Saia Inc Q3 FY2021 Earnings Call

Good day, and welcome to the Saia Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doug Col. Please go ahead, sir.

Thanks, Todd. Good morning, everyone. Welcome to Saia's third quarter 2021 conference call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Before we begin, you should know that during the call, we may make certain 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 SEC filings for more information on the exact risk factors that could cause actual results to differ. Also, in the third quarter, we recorded a $4.3 million gain from the sale of a terminal. When we discuss adjusted operating ratio or adjusted diluted earnings per share in our comments, it refers to adjusted results that exclude the gain from that sale. See our press release announcing third quarter results for a reconciliation of non-GAAP financial measures. That press release is available on the Financial Releases page of Saia's Investor Relations website as well. I will now turn the call over to Fritz for some opening comments.

Good morning, and thank you for joining us to discuss Saia's third quarter results. I'm pleased to report that we continue to have record results across the board in 2021. Our revenue during the third quarter is a record $616 million, surpassing last year's revenue by 28%. Operating income also grew by 92% to a record $106 million, and our record 82.8% operating ratio in the quarter marked the fifth consecutive quarter where our OR was below 90%. Our adjusted operating ratio for the quarter is 83.5%, and this is the single best OR reported for a quarter in our company's long history. The quarter was marked by consistent levels of demand from our shipper customers as we've all worked through the supply challenges and tight labor markets that persist. Our operations group continues to provide excellent service and with a 3.2% increase in shipments per workday in the quarter, we still posted a 98.1% on-time delivery standard in the third quarter. Stock productivity continues to face a bit of a headwind just based on the number of new associates still in various stages of continuous training across the company. However, even as we onboard new employees and expanded our footprint, our team was still able to maintain a cargo claims ratio of 0.63%, flat with last year and among the best in the industry. Our focus on pricing remains a key pillar of the improving profitability results we've been able to achieve again this year. Our LTL revenue per hundredweight increased by 14.9% in the quarter. This measure of pricing is aided somewhat by our length of haul, which increased by 2.5%, but offset by an 8.6% increase in weight per shipment this quarter. The overall improvement in yield is driven by continuing to provide great quality and service for our customers and our market-based approach to pricing across not only base rate but accessorial charges as well. Strong yield gains and the accompanying improvements in freight mix enabled us to increase our revenue per shipment by 24.8%, including fuel surcharge to a record $299 per shipment. I cannot overestimate the importance of managing the freight mix for an LTL carrier; cube, density, length of haul, and special handling charges or accessorials are all important factors to consider in our business. These factors have implications not only for pricing but for optimal capacity utilization as well. Our performance in Q3 reflects our continuing ability to improve not only pricing but our mix of business. With that said, I will turn the call over to Doug for a review of the third quarter financial results.

Thanks, Fritz. Third quarter revenue increased by $134.8 to $616.2 million, a 28% increase from the prior year. The components of the revenue growth in the quarter were as follows: tonnage grew 11% this quarter, a combination of 2.3% shipment growth and an 8.6% increase in our average weight per shipment; yield, excluding fuel surcharge, improved by 10.2%; fuel surcharge revenue increased by 72% and was 13.9% of total revenue compared to 10.4% a year ago. Moving now to some key expense items in the quarter. Salaries, wages, and benefits increased by 9.9%, driven by wage increases across our driver and dock workforce as well as the hiring and referral bonuses that were paid in the quarter to attract new employees. Additionally, our January and August wage increases of approximately 3.5% and 4.7%, respectively, contributed to this increase on a year-over-year basis. Purchase transportation costs increased by 80.2% compared to the third quarter last year and were 11.7% of total revenue compared to 8.3% in the third quarter last year. Truck and rail PT miles combined were 19.7% of our total line haul miles in the quarter compared to 14.3% in the third quarter of 2020. Fuel expense increased by 49.2% in the quarter, while company miles increased 3.9% year-over-year. The increase in fuel expense was a result of national average diesel prices that continued to rise after their pandemic-related drop in the prior period; the third quarter prices rising 38% compared to the prior year. Claims and insurance expense increased by 30% in the quarter, reflecting increased frequency and accident severity in that expense line and higher premium costs versus the prior year. For perspective, the $3.6 million expense increase compared to the prior year would have been $2.7 million, if not for the premium increases. Also, to illustrate the volatility in this expense line, I would note that claims and insurance expense was down 10.4% or $1.8 million sequentially from the second quarter. Appreciation expense of $35.7 million in the quarter was 4.4% higher year-over-year. This is a continuation of the trend we've seen over the past few years as we've grown our terminal network, invested in equipment to lower the age of the fleet, and made meaningful investments in technology. Total operating expenses increased by 19.7% in the quarter and with the year-over-year revenue increase of 28%, our operating ratio improved 570 basis points from a year ago to 82.8%. As we mentioned earlier, adjusting our results to exclude the impact of a $4.3 million real estate gain, our adjusted OR is 83.5%, a record for the company. Our tax rate for the third quarter was 24.3% compared to 23.7% last year, and our diluted earnings per share were $2.98 compared to $1.56 last year. Adjusted diluted earnings per share in the third quarter are $2.86. We anticipate an effective tax rate of approximately 24% for the remainder of the year. For the first 9 months of 2021, we've made capital investments totaling $154.9 million, capital expenditures on equipment in the first 9 months were below our forecast as some of our suppliers are seeing delays in component shipments and production has been behind schedule all year. We have a number of real estate projects in the pipeline in the current quarter, and we still expect full year 2021 capital expenditures will be about approximately $275 million. Our balance sheet remains strong with $121.7 million cash on hand and more than $300 million of availability through our revolving credit facility and additional outside borrowing sources. I'll now turn the call back over to Fritz for some closing comments.

