Hatfield with Raymond James.
Arthur Hatfield (Senior Equity Analyst)
Morning. Hey, thanks for taking the question this morning. Hey, Rick, when you look at your tonnage, where it's gone and where it's kind of October, you talked about the softness in the economy, and you also talked about a couple of examples of maybe some more aggressive pricing. Where would you characterize your tonnage downdraft from the standpoint? How much do you think of it's just the economy, one, and how much do you think it is your focus on maintaining price at current levels?
Richard O'Dell (CEO)
I mean, you just have to look, you know, I'm going to have to get everybody else's numbers for the quarter, and then I have to compare our tonnage trends to how they're doing, right? I mean, I think we have on the UPS Freight, I believe their numbers were out. What were they, Fritz?
Fritz Holzgrefe (EVP and CFO)
Tonnage was down 10%, I think.
Richard O'Dell (CEO)
So-
Arthur Hatfield (Senior Equity Analyst)
Yeah.
Richard O'Dell (CEO)
I mean, I think when everyone else comes out, then we'll have to see kind of, you know, like you said, how much of it is... I mean, I think we probably have a little more exposure to the oil patch than some of our competitors, just because, you know, we don't have 48-state coverage. So by definition, we got a strong share there in, you know, Texas, Oklahoma, Louisiana, where the company kind of grew up. You know, comps are difficult because of last year's TL spillover.
But, I mean, I would tell you, the biggest frustration I have is, you know, last quarter, I wasn't particularly pleased with the tonnage, but with the yield and the cost management, you know, we were able to overcome that and have a pretty good quarter, you know, that being a record. And then, you know, it changed pretty dramatically, you know? The timing is a little bit unfortunate because we made a significant investment in employees that I think was necessary, and the driver market's tight. You know, we're not gonna hold down, you know, driver wages while we're reporting record earnings. I mean, that's not gonna make—doesn't make any sense, and, you know, that's not the kind of company that we are.
So we based on our market study, we made a significant investment, and then, you know, a little bit of our issues were somewhat self-inflicted, with us not executing as well as we could have on the reduced volume environment. I think over time, our it'll work. You know, the yield didn't go up in a linear fashion that we'd kind of had kind of estimated, so, you know, that left us a little short on that side, too. So I think it's just a combination of factors that, you know, created the situation that we're in. Very disappointed in it and, you know, committed to getting the cost management, you know, more focused on the cost management side while we continue to manage through our revenue mix and yield opportunities as well.
You know, what I would tell you is there's still a deal flow out there, business that's coming to market and going through RFQs. You know, we're diligently mining those opportunities for growth opportunities. We're gonna open a second terminal in Chicago in the first quarter, which should be a positive for us. You know, we're not just conceding the market. You know, we should be able to generate at least incremental business there of, you know, $40,000-$50,000 a day in the first year, you know, which would be 1% growth.
I mean, what you have to do is, you have to mine the market for the customers that value, you know, what, what you're doing out there in terms of service quality, cargo claims ratio, you know, the responsiveness that we have in our organization to the customer. So we're, we're, and we're continuing to pursue those things, and, you know, I'm confident over a period of time, you know, we're, we're, size is not gonna be in a perpetual market share decline. You know, I'm, I'm willing to take a couple percentage points off where somebody else is, if, if my yield goes up 2%-3% higher than the market.
My analytics show that, you know, we're underpriced in the marketplace, and, you know, we need to continue to take those opportunities to reprice accounts appropriately that need to be repriced, over a period of time, you know, depending on market conditions.
Arthur Hatfield (Senior Equity Analyst)
No, that's helpful. When you talk about your poor execution on the cost side, is that an issue of recognition, or was it an issue of just putting off the decision in thinking that maybe it would turn at any moment?
Richard O'Dell (CEO)
I mean, I think when it was time, and it was clear where we were, you know, a decision like that is always difficult. You know, you impact people, their families, you know, even if some person has some documented performance issues, I mean, you'd rather coach them around and get them to improve, right?
Arthur Hatfield (Senior Equity Analyst)
Right.
