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Edited Transcript of SAIA earnings conference call or presentation 31-Jul-19 3:00pm GMT

Q2 2019 Saia Inc Earnings Call

JOHNS CREEK Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Saia Inc earnings conference call or presentation Wednesday, July 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frederick J. Holzgrefe

Saia, Inc. - President, COO, Secretary & Director

* Richard D. O'Dell

Saia, Inc. - CEO & Director

* Robert Scott Chambers

Saia, Inc. - VP & CFO

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Conference Call Participants

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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Patrick Tyler Brown

Raymond James & Associates, Inc., Research Division - MD

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Saia, Inc. Second Quarter 2019 Conference Call. My name is Diana, and I'll be your conference operator today. This call is being recorded and will be available for replay beginning today through Wednesday, August 28. Replay instructions can be found in today's press release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This 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. Please refer to today's press release on our most recent SEC filings for more information on the exact risk factors that could cause actual results to differ.

At this time, I would like to turn the conference over to the company's Chief Executive Officer, Mr. Rick O'Dell. Please go ahead, sir.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [2]

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Well, good morning, and thank you for joining us. With me on the call today are, Fritz Holzgrefe, our President and Chief Operating Officer; and Rob Chambers, our Chief Financial Officer. I'm pleased to report record second quarter revenue, operating income, operating ratio and earnings per share. These numbers were not only records for the second quarter, but for any quarter in our history.

Second quarter revenue was up 8.3% to $464.2 million and with our 89.0 operating ratio, we grew operating income 23.1%, to $51.2 million. This 27.1% incremental margin is the best we've posted since our northeast expansion began in May of 2017. Diluted earnings per share grew nearly 22% to $1.40.

I'd like to take a minute to break down the revenue growth and give a little color with regard, what we're seeing in terms of volumes and pricing. The 8.3% revenue growth was fueled by a 9.8% increase in revenue per hundredweight, offset by a 1.9% decline in tonnage. Contractual renewal activity remain positive and average 6.7% in the second quarter. Second quarter also marked our 36th consecutive quarter of overall year-over-year yield improvement.

In terms of demand activity, overall, felt steady to us, as shipments grew by 3.6%, but we did see a decline in our weight per shipment of 5.3%, the third quarterly decline in a row. Positive note on a shipment weight is that it improved sequentially each month throughout the second quarter on an absolute basis and the year-over-year decline was less negative each month. So comparisons from the second quarter this year compared to the second quarter of 2018 are as follows; despite the decline in weight per shipment, our LTL revenue per shipment rose 4% to a record $234.33. Purchase transportation miles were 10.8% of total linehaul miles compared to 11.4% in 2018. With the improvement coming from better utilization on Saia capacity and increased density in some of our newer markets.

Linehaul cost as a percent of revenue improved by 4.5%, benefiting from an improvement in lower average, reduced purchase transportation and higher yields. Our length of haul expanded slightly to 841 miles from 837 miles a year ago. Our cargo claims ratio of 0.76% was improved from last year's 0.82%. Continuous training efforts are enabling us to perform consistently against our quality benchmarks.

Back in city productivity measured by bills per hour and stops for hours, respectively, were relatively flat year-over-year, despite the opening of another 6 terminals in the past year. The newer terminals still create a bit of a headwind to these productivity measures as lower density prohibits optimal productivity and will improve over time.

With that, I'm going to go ahead and turn the call over to Rob Chambers to review our financial results in a little more detail.

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Robert Scott Chambers, Saia, Inc. - VP & CFO [3]

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Thanks, Rick, and good morning, everyone. As Rick mentioned, we generated total revenue of $464.2 million in the second quarter compared to $428.7 million in the second quarter of 2018, an 8.3% increase. Revenue benefited from a 9.8% increase in LTL yield and 3.6% shipment growth, offset by a 5.3% decline in weight per shipment. Fuel surcharge revenue was a modest benefit to the revenue comparison, up 3.9% from the prior year.

A few key expense items, which impacted second quarter results on a year-over-year basis, our salaries, wages, and benefits grew 7.8% to $237.7 million in the second quarter, reflecting the impact of an average wage increase of 3% last July, higher health care benefit costs and an approximate 3.6% increase in our average employee count throughout the quarter. Salaries, wages and benefits were 51.2% of revenue in the quarter compared to 51.4% last year. Purchase transportation expense was essentially flat at $34.2 million in the quarter and 7.4% of revenue compared to 8% of revenue a year ago. The reduction as a percent of revenue is due to lower purchased miles as a percent of total linehaul miles, as Rick mentioned, as well as a more stable truckload rate environment we experienced this year versus last year. Fuel expense declined by 3.1% in the quarter as a national average diesel prices were down 2% to 3% throughout the quarter versus a year ago. We also continue to benefit from a newer more efficient fleet and our miles per gallon improved by 1.1%. Claims and insurance expense in the quarter increased by 32.8% to $13.2 million, with most of the job being related to accident severity versus the prior year.