Thanks, Doug. Along with the solid financial results produced by the team this quarter, I'm particularly pleased with our execution around new terminal openings. In late September, we opened a new terminal in Fredericksburg, Virginia, our fourth in the state and our third terminal opening of the year. Additionally, in October, we opened terminals near New Haven, Connecticut, and Youngstown, Ohio. These new terminals allow us to provide our customers with more direct shipping points. As we get closer to our customers, we're in a position to offer differentiated service. We plan to open 2 additional terminals before the end of the year for a total of 7 new openings in 2021. That would put us at 176 terminals compared to 169 at the end of 2020. We look forward to 2022. Our plan calls for 10 to 15 new terminal openings next year, and we also target several relocations of existing terminals into larger or better-positioned facilities as well. In order to support our pace of openings, our Human Resources group is continuously recruiting and onboarding the talent that is required to open and operate these terminals. We're expanding our driver academy program to more locations in the coming year and are also partnering with driver schools and technical colleges in select markets to increase our candidate pipeline. We continue to stick to our playbook in terms of growth. Our organic growth strategy kicked off in 2017 has changed the footprint and profile of the company. Our investments in people and technology have been an important catalyst for this successful strategy and will serve as the backbone for our continued growth. With each new terminal opening, we get closer to our customer base, and by doing so, we give the customer the opportunity to choose our value proposition, which is appealing to new customers as well as existing customers familiar with our quality. We continue to position our real estate pipeline for multiyear growth. At the same time, our current operational execution and financial performance will allow us to fund these investments from operating cash flow. With that said, we're now ready to open the line for questions, operator.

Our first question comes from Amit Mehrotra with Deutsche Bank.

Congratulations on the good results. Fritz, is the approximately $300 in revenue per bill a new baseline for the company? I know this has been a major focus for you. Can you discuss whether you see that number trending, and what you’re doing to influence it through pricing strategies or adjustments to minimum charges?

This is an ongoing opportunity for us, and we’re not stopping at $299. There is room for growth. If you compare us to other top national carriers, it’s clear that the opportunity remains. We certainly have initiatives in place around this. As we enhance our understanding of freight impact on our network and its effects on our capacities and market pricing, we will continue to pursue this. It could involve various factors, such as excessive length, minimum charge shipments, or complex deliveries. One thing is evident: the underlying business is experiencing inflation. We are making significant investments in our business and providing exceptional value to our customers. This means we must continue to leverage pricing opportunities because they still exist. We’re pleased with the progress made in the third quarter, but we know there’s more to do. Our team is very focused on this initiative and I don’t foresee us easing up. Continuously assessing our mix and pricing opportunities is becoming a core part of our business process.