Richard O'Dell (CEO)
And it's not really a philosophical decision to go out and do that, so you never feel good about it, right? But, I mean, in fairness, like, we weren't managing our variable labor hours to the extent that things had slowed down. So in that part of it, it's our own execution. I would tell you, you know, because the driver market's been tight and, you know, our employees are highly valued, I mean, we probably waited a little bit longer than, in hindsight, you know, than I would've liked. But, you know, I think that's prudent too, right? You're not, we're not the kind of company, every time you turn around and volumes dip for three weeks, you're gonna turn around and lay people off. I mean, that's just, that's not appropriate.
So, I would've liked to seen our execution be a little bit better. I mean, but, you know, when volumes soften up, it's hard to maintain, you know, load average and productivity, and you lose some route density, and you gotta work through those things and make adjustments. And we didn't adjust as quickly as we would've liked, and, you know, I'm confident over a period of time, we'll execute better. I wouldn't necessarily call our execution poor, but I think it could have been better. We have higher expectations than what we achieved, let's put it that way, right?
Arthur Hatfield (Senior Equity Analyst)
No, that's a fair explanation. Last thing for me right now. On the insurance side, it seems like insurance costs are kind of headed higher. Can you talk a little bit, not just about you, but really about the, where you see the market heading, and is this gonna be something that theoretically is problematic for some carriers and that their insurance costs start to get out of control, one? And two, are you seeing any providers pulling back from the market at all?
Richard O'Dell (CEO)
You know, we're working toward our renewal right now, and, you know, indications are that the expenses are gonna go up a fair amount. You know, that's not the biggest portion of our... Because we're so self-insured, you know-
Arthur Hatfield (Senior Equity Analyst)
Right
Richard O'Dell (CEO)
... it's not a huge portion of our overall expense, but, you know, it's looking to go up materially next year. I don't know. Doug, have you seen somebody pull out of the market or anything? Doug handles our risk area, so he'd probably be better to answer that directly than me.
Douglas Col (Head of Investor Relations)
I don't think we're far along enough in the renewal process to say we're not seeing, you know, carriers willing or insurance carriers willing to come in and compete. But, you know, just given the size and the visibility of some major, you know, transportation-related, you know, claims and awards last year, I'd just say, you know, insurance carriers are, you know, if they're still playing in this market, they're very careful about, you know, who they underwrite. So it's competitive, but-
... you know, it's something we'll manage through as we get closer to our renewal.
Arthur Hatfield (Senior Equity Analyst)
Sure. So it sounds like it's not necessarily an issue for you, but it could be an issue for some smaller carriers if they've got poor experience.
Richard O'Dell (CEO)
Yeah, potentially. I think that, I think that combination of poor experience and, you know, some very high-profile accidents that probably have some huge numbers associated with it, right?
Arthur Hatfield (Senior Equity Analyst)
Yeah.
Richard O'Dell (CEO)
Got to make you think. And like you said, for us and carrying carriers that have a robust safety program or investing in technology, you know, have you know all the onboard devices and electronic logging and things that are you know going to come you know to market and become even more prevalent out there amongst the smaller carriers, and you got to think it's going to have some impact, right?
Arthur Hatfield (Senior Equity Analyst)
Right. No, I would think so. Hey, thanks for the time this morning, guys.
Operator (participant)
We'll go next to Alex Vecchio with Morgan Stanley.
Alexander Vecchio (VP)
Hey there. Thanks for taking my questions. Rick, you know, obviously, we've seen M&A pick up in the space over the last few months, and I kind of want to touch back on the pricing environment, and maybe can you kind of talk to the extent to which there might be some relationship between the behavior of some competitors, just given what's happened in the market from an M&A perspective?
Richard O'Dell (CEO)
So, are you talking about XPO specifically, or what? I don't know what your question there is.
Alexander Vecchio (VP)
My question is, are you seeing behavior change at carriers that are now owned by different companies? So, yes.
Richard O'Dell (CEO)
Oh, no. Yeah, I don't want to get into, you know, one sign of something I saw with a couple people, you know, and we don't normally name other carriers out there, but that wasn't the carrier that I was referring to.
Alexander Vecchio (VP)
Okay. But there are numerous other folks out there that are engaging in a bit more aggressive pricing behavior.
