Saia - Q3 2017
October 27, 2017
Transcript
Operator (participant)
Good day, everyone, and welcome to the Saia Incorporated Third Quarter 2017 Results Conference. Today's call is being recorded. At this time, I would like to turn the conference over to Doug Col. Please go ahead.
Doug Col (EVP and CFO)
Thank you, April. Good morning, everyone. Welcome to Saia's third quarter 2017 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer, and Fritz Holzgrefe, our Executive 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 actual results to differ. I'm gonna go ahead and turn the call over to Rick O'Dell.
Rick O'Dell (President and CEO)
Well, good morning, and thank you for joining us to discuss Saia's results. This morning, we announced our third quarter 2017 financial results, with third quarter diluted earnings per share of $0.55 compared to $0.54 in the third quarter last year. Third quarter results we will discuss today were impacted by two significant hurricanes, which affected a wide swath of the southern half of the United States. Hurricane Harvey disrupted operations across much of Texas, while Hurricane Irma impacted the entire state of Florida and was felt all across the Southeast to some extent. I'm pleased to report that although there were significant impact on volumes in the days surrounding these storms, our employees and their families are safe. Our facilities were not meaningfully damaged from a structural standpoint, and in all locations, we were able to restore operations a few days thereafter.
Third quarter results reflected good volume growth that has accelerated into October. The pricing environment remains rational, and I'm pleased with our 8% improvement in LTL yield. Contractual renewals increased an average of about 6% across 325 contracts. Saia again posted a year-over-year improvement in our cargo claims ratio. Strong customer service remains key to our ability to grow and enhance yield with customers who place a value on Saia's quality service. I'd now like to mention a few of the key operating highlights from the quarter. LTL shipments per workday rose 3.1%. LTL tonnage per workday rose 3.6%. LTL weight per shipment increased by 0.5%. Length of haul of 813 miles was 3% longer than a year ago and was also up sequentially from the second quarter.
Revenue per LTL shipment rose 8.5%. Our cargo claims ratio of 0.74% improved from 0.87% in the third quarter of last year. Cargo claims filed per day are down 7% from the third quarter of a year ago, in spite of the increased volume. Purchased transportation miles in the third quarter were 11.6% of total miles, compared with 8.7% last year. Purchased transportation usage was heavier following the storms to get the network quickly back in the cycle for our customers and certainly to service the impacted areas. Fuel mileage improvements across the fleet continue to be a positive, as we averaged 7.12 miles per gallon in the third quarter, compared to 7.04 a year ago.
With these general comments, I'm gonna go ahead and turn the call over to Fritz Holzgrefe to review our financial results.
Fritz Holzgrefe (EVP of Finance and CFO)
Thanks, Rick, and good morning, everyone. Third quarter revenue of $350 million was 10.6% higher than a year ago, benefiting from positive shipments, tonnage, fuel surcharge revenue, and yield improvement. We estimate that the revenue was negatively impacted by approximately $3.5 million as a result of lost volumes during both hurricanes in the quarter. Third quarter operating income rose by 8.6% to $24.6 million, compared to $22.6 million earned in the third quarter of 2016. Hurricanes created an approximate $2 million negative impact on operating income, a function of lost revenue, as well as incremental operational and recovery costs and costs that remained during terminal closures.
A few of the key expense items which impacted the third quarter results are as follows: Salary, wages, and benefits rose 9.1% to $194.9 million in the third quarter, reflecting the impact of an average wage increase of 3% in July. Higher healthcare costs and incremental labor related to year-over-year shipment growth in the quarter, including our expansion into new markets in Pennsylvania and New Jersey. Fuel expense rose 19.1% over last year, offset by increased fuel surcharge revenue, which rose 22.6% from a year ago. Fuel surcharge revenue was 11.3% of revenue in the third quarter, compared to 10.2% in the third quarter last year.
Purchase transportation expense in the third quarter rose by 47.4% to $23.1 million, and was 6.6% of revenue versus 5% last year, a function of higher purchase transportation utilization, as well as higher cost per mile. Outside maintenance and parts expense fell by 8% compared to the third quarter last year, reflecting the benefits of operating a newer tractor fleet with more units under warranty. Claims and insurance expense in the third quarter fell 14.5% to $8.5 million, compared to $10 million last year.