Okay. That's helpful. And then, Doug, what's the right expectation for OR in the fourth quarter? I know it typically deteriorates 150 to 100 basis points sequentially. Can you speak to the expectation there? And then just related to that, Fritz, obviously, you're going to see something like 400 basis points of margin expansion this year or in that range, which is obviously incredible. What's the right expectation for next year? Is it still kind of that 150 to 200 bps range that you talked about, could it be even better given the density benefits in the new terminals? Just talk about what the right expectation there is for next year as well?

Amit, yes, I'll take the first part. So yes, I think 150 basis points into Q4 is probably still the right way to think about the deterioration. I mean we've got 3 less working days in the period. A couple of the working days you have around the holidays, they're light revenue days because some businesses have a little different holiday schedule. And then you do get the normal kind of November to December freight and shipments per day. So those factors are all still there. So I think around 150 basis points, which has been the historic, is a good way to think about Q4.

Yes. Amit, if we consider the future of this business, we've consistently stated that we expect an improvement of 150 to 200 basis points year-on-year. Given the current environment, there’s definitely an opportunity for us to aim for the upper end of that range, or possibly even exceed it. Since 2007, we have improved our efficiency in how we manage terminal openings and scale them. I don’t see the 10 to 15 openings we plan for next year as a setback; it's work we are committed to completing. This will be reflected in our margin projections for next year, alongside any relocations we undertake, which will also play a significant role over time. Therefore, as long as we are in a favorable economic climate, I believe that the upper end of that range is well within our reach.

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

Thank you, operator. I wanted to talk a little bit more about the ancillary charges that you guys have been putting on. How should we look at that in terms of what's the opportunity for '22? Is there further penetration to go of putting on these charges? And then how should we think about maybe a year-over-year increase versus your expected year-over-year increase in pricing?

Yes, Jason, one way to approach this is by examining our year-over-year revenue per bill improvement in the third quarter, where approximately 20% can be attributed to the impact of accessorial improvements. As Fritz mentioned, we believe there is significant potential for growth in this area, as we are still catching up to market standards. Currently, much of the work we are undertaking is in the early stages. Previously, we may have waived certain charges for customers to establish business relationships, but that approach isn't feasible in the current market. This year, discussions have shifted to including these charges without the possibility of waivers, and in the following year, we anticipate conversations will center around increasing those charges to align with market expectations. So, we are still in the initial phases. Additionally, in regards to Amit's question, for next year, we rely on contractual renewals as a basis for our projections. Our contractual renewals saw a notable increase from Q2 to Q3, with a year-over-year rise of 14.3% in the third quarter. While we can't consider this as pure yield improvement in our model, it does suggest that shippers expect ongoing market tightness and continuing supply chain challenges, allowing us to adjust our pricing accordingly.

That's good color. You said you have a long runway. Where would you say you are as a percent of penetration to your customer base in terms of being at market for accessorials?

I don't have a specific metric for that, Jason, but I would suggest looking at the other public carriers and comparing our operating statistics, such as haul weight per shipment, with theirs. You can then analyze where we stand on a revenue per shipment basis compared to them, and see where they are reporting or have reported. We view this as an opportunity to close the gap. However, it's important to highlight that if we're providing exceptional service over time, we should expect to be at a premium compared to some of them. So, I want to stress that we don't see this as just a static goal to reach; instead, we're focused on closing the gap while continuously pushing forward, because we deliver great value and this business is too costly to not earn appropriate compensation.

That's great color. And just going back to the demand side, I mean, it seems like it's still fairly robust out there. What are your customers telling you to expect in '22?

I think they see the supply chain disruption continuing into next year. They also observe that there is still a significant amount of stimulus in the economy currently. Therefore, you would expect the economic environment to remain positive throughout the year. If there is additional stimulus or spending, it might contribute to some inflation, but what we're hearing is that this situation is expected to persist well into next year.

We'll take our next question from Jon Chappell with Evercore ISI.

Doug, in your last question, Doug, you said that contract renewals in 3Q up 14.3%. I think in the last quarter, you said 9%. So obviously, there, we're seeing a lot of momentum. Is there any way to gauge where you are in the overall book of business as you've gone through these renewals? So if we think about this momentum being maintained, is there further acceleration in 4Q in the first part of next year?

