Saia - Q3 2016
October 26, 2016
Transcript
Operator (participant)
Good day, and welcome to the Saia Inc. Third Quarter 2016 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference, excuse me, over to Mr. Doug Col. Please go ahead, sir.
Doug Col (VP and Treasurer)
Thank you, Michelle. Good morning. Welcome to Saia's Third Quarter 2016 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Fritz Holzgrefe, our Vice President of Finance and Chief Financial Officer. Before we begin, you should know that during this call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements and all other statements that might be made on this call that are not historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially. We refer you to our press release and our most recent SEC filings for more information on the exact risk factors that could cause the actual results to differ. With that, I'd like to turn the call over to Rick O'Dell.
Rick O'Dell (President and CEO)
Well, good morning, and thank you for joining us. This morning, we announced our third quarter 2016 earnings, with diluted earnings per share of $0.54 compared to $0.46 in the third quarter of last year. The third quarter results reflect our continued positive pricing actions, coupled with productivity improvements and cost initiatives realized across our operation. It's also nice to be able to say that with positive manufacturing data having been reported for six of the past seven months, our shipment trends turned positive in September and have improved further into October. So with that as the backdrop, I'd like to share a few comparisons of the 2016 third quarter results versus last year's third quarter. LTL yield increased 3.7%, and contractual price renewals increased an average of 5.7%.
The third quarter marked the 25th consecutive quarter in which we were able to show a year-over-year improvement in our LTL yield. LTL shipments per workday were down 1.2%, but turned positive in September for the first time since February. LTL weight per shipment fell 1.7% to 1,114 pounds. Dock productivity, as measured by bills per hour, improved by 6%. P&D productivity, as measured by stops per hour, improved by more than 2%.
Purchased transportation miles per day were down 19% in the third quarter and represented 8.9% of our total line haul miles, compared to 10.7% in the third quarter of last year. Our cargo claims ratio of 0.85% was flat compared with last year, but we did see a 3% reduction in the average cost of a cargo claim during the quarter. Now I'd like to have Fritz review our third quarter financial results in more detail, and I'll make some final comments.
Fritz Holzgrefe (VP of Finance and CFO)
Thanks, Rick, and good morning, everyone. We generated total revenue of $316 million in the third quarter, compared to $317 million in the third quarter last year, a decrease of 0.2%. Revenue is held essentially flat year-over-year, as declines in tonnage and fuel surcharges were largely offset by yield management.
Operating income rose by 14.1% to $22.6 million, compared to $19.8 million earned in the third quarter of 2015. Both periods included 64 workdays. As Rick mentioned, third quarter LTL yield rose 3.7%, reflecting the positive impact of our continuing pricing actions, offset by lower fuel surcharge contribution. Fuel surcharge revenue was down 11% from last year's third quarter. I'd like to mention a few key expense items and how they impacted third quarter results on a year-over-year basis.
Salary, wages, and benefits rose 0.6% to $178.7 million in the third quarter, reflecting the impact of an average wage increase of 3% in July, offset by lower headcount and improved productivity. Purchased transportation expense in the third quarter fell by $3.7 million-$15.7 million, and was 5% of revenue versus 6.1% of last year. This expense line item continues to benefit from increased utilization of internal assets, favorable truckload carrier rates, and lower fuel costs charged by carriers. As Rick mentioned, purchased transportation miles as a percentage of our total line haul miles were 8.9%, compared to 10.7% in the third quarter of 2015. Outside maintenance and parts expenses were down 14% in the third quarter compared to last year.
These expense items are benefiting from our investments in new equipment and also from enhanced maintenance processes and programs. We continue to see fuel cost savings related to improved fuel efficiency being achieved with our younger tractor fleet. In the third quarter, we averaged 7.04 miles per gallon, an increase of nearly 2% compared to the same quarter last year. Claims and insurance expense in the third quarter increased by 9.2% versus the prior year to $10 million, with the increase being largely the result of higher insurance premiums. Depreciation and amortization expense of $19.9 million compares to $16.8 million in the prior quarter and reflects our continued investments in tractors, trailers, and forklifts. So far in 2016, we have put into service approximately 2,300 pieces of new rolling stock equipment.