Depreciation and amortization expense rose 12.1% to $22.3 million, compared to $19.9 million in the prior year quarter, and the increase reflects our continued infrastructure and equipment investments. Our effective tax rate was 38.5% for the third quarter of 2017, compared to 35.9% in the third quarter of 2016. For the full year, we expect our tax rate will be approximately 37%. At September 30, 2017, total debt was $127.2 million. Net debt to total capital was 19.3%. This compares to total debt of $94.2 million and net debt to total capital of 16.6% at September 30, 2016.
Net capital expenditures through the first nine months of 2017 were $183.9 million, including equipment acquired with capital leases. This compares to $142.5 million in net capital expenditures in the first nine months of 2016. For the full year 2017, we expect net capital expenditures will be approximately $230 million, including investments in terminal infrastructure improvements, as well as continued investments to lower the age of our tractor, trailer, and forklift fleets. Now I'd like to turn the call back to Rick.
Rick O'Dell (President and CEO)
Thanks, Fritz. We're very encouraged by the early results from the incremental business in our expanded Northeastern coverage, which thus far, has modestly exceeded our expectations. Along with the four terminals we opened on May 1, we opened an additional terminal in Laurel, Maryland, on October 16. This new terminal is well positioned to allow us to service customers in and around the Baltimore and Washington, D.C., areas. In December, we will open our sixth new terminal of 2017 in Allentown, Pennsylvania. In 2018, we plan to open an additional 4-5 terminals in the Northeast, and we'll share locations and timings as those plans are finalized. Along with the $230 million that we will have invested in our business in 2017, we plan to spend that much or more in 2018.
While some of the capital will certainly go to our expanding service geography in the Northeast, we're also investing in expansion in other parts of our network, where larger or multiple terminals will give us an enhanced service capability and market share opportunities. Our value proposition around quality, on-time performance, and low cargo claims continues to allow us to see positive momentum on the pricing front, while still growing LTL volumes. Daily execution for the customer is our goal, and as we are successful with that, we expect to be well positioned for market share gains in existing markets, as well as our expanding coverage areas. With these comments, we're now ready to answer your questions. Operator?
Operator (participant)
Thank you. If you would like to ask a question, simply press the star key, followed by the digit one on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one at this time. We'll pause a moment. And we'll first hear from Todd Fowler of KeyBanc Capital Markets.
Todd Fowler (Analyst)
Great. Thanks. Good morning. So, nice job in kind of managing through the weather issues here in the quarter. I guess, given all kind of the moving parts and the noise, can you help us think about what we should expect from a progression standpoint into the fourth quarter? Either, I guess, as we think about, you know, maybe the OR or maybe some puts and takes in the third quarter as we move into the fourth quarter.
Rick O'Dell (President and CEO)
Sure. So if you normalize for safety, the fourth quarter operating ratio usually declines between 1 and 1.5 points. Obviously, there's a lot, a lot of moving parts around work days and how they fall around the holidays, you know, timing of general rate increases. Now we have our expansion costs and benefits, and then, obviously, the third quarter results. So given our third quarter results and our current trends, we would expect a flat to modest deterioration in the OR into the fourth quarter.
Todd Fowler (Analyst)
Okay. That helps, Rick, and that's obviously why I was asking the question. So-
Rick O'Dell (President and CEO)
Right.
Todd Fowler (Analyst)
Maybe just on the tonnage environment during the quarter, do you have the or could you share with us what the September tonnage is, what you're seeing into October, and then maybe an idea of, you know, what you think you picked up from the Northeast during the third quarter, and how that should trend, you know, for the rest of the year?
Fritz Holzgrefe (EVP of Finance and CFO)
Sure. So Todd, if I were... This is Fritz. If I were to break apart the quarter, LTL tonnage and shipments, July, August, and September.
Todd Fowler (Analyst)
Mm-hmm
Fritz Holzgrefe (EVP of Finance and CFO)
... we're positive 2.8, +2.3 in August, +5.8 in September. I should point out that, if you adjust for the July third, which was a Monday before the fourth, if you take that, adjust for that, our July tonnage would've been +4.6. So full quarter tonnage then is 3.6. Adjusted for that holiday, it's 4.1. If you take the shipments number, the 2.5, 1.9, and 5.1%, all positive year-over-year, making that same adjustment for the July third, it would have been +4.3 in July versus the 2.5. So for the full quarter, reported +3.1, sort of highlighting the July, it's +3.7% on shipments.
