All improvement: Saia's CEO Discusses Q4 2013 Results

Executives

Doug Col - Treasurer

Rick O’Dell - President and CEO

Jim Darby - Chief Financial Officer

Analysts

Brad Delco - Stephens

Jason Seidl - Cowen and Company

David Ross - Stifel

Scott Group - Wolfe Research

Bill Greene - Morgan Stanley

Saia, Inc. (SAIA) Q4 2013 Results Earnings Call January 31, 2014 11:00 AM ET

Operator

Good day. And welcome to the Saia Inc. Fourth Quarter 2013 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Saia’s Treasurer, Mr. Doug Col. Please go ahead.

Doug Col

Thank you, Shannon. Good morning. Welcome to Saia’s fourth quarter 2013 conference call. Hosting today’s call are Rick O’Dell, Saia’s President and CEO; and Jim Darby, our CFO.

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.

Rick O’Dell

Well, good morning and thank you for joining us. I am pleased to report the Saia’s strong performance of 2013 continued through year end. In the fourth quarter, we delivered a solid increase in year-over-year earnings, while making meaningful investments and growth initiatives. The success this past year was built on the hard work and talents of the entire Saia team.

Highlights in the quarter compared to the fourth quarter of 2012 include the following. Total revenue increased 5.8% to $280 million, LTL increased 5.1%, LTL tonnage rose 2.9%, our operating ration of 94.7 improved by 150 basis points and earnings per share of $0.32 increased 45% from the $0.22 earned in the fourth quarter of last year.

Saia continues to prioritize throughout our organization, our commitment to deliver our quality service product to our customers. The fourth quarter represented the ninth consecutive quarter of 98% on-time service. The value preposition is clear. Our customers have a need for consistent on-time claims free freight service.

As we have success in meeting that need, our yield continues to improve. LTL yield rose 2.3% in the fourth quarter compared to the fourth quarter of last year. Fourth quarter results are particularly satisfying as we were able to achieve the year-over-year improvement in earnings while simultaneously making investment in equipment and sales power to drive result in 2014 and beyond.

For the full year 2013, Saia achieved a 27% increase in operating income over the last year. A few of the highlight from the past year include the following. Our cargo claims ratio improved to 0.85 versus 0.93 in 2012. Our load average for the year improved 4.3%. Our purchase transportation miles we're down 6.9% during the continued impact of our line haul optimization which selectively directs us to use the most cost efficient transportation load available in any given lane.

The skill of our professional drivers coupled with investments in technology and new equipment over the past several years had driven improvements in miles per gallon. Fuel efficiency improved 3.2% this year to 6.5 miles per gallon. We completed the planned addition of 20 sales professionals in the fourth quarter which enhances our competitive selling position to achieve future market share gains.

Our improve results have resulted in improved cash flow and a stronger balance sheet. We reduced our interest expense by $1.3 million while making significant investments in our people, facility, equipment and technology. Quality matters initiatives remained the cornerstone besides corporate culture. The pursuit of quality is evident and the action that you see everyday, at every terminal, every shop and every office across our network.

This investment in quality that supported Saia’s industry-leading yield initiatives over the past several years. We expected our continuous focus on quality and our enhanced value proposition will support the combined yield and growth advancements that we seek this year in 2014.

Now I’d like to have Jim Darby review our fourth quarter and year-to-date results. Jim?

Jim Darby

Thanks, Rick, and good morning again everyone. As Rick mentioned, the fourth quarter 2013 earnings per share were $0.32, compared to $0.22 in the fourth quarter of 2012. For the quarter, revenues were $280 million with operating income of $14.7 million. This compares to 2012 fourth quarter revenue of $264 million and operating income of $10.1 million. Both period included 62 workdays.

As Rick mentioned, LTL yield for the fourth quarter 2013 increased by 2.3%, which primarily reflect the favorable impact of continued pricing action consistent with the trend of the past several quarters.

Our industrial engineering initiatives and operational effectiveness have maintained our high-quality service, while significantly enhancing our linehaul effectiveness and fuel utilization.