Richard O'Dell (CEO)
It's actually. I've only... There's been a couple of other instances, and you see it in RFQs, and sometimes I don't know who won the business, or if somebody tells me that, if they're telling me the truth or not, you know? So somebody, they may tell me, you know, "Oh, they're trying to get me to match somebody's pricing," and they may tell me it's FedEx who won the business. I don't necessarily really know if they're benchmarking me against FedEx, or it's a second-tier player, and they're just looking for cost savings, and they're going to that. So from that perspective, I really don't know. I do have...
There's an example of a competitor who went to a 3PL, you know, on good sources that I have and made some adjustments to their rates for volume, and it's one of the bigger players. So to me, that's. I just don't like that, and I haven't seen that as being widespread, and I wouldn't say it's numerous, but I don't know kind of where we are. And I guess the only other thing I would say about the merger and acquisition thing, I think there's some other 3PLs that control a fair amount of business or work through TMS.
And, you know, there's some of those players, while most people are taking a wait-and-see attitude, there's some of those players that are a little uncomfortable with the closeness of that relationship of the asset base and the 3PL provider and having access to their information and that freight information. So we've seen some opportunities, a handful of opportunities come to us, because of some concern with respect to that. So, I mean, over time, I mean, that could potentially be a positive, you know, for us. That's the only other sense examples I would have of an impact of the merger in the space.
Alexander Vecchio (VP)
Okay. No, that's really helpful color on that front. On the tonnage, you know that October was down 8.5%. Assuming you kind of want to stay as disciplined as you feasibly can on pricing and this behavior kind of persists from the market, should we assume that that tonnage might actually get worse and maybe end up being worse on a year-over-year basis for the full fourth quarter? How are you thinking about the full fourth quarter from a tonnage decline perspective?
Richard O'Dell (CEO)
Our comps get easier kind of through the quarter, and then obviously, you know, all year we've been, we've been down, right? So, you know, last year kind of had the truckload spillover, and things freed, freed up a little bit in the fourth quarter. So I think the comps get a little bit easier. You know, I think if we take today's kind of current run rate and move that kind of into next year and had normal seasonality, I think we end up in the down 2% area. So if you didn't get another step down, kind of where you end up in a run rate in the next year is a, is a 2% kind of level, based on kind of a three-year historical average of what we would consider normal seasonality, and whatever that is anymore, you know?
Alexander Vecchio (VP)
Yeah, I hear you. Okay, so that's kind of a comment for... Go ahead, sorry.
Richard O'Dell (CEO)
But that's how. You know, that's—I don't know how else to plan, right? I mean, you have that plus whatever, you know, wins you have in the marketplace, and some, you know, business gets deselected from a variety of reasons, at points in time, you know, whether that be our choice or the customer's choice. Sometimes they change modes, and there's things that are out of your control, you know, somebody moves a plant, something like that. But it's. You know, that, I guess that's just an indication of kind of a run rate thing we're looking at migrating toward for next year. That's probably the best data I would have for you at this point in time.
Alexander Vecchio (VP)
You know, great. That, that's really a helpful color on the outlook there on the tonnage. So, so lastly then, how much pricing do you actually need to expand margins? You know, at what point, if, if pricing were to fall to X%, is it, is it almost, or, or, or much more difficult to expand margins for you?
Richard O'Dell (CEO)
Yeah, I mean, yield is obviously the biggest. We have a lot of levers. I mean, there's cost levers. I mean, you know, we can make other adjustments if necessary. We have engineered improvement opportunities. I guess what I would tell you is just, let's just say we look into next year, right? When we stated this, I mean, we think, you know, we should be able to kind of improve in a normal year by 1.5 points or so on the operating ratio, because I think we're still underperforming, and we're not getting the types of returns that we seek. You know, if pricing and tonnage are both negative, obviously, that gets more difficult to do.
Beyond that, I don't know that, I mean, we could kind of try to step through, you know, cost increases are going to run a little bit higher, you know, into the year because we've already committed to our, our, wage increases as we go into next year. You know, you're going to have healthcare inflation. I would tell you, I think next year's, while I do think the driver market will stay tight, I mean, I think compared to this year, where we made some pretty meaningful market adjustments, you know, in specific markets, as well as with positions like over-the-road drivers, that next year will be more of a normal increase, more in the 3% range. So the back half, we won't have the same inflationary challenges.