I mean it's hard to say. I think Q2, I think, was up 10.6% and like I said, 14.3% this quarter. I mean, there's no kind of narrow window that we look at as bid season. The contracts kind of renew ratably through the year. We're seeing cost inflation in the business, even accounts that aren't receiving increases this year are likely to have to face them again next year, just based on some of the cost pressures we see depending on where the market's at and how the business operates for us. It's been a pretty consistent path we've been on to approach customers for rate increases when we're simply just not earning the proper return. So I don't know that it accelerates from here, but I do think that we've already seen some announcements about GRIs early in next year, and this is pretty early for folks to be kind of forecasting their GRI or letting the customers know that's coming. So it feels like kind of more of the same should be expected, at least for the first half next year.

We'll take our next question from Fritz, you touched on something really important. So you've grown the terminal base by a little bit less than 5% this year, up 8%. Next year, you're hoping for 10% to 15%, which would be basically double that pace on a percentage basis. But you noted that you've kind of got into that scale now where start-up costs associated with bringing these terminals online is a little bit less relevant. Can you speak a little bit to the margin impact when you're talking about land, equipment, hiring people aggressively, do you think you can bring 8% terminal growth on next year with kind of limited overall impact on the margin improvements you've made?

Yes, we believe we can achieve that. Currently, we are in the process of adding terminals and moving closer to our customers, which allows us to reach markets that were difficult to access previously due to long lead times. This proximity results in built-in cost savings when serving customers. Additionally, recruiting staff becomes somewhat easier in these new locations. For instance, with our facilities in Atlanta, we avoid heavy traffic while also placing ourselves in areas that facilitate recruitment, ensuring we can adequately staff these operations. We have a structured approach to hiring, training, and establishing technology and brand presence at new locations, enabling us to act swiftly. The essential infrastructure for expanding in certain regions, such as the Northeast, is already in place, so we do not anticipate needing to increase corporate overheads significantly. This means we can operate terminal activities efficiently, and in some scenarios, like with our Atlanta facilities, we can even achieve cost savings, which supports our financial objectives. Overall, we do not foresee any negative impact from new openings; rather, we see it as a manageable challenge. Engaging with customers who are already familiar with our services enhances their experience whenever we launch a new facility. While we don't often discuss our regional performance in detail, it's worth noting that our operations in the Northeast, which began in 2017, now align with the entire company's operations. Thus, our strategy involves strategically placing facilities in areas where our existing infrastructure can support them, leading to a positive outlook on the impact of these new openings.

Our next question comes from Scott Group of Wolfe Research.

I don't know if I missed this, but can you give us the shipment and tonnage numbers for September, October? And just as we think about the terminal growth next year, any way to think about door count growth and if that's maybe a better way to think about the potential for volume growth next year?

Sure. September shipments per workday increased by 1.6%, and the tonnage rose by 10.6%. So far in October, shipments per day are up about 1%, and tonnage is in the 9% to 10% range.

And the door count growth?

Yes, in terms of the door count, I mean, 15 openings on the base of what we think will be 176 at year-end is 8%, 8.5%, I guess. I think door count in the range of 8% to 10% is probably right. When you think about some of the work we'll also have going on in the year with relocations. So just like we do every year, we've got some terminals where we move out into something bigger. So probably 8% to 10% on a door count basis is the right way to think about it.

One thing to consider regarding the door count is that the investments we are making are not just for the volumes expected next year. We should be able to grow into those investments over time.

We are continually studying the impact of freight on our network. For example, excessive length in freight can be challenging to manage as it consumes a significant amount of capacity. It’s crucial for us to identify this type of freight and ensure we charge appropriately. While we may want to retain some of it, we still need to be compensated for the capacity being utilized. As we analyze various business segments, we are actively taking action in areas that use considerable capacity, ensuring they provide a satisfactory return based on that capacity. In previous quarters, we discussed minimum charge shipments and limited access deliveries, which add complexity to our business and costs. Consequently, we either have to ensure we are compensated for these services or consider exiting that market segment. We are prepared to make those adjustments as part of our ongoing focus on pricing and analytics, especially in the current environment, as it's essential to manage both effectively.

I'm sorry, you just said the weight per shipment?

Pardon?

Just your thoughts on weight per shipment going forward into next year?

I believe this reflects our commitment to ensuring we have the right mix of business. We are targeting segments of the market that we feel we can manage most effectively and where we can achieve the best returns, which is evident in our business trends. I anticipate this approach will carry into next year. While the environment can change, our current focus remains on maintaining this mix of business.

We'll take our next question from Tom Wadewitz with UBS.