The quarter, however, did include higher cost in some areas, including salaries wages and benefits rose to $144 million in the fourth quarter, reflecting a midyear wage increase of approximately 3% and improve tonnage strength.

Purchase transportation expense for the quarter rose $2.6 million compared to last year. This increase favorably impacted our results due to the effective use of lower cost rail miles.

Depreciation and amortization ran $13.8 million during the quarter versus $12.3 million in the prior year quarter due to our significant capital expenditures for tractors and trailers. Claims and insurance expense was $7.4 million in the quarter, compared to $6.3 million last year in the same quarter, which was the result of slightly higher accident severity.

For the full year revenues were up 3.7% to $1.1 billion, while operating income of $74.4 million was 27% higher than the $58.7 million posted in 2012. In 2013, net income rose 36% to $43.6 million from $32 million earned the year before. Diluted earnings per share were $1.73 versus $1.29 in 2012.

Our effective tax rate was 38.7% for the fourth quarter of 2013 and 36% for the full year. Excluding the impact of the tax credits recorded during the first quarter of 2013 that were retroactive to 2012 our effective tax rate for 2013 was 37.5%.

At December 31, 2013, total debt was $76.9 million. Net debt to total capital was 20.1%. This compares to total debt of $60.7 million and net debt to total capital of 19.2% at the end of 2012.

As previously disclosed, we were able to take delivery of an additional 170 tractors in the fourth quarter and therefore our pull-forward some of our anticipated 2014 capital expenditures. Net capital expenditures for 2013 were $122 million. This compares to $83 million of net capital expenditures in 2012.

In 2014, the company currently plan net capital expenditures of approximately $85 million. This level of expenditure reflects primarily the replacement of revenue equipment, investments in technology and real estate projects.

Now, I’d like to turn the call back to Rick.

Rick O’Dell

Okay. The fourth quarter finish with improve margins and increasing tonnage achieved through solid execution across our network. I believe our ongoing investments in technology and quality has set the stage for us to build on these demonstrative results.

We remained committed to our core strategy of improving yield, enhancing customer satisfaction, building density and reducing cost to engineer process improvements and continuous employing training. We believe this strategy provide the strong foundation for our long-term profitable growth and increase shareholder and customer value going forward.

With these comments, we’re now ready to answer your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Brad Delco with Stephens.

Brad Delco - Stephens

Good morning Jim.

Jim Darby

Good morning Brad.

Brad Delco - Stephens

Rick, comments in the release about some accelerating tonnage trends in the quarter. It seems as if you maybe had a little bit quicker success with your growth and your sales force plus the environment was a little bit better. Can you talk about expectations for tonnage growth going forward and maybe provide some details and monthly tonnage throughout the quarter for us?

Rick O’Dell

Yeah, I’ll have Jim kind of step you through the tonnage trends for the quarter. And then I’ll make some comments like you had suggested.

Brad Delco - Stephens

Okay.

Jim Darby

Brad, going through the quarter and this is LTL tonnage year-over-year comps. October was up six tenths of 1%, November was up 2% and December was up 7.4% and that gets us to the quarter of being up 2.9% over fourth quarter of ‘12. So far month-to-date through January, we’re trending up 3.2%, and that includes obviously all the -- whatever weather impacts that we’ve had this year. So far the months were up 3.2% in LTL tonnage.

Rick O’Dell

So, again we’ve completed the additions of our sales force as planned. It was completed throughout the fourth quarter. And obviously we’re pretty pleased with tonnage trends especially December and then as since the weather impacted days that we experienced in January, turns were also favorable.

I would say, probably, from the run rate going forward, it’s probably somewhere between that 3.5% and 7%, maybe in the 5% range, would be maybe our current expectations. And I think the timing of our sales force addition probably proved beneficial to some of the things that are going on in the market place out there.

Our upper Midwest is growing faster than the rest of our network. There is a competitor that’s going through an integration up there that I think we’re seeing some benefit from. And I think economy is a little bit better. We also enhanced some of our longer haul lanes in November and are having some early success with that that we would expect to continue to build on.