And then I think I commented, I mean, as we go through our planning process, you know, we're planning for lower tonnage and lower pricing than what we achieved this year, and we're very focused on some engineered cost initiatives, you know, targeting in excess of $20 million for next year. So I don't know if that helps you from a modeling standpoint and from a philosophical standpoint.
Alexander Vecchio (VP)
No, that, that is really helpful. Okay, I appreciate the time. I'm going to pass it along. Thank you.
Richard O'Dell (CEO)
All right. Thanks.
Operator (participant)
As a reminder, it's star one if you'd like to ask a question. We'll go next to Scott Group with Wolfe Research.
Scott Group (Managing Director)
Hey, thanks. Morning, guys.
Richard O'Dell (CEO)
Morning, Scott.
Fritz Holzgrefe (EVP and CFO)
Morning.
Scott Group (Managing Director)
The 4% workforce reduction, when did that take effect, and, and what % of the salaries line does that impact?
Fritz Holzgrefe (EVP and CFO)
It took effect on Friday, so you know, it would be—we'll get about two months of benefit for the quarter. And then, when you say it's our salaries, wages, and benefits line that will be impacted, and over time, you'd see some impact in the fringe rate as well.
Scott Group (Managing Director)
I'm guessing, though, it's not, doesn't impact the entire salaries line. I'm guessing there's some part of that that's more fixed or bonus related or something.
Fritz Holzgrefe (EVP and CFO)
That's correct.
Scott Group (Managing Director)
Or should we just-
Richard O'Dell (CEO)
Yeah.
Scott Group (Managing Director)
So what's a good... Like, of that salaries line, what's a good percent to take that would come down 4%? Or I guess if it's simpler for you, what, what's the ultimate cost savings from this 4% workforce reduction?
Richard O'Dell (CEO)
Our first pass, again, I don't even have a full week of productivity targets that we're achieving, you know, post that, right? So I don't. I'm giving you based on my historical experience with doing this and our working to manage better after we've gone through a process like this. It's probably around $1 million a month, reduced expense run rate.
Scott Group (Managing Director)
Okay, that's helpful. So on the pricing-
Fritz Holzgrefe (EVP and CFO)
But, Scott, that wouldn't be in addition to what you described earlier.
Richard O'Dell (CEO)
Oh, yeah.
Scott Group (Managing Director)
Got you. Okay.
Fritz Holzgrefe (EVP and CFO)
I would say, you know, there's some overlap with that for our targeted savings for next year, right?
Scott Group (Managing Director)
Gotcha. Okay. Okay. On the pricing, I don't know if there's enough history with the, with the 3PLs, but is this how the pricing has started to fall in the past? Does it start with the 3PLs and, and then lead, or, or is this an unusual kind of first chink in the armor?
Richard O'Dell (CEO)
Yeah. What I would say is, you know, I've seen that be a first chink in the armor thing, and then sometimes it falls after that. But you've also- I've also seen sometimes you just have one player who says, "I want to do this," and maybe he didn't participate with this 3PL previously, or he's not participating to the extent they choose to, and it's just a one-time action, right? So the question is: Is that, is that a reactionary thing where somebody else follows, somebody else follows, the next thing you know, you know, this segment of your business begins to deteriorate from a yield standpoint? I mean, I don't, I don't know. I think it's, to, to me, when people ask me, you know, what's the first sign? I mean, to me, sometimes that's a sign that you look at.
But I also see people are using various tactics with 3PLs. I mean, some people, you know, cut their rates with 3PLs from December to February to March first because it's a slow seasonal period, and they want more business. I mean, I personally think it's a slow seasonal period for them. It's a slow seasonal period for me. I'd rather manage through it than reduce my yield. So I've chosen not to do that. I also feel that people that resell a blanket 3PL, if they, they want to resell my pricing, I'll give them that, but I'm not turning my pricing into transactional business every time there's a seasonal downturn. So, but other carriers have different philosophies or something they're trying to do during that time period. So I don't, you know, I don't control what other people do.
We only control our philosophy and our discipline.
Scott Group (Managing Director)
Yep. So knowing what you know-
Richard O'Dell (CEO)
Why exacerbate a low seasonal period? I mean, to me, it just doesn't make any sense to me. Just accept that's a low seasonal period and manage through it.
Scott Group (Managing Director)
Yep, yep, yep, I hear you. Knowing what you know, how would you budget for LTL pricing next year? Your LTL pricing.