Our effective tax rate was 35.9% for the third quarter of 2016, and we expect our full year tax rate will be approximately 36%. At September 30, 2016, total debt was $94.2 million, and net debt to total capital was 16.6%. This compares to total debt of $81.2 million and net debt to total capital of 15.6% at September 30, 2015. Net capital expenditures through the first nine months of 2016 were $142.5 million, including equipment acquired with capital leases... This compares to $114 million of net capital expenditures in the first nine months of 2015. Now I'd like to turn the call back to Rick.
Rick O'Dell (President and CEO)
Thanks, Fritz. I'm very proud of the value proposition we presented and delivered to our customers in the third quarter. In what's generally a soft LTL market, we had flat revenue, but we executed very well across our organization and improved our operating ratio by 90 basis points. Our focus continues to be on delivering quality to our customers, and that starts with listening to their needs and doing whatever it takes to meet those needs. In 2015, Saia improved in 25 of 26 service attributes of customer service in the Mastio & Company annual survey. That was more than any other LTL carrier. In 2016, we are working hard to further improve in all of these areas, and the response from our customers has been great.
We're gratified that our customers see value in what we are doing, and to see shipments and pricing both positive in the quarter is very encouraging to all of our employees. Now, before we open it up for questions, I'd like to share an update on our plan to expand our service geography into the Northeast. For those of you who have listened to these calls in the recent past, you know that we have increasingly discussed the topic of expanding our geographic reach into the remaining U.S. LTL markets, not currently served directly by Saia. We estimate that the Northeastern U.S. LTL market is approximately $7 billion in terms of annual revenue generated by freight that moves in both directions between our existing service area and the 12 Northeastern states we do not currently serve directly.
This is an approximate 25% increase in the size of our addressable market. Of course, a lot of our best customers do business in this market and currently use providers other than Saia. We view this market as one that holds significant market potential for Saia over time. Beginning in the second quarter of next year, we plan to open three to five terminals in 2017, targeting major markets in Pennsylvania and New Jersey. Beyond this first phase, we're targeting a similar pace of new markets to be added in 2018 and 2019. As always, we will remain opportunistic toward any acquisition opportunity that may allow us to speed up the process or otherwise allow us to fill in an unserved geographic market.
Not only do we plan to invest in new terminals and equipment, but we intend to invest heavily in certain areas of our existing network so that we will be able to handle the increased LTL freight flows to and from the new market. Our total planned capital expenditures in 2017 will approach $200 million, including the investments in properties, equipment, and technology to facilitate our growth. We're excited to move forward with our plans, and we look forward to growing in these new markets with both existing and new customers. So with these comments, we're now ready to answer your questions. Operator?
Operator (participant)
Thank you. If you'd like to ask a question, please signal by pressing the 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. Again, press star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. The first question comes from Jason Seidl of Cowen. Please go ahead.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Thank you, operator. Good morning, guys.
Rick O'Dell (President and CEO)
Good morning, Jason.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Rick, I guess my, my question is going to be now about that Northeast expansion. You know, historically, it's been a very competitive LTL market in terms of margins that are out there. Talk a little bit about sort of the pace of your expansion. Is that why it seems like you're just going to go in and try to do it, you know, organically in some key areas? Also, you know, is this an area where you're going to go in and buy buildings initially, as opposed to lease them?
Rick O'Dell (President and CEO)
We, you know, we have a strategy to own strategic real estate. So, you know, we would seek in some of the major markets to own those, if that made sense and they were available to us. But the majority of them that we've located thus far in our thus far are going to be leases. And obviously, you know, that kind of helps facilitate your growth, too, over a period of time without getting into a high-cost situation right out the gate. You know, I guess if you kind of look at the Northeast, you know, at this point in time, you know, we're kind of caught in the middle. You know, we're too big to be kind of a regional niche player, yet we really don't have the national footprint of some of our largest competitors.
You know, expansion into the Northeast represents a 25% increase in addressable market. Of the $7 billion market potential, $5 billion of that moves between Saia's current 34 states. So, you know, today, that's kind of a missed opportunity for density benefits. It leverages our fixed cost network, supports our yield initiatives. It positions us to compete more effectively against our peer group of the top 10 carriers. You know, currently, the Saia network, our flows are stronger from east to the west. So you know, with this being primarily an inbound market, the west to east flow into the Northeast would have in-house synergies for us. So again, we feel like there's stronger customer positioning with the broader market.