Cargo claims expense was essentially flat year-over-year despite the increase in shipments handled versus the prior year. Depreciation and amortization expense grew by 15.5% to $29.1 million and reflects our continued investment in real estate, equipment and technology. As a percentage of revenue, depreciation and amortization was 6.3% of revenue compared to 5.9% last year. Operating income rose 23.1% to a record $51.2 million compared to $41.6 million earned in the second quarter of 2018. The operating ratio improved by 130 basis points year-over-year to 89.0. At June 30, 2019, total debt was $179.9 million. Net debt to total capital was 19.1%. This compares to total debt of $155 million and net debt to total capital of 19.4% at June 30, 2018.

Net capital expenditures in the first half of 2019 were $171.1 million including equipment acquired with capital leases. This compares to $140.6 million in net capital expenditures in the first half of 2018. In 2019, net capital expenditures are forecasted to be between $275 million and $300 million, including investments in real estate, terminal infrastructure improvement projects, our fleet and continued investments in technology.

Now I'd like to turn the call over to Fritz for some closing comments.

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [4]

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Thanks, Rob. We're very pleased with the record results of the second quarter. But in this business, we find that you can't really spend a lot of time celebrating past results. We handle more than 30,000 shipments a day for our customers and those shipments never stop moving. In the first half of the year, we've opened three new terminals in the Northeast, we also replaced the lease facility open in May of 2017 in the Harrisburg, Pennsylvania market with a larger owned facility, which gives us plenty of capacity for growth as we continue to build our direct coverage in the remaining Northeast US.

We will continue our aggressive terminal opening schedule in the second half with 6 terminal openings planned, 5 of these will be in the new markets in the Northeast. We're also planning to relocate an additional 3 terminals in the second half. These are terminal -- these are markets where we have simply outgrown our truck capacity.

While this aggressive opening schedule -- some opening cost forward into the third quarter, we're very pleased with the opportunities that presented themselves and this pace allows us to actually get ahead of our planned opening schedule. As of today, we've opened 13 new terminals in Northeast since our openings began in May of 2017, and plan to finish the year with a total of 18 new terminals opened in less than 3 years.

Before I open it up for questions, I'd like to comment on the 27.1% incremental margin we posted in the second quarter. This is the best incremental margin enjoyed by size, since we kicked off our organic expansion efforts. While we do not view the 27.1% as the finish line, I do think it's important that it gives a glimpse of the operating leverage inherent in a network business such as ours. We're seeing evidence of the fixed cost leverage that we expected and we sought to build our expanded geographic coverage and essentially 4 more states of revenue over certain fixed network costs.

With those comments, I'd like to go ahead and open the call up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mr. Scott Group from Wolfe Research.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [2]

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It's Rob on for Scott. Could you walk us through your sequential tonnage and shipment trends by month in the second quarter?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [3]

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Sure, no problem. If we look -- if we start with shipments in April, they were up 1.3% year-over-year, tonnage was down 4.7% in April. In May, shipments per day were up 3.1% and the tonnage per day was down 2.5%. And in June, a shipments per day were up 6.5% and the tons per day turn positive, up 1.8%. And so for the total quarter again that with the shipments per day, up 3.6% and the tonnage down 1.9%.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [4]

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And do you have a preliminary number for July, how about shipments and tonnage are trending?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [5]

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Yes, we're seeing positive trends in shipments with July up 4.4% and the tonnage up 0.9%.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [6]

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And then Rick or Fritz, historically, you guys have talked about the sequential margin trends 2Q to 3Q, you called out kind of additional terminal openings. I was just curious how we should be thinking about the sequential trend coming off of the 89 in the second quarter?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [7]

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As our wage increases effective the first week in July. So that's had some impact sequential, and the same thing obviously occurred this year. I mean, historically, even in the 80 basis point decline, and I think with some of our -- we actually are opening 3 terminals at the very end of September. So we're more looking at a deterioration of about 100 basis points.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [8]

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And then I guess, as we think out to 2020, how should we be thinking about the possibility of getting to a sub-90 or given the incrementals that, that you achieved in the second quarter. Is that something which is a possibility as we look out? Or could this be a 2021 event? We'd love to get your perspective on that.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [9]

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Yes, I mean, obviously, that's certainly our goal and we think it's positive. We're seeing some positive trends of benefits from our fixed cost leverage. As we stated with some of the good motor freight facilities becoming available, we were actually -- and the way things are going at the company, we're looking at expand -- accelerating our Northeast expansion probably above our initial plan. So assuming the external environment stays positive and we continue to execute well which we fully expect and I think it's certainly possibility.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [10]

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And just for clarification -- through 2 years, do you think it's a possibility that we could get some 90 in 2020?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [11]

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Yes.