So we’re pretty pleased with what we’re seeing from a topline perspective and for the year, we would clearly expect to see some improved tonnage trends going forward.

Brad Delco - Stephens

Great. And then I guess, one another one, Jim, you kind of touched on the weather issue. Clearly, we’re hearing a lot about that. Can you kind of talk about what is sort of the normal sequential change in operating ratio from fourth to first and whether maybe some of the, kind of, cost associated with these newer sales guys may due to what maybe the kind of normal historical sequential change?

Rick O’Dell

Sure. In the recent years, we’re kind of look back about four years in the first quarter and it has been about a point better than the fourth quarter. But this year expectations need to be tampered for the first quarter due to two major factors. One is that we’ve experienced severe weather already in January. We recognized trucking remains an outdoor sport.

Somebody reminds me the other day and we’ve had a deal with that. We’re pleased to see that today is the last day of January and we’d like to put January behind this. And number two, also as we’ve had unfavorable accidents and self-insurance experience already in the month of January. As a reminder, our self-insurance rotation is $2 million per incident and while our frequency in our fundamental safety program at Saia are very good.

As we stated before, we are subject to earnings volatility from accidents severity and we are not going to have a good safety quarter due to what’s happened already in January. And our results are going to be unfavorable from normal expectations from a safety by more than one operating points. So that being said, we now expect OR to be more flattish from the fourth quarter as opposed to the approving trend that we’ve experienced over the past two years.

So, again, it’s early in January. We’ve experienced some unfavorable items. Obviously the best months of the quarter are ahead of us and obviously the remaining 11 months of the year are ahead of us too and we like the fundamental things we are seeing. But we’ve had some bad experience with weather and accidents severities.

Brad Delco - Stephens

Terrific. Guys, thanks for the time.

Rick O’Dell

Sure.

Operator

And we’ll move next to Jason Seidl with Cowen and Company.

Jason Seidl - Cowen and Company

Hey, guys. Good morning.

Rick O’Dell

Good morning, Jason.

Jason Seidl - Cowen and Company

Just a couple of quick things here. You talk about pricing and what you guys are seeing in the renewals. Obviously, we had a very good pricing year for the LTL market. What sort of built in your expectations for 2014?

Rick O’Dell

We had many contract renewals in the fourth quarter. We are again greater than 3%, so again, where we’ve had greater increases in that in the last two years. I think last year, we were up 4.2 I believe for the year and then the prior year was even better than that. But I think as we stated, lot of our corrective action pricing is behind us. And we expect to be kind of a more normal level. Obviously, we price it account by account, lane by lane and our analytical discipline pricing continues to pay dividends but we think market is pretty good.

Rick O’Dell

For the quarter, our yield was up 2.3%. Fuel surcharge had a negative impact of about 1%. So our yield was up, adjusted for mix and fuel surcharge a little over 3% and that’s kind of in line with what our expectations are and kind of what we stated and we would -- our target is to continue to achieve something in that range going forward. And we think the environment is conducive to that so far.

Jason Seidl - Cowen and Company

Okay. That’s great color. Thank you. And when we look at some of your expectations for tonnage, I believe you said somewhat at the midpoint of about 3.5% to 7% range. I guess what is kind of mucking up sort of the underlying demand here right now in January. How much of that sort of 5% tonnage expectations do you think is coming from the economy and how much do you think might be coming from some competitors that are almost struggling right now?

Rick O’Dell

I don’t know -- we have such a diverse customer base. It’s hard to see kind of where your volumes are coming from. We are one of the early reporters out there from a tonnage prospective interest and trends. I guess my comment would be, we expect to get our fair share of plus some with some of the investments in way the company is operating and having a very good value proposition out there. So it’s hard to say. I mean, obviously there is multiple factors that go into that. But I would tell you, I think we are well positioned to capitalize on it and if we can get a 5% type LTL tonnage and a 3% type rate increase I think we will be in a good position to have some good results again this year.