You know, we expect to be price disciplined and market our quality service offering into this market and not go in there and buy business. So, it's obviously a staged organic expansion, you know, into some of the major markets, which I think are, you know, probably easier to enter organically, let's say, because the market potential is bigger, therefore, you know, compared to getting into some of the end-of-line-type terminals right out the gate, right?
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Right. No, that's it. It seems like you're taking a very measured approach to this. How should we think about it just from a financial standpoint, if you open up those five terminals, let's say, you know, in 2017, I'm assuming it's gonna take some sort of a ramp to get those terminals to break even. So is this a minor drag on margins, all things being equal?
Rick O'Dell (President and CEO)
Yeah, it's a mi-
Jason Seidl (Managing Director and Senior Equity Research Analyst)
At least in the next-
Rick O'Dell (President and CEO)
....it's a minor drag. It's a minor drag year one.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Okay. That's good color. I also wanted to talk about on the pricing side, your rate increases on the contractual renewals is actually increasing. Can you talk a little bit about what's driving that? You know, because I think it was slightly below that on the sequential in 2Q, when you look at it sequentially.
Rick O'Dell (President and CEO)
Yeah, I mean, it was just a good, it was a good quarter for us, I guess, just in terms of some of the contract renewals that came up, needed some corrective action pricing in certain lanes. And so, you know, we're very disciplined in doing that. Now, you know, we didn't always retain 100% of that business. So, if I look at, adjusted for length of haul and weight per shipment, our yield increases were up a little over 4%, year-over-year.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Okay. Well, good. Listen, I don't want to tie up all the questions.
Rick O'Dell (President and CEO)
A bit of mix change there, too.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
I'll turn it over here.
Rick O'Dell (President and CEO)
All right, thanks.
Jason Seidl (Managing Director and Senior Equity Research Analyst)
Thanks, Rick. Much appreciated.
Operator (participant)
Thank you. If you find your question is being answered, you may remove yourself from the queue by pressing star two. The next question comes from Todd Fowler of KeyBanc Capital Markets. Please go ahead.
Todd Fowler (Managing Director and Equity Research Analyst)
Great, thanks. Good morning, and congratulations on a nice quarter and the expansion plans. I guess, Rick, maybe if you could talk a little bit about the experience that you're seeing with the general rate increase that you guys put in. You know, how's the market responding to that? And you know, what are your expectations for that as you move to the fourth quarter and the first part of 2017?
Rick O'Dell (President and CEO)
Yeah, no, you know, our philosophy is to keep our tariff in alignment with the major competitors, and we tend to go with the market with the general rate increase. And the majority of the, particularly the big players, you know, took the increase in a timing similar or ahead of us. And so we kind of, we followed the market with that, and it's been, it's holding very well.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay. And then what's the impact for that as we think about the operating ratio? I think that, you know, typically there's a little bit of degradation as you move into the fourth quarter. Given the seasonality, you've got the timing of the GRI coming, you know, early in the fourth quarter this year. You know, what would your expectation be for the OR sequentially into the fourth quarter?
Rick O'Dell (President and CEO)
Sure. Okay, so, if you look back three to four years, if you normalize for safety, the fourth quarter operating ratio normally deteriorates between 1.2 and 2.2 operating points, worse than 3Q. And, you know, I would just caution, right, 4Q can be particularly difficult to predict just due to holiday volume impacts, where they fall and potential weather disruptions. But, you know, given our current shipment trends and the timing of the general rate increase, we would expect it to be at the favorable end of this historical range.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay, that makes sense. And then I guess just a couple of quick ones, maybe on the cost side and then a couple of housekeeping things. But first, I think you had some comments about higher insurance premiums, and the insurance expense has been a little bit elevated the past couple of quarters. With where you were in the third quarter, is that the run rate that we should see going forward? And is that mostly premiums, or was there anything else on the insurance line item this quarter?