Todd Fowler (Analyst)
Then, Fritz, there would be something on top of that. There's another 100 basis points for the storm in addition to the July third holiday?
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah, I would roughly about 100 basis points for the impact of tonnage, tonnage and shipments related to the hurricanes.
Rick O'Dell (President and CEO)
They're through the quarter.
Fritz Holzgrefe (EVP of Finance and CFO)
Yes, through the quarter.
Rick O'Dell (President and CEO)
Which would really, mostly be off-
Fritz Holzgrefe (EVP of Finance and CFO)
Sure.
Rick O'Dell (President and CEO)
It's actually across August and September and the first week of September, right?
Fritz Holzgrefe (EVP of Finance and CFO)
Yep, exactly.
Todd Fowler (Analyst)
And then what about the... What would you estimate the impact from the Northeast? And if you could care to share, you know, where we're trending October to date, that could be helpful.
Rick O'Dell (President and CEO)
... Yes, so quarter to date, or October to date, I should say, tonnage is +6.5, shipments are +6.9 year-over-year.
Todd Fowler (Analyst)
Okay.
Rick O'Dell (President and CEO)
On the Northeast revenue, I guess, you know, there's just so much noise in the third quarter shipment and tonnage trends, you know, with adjustments to 3PL pricing and the hurricane impact. So I think what we'd like to do is just talk about October, you know, in terms of what, you know, what some of those segments might look like. So in October, the Northeast expansion represents about 4.5% of revenue, and I think, in 2Q, when the run rate was a little bit under 3%. And I would note that since the Baltimore terminal opened just two weeks ago, the run rate this has accelerated to over 5% of our revenue. So we're really pleased with the customer response to our enhanced service offering.
Todd Fowler (Analyst)
Okay. Yeah, that's helpful commentary. And then just on the purchase transportation here in the quarter, I understand that there's additional usage to get the network back into cycle. There's also cost pressure. Is this a situation where purchase transportation is going to remain elevated for a period of time, or should that start to step down as you move through, or as the network cycles back after the storm issues? How do we think about purchase transportation going forward?
Rick O'Dell (President and CEO)
Yeah, I think it would come down a little bit, although I would also comment that, you know, with our length of haul continuing to increase, particularly with some of our, you know, with the Northeast expansion, that, you know, there's an increased use of rail that, you know, is an efficient use of purchase transportation, too. So you'll see some of that will continue. And then, you know, as sometimes you have volume spikes, right, you may use purchase transportation to supplement. It may be a bit suboptimal, and then over time, you know, you do your staffing and reoptimize that.
Todd Fowler (Analyst)
Okay. The last one I had, and I'll turn it over, but and I know this is preliminary, but thinking about as you move into 2018, more investment in the Northeast coming, but also some benefits from the initial investment. Can you help us think about, you know, at maybe a high level, I think in the past you've talked about, you know, seeing, you know, 100-200 basis points of normalized or of margin improvement, kind of in a normalized environment. With what we're seeing with freight fundamentals and rates, and then, you know, balancing with the organic growth that you're doing, how should we think about the ability to improve margins into next year? Thanks.
Rick O'Dell (President and CEO)
Yeah, I mean, I think the opportunities are significant, and I think more, you know, what we're obviously focusing on is capitalizing on the investment in the Northeast to grow the top line, as well as to- we think that'll clearly be, you know, positive to the bottom line as well. You know, we are making investments in, you know, size, existing geography, as well as some incremental investments in the Northeast, you know, which you have to invest in both facilities and people, et cetera, you know, ahead of your, you know, to create capacity ahead of your expansion.
So given those things, you know, obviously, we, you know, we would clearly expect to see, you know, kind of double digit top line growth and, you know, 100 basis points or, or maybe a little bit more, around 100 basis points, probably on the bottom line due to some of the investments that we're making.
Todd Fowler (Analyst)
Okay. That's helpful, Rick. Thanks for the time, everyone, and have a good weekend.
Rick O'Dell (President and CEO)
Sure. Thanks, Todd.
Operator (participant)
Next, we'll hear from Brad Delco of Stephens.
Brad Delco (Analyst)
Good morning, Rick.
Rick O'Dell (President and CEO)
Morning. Hey, Brad.