Jason Seidl - Cowen and Company

Right. And you -- when you start thinking about that sort of the topline and hopefully bring it to the bottom line at 14%, your CapEx is going to be reducing in 2014 and probably not going to be back to prior year levels? Any plans going forward on the balance sheet side, I mean you guys are seem a little sort of under-levered your net debt-to-cap, just how is the market for maybe potential acquisitions looking?

Rick O’Dell

Yeah. I mean, we said that we get 93 type operating ratios then returns are better in the business and we would look for opportunities to continue invest in not only the LTL product offering but as well as some of asset light opportunities.

So, again, we think they are good opportunities to improve margins and returns within our existing businesses, but we would also look outside of that for the right opportunities, provided that they don't detract from the priority that we see and the opportunity that we see within our existing business, right.

We get -- and I guess the market, it seems like there is some deals and opportunities out there, particularly in that kind of asset-light type models that a lot of people are seeking those businesses and if we could find some of that spikes reasonably, that has some good synergies and opportunities for growth then we would certainly seek those as well.

Jason Seidl - Cowen and Company

All right. Listen I appreciate the time as always guys, I'll turn it over to somebody else.

Rick O’Dell

All right.

Operator

We'll go next to David Ross with Stifel.

David Ross - Stifel

Hey. Good morning, gentlemen.

Jim Darby

Good morning, David.

Rick O’Dell

Good morning.

David Ross - Stifel

Rick, you talked about any e-commerce activity that may have helped drive that your December tonnage number, is that something you're seeing more of at Saia?

Rick O’Dell

I don't think so particularly, one of that obviously is residential type traffic and I think while see some more of that, people doing business out of their homes and as well as, consumer goods being delivered to our homes as we intend to order more over the internet, I don't think it's a major factor at all.

David Ross - Stifel

You guys don't have kind of let’s get some of the trailers and aren't gearing towards that business for any reason?

Rick O’Dell

We have probably more than our fair share of that but we tend to be more at the strip mall as opposed to at your driveway.

David Ross - Stifel

Okay. Driveway could be rather expensive for your haul operators, so it's probably better that way.

Rick O’Dell

Right.

David Ross - Stifel

And then, Jim, on the operating taxes and licenses parts, it was down year-over-year, which is the good thing because it's been in that $9 million to $10 million a quarter range for the past four years, was there anything one time there like a year end true-up to drive at lower and what's your expectation for that line item going forward.

Jim Darby

I would think, David, if you look at the year-over-year we're down slightly, I mean I would trend that forward.

David Ross - Stifel

Okay.

Jim Darby

I don't know there's any big one-time thing in the fourth quarter that impacted that.

David Ross - Stifel

And it just seems the lot would see more trucks that you would have lower taxes and licenses expense, because I don't know if there's anything else missing.

Rick O’Dell

What line was that again?

David Ross - Stifel

Operating taxes and licenses.

Rick O’Dell

Yeah. A lot of that fuel though, I mean with the fuel economy improving in our linehaul effectiveness is impacting that, that's what that is.

Jim Darby

Yeah. The fuel amount per gallon and amount per gallon being up lower burn of fuel takes the taxes down.

Jim Darby

That's correct.

David Ross - Stifel

Got it. Okay.

Rick O’Dell

And you also see that our purchase transportation was up a little bit year-over-year and just a way the holiday spell and the weather that we experienced in December, as well as some of the longhaul lanes that we're seeing some growth and I think the haul was up, we use more cost effective use of rail. But you know that takes down your miles and your fuel consumption.

David Ross - Stifel

Yeah. And you talked about your November, I guess, enhancing some of the longer haul lanes, that was with driven around, you basically figured out how to work some intermodal into your network?

Rick O’Dell

Probably not an incremental intermodal, really just looking at transit times that we have and maybe one day a week you can't run it on the rail to make some more aggressive cross-country transit times, but if you grow them -- if you're growing the lane, right, you might be running it one more day over the road, but when you have the weekend, you may put it on the rail, right. So you see kind of a growth of the rail overall as well. And then, again, just a way the holidays fell, you had some more opportunities to run more rail during the week.