Fritz Holzgrefe (VP of Finance and CFO)
I think what you've got right now, if you look at the year-to-date sort of numbers, that's probably a reasonable trend line over time. You know, I think there... We're impacted in the quarter, as we highlighted, about, you know, the premium increases. That was a big driver when you compare a quarter to, you know, year-over-year. But I think that just in general, you know, we're seeing, you know, a more litigious environment, claims, settling claims and so forth, tends to be a bit more expensive. So I you know, I don't know that it's going down anytime soon, so it's, you know, recent trend is probably the best indication.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay. That, that definitely helps. I guess just the housekeeping ones. Did you give a September tons per day trend, and did you mention what tons per day are doing here in October?
Fritz Holzgrefe (VP of Finance and CFO)
We have not, but I can highlight that. So if you look at the LTL tonnage, you want to go ahead and give it for the quarter each month-
Todd Fowler (Managing Director and Equity Research Analyst)
Sure.
Fritz Holzgrefe (VP of Finance and CFO)
- That's usually the question. July, August, September. July was -3.8%, August down 3%, September was down 1.6%, and then month to date, October, we're +0.3%.
Todd Fowler (Managing Director and Equity Research Analyst)
Right.
Fritz Holzgrefe (VP of Finance and CFO)
That's on tonnage. Now, speaking of shipments alone, July, August, September, in order, down 2.2, down 1.3, positive 0.1% in September, and then October, positive 2.5%.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay, that helps. And then just the last one, you know, on the expansion. You know, Rick, what would your expectation be for number of years? I know you've given, you know, some initial thoughts on 2017 and the CapEx, but is this something that becomes, you know, is it a two or three-year process, or is it a five or seven-year process just to fully build out into the Northeast?
Rick O'Dell (President and CEO)
You know, we could cover the market with 20 terminals.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay.
Rick O'Dell (President and CEO)
You need to kind of do the math on that, right? If we open, whatever, four to five terminals a year, and then if you, you know, if we were to find a tuck-in or something, that could accelerate that.
Todd Fowler (Managing Director and Equity Research Analyst)
Okay, that makes sense. Nice quarter. Thanks for the time.
Rick O'Dell (President and CEO)
Appreciate it.
Operator (participant)
Thank you. The next question comes from David Ross of Stifel. Please go ahead.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
Yes, good morning, gentlemen.
Rick O'Dell (President and CEO)
Good morning.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
Hey, Rick, can you talk a little bit the length of haul trends? It's been positive this year, but it accelerated a little bit in 3Q. Certain customer type or market you're targeting, just better luck with the sales force, having cross sales across regions. How would you think about that number?
Rick O'Dell (President and CEO)
Yeah, I mean, we, obviously, we have some focus on revenue per shipment being an opportunity for us and leveraging our network. Also, kind of looking at this expansion in the Northeast and kind of looking at the generally having an east to west flow. We've began to market a little more heavily in some of the longer haul from the west to the east. And, you know, the West Coast market has actually been one of our strongest markets, so, you know, that's kind of helpful and has good contribution margin to us.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
And you mentioned the West Coast has been one of the stronger markets. Have there been any stronger industries or other stro`ng markets? Or anything you've seen that has driven this September, October shift to positive shipment growth?
Rick O'Dell (President and CEO)
I don't think I could point to anything specific. I mean, we have such a diverse customer base.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
And how's the energy business doing? Is that... Do you think you've found a bottom there in the oilfield services?
Rick O'Dell (President and CEO)
Yeah, but it's still a big negative, obviously, right?
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
Yeah. And the last question is just on the sales force. Are we at the process where, you know, you're good at where we are in the sales side? Do you need to cut any more? Do you need to start adding people now that shipments are coming back?
Rick O'Dell (President and CEO)
No, I think we're in good shape there. We basically have had kind of flattish type of sales resources in the field, and where we've kind of made our investments there is in inside sales to work on prospecting and help our field sales group kind of be more productive when they're, you know, out and about in their territory. So that's really kind of been our focus, is on a, you know, a team-based selling relationship.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
Have you seen the benefits of the inside sales, or how, how are you measuring that?
Rick O'Dell (President and CEO)
Yeah, our field, revenue is actually growing in eight of 11 regions. And overall at the company, our field revenue is up. Our 3PL business, blanket 3PL, you know, resale business is kind of flattish, and our national account business is down a little bit.
David Ross (Managing Director and Director of Transportation and Logistics Equity Research)
Excellent. Thank you.
Rick O'Dell (President and CEO)
All right.