Brad Delco (Analyst)
I wanted to make a joke and say all my questions have been answered, but I don't know that that's funny. Todd asked all the good ones. One of the questions I had, you saw some nice acceleration based on the tonnage numbers that Fritz gave. You sort of alluded to the fact that the aggressive pricing actions with 3PLs, you think would eventually come back. You think that's what's sort of driving September, October tonnage, or do you think it's more traction in the Northeast?
Rick O'Dell (President and CEO)
It's more continued traction in the Northeast, but that business, a lot of that business has come back. I mean, just to give you a perspective. Let me find my note here on it. In May, 3PL, that blanket 3PL business was up 17% on shipments. In July, it was down 17%, and now it's only down 3%. So the business is kind of returning, not fully back to where it was in, you know, pre-pricing adjustments, but kind of. It's coming back anyway, right?
Brad Delco (Analyst)
At the double-digit increases that were put through?
Rick O'Dell (President and CEO)
Correct.
Brad Delco (Analyst)
Gotcha. And then when you think about yield, and I understand that it was positively impacted by length of haul and weight per shipment, but you know, you're not seeing probably as much flow through to the bottom line. Should we just read that as to a bunch of noise related to storms and cost associated with that? I think most people expected you to see some of the greatest disruption among the public LTLs, given your Houston exposure. But I'm just trying to get a sense of when we really start to see your, your great pricing kind of start driving a lot of margin improvement.
Rick O'Dell (President and CEO)
Yeah, I think there's, you know, there was an impact of the storms, which we estimate to be about $2 million. So, you know, that's what? 0.7 of a point on the operating ratio, 0.6 of a point on the operating ratio. So we would have seen some good improvement. You know, again, there are some investments throughout our network and in the Northeast that are some incremental costs that we're costs in our run rate that we're making as well, you know, both in equipment, facilities, and people. So, you know, I think that's having some impact. But, you know, we would expect to continue to progress the operating ratio.
Brad Delco (Analyst)
Okay. And then last one from me. I think Fritz, Fritz, maybe you mentioned CapEx next year related to building out some of your sort of legacy network. Where do you think you stand with that network in terms of door capacity? I guess the question is, are you reacting to the need for additional capacity in the network, or are you trying to be a little bit proactive with those investments?
Rick O'Dell (President and CEO)
Proactive. Yeah, I mean, we have a few tight spots, but it's, it's more proactive, where we're really making some investments that, you know, we, we hadn't made before, probably, or on facility availability, especially when you end up doing a construction project. Obviously, it's by the time you get those complete, et cetera, you know, there's a little bit of reaction to it, but there's a, it's a material expansion and capacity.
Fritz Holzgrefe (EVP of Finance and CFO)
Just to add to that, Brad, it's also, I know we've talked to you about it before, but it's much, in many cases, about getting closer to the customer. So, you know, some of the locations, it's adding, you know, markets, it's adding a second terminal, that is, you know, maybe geographically closer to some of the customer base.
Brad Delco (Analyst)
Gotcha, that makes sense. So, yeah, and I guess the question is, as it stands today, you know, you have capacity to grow into, in sort of your existing network. I guess, yeah, could you quantify that 10%, 15%? What type of latent capacity do you think you have in that network?
Rick O'Dell (President and CEO)
Yeah, it, it's 10-15 every time we look at it.
Brad Delco (Analyst)
Okay. Well, that's all for me. Thanks, guys.
Rick O'Dell (President and CEO)
All right, great. Thanks.
Fritz Holzgrefe (EVP of Finance and CFO)
Thanks, Brad.
Operator (participant)
Next, we'll hear from Scott Group, Wolfe Research.
Scott Group (Analyst)
Hey, thanks. Morning, guys.
Rick O'Dell (President and CEO)
Morning.
Fritz Holzgrefe (EVP of Finance and CFO)
Morning.
Scott Group (Analyst)
So wanted to ask about pricing. So I think you said 6% renewals in the quarter. Is there a way to... The 8% number from last quarter, is there a way to adjust that for the 3PL pricing, meaning X, that big increase on 3PLs, it would have been 5 or 6? I just want to understand if the pricing environment underlying is accelerating or not.
Rick O'Dell (President and CEO)
Yeah, I think it was in the 5%-6% previously as well, absent those 3PL adjustments.
Scott Group (Analyst)
Okay. So accelerating a little bit. So I, I guess, you know, the truckload pricing is going to get a lot better next year.
Rick O'Dell (President and CEO)
Right.