David Ross - Stifel

Excellent. Thank you very much.

Rick O’Dell

Sure.

Operator

And we’ll take our next question from Scott Group with Wolfe Research.

Scott Group - Wolfe Research

Hey. Thanks. Good morning, guys.

Rick O’Dell

Good morning, Scott.

Scott Group - Wolfe Research

So finally getting your view on how we should think about incremental margins going forward. So they’ve been obviously really good in the past couple of years when it was about pricing and all other internal things. But as we get a little bit more balancing with the tonnage and yield, maybe you had better even tonnage than yields. How do you think incremental margin should look going forward? And I understand the first quarter, but I was thinking more kind of over the course of the year.

Rick O’Dell

We think there are good opportunities to improve margins. We have few costs headwinds but they are kind of normal, right. You are talking recession from the incremental equipment, healthcare, wage and benefit increases probably in the neighborhood of $35 million, $36 million in total. And if you get a 3% yield increase that basically covers that.

So then you’ve got the benefits from incremental tonnage as well as our engineer cost savings project that we have is kind of in the $10 million to $12 million range. So, we think there is -- if you kind of do the math on that, right. Absent the accident severity and weather type things, we would be seeing good OR improvements for the year.

Scott Group - Wolfe Research

That’s helpful. We can do the math on that. So, Rick, what was the cost saving number you just gave and is that kind of the total revenue thing in our cost save this year and you’ve given some good color in the past on what you guys were targeting?

Rick O’Dell

Yeah. I guess what I would tell you that’s more in the $10 million to $12 million range. So our targets been -- obviously, we have a little bit more than that. You don’t get 100% effectiveness but it’s probably in the $12 million range. And it’s a little different whereas in last year, couple of year actually that we’ve had some big buckets like this last year. We had tens of million of dollars in both just fuels and linehaul in those two items, right.

So, I don't have those big opportunities this much. It's more of an accumulation of smaller $2 million and $3 million projects that we’re targeting. So, I don’t have as much color to provide in terms of the detail on project success, right. But there's still number of projects that are well outlined and we’re confident in our ability to execute some of those things whether it, be load average, daily production, dock production. We can also get some help from that from a tonnage perspective. So incremental margins on tonnage with our fixed costs and some efficiencies can be positive there too, like more in the 25% range.

Scott Group - Wolfe Research

Yeah. That sounds good. And then just last thing, I know it’s a small part of the business but the truckload volumes were very good in the quarter. I think that’s an easy comp or something changing in the business, do you have any perspective there?

Rick O’Dell

Well, some of our targeted marketing and sales efforts have been on some of the heavier weighted shipments where they make sense for us particularly filling backhaul lines. So we have executed, what I think fits really well in that area with some changes and some targets that we’ve looked to achieve. So, I mean it’s been a good successful effort over the past six months or so that’s contributed to our total tonnage and our over 10,000 pound shipments.

Scott Group - Wolfe Research

Are you seeing any spillover from total truckload into the network, do you think?

Rick O’Dell

Maybe some as truckload tightens up a little bit. Some of these truckloads stop off type shipments would come back to LTL. And I think, again given, we’ve targeted some of these opportunities within the -- what we call it truckload because it’s over 10,000 pounds. But our shipments in that area weigh around 14,000 pounds, is the average shipment in our over 10,000 pound size, and it’s really more partial uploads so to speak right. But that’s the market we’re playing in. And particularly that’s not the primary thing we're looking for and you’ve probably seen, we won’t handle much of that outbound out of Chicago, or at some big head haul lane but in backhaul lanes, these partial truckloads make a lot of sense for us.

Scott Group - Wolfe Research

All right. Good stuff. Thanks, guys.

Rick O’Dell

All right. Thanks.

Operator

(Operator Instructions) We'll move next to Bill Greene with Morgan Stanley.