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Operator [12]

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We'll take our next question from Mr. Todd Fowler from KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [13]

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Fritz, just a follow-up on your comments at the end of the prepared remarks about the incremental margins. I guess a couple of things, you're thinking about the second quarter. Do you think that that's a function of where you're at with the northeast expansion that got you to the 27%, is that more on the pricing environment or is there something else going on? And then how do you think about the incremental margins kind of the run rate that we should expect and obviously, there will be variability quarter-to-quarter, but when we think longer term, what's the right incremental margin for the business?

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [14]

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So Todd. I would start with Q2. I mean, I think the elements that you pointed out, yes pricing was favorable. Our production, our efficiencies were favorable, all those things kind of combined into that, I mean what we think about where our future is with this Northeast expansion and quite frankly is our -- as we further invest in penetrating those for the legacy geography, I think that those sort of incrementals would be kind of where we would be and likely grow from there, right? But I think in the short term, as Rick described, that Q2 to Q3 sort of step for us, is that we'll continue to push the incrementals, but it's going to fit in the face of the time we're investing in some new terminals, that's going to be a little bit of a drag for us, so challenge that a bit. And we also -- you have the weight step up that starts July, now that's happened historically that's nothing new for us, kind of business process.

But I think part of what ends up happening is that, you'll see the incrementals continue to improve over time. Q2 certainly was a good quarter. I don't think that's the end where we can take that. But I think that over time, I would expect to see that we continue to improve.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [15]

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Okay. That helps. And then Rick, In response to the last question, you made a comment about accelerating the plans in the Northeast expansion and understand that you're going to pull some terminals forward. When you say accelerating the plan, you're just talking about doing more terminal sooner than what you anticipated? Is there or is there more opportunity in the Northeast, relative to what you initially had mapped out?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [16]

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Well, I mean, obviously, we're executing well on our strategy. So you want to continue that process. And then secondarily, I think we've said historically, we've targeted opening 4 to 6 terminals. We've already opened 3 and now we're going to open 6 more in the second half. So I'm just commenting compared to our prior comments with terminal availability and execution, well, we're going to open more terminals.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [17]

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And is the Northeast profitable at this point on a fully allocated basis?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [18]

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Yes, modestly.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [19]

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Okay.

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [20]

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Todd, as we pointed out though in the past keeping what it is in the network business, so elements of that profitability surface throughout the network. It makes other operations more efficient.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [21]

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Right. And I think for it's what you're commenting on there is kind of the surrounding geographies might be getting some benefit from the flow in and outs in the Northeast, right?

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [22]

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Exactly.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [23]

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Okay, good. Just a last one from me. Rick, if you want to put some comments, we've heard some commentary around the LTL pricing environment. I apologize if you gave a contract renewal number here in the quarter, if you didn't, if you could share that? But then just your general thoughts on kind of the yield environment and what you'd expect for the rest of the year? Thanks.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [24]

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Yes. The contract renewals were 6.7% and we continue to see a very stable environment to be operating and so -- the current environment has been a little bit weaker than we had anticipated, but the pricing environment remained stable. I see a lot of -- still fair amount of cost inflation, driver availability. So it's been -- the pricing environment has been good.

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Operator [25]

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We'll take our next question from Mr. Amit Mehrotra from Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [26]

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Congrats again on the result. It's great to see, I guess the footprint expansion gaining some traction on the OR. I wanted to ask my first question just on that very issue. Fritz, you talked about kind of the benefits of the expansion, having this network efficiency effect and that kind of helps the whole system. And I just wonder in that context, did the record kind of an 89 OR in the quarter, did that come from -- was that more attributable to even better OR performance at the legacy terminals? Or are the Northeast terminals going from more loss making to slightly profitable? I just want to kind of decide for those two elements, if you could just help us think about kind of the runway you have relative to the 89 OR?

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [27]

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Yes. So Amit, thank you. Good question. It's kind of across the board to be honest with that OR improvement. So if you think about the efficiencies and if you make a pick up in a place like Dallas, you got an extra shipment that is extra part of that pickup is now going to be carried on in the Northeast, that's incremental in Dallas to right leveraging net infrastructure. We saw the benefits of this performance across all regions.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [28]

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Okay, that's helpful. And then one as a follow-up, just more on the operating stats, shipments are up very nicely, but we're also seeing kind of a pretty sizable reduction in the weight per shipment. And that's pretty -- that corresponds to just more e-commerce related volumes. So one, can you just talk about that dynamic. What's driving that shipments up -- weight per shipments down? And then, how does that kind of impact profitability because it's a little bit tough right now because the OR performance is in an environment of very strong contract rate renewals. And so if you just kind of put that to the side for a second, just talk about the OR impact from shipments being up and weight per shipment down, I think that would be helpful as well?