Wanted to, I guess, continue a little bit on that kind of theme of the weight per shipment versus shipments. How do you think about the use of capacity? Do you think about that like door capacity or terminal capacity, is that driven more by your shipments or do you think of that more driven by weight? And I guess, the reason I ask is you're seeing really strong tonnage growth, but the shipment growth is more muted, and then you're adding significant capacity. So I wonder if the kind of capacity add versus shipments, that's a fairly wide gap. Is that the right way to look at it and it's just kind of opening up more future capacity or do you look at terminal utilization more by the tonnage that goes through than the shipments?

Yes. Probably, in our view, we look at it probably more so on a tonnage basis, especially in our line haul network at night. I'd say for us, it's probably the same across the docks, too. I mean, I think when we're thinking about door pressure, we think about tonnage through the doors. So yes, I mean, our capacity additions, both across the fleet and across the terminal network are really preparing us for continued tonnage growth.

Yes, I understand it's a complicated question, and I appreciate your insight. Regarding labor, it seems you are not facing significant constraints, and some of your comments about terminal locations suggest it might be easier to find workers. Can you provide more information on how you are navigating the labor market? Is it in any way limiting your growth, especially since we've heard similar concerns from other transportation companies?

It's challenging out there. I introduced new facilities that help access new labor markets, providing additional benefits, but we still face challenges. We are actively offering referral bonuses, sign-on bonuses, and hosting recruiting fairs across the country. Some markets are more competitive than others. We have launched a TV ad that highlights both our brand and targets drivers and potential employees. The market is tough, and it’s crucial to optimize our capacity to the fullest. Drivers are a key element of this capacity, and we need to adjust pricing accordingly since they are a limited resource. We've seen some progress in hiring over the past couple of quarters as we've concentrated on referral bonuses and other initiatives, but it remains a significant challenge.

Is that limiting your growth or not really?

In some areas, I believe it limits our growth, but ultimately, we need to identify which businesses we can effectively serve for our customers. This means focusing on building density and ensuring we have the right route structures. We shouldn't have a limited driver servicing a customer 100 miles from a terminal. Instead, we should concentrate on markets where we can serve them best and optimize their capabilities and capacity.

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

So Fritz, I guess, as you're thinking about and executing on these kind of larger structural changes in terms of how you guys are thinking about getting paid for the services you're providing? And clearly, it's going very well just looking at your results. How do you incentivize the sales force to go after that incremental dollar, whether it's an accessorial or just making sure you're getting paid for the little things that you're doing to service the customer? Have you guys made changes to your sales force incentive structure to better align how they get paid with how you want to be compensated as a consolidated company?

Yes, absolutely. Our sales force is measured using two key metrics this year: revenue growth and year-over-year improvement. Both are focused on driving revenue and significantly improving margins. This structure serves as a strong incentive for them, as they are directly involved in the company's performance and play a crucial role in our success. Our operations team is performing well, and the sales team is effectively engaging with customers and showcasing our offerings. The incentives are aligned, allowing them to share in the company's success, and based on the results, I believe this approach is effective.

Okay. No, that makes sense. And I guess, going back to something you were saying, Fritz, in your prepared remarks around dock productivity and maybe some headwinds that you've just seen there with all the new hires you've been making. Could you maybe kind of help us think about that a bit more? Would you expect to see some tailwinds from that as you kind of move maybe into next year as those folks get seasoned? And I guess from a bigger picture perspective, kind of revisiting the technology theme that I think was on everyone's mind last year. Can you maybe talk a bit more about ways to leverage technology to drive greater dock efficiency and productivity?

Our operations team is primarily focused on ensuring we deliver freight safely, minimizing claims. The dock team plays a crucial role in this. We're prioritizing service over cost productivity, though we expect some efficiency gains in dock productivity. However, next year's operational improvement will largely hinge on pricing and our ability to serve customers effectively. Our ops team is dedicated to achieving this. We’ve implemented a technology system to monitor dock production, providing each dock worker with a scorecard on their tablets to track their performance. This visibility allows real-time interventions from supervisors and terminal managers for those who may be struggling. Enhancing this technology is important to boost dock productivity, but our main priority remains caring for our customers’ freight.

We'll take our next question from Jordan Alliger with Goldman Sachs.

Just a question, again, on the labor front. Just thinking in terms of next year, and obviously, there's been a lot of inflationary pressures around wages. How is the best way to think about 2022? Is it best to look at it like compensation per ton growth or just rate of change year-over-year relative to revenues, if you could give me some sense?