Richard O'Dell (CEO)
I mean, I think there'll be a step, a step down from what we've been able to achieve in the prior year, so we're trying to be conservative. We've taken our tonnage expectation. I think I talked to you guys about that, where we kind of think our run rate would be if we got normal seasonality. And, you know, I still think with where we are and what we're seeing in the marketplace, I mean, we're targeting a 4%-5% increase in contract renewals. And I think you're looking at, you know, based on the general rate increases and the timing that's already been announced, I mean, we would target something in that range as well, similar to what other people have done.
Our practice is kind of to follow the market, so let other people get out there in front, and then, you know, we go along. We want to keep our tariff in line with the market. So, and as you're out there pricing, you know, you're not out of whack from a discount percentage, right?
Scott Group (Managing Director)
Do you still think 4%-5% pricing is reasonable for next year?
Richard O'Dell (CEO)
That's what I, that's what I'm targeting.
Scott Group (Managing Director)
Okay. Just last question. Maybe with the tonnage commentary, the pricing commentary, do you think we can see that margin improvement in earnings growth in the first half next year, or do we realistically need to wait until third quarter and kind of lapping this kind of latest leg down in tonnage?
Richard O'Dell (CEO)
It's probably a little early to say.
Scott Group (Managing Director)
All right.
Richard O'Dell (CEO)
All right.
Scott Group (Managing Director)
Thank you for the time, guys.
Fritz Holzgrefe (EVP and CFO)
I mean, I have some preliminary modeling that we've gone through and things, but I'm not sure I'm prepared to answer that right now.
Scott Group (Managing Director)
Okay, that's fair.
Richard O'Dell (CEO)
Right?
Scott Group (Managing Director)
I know it's early.
Richard O'Dell (CEO)
Okay.
Scott Group (Managing Director)
Yep.
Richard O'Dell (CEO)
All right.
Scott Group (Managing Director)
All right. Thank you, guys.
Operator (participant)
We'll go next to Willard Milby with BB&T Capital Markets.
Thomas Albrecht (Managing Director and Analyst)
Hey, it's Tom Albrecht. I accidentally knocked my own phone off, so I'm using Will's. A couple things. I didn't see on your website, but did you end up doing an October GRI like a few of the players did? And then I had a kind of a follow-up.
Richard O'Dell (CEO)
No, we tend to follow the market from a general rate increase perspective, Tom. You know, while some people have gone early, you got some other players that went last year in January and are doing that. We tend to kind of not come early to that party, but just show up when everybody else gets there, so to speak. You could probably assume a January timeline and something in line with what others have done to keep our tariff in alignment.
Thomas Albrecht (Managing Director and Analyst)
Okay. And I think Scott kind of partly clarified this, but, you know, when you get at these points where the market's turning for better or worse, you kind of parse every word. You were talking earlier that, you know, relative to 2016, you thought that, you know, tonnage and pricing would be lower. I think what I heard is, on the pricing front, you meant rate increases would be smaller, not necessarily negative pricing, but that on the tonnage front, maybe for a while, it could still linger and be negative, at least to start 2016. Am I hearing you right on those two fronts?
Richard O'Dell (CEO)
Correct.
Thomas Albrecht (Managing Director and Analyst)
Okay.
Richard O'Dell (CEO)
Yes, like I said, if we kind of got normal seasonality as we from here, and I'm talking about October's run rate, you know, as you kind of overlap some weaker periods we experienced last year, you know, it's around a -2% tonnage would kind of be a normal thing from here. And obviously, I mean, we're seeking market share. We're opening another terminal in Chicago in the first quarter. I mean, I'm not just accepting a reduced tonnage outlook into perpetuity or anything, but I think from a planning perspective and what you're going to achieve from a margin standpoint, I think it's prudent to plan for maybe a softer environment, you know, some continued yield discipline on our part, and get more aggressive on a cost, from a cost management perspective.
So philosophically, that's what we're working on.
Thomas Albrecht (Managing Director and Analyst)
Okay, that was helpful. Thank you.
Douglas Col (Head of Investor Relations)
All right. Well, thank you for your interest in Saia this morning, and we look forward to providing you some additional updates as we visit with you guys. Thanks.
Operator (participant)
This does conclude today's conference. We thank you for-