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [29]

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Sure. I would just admit that that clearly for us, I mean, that's a bit of a headwind, right. I mean you are -- as you continue to make those deliveries, e-commerce related sort of activity, lower wafer shipments, we're spending the same amount of resources to execute much of that shipment growth. So it was -- it is a headwind in the numbers and that kind is reflected in our results, but we're so pleased with where we were we ended up in the quarter.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [30]

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Right. But I guess more specifically, can you just talk about, I mean when shipments are up, does it basically -- do you have to keep resources because of the shipment growth even though maybe be the headwind on the weight per shipment. So going forward, how should I mean -- I'm not asking the question, the right way. But it's 25% to 30% incremental margins kind of the right way to think about it, even despite that headwind if weight per shipment continues to go down or when do you think that would turn from a comps perspective.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [31]

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So I think the way to think about that going forward. we're very focused on driving those incremental. So obviously we have to drive our efficiencies to achieve those incrementals as shipment patterns change over time. Right. So if you have our weight per shipment continues to trend where it has been, we have to adjust our sort of productivity model vehicle to deal with that. So I think that going forward, we continue in a reasonable sort of economic environment -- will continue to drive the sort of incremental kind of in the ranges that where we've been, and hopefully improving Q3 is going to be a challenge. Simply because as the items that we pointed out, but as we continue to grow out of Q3.

I think that we can take advantage of kind of our operating efficiencies but weight per shipment trend where it is. That certainly a headwind in a bit of a challenge.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [32]

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And you think the sequential, you said 80 basis points historically deterioration, is that the right number to think about just given the. I mean the 2Q performance is way better because you know, the first quarter was extraordinarily weak because of weather. So just given how strong the second quarter was, is that 80 basis point deterioration still the right number to think about it should be a little bit higher than that?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [33]

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Yeah. We talked about, there will be a bit of an erosion Q2 to Q3 because of some of the pulling forward those terminal openings that are happening right towards the end of the quarter, but we're not going to get the revenue benefit of that. We have yet to invest ahead of that in a sense of getting your drivers on staff. You get them trained, dock work -- workers -- the leadership is in place. But that takes some time to develop some efficiencies out of that too. Even if you did get a little bit of revenue in a quarter, that's not going to be very efficient for incremental on that new businesses in terms of terminal. So that's the drag so we talked about sort of 80 basis point to 100 basis point erosion in Q2 to Q3.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [34]

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Okay, excellent. Thanks everybody for answering my questions. Congrats again. Appreciate it.

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Operator [35]

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We'll take our next question from Mr. Jack Atkins from Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [36]

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Hi guys, good morning. Thanks so much for the time. So just going back to the OR cadence for a moment if we could, I mean, what you're saying about the third quarter, makes a lot of sense, and if I'm hearing you correctly, it looks like we've got three more terminals that the plan is to bring online in the fourth quarter so as you sort of think about the cadence 2Q to 3Q, 3Q to 4Q, I mean do you think that you'll be able to get some leverage 3Q into 4Q given you're bringing those -- on those terminals on in the 3Q late in the quarter or should we think about normal seasonality as we move through the year getting past the third quarter if that question makes sense ?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [37]

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Yes, I think you probably should consider normal seasonality from Q3 to Q4, simply because you're going to have the impact of that, as you know Q4 is often challenged period based on where holidays and Thanksgiving and Christmas holiday those are always impactful for us, it's probably a little bit early to say what macro trends look like in to the fourth quarter so we typically, as you know, given shipments of tonnage update during this quarter, as it kind of advances and that will give some indication of where maybe some of the bigger trends might be headed.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [38]

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Okay. Now that makes sense and then I guess just following up on sort of the expansion plans, I guess, not just in the Northeast but as you look elsewhere across your network I mean given the pain that I think a lot of smaller carriers are feeling out there right now, private carriers are feeling out there right now. Are there maybe some opportunities to do some tuck-in M&A at certain places where you'd like to build some scale, whether it's in the Northeast or other places, just curious if there is some inorganic opportunities out there that you guys are seeing perhaps ?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [39]

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We keep an eye on that pretty closely. And I think that there are certainly potential opportunities if not for maybe that tuck-in sorts of things but then also frankly available real estate as people who have adjusted the business, exits their business such that creates some opportunity and certainly as you hear our plan to opening numbers, it's no small part driven partly by our execution, but also partly by the availability of some assets. So I think that those things all help.