Operator (participant)
Thank you. The next question comes from Brad Delco of Stephens Inc. Please go ahead.
Brad Delco (Research Analyst)
Good morning, Rick. Good morning, guys.
Rick O'Dell (President and CEO)
Morning, Brad.
Fritz Holzgrefe (VP of Finance and CFO)
Hey, Brad.
Brad Delco (Research Analyst)
Rick, the inflection in September, do you have any kind of good reason why you think you saw that in your network? And would you expect that that's more of a market event, or do you think it's more company specific?
Rick O'Dell (President and CEO)
Brad, I mean, I really don't know until we get the competitors' results, and we kind of get a better feel for what's going on in the marketplace. But, I mean, I think it's encouraging.
Brad Delco (Research Analyst)
Yeah, I guess the only thing I could wonder is, pushing the GRI later, do you feel like you saw some customers come over from others that pushed that GRI sooner? If that there was enough of a lag to matter.
Rick O'Dell (President and CEO)
I don't think so. We did it the first day of October and, you know, announced it a little bit ahead of time. I mean, we don't generally see that small customers for a week or whatever will change their relationships.
Brad Delco (Research Analyst)
Makes sense. And then,
Rick O'Dell (President and CEO)
I don't think that's what the driver is.
Brad Delco (Research Analyst)
And then in terms of the expansion plans, I know real estate is hard to come by. It seems like you have a pretty good idea at this point what facilities are available. It sounds like you're going to be leasing them. Are there any other things to be thinking about that could be an impediment to that timing that you laid out?
Rick O'Dell (President and CEO)
I don't think so, or we wouldn't be talking about it in this kind of detail, right?
Brad Delco (Research Analyst)
Yeah.
Rick O'Dell (President and CEO)
We're pretty far along in securing the facilities. Leadership candidates have been identified. You know, we've got an executable plan to be prepared.
Brad Delco (Research Analyst)
And then maybe my final question: It seems like when you enter into some expansion plans, you would sort of have some customers that will help you initially with density. Have you already had conversations with customers, and do you feel like you have, whether it's firm or tentative commitments that, you know, you'd be picking up a good bit of that Northeastern business from your existing customer base?
Rick O'Dell (President and CEO)
Yes. Yeah, you can assume we've done our research, our homework, and worked through the opportunities. And, you know, it's kind of interesting, you know, when we do an RFQ today, right, we get... We generally, people send us an RFQ, we get all their data. So today, when we mine that data for opportunities, we sort of, the non-direct states, we sort of take those off, but we keep the data, right?
So we have that data to go back and say, "Hey, you know, we did an RFQ with you a year ago. We see this as the business you have in the Northeast, and, you know, now we're going to have these terminals open. We can actively, proactively work on that." So we're not. It's not like you're starting from scratch, right? And then don't forget that of the-...
It's primarily an inbound market, and of the $7 billion of market potential, you know, $5 billion of that goes to and from our existing geography. So, and I know people talk about that being a tough market, and I think particularly the regional market up there is particularly tough. You know, we, we would obviously be looking to participate more in the interregional market with our, and leverage our, our coverage area as well as, you know, the freight flows that we have today, you know, running partials up in that direction.
Brad Delco (Research Analyst)
No, that makes sense. Well, let me just ask this follow-up then. You know, the comment about it being a competitive market, would you think it would be any more competitive than the Southeast market, considering the number of well-run private carriers in that region?
Rick O'Dell (President and CEO)
No, I would not.
Brad Delco (Research Analyst)
All right. Well-
Rick O'Dell (President and CEO)
And you know, that's one benefit to us, right? I mean, if you look at it, if we look at our network overall, the middle operates better than the ends generally. And so if you expand your end, you'd really have more middle, right? So for us, the Charlotte region, you know, which goes up into Virginia, is kind of end of our network. And today, you know, Ohio would be the end of our network, too. And as you kind of expand further, you know, you begin to be able to get freight flows in both directions across those regions, which really helps their profitability.
Brad Delco (Research Analyst)
No, that makes sense. Well, guys, congrats on the good quarter, and best of luck.
Rick O'Dell (President and CEO)
Thanks.
Fritz Holzgrefe (VP of Finance and CFO)
Thanks.
Operator (participant)
Thank you. The next question comes from Tyler Brown of Raymond James. Please go ahead.