Scott Group (Analyst)
Your pricing, LTL pricing, has already been really good. Do you think that the better truckload pricing means that your pricing can get even better next year, or is it sort of, "Hey, we've already been doing well, and we just want to maintain the 5%-6% pricing that we're already getting?" Or do you think it can get even better?
Rick O'Dell (President and CEO)
I think 5%-6% is probably the most reasonable range. I mean, it could get modestly better, right? But that's a pretty, pretty robust number.
Scott Group (Analyst)
No, for sure. Yeah. Okay. Okay, on the purchase transportation side, can you just give us a sense of what % of your linehaul miles are you doing PT on, and how much of that is rail and how much of that is truck?
Rick O'Dell (President and CEO)
We said the percentage was 11%-
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah.
Rick O'Dell (President and CEO)
Hang on a second. I had it in my comments.
Fritz Holzgrefe (EVP of Finance and CFO)
Hey, Scott. Purchase transportation miles were 11.6% of total linehaul miles, and that compares to 8.7% last year. In terms of breakdown.
Scott Group (Analyst)
And do you have a rough split of how much of that's rail and how much of that's truck?
Rick O'Dell (President and CEO)
I don't have it in front of me.
Fritz Holzgrefe (EVP of Finance and CFO)
I don't.
Rick O'Dell (President and CEO)
We can give it to you offline, though.
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah.
Scott Group (Analyst)
Okay, perfect. And then just two small things just for our models for next year. Do you have an initial tax rate, Fritz? And then as you take on some debt for the CapEx, what's a good interest rate to assume?
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah. So I think the tax rate probably around 38% full year. Now, you'll see some volatility during the quarters, similar to what you saw this past year. But I think for a full year, that's probably a reasonable estimate. And for a borrowing cost, I mean, we typically are, you know, our capital lease rates, you know, longer-term rates are probably somewhere around 2.5-3, creeping above 3 a little bit, but we're at, you know, probably around 2-ish for line of credit borrowing, so.
Scott Group (Analyst)
Okay, perfect. And if I just heard right, the tax rate 38% next year, but 37% this year?
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah.
Scott Group (Analyst)
Okay. All right. Thank you, guys.
Operator (participant)
Next, we'll hear from David Ross of Stifel.
David Ross (Analyst)
Yes, good morning, gentlemen.
Rick O'Dell (President and CEO)
Morning.
David Ross (Analyst)
Great to see you open up in Baltimore.
Rick O'Dell (President and CEO)
Yeah, right?
David Ross (Analyst)
Yeah. Everybody needs a little more Baltimore in their life. But-
Rick O'Dell (President and CEO)
Have you seen our trucks there? Have you seen our trucks there yet?
David Ross (Analyst)
I have not. I have not, but I will keep a look out. As you remember, I moved to Miami last year, so I'm not up there as much as I used to be. But when I go back for Thanksgiving-
Fritz Holzgrefe (EVP of Finance and CFO)
Right.
David Ross (Analyst)
I'll definitely take a look and send you some pics.
Fritz Holzgrefe (EVP of Finance and CFO)
There you go. Great.
David Ross (Analyst)
On the driver side, you talked about the annual pay increase you took this summer. Is there any need to do more in select markets or with select positions in terms of the workforce?
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah, so the number we, David, the number we quote is an average across all the markets that we operate in or all the job classes, meaning, you know, there, there may be a market where we provide a higher rate to maybe the drivers or mechanics somewhere else. I would expect next year, you know, similar sort of sort of view, maybe a little bit higher average rate, but it's gonna be mixed by market again. But we tend to, we tend to benchmark by market.
David Ross (Analyst)
Okay. And then, you know, for specifically on the markets, where are you seeing the most wage pressure for drivers in particular?
Fritz Holzgrefe (EVP of Finance and CFO)
You know, I think it's the ones you traditionally hear, you know, like the Chicagos, Oakland, you know, Denver at times, Houston region.
David Ross (Analyst)
Are those the ones that have the highest pay currently, or just the most upward wage pressure?
Fritz Holzgrefe (EVP of Finance and CFO)
They tend to be generally are the highest paid markets today.
David Ross (Analyst)
Okay. And then the competitive landscape in the Northeast, because it's a new geography for you all, are you finding that the competitive landscape any different there than the other regions that you compete in now? Or how do you think it differs?