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [40]

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Yeah, and obviously with a strong balance sheet, we're in a position to pursue other opportunities that would come available,

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [41]

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Absolutely, absolutely. Right. Okay, last question, I'll hand it over. Just on the tonnage front, the July number that you quoted at the beginning of the Q&A is pretty encouraging, considering my numbers are right, it's a pretty tough comp, still. But comps do get a lot easier as you move through the third quarter. I mean is it sort of your opinion that maybe we reached an inflection point from a tonnage per day perspective, that third quarter could see some solidly positive tonnage on a per day basis, if trends hold together?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [42]

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I think, it's -- we're dependent as you know on the sort of macro environment, so I think that the numbers are what they are right now. We're pleased with the trends we've seen so far in July. We'll see how August and September sort of develop. Obviously, August is a -- can be a holiday period or vacation period for people that could be a bit choppy. So we'll look to see how that develops.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [43]

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Okay. Thanks again for the time guys.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [44]

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Thank you.

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Operator [45]

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We'll take our next question from Mr. Matt Brooklier from Buckingham Research.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [46]

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Thanks, Good morning. So I'm trying to get maybe a little bit more color in terms of your, let's call it a relative tonnage outperformance in June, in July. We've heard from a number of your peers that June during 2Q was -- probably the toughest month of the quarter. I'm assuming, the improvement in tonnage that you saw towards the end of the quarter, was it -- was a function of the additional terminals that came online, but maybe you could give a little bit more color, if there's other factors. If there were any large account wins, did you potentially pick up some share from I think a couple of, a couple of carriers filed for bankruptcy in 2Q. Just trying to get a little bit more color there.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [47]

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Yes, this is Rick. I would just comment that our Northeast expansion strategy. When you see growth to and from the northeast, it's not just because we opened three new terminals. A large portion of the -- of our growth continues to come from business to and from the terminals that we've opened two years ago for instance. So historically, as we've executed an expansion over a five year period, we've seen share gains as the -- we mature as a market participant there.

And then also as you know as you open three more terminals there adjacent to our current northeast and our coverage becomes more attractive to somebody that was maybe piecemealing their business amongst other carriers. So we've seen some -- we've obviously seeing a fair amount of benefit from that. And then again, as Fritz had commented on the operating income, a lot of that businesses move in to and from our legacy geography, and where we have good production, good load average and then, over time too it provide us the opportunity, you may grow and use purchase transportation to handle the incremental business, and then over time you re optimize your line haul network.

So there's -- there is also a fair amount of benefit from seeing maturity of the terminals that have been open over the last couple of years.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [48]

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Okay. So it sounds kind of more all encompassing. I guess in terms of, you have expansion in the Northeast, you've been growing terminals outside of that geography and all in you seem to be picking up a share, which is obviously the intention there and then the six additional terminals in the second half. The target is I just want to clarify something, three of those are for swapping out a smaller -- smaller terminal with a larger terminal and then three of those are completely new locations.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [49]

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Yes, so of the six that we quoted, five of them are actually new markets in the northeast. And then we're at the end of the day in the second half, we got the six terminal openings planned, five of them are in new markets, and then we're also going to relocate an additional four terminals in the second half as well.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [50]

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Okay, got it. That's incremental all right. Helpful color. Appreciate the time.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [51]

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Thank you.

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Operator [52]

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We'll take our next question from Ms. Stephanie Benjamin from SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [53]

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hi, good afternoon. I wanted to follow up on some of the questions we had previously. And just the volume growth and the improvement we saw kind of throughout the quarter and then into July. Were there any pockets of strength you can point to particular industries or markets where you really saw this improve and then I just have a quick follow-up.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [54]

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Yes so Stephanie, I would just say, it's tough for us to really highlight individual industries. I would say that because I commented earlier the improvement is really pretty broad based for us. There isn't a call out other than say the Northeast continue to execute and grow. And so I think, it's pretty broad based for us with that sizeable call out into either by industry or region.

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [55]

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And I would also comment that we have some company specific marketing programs that are execution including in legacy markets that have been successful for us, and obviously got a very good cargo claims ratio. Our service has been really, really solid. So I think, we've just positioned ourselves well in the marketplace to execute as well.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [56]

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Great and that's helpful and then I wanted to turn to just the expectations you said on the last call about -- call it about a 100 basis points of OR improvement for the full year, I think after the kind of weaker 1Q or weather-driven disruptions that had been a little bit higher, call it, maybe 150 basis points to 200 basis points, is there, ideal kind of levers at this point, where we could see it kind of higher than 100 bps of improvement after the strong 2Q performance or is it more of a decision to accelerate some of those terminal expansions to kind of generate that greater efficiency and scale as we kind of move into 2020. Just some color on that would be helpful. Thanks.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [57]

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I would say we're still within that range that we described on the last call, I think the interesting thing is that we've been able to identify these openings that we buy and we think that's appropriate investment for a longer-term value, at this stage. So I think we're still comfortable with that characterization. We'll see how this third quarter develops that will lead to kind of where we see Q4 base, maybe that adjusted towards the end of the year, but at this stage (inaudible) couple of that.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [58]

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Great, thanks so much.