Tyler Brown (Equity Research Analyst)
Hey, good morning, guys.
Fritz Holzgrefe (VP of Finance and CFO)
Morning, Tyler.
Rick O'Dell (President and CEO)
Morning.
Tyler Brown (Equity Research Analyst)
Hey, Rick, I was just hoping to come back to productivity. You guys have been doing a nice job there despite the tonnage. I'm just curious if you can talk about how you're achieving that. Is it really about manpower planning? And is there any new technology there that's helping, or, or what is catalyzing that?
Rick O'Dell (President and CEO)
Yeah, no, it's primarily manpower planning. I mean, we have very robust toolbox, right, in terms of dispatch tools. You know, we measure miles per stop and have some targeted individual opportunities. And, you know, our engineering group does a good job of supporting the organization. But, you know, quite frankly, it's a lot of days in this business, it's about discipline, right? You got pretty hard data about what your pickup volumes look like and your stops, and you know how many freight bills you have to deliver. You just have to staff the terminal to kind of effectively manage your productivity.
Tyler Brown (Equity Research Analyst)
Yeah.
Rick O'Dell (President and CEO)
I think it's particularly rewarding because, you know, our most dense areas in the company, you know, is kind of in the Texas, Louisiana area, and, you know, that business is down. So you've actually in, you know, in an area where we're very efficient, we have less bill count, and in other areas where we're growing, you know, we've been able to manage for some improvement in our production overall. So that's been... The cost execution, you know, given some of the challenges we have with some of our most one of our most profitable regions being down materially, has been, you know, showing some pretty solid execution.
Tyler Brown (Equity Research Analyst)
Yeah. No, absolutely. Great blocking and tackling. But it is nice to hear about this, call it, I guess, a de novo growth strategy. But Fritz, can you talk about the cash component to the $200 million in CapEx? Is it safe to assume that that's kind of a holistic number that incorporates the value of the leases? I'm basically looking for some sort of color on how much investment will show up on the cash flow statement.
Fritz Holzgrefe (VP of Finance and CFO)
Yeah. So what we should be, and if you think about our internal cash flow, right? So if you just look at what our operating cash flow, I think what you're going to see is that as we make the investments, our normal investments in fleet and in any real estate investments we make, you'll see us leverage up in the earlier quarters of the year. And then as we continue to generate cash from operations, you'll see us pay down. We'll probably put on a modest amount of lease, capital leases in there, but most of that, we think will generate from our pay down over a relatively short period of time.
Tyler Brown (Equity Research Analyst)
Okay. So most of the CapEx is cash in nature, though?
Fritz Holzgrefe (VP of Finance and CFO)
Yeah. Right.
Tyler Brown (Equity Research Analyst)
Okay, okay.
Fritz Holzgrefe (VP of Finance and CFO)
Only time, right?
Tyler Brown (Equity Research Analyst)
And then just a couple quick... Yeah, yeah.
Rick O'Dell (President and CEO)
Just a fairly significant amount of that is real estate projects for some expansion that we really need across some of our upper Midwest geography to handle freight flows, you know, to and from the Northeast, where today we're in a facility that's kind of at capacity. And if we look at where we're headed, you know, you need a bigger break bulk operation in a few of those cities.
Tyler Brown (Equity Research Analyst)
Right. Right, right, right. Okay, and then just a couple quick housekeeping items, but what percent of the book is on your general tariff these days?
Rick O'Dell (President and CEO)
Less than 25%.
Tyler Brown (Equity Research Analyst)
Less than 25%. Okay, great. And then just real quickly on the day count, just so I don't get it wrong, what is the Q4 day count? And will you have 1 less day next year, I'm assuming, in Q1 from the leap year?
Fritz Holzgrefe (VP of Finance and CFO)
Yeah. So we got 64 days in the current quarter, right?
Rick O'Dell (President and CEO)
No.
Fritz Holzgrefe (VP of Finance and CFO)
Oh, excuse me, six-
Rick O'Dell (President and CEO)
61.
Fritz Holzgrefe (VP of Finance and CFO)
61 days. Excuse me, I was looking at the wrong sheet there. 61 days in the fourth quarter. Next year will be 252 workdays.
Tyler Brown (Equity Research Analyst)
Okay, with the delta in Q1?