Fritz Holzgrefe (EVP of Finance and CFO)
I would say it's similar. From a hiring perspective, one of the benefits that we have with our being a new entrant to the market, the opportunity for a driver to come work for us and maybe be higher on the seniority scale, and thus be able to pick more attractive routes or routes that he's more interested in, that that's a little bit of a sort of qualitative benefit we have right now. But I think that it's, you know, it's pretty similar to what we see everywhere else.
David Ross (Analyst)
And is most of that business currently interregional business, you know, in the sense that it's, you know, moving in or out of legacy Saia territory into the Northeast? Or are you... Or, I guess, what percentage-
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah
David Ross (Analyst)
what I consider intraregional as well?
Fritz Holzgrefe (EVP of Finance and CFO)
I mean, I'd say the vast majority of it is from our existing geography into the Northeast and then out. It's actually, it's over 90%-Yeah-to and from Saia legacy geography.
David Ross (Analyst)
Okay. How long, you know, do you guys think that that might take to build up an intraregional footprint? Do you have to wait really until you finish the, you know, full terminal expansion over the next few years to start doing that?
Fritz Holzgrefe (EVP of Finance and CFO)
Yeah, kind of, right? I mean, to really have that, you know, aggressive overnight service and build direct between them, you need to get a little bit of scale to you and some incremental coverage areas, right? So right, right now, I think we're more attractive to customers in the, in the crossing our network. And then it's also good synergy for us crossing the network, you know, where you're getting multiple pickups and deliveries and building some route density within our existing geography as well. So, you know, our revenue per bill is higher. You know, our length of haul in and out of there is probably in the 1,100-mile range right now, so we're, we're focused, you know, kind of more focused on that two-day freight there.
David Ross (Analyst)
Well, all sounds good. Keep up the good work. Thank you.
Fritz Holzgrefe (EVP of Finance and CFO)
Thanks, David. Just wanna interject. Just a quick Scott Group follow-up question on the linehaul miles. The rail is roughly 3.7% of our total linehaul miles. We commented the total PT was 11.6, so 3.7 would be rail-related.
Operator (participant)
As a reminder, if you would like to ask a question or make a comment, press star one at this time. We'll now hear from Jason Seidl of Cowen and Company.
Jason H. Seidl (Analyst)
Yeah. Hey, Rick. Hey, Fritz. Question as we look out to next year, obviously, with the tight truckload market, historically, LTLs have gotten spillover type freight, which has led to increases in weight per shipment. That tends to sort of bring down your reported yield numbers, right? Which has nothing to do with pricing. But just from a modeling standpoint, how should we look at that going forward into 2018, and what kind of an impact that's gonna have with the reported yields?
Fritz Holzgrefe (EVP of Finance and CFO)
There's some correlation coefficients on that, on what let's just say a 50-pound change would be. I think it runs 30-35% of that? Yeah, roughly. So if you look at the percentage change, if you look at the percentage change in weight per shipment, I think it correlates to about 35%. Yeah, of the change. Yeah.
Jason H. Seidl (Analyst)
Okay, now that,
Fritz Holzgrefe (EVP of Finance and CFO)
In terms of ballpark, that would be a way to look at it, right?
Jason H. Seidl (Analyst)
Okay. It's very helpful. Thank you. I apologize if this has been asked already on capital spending, and obviously, you're gonna expand again next year as well, but how should we look at that CapEx number, 18 versus 17, on the net side? Is that gonna run about equal to 17?
Fritz Holzgrefe (EVP of Finance and CFO)
Now, you should see it increase somewhere around $250 million next year, maybe a touch higher. And the way to really break that apart is that it, you know, our IT, we've got spend, obviously, on IT, that'll stay relatively flat. We'll probably see a modest increase or volume-related increase on the equipment sort of investments, and the balance is gonna be real estate. We'll, we've got some terminal expansion projects in the works for 2018, so those are. That's a big part of why the number is up year-over-year.
Jason H. Seidl (Analyst)
Okay. Well, that's fair enough. That's all I have, gentlemen. Thanks for the time.
Fritz Holzgrefe (EVP of Finance and CFO)
Thanks, Jason.
Operator (participant)
As a final reminder, that's star one to ask a question. It appears there are no further questions at this time.
Frederick J. Holzgrefe (EVP of Finance and CFO)
All right. Thank you for your interest today. We appreciate it.
Operator (participant)
That does conclude today's conference. Thank you all for your participation. You may now disconnect.