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Operator [59]

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We'll take our next question from Jason Seidl from Cowen & Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [60]

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Thanks, operator. Hey guys, good morning. How do you go about looking at the upcoming peak season, we heard a lot of sort of mixed expectations, if you will from different capacity providers throughout the supply chain. I would just love to hear your thoughts.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [61]

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I think the comps get it little bit easier as we go into the future months. So we feel okay about it and our general conversations with customers have been pretty good. And I guess probably beyond that you see the same economic data that we see and we will just have to see how the environment develops.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [62]

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Okay, fair enough. And getting to the contract renewal rates obviously 6.7% is fantastic, how should we think about it longer-term though because if you go back in the LTL history over a decade long period it gives us an average 6.7%. So how should we think about that going forward. Is there a point in time where we should expect a step down in that rate?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [63]

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Yes, so I would think so, right. I would think over time it's going to step down. When we do longer-term forecast and planning, we're not assuming that we're going to be able to achieve those types of increases forever, but it is within our portfolio of customers there are some customers that are not currently being appropriately compensated for our costs and so we'll continue to address those as that comes up and then obviously and we're doing it now, we have some customers that are where we're being properly compensated and where they're not seeing a 9% increase or whatever. So when you average 6.7% that's not -- we're not just saying and try to mandate a 6.7% increase. It depends on the customers' portfolio and how it's operating within our network.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [64]

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That makes a lot of sense. And I know it's early, but how should we conceptually think about net CapEx for 2020?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [65]

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Yeah so we would expect this year to sort of -- and sort of somewhere between 275 and 300. I think from next year, it's probably 300 plus maybe 310 something like that, it's all dependent upon what the investment opportunities are that are out there. Kind of what the -- what our view of the macro environment looks like closer in because as you know, our big buckets of investment spending is really maintaining fleet sort of age and such so if there were change in the environment, we may change that number, but right now, I think that sort of discounted range where we've been.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [66]

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And I would also comment -- I would also comment to this as we continue to grow our network, it's really important to have particularly your larger break bulk facilities, built out ahead of your growth and in some markets, especially if you have to build a facility or you actually even acquiring them now, it's very expensive to get a large coveted rightful type of operation and I think historically, we look at sometimes we didn't build our network out ahead of our growth and then it would impact our margins as you have capacity constraints and you have to run freight sub-optimally or generate backlogs or can't build as many directs as you need from a door count capacity. So we're very focused on strategically making those investments ahead of our growth.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [67]

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That makes sense. Listen, gentlemen, I appreciate the time as always.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [68]

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Thanks.

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Operator [69]

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We'll take our next question from Mr. David Ross from Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [70]

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I wanted to, I guess, follow-up on Jason's question on the contract renewals asking in a different way. The 6.7% is much higher than average. Why is that the case? Is it that you guys were that much below market? Or is there something else going on there?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [71]

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Well obviously, I mean, apparently that's part of it, right. I mean, you kind of look at our operating ratio versus some of the competitors out there that run a similar network. We've obviously made a lot of investments in our company and the quality of our service offering. And I think we're in a position to execute and expect to be properly compensated for that. So if you look at kind of our [OR gap] against some of the best-in-class operators out there, part of it's yield, and as you expand your network and have a broader product offering and execute on a quality product with the good cargo claims ratio. I think -- we expect to be properly compensated for that and we're executing that pricing discipline in the marketplace. Obviously, on a customer-by-customer basis.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [72]

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And there is nothing in there that accounts for weight per shipment, because that typically goes into yield. So even if the customer is giving you lighter weight shipments this year versus a year ago for the same shipment, like-for-like basis is up 6.7%. Is that correct?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [73]

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Well, it's -- it is a bit of a odd metric, right. So what you're basically saying is when you come up for renewal that you're looking across that base of business that you currently have and what we're saying is on average based on the base of business that we have at that point in time, we got a 6.7% increase.

Now, in fairness, right some of the business goes away. All right. You have price shop shoppers and they may take lanes away and you also may gain new lanes in a renewal as well, right. So I mean that's why you don't see a perfect correlation, but I think it is a -- so it's a metric that we look at internally to see like how well are we executing against how the customer operates and again, you don't always keep the -- all the business or it may change right what changes your mix over time.