Fritz Holzgrefe (VP of Finance and CFO)
No, the delta will be in Q4.
Tyler Brown (Equity Research Analyst)
Q4, okay.
Fritz Holzgrefe (VP of Finance and CFO)
OR Q3 be 63, Q4 will be 61.
Tyler Brown (Equity Research Analyst)
Ah, okay, perfect. All right. Thanks, guys.
Operator (participant)
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one at this time.... We'll take our next question from Scott Group, Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Equity Research Analyst)
Hey, thanks. Good morning, guys.
Rick O'Dell (President and CEO)
Good morning, Scott.
Scott Group (Managing Director and Senior Equity Research Analyst)
So just a few more on the Northeast rollout. So, I think you said that the terminals start in the second quarter, but when do you—what's the kind of expected timing of the three to five? Is it all in the second quarter, or is it a couple each quarter? And then when do the costs start? Is that first or second quarter? And then maybe just with that, do you also—beyond just the guys in the terminals, do you need to ramp up the sales force?
Rick O'Dell (President and CEO)
Yeah, there, there'll be, we're projecting about 13 sales resources for the markets that we're gonna open, next year. You know, we're targeting kind of first of April type opening, but, you know, we need to get the, this things kind of locked down. So, you know, that could push a little bit. I would say we'll have, you know, either three or four terminals early, 2Q. So there'll, there could be some minor 1Q, startup type costs, 'cause you're gonna obviously hire employees and train them, you know, ahead of the opening, right?
Scott Group (Managing Director and Senior Equity Research Analyst)
Makes sense. And 13 sales resources is on a base of how many? Just for some perspective.
Rick O'Dell (President and CEO)
About total sales resources, including leadership and national accounts, about 260.
Scott Group (Managing Director and Senior Equity Research Analyst)
Okay. Makes sense. So your comment about some margin pressure just in year one of these terminals, was that a comment on just these terminals specifically, or that broadly, we could see margin pressure in kind of consolidated results in 2016 as a result of this?
Rick O'Dell (President and CEO)
No, I just said it's, it's first year, it's a modest negative, right? Just because you have the startup costs.
Scott Group (Managing Director and Senior Equity Research Analyst)
You're not saying that you think full year margins are lower in 2017 than 2016 because of this?
Rick O'Dell (President and CEO)
I did not say that. No, that's correct.
Scott Group (Managing Director and Senior Equity Research Analyst)
Okay. Okay. I didn't think you were saying it, just wanted to make sure. So just on the four-
Rick O'Dell (President and CEO)
Yeah, I mean, I'm just saying the four terminals, you mean the day you open them, they don't contribute positively, right?
Scott Group (Managing Director and Senior Equity Research Analyst)
Right. Okay.
Rick O'Dell (President and CEO)
You got some lead time, you know. Our experience has been, you know, we know what kind of share we historically take, whether it be after an organic opening or an acquisition, post-acquisition. And, you know, they're out of the gate, it projects modestly negative.
Scott Group (Managing Director and Senior Equity Research Analyst)
Okay. And then just last question. So we've talked in the past about the goal is getting to a sub-90 operating ratio. Does this terminal rollout accelerate that because of the density, slow it because of the lack of density initially, or big picture, it's three or four terminals, and it really doesn't impact the timing?
Rick O'Dell (President and CEO)
I think big picture, that near term, it doesn't really, it doesn't necessarily impact the timing. I mean, it's modestly negative as you go into it, and then it's incrementally positive. And one positive about the whole thing and the reason that it, part of the reason that it makes so much sense, right, is about 9%-10% of our costs are kind of, I would call fixed. So if you have business on an incremental basis were to operate at a 90, you know, to the extent that it's kind of bolt-on geography, it's 80, so it's, you get almost a 20% margin improvement over a period of time.
And the way we're entering the markets, obviously, the markets that are most adjacent to us happen to be the largest markets. So, you know, those while you open those originally, they're larger, they should contribute more quickly than, you know, the last terminals that you open are more end-of-line terminals, right? In the New England states that aren't generating a lot of outbound anyway.
Scott Group (Managing Director and Senior Equity Research Analyst)
Right. So maybe just the last thing. So what's the risk of it? Because obviously, if there was no risk, you would have done it already.