So, its I think it's indicative of our execution on what's going on in the marketplace more so than saying hey we actually retained a 100% of that.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [74]

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And then the 5% drop in weight per shipment, how much of that do you actually attribute to e-commerce ?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [75]

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Yeah, I don't know, I would say that's across the total book-of-business, so it's tough for us to identify exactly would be the sliver of that that will be e-commerce related. But if you look at it year-over-year, I mean, I think it's obviously the higher weighted shipments that were evident last year and that in macro environment, be it sort of industrial activity compared to this year that's probably the biggest driver of that year-over-year this is if you looked at the data and said, all right, which -- where is that gone and it's probably more industrial related than say, e-commerce taking it away, it's more about trends and other elements of the business.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [76]

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Excellent, thank you very much.

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Robert Scott Chambers, Saia, Inc. - VP & CFO [77]

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Thanks, David.

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Operator [78]

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We'll take our next question from Mr. Ravi Shanker from Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [79]

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Thank you, gentlemen. Just a couple of follow-ups to some of your recent commentary, just out of the e-commerce side, I think you said that it will be hard to quantify the -- the year-over-year decline, how much of that came from e-commerce, but can you help us understand kind of what percentage of your overall volumes today our e-commerce versus the quote unquote traditional kind of industrial heavy freight that you guys ship usually ?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [80]

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I think that statistics we can give you and in this I would argue is probably not encompassing all of our e-commerce, but I just looked at residential or sort of appointment related business a year ago maybe that number was sort of 5-ish percent that's crop up to maybe 6-ish percent to 7-ish percent, somewhere in that range. But as you know, Ravi, I mean that e-commerce is really impacting the rest of the supply chain too so that could be impacting other elements of our business as we move freight from a DC to a distributor or last mile provider so that that's a subset the residential sort of focus but I think that's kind of the trend.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [81]

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Got it, so I'm assuming that you don't expect that 5% to 6% to be like a huge portion of your business in 5 years time and it's not going to be 25% or could it be ?

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Frederick J. Holzgrefe, Saia, Inc. - President, COO, Secretary & Director [82]

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No.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [83]

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No. Yes, alright. It be actually residential following the 25% now. Yeah.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [84]

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Okay, understood and also just to kind of confirm that, when you say e-commerce does that -- is that strictly B2C or is also kind of B2B business I think that's what you alluding to earlier and that's...

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Richard D. O'Dell, Saia, Inc. - CEO & Director [85]

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That's my point around the differences in the supply chain, right, so it could be B2B but it could be how the supply chain is being influenced by e-commerce activity. The residential is for us. So I would -- that I described is simply B2C, right?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [86]

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Yes. So in other words like where we're used to take a certain amount of business into a retailer. The average shipment weight on those would be generally higher as opposed to, if you taken them to a final mile carrier or warehouse provider is delivering to final mile or breaking those down and delivering them in smaller packages, all right. They tend to be more fragmented, because they're trying to get closer to the customer, more people are shopping online as opposed to going to retail stores.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [87]

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Understood. Just finally, on your prepared remarks, you spoke about tech spend being an incremental, I don't say headwind, but a call on cost going forward. Can you just elaborate a little bit more kind of what exactly you're spending on the tech side and kind of how much that could be in '19 and '20?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [88]

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So if I looked just at the third quarter as that was kind of our commentary centered, we are going to open the terminals, so that means we're going to make sure that we've got the appropriate staff in place at the terminal level. So that we've got to get them trained, we've got to get them staffed such that they can provide the starting service, we clearly are going to be operating at any sort of productivity level that we would long-term be focused on. So that's probably 25th-ish drag on the quarter, maybe a little bit more on the third quarter, but over time, as we've shown into the second quarter just -- that we just completed, we can translate that and drive the incremental margins up over time.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [89]

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And we have some targeted terminal openings in 2020, but we're not that close to a pipeline of those I mean at this point in time they -- the remaining markets we have to open tend to be more smaller markets and we think we'll be able to find some available facilities as opposed to having it build those for the most part. So if we were going to open in 2020 and build it we would have at -- probably already have closed on the land and we don't have any of those instances in our expanded geography. We are expanding some of our own great capacity, so we're just not -- we're not in a position to kind of give you precise timing on what headwinds those might be potentially in 2020.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [90]

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Understood. Thank you.

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Operator [91]

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We'll take our next question from Mr. Tyler Brown from Raymond James.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [92]

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Hey, good morning guys. Hey, just a quick clarification. But it sounds like you have some additional greenfield terminals plan. In addition, you've got some terminal swaps, a big picture and I don't want the physical numbers because I know you're not going to give it to me but any color on what your Northeast door footprint is actually growing this year?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [93]

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We'll have to get you that offline, we don't have that right here.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [94]

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Okay. My hunch is it's quite a bit though.

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Robert Scott Chambers, Saia, Inc. - VP & CFO [95]

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Correct.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [96]

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Yeah. Okay and then sorry if I missed it, but on the six additional terminals, this year, will those be owned or leased?

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Robert Scott Chambers, Saia, Inc. - VP & CFO [97]

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There's going to be mostly leased, one owned.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [98]

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Okay. And then maybe this is a big picture question, but longer term, where would you guys like to be in terms of owned versus leased, and how do you think about that. Strategically, longer term?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [99]

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That so Tyler on that, on that front I mean that hasn't changed for us, we're very focused on, we want to own strategic assets but if the lease provides us access to a market, we certainly will take advantage of that. And we also, we can do that for a couple of reasons. Sometimes it gets you into the market kind of as we described that earlier, Harrisburg, where we got, we were able to access that market through a lease then later we found the property we could purchase. So that's kind of the methodology around that. So, I don't know that I read in to the fact that there is a greater percentage of leased assets other than to say that that got us access to the market.

Those were available; conceivably down the road we could actually buy and sell these if we think that's long-term strategic. But I think, right now we prefer to generally own strategic assets where we can.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [100]

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Okay. That's it. I appreciate it.

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Operator [101]

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We'll take our next question is from Scott Group from Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [102]

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Hey guys, thanks for the follow-up. Clearly, the Northeast market right today just broke even. It's profitable, but quite a bit lower margins than the consolidated OR average for Saia overall, longer term as you build the density in the Northeast. How should we think about the margins relative to the corporate average. Clearly, the Northeast is a more expensive region to operate in. But I'm just curious, if you think it can be as profitable to the corporate average?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [103]

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I would expect over time that where we are right now is not where we are going to end up in the Northeast, and you're right, it is a very expensive market to operate. So that makes it even more important that we do a good job of understanding those cost drivers and pricing accordingly and identifying that freight that is ideal for that market. I would suspect over time that although I think we can get that to be a lot better, it probably won't have the same margin structure, per se than say the markets in the center of the country, where you have more inbound and outbound freight, you're more closely balanced in terms of how you spread your cost between freight that comes into a market or exits a market or passes through a market. So probably won't get to -- be the lowest OR but I think it's -- I don't see a reason that would be a impediment to us getting to higher levels of where we are right now for approved levels, I should say from where we are right now.

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Robert Scott Chambers, Saia, Inc. - VP & CFO [104]

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Yeah. I would also comment that if you just look at where we are, we're pretty immature in the marketplace there. We don't have as many terminals there, some of our competitors do, so we're running some longer pedal run. So there are clearly some opportunities as you gain more density in the marketplace to gain some operating efficiencies and quite frankly, the long you're there over time. We're not price player jumping in there, but as you gain some efficiencies, we should be able to improve there. And I think as you gain some maturity and your brand strengthens there too. We should have some incremental pricing leverage as well.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [105]

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Yeah, that makes sense. It should be a very good incremental margin business as you guys build the footprint. I mean, can it get to an average kind of OR for Saia overall, obviously you noted it can get to the best, but should we think about this as an average or below average market?

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Richard D. O'Dell, Saia, Inc. - CEO & Director [106]

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Rob, remember the thesis around this Northeast expansion, I mean it's going to be an incremental add, because we're leveraging an infrastructure of a public company across 48 states of revenue when this is wrapped up and we continue to penetrate other markets.

So I absolutely think it should get to be company average but I don't see there's a drag. Longer term, and it benefits in a network. It benefits those other better or bigger more mature markets, just to be able to drive more freight through those or start more freight in those markets and have to bend up in -- into Northeast. So I think it's a win-win all the way around for us.

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Robert Scott Chambers, Saia, Inc. - VP & CFO [107]

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And I would comment it even if -- if you grow longer-haul business it flows across the rest of your network, and it gives you an opportunity to have load more directs and have some incremental opportunities to leverage flows across your line-haul network and re-optimize those. So I mean, regional profitability. It's just allocating your cost across an entire network. So there is a portion of that that where you're gaining some efficiencies that are benefiting the rest of your freight that you're not really going to see that necessarily in your Northeast operating ratio, but you're going to see it, you may see some of that across the rest of your network

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [108]

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That's fair. And we've definitely seen that with some of your competitors as they expanded geographic footprints, that clears it up for me. Thanks a lot for the follow-up guys.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [109]

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Great, thanks.

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Operator [110]

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That concludes today's question-and-answer session. At this time, I will turn the conference back to you for any additional or closing remark.

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Richard D. O'Dell, Saia, Inc. - CEO & Director [111]

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Great. Thank you for your interest in Saia. We appreciate it, and we'll talk to you.

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Operator [112]

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This concludes today's call. Thank you for your participation. You may now disconnect.