Rick O'Dell (President and CEO)
Yeah, I mean, you know, the risk could be, I guess, you stumble, fall on your face, you can't get much business, so you get stupid and go out and buy business at a, you know, at bad rates, but, and we're not going to do that. I mean, it's a small incremental steps, you know, if it's not going particularly well, you can slow it down till you execute better. I mean, I don't see it as being particularly risky. Now, if you look at the rationale, right? I mean, we've identified yield as being our biggest opportunity and, you know, kind of for reasons of making sure we capitalize on the biggest opportunity we have, you know, we stayed focused on improving the quality within our organization and capitalize on the yield opportunity.
Now we're generating meaningful cash flow. We've got our age of fleet where it needs to be. You know, we have the capital to invest in the real estate that supports this geographic expansion. I mean, it's a very good investment. I mean, if you said, "Hey, you got a 4% share, let's say, over time in a $7 billion market," I mean, look at the incremental revenue that we would have that could operate at, you know, with the, with the fixed cost leverage, 20% margins. It's a meaningful improvement in our operating income.
Scott Group (Managing Director and Senior Equity Research Analyst)
Makes sense. Okay. Thank you, guys.
Operator (participant)
Thank you. The next question comes from Brad Delco, Stephens Inc. Please go ahead.
Brad Delco (Research Analyst)
Thanks, thanks, Rick, for taking the follow-up. Rick, Rick, I just wanted to ask, and I don't know to what extent you could comment on this, but if we wanted to try to read into this, does this sort of suggest that the M&A opportunities or the, I guess, exploration of M&A opportunities has been exhausted, and this is sort of just sending the message that add a tuck-in here to, to expand in the Northeast, we're just gonna do it organically ourselves? And, you know, maybe you're going after the share that some of those Northeast regional carriers have, and, I mean, do you think this may change their mind in terms of willingness to sell?
Rick O'Dell (President and CEO)
I don't know. You know, this is really based on our business case. I mean, you know, and I think I've always said I thought the most likely avenue for expansion in the Northeast was probably a combination of organic and acquisition. And I'm not saying, you know, that, you know, we said we continue to explore opportunities in the marketplace. A lot of times, you know, if you go in and buy a regional carrier, you know you're not gonna get the great bulk operation that you'd really need to handle this $5 billion of freight that goes to and from our geography, right?
So, you know, we think this organic with some meaningful real estate investments in the marketplace is a good way to get started, and probably that type of investment would be needed anyway. So it doesn't preclude us looking at smaller regional organizations that may be interested in selling. It's just that these are attractive markets, and we're ready now, and, you know, we're confident of the business case looks good on this organic expansion, and, you know, we're ready to progress.
Brad Delco (Research Analyst)
No, that makes sense. And then maybe finally, this may be similar in nature to Scott's question, but, you know, we've always kind of viewed Saia as working towards that sub-90 OR, and I'm guess I'm wondering, is this sort of a chicken-and-the-egg question? Meaning, do you think this is really one of the final pieces that would help you get below the 90, or did you do you think you maybe were not able to achieve that sub-90 OR without having this national footprint?
Rick O'Dell (President and CEO)
I do think that it. I think it really helps us. I think we could have done it anyway, but if you really look at the contribution margin of incremental business, you know, at those kind of 20% margins, you know, that's a pretty big lever. And then, you know, let's be honest, I mean, we still get levered out on price at times because we don't have coverage in the Northeast.
And they say, "Hey, you know, I have to use, pick one of the other top ten carriers to go to the Northeast anyway, so I'll use you, but you need to show me a discount to what they'll do." You know what I'm saying? So sometimes you get leveraged out there, don't. So it's not just the incremental margins in the other geographies, but it also helps us, you know, you have a network to leverage with your existing customers in your existing geography as well.
Brad Delco (Research Analyst)
No, that makes sense, and appreciate the color there. Well, thanks again, guys.
Rick O'Dell (President and CEO)
All right, thanks.
Operator (participant)
Thank you. It appears there are no further questions at this time. Mr. O'Dell, I'll turn the conference back to you for additional or closing remarks.
Rick O'Dell (President and CEO)
Okay, well, thanks for your interest in Saia, and we look forward to catching up with you guys at some of the upcoming conferences.
Operator (participant)
Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.