Well, this year, keep in mind, we've got 2 wage increases this year, one in January and then another one in mid-August. So at the moment, we wouldn't foresee 2 of those next year. But I think the right way is just to think about the percentage range increase we've seen over the last few years, which is 3.5% to 4.5%. It feels like pure wage inflation, and on that same line, you've got benefits inflation, which has been low single-digit year-in and year-out. That's probably the right way to think about it just off of this year's base run rate of expense.

We will take our next question from Allison Poliniak of Wells Fargo.

Just want to go back to the conversation of the new terminals. It sounds like, Fritz, your comments that the expected new terminals are certainly starting off in a more favorable position versus some of the older ones, since they're not impacting at OR. But how should we think about it maybe past that first year in terms of additive to that sort of OR expansion? Does that start to accelerate to some extent as those new terminals become more productive?

Yes, that's a good way to think about it as they become more efficient. Additionally, the key aspect of those terminals is that we are moving closer to the customers. This brings inherent cost savings. More importantly, being near the customer allows us to deliver the service they expect and the reach they anticipate. In the long run, this not only gives us expansion opportunities but also supports further pricing and differentiated service compared to our competition.

I think the best example, too, Allison, for that is if you just think about the Northeast, we started our expansion up there in 2017, and it took us a couple of years to get to breakeven. I'll tell you another couple of years into it, that region is operating sub 90. So once you get that kind of base built as we continue to drop terminals in, as we've been doing up there, it's very much a contributing factor to the improvement we're seeing.

Got it. And then just on the balance sheet, obviously, a favorable leverage position here. Understanding you're certainly in a growth mode and obviously, some cyclicality in the business longer term. How should we think about what that optimal leverage range is or how are you guys thinking about that optimal leverage range for the business here?

We don't dwell on it too much. We're currently in a solid cash-generating position and are looking for more opportunities in real estate. We could certainly leverage our balance sheet to be more aggressive in that area. Regarding capital expenditures, we are open to it. We could allocate around 15% to 20% of our revenue to CapEx over the next few years if we can align the right elements. Even at that expenditure rate, given our current profitability, we expect to generate enough cash flow to cover it. It’s not about management’s comfort level; rather, we simply don’t see significant opportunities to add to our balance sheet right now.

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

This is Zach on for Todd. Just wanted to first ask about purchase transportation, I guess how should we think about that maybe moving into 2022? Is that something that probably stays elevated as a percentage of revenue in the first half and then trails off as new employees are brought onboard and productivity increases or just would like to hear your general thoughts there.

Yes. I'd say just leave it at the first part of your question; it probably stays at that elevated level, and I'm not going to say it tails off. While we're in the growth mode like this, I mean, we're net adding drivers, but as Fritz said, it's a challenge, and we'd love to have more drivers. So I won't commit to it tailing down, but I think it's going to stay at this level through the first half, would be an okay assumption in your model.

Okay. That's helpful. And then just with terminals, do you guys have any visibility as to what the cadence could be on those adds in 2022? Should we assume maybe kind of a steady addition through the year or is it weighted one way or the other?

It's probably weighted a little bit to the second half, but that's kind of where we are right now in terms of getting some of the final touches and getting things in place, but I'd weight it to the second half.

We'll take our last question from Ken Hoexter of Bank of America.

Great job this quarter and with operations. I just wanted to follow up on Zach's question regarding how you strategically approach in-sourcing line haul compared to rail and truck. I understand you mentioned the employees, but do you have a strategy in mind for what your goals are regarding outsourcing or bringing operations back in-house?

We aim to handle as much as possible internally, but we also need to consider the balance within the network. When there is an imbalance, such as having a lot of freight moving in one direction compared to the other, it limits how many drivers we can deploy effectively. There will always be a demand for partnership transportation as we assess network connectivity. Currently, the situation is more than optimal, but it is manageable. As we improve density and achieve better balance in the network, we expect to shift more operations in-house naturally. However, since we are in a growth phase, some imbalance will occur, necessitating the use of outside resources, which is practical at this time.

Perfect. You mentioned the 10 to 15 service centers, which has been widely discussed. What are your thoughts on the ability to scale them? Is the annual growth rate relatively fixed at 8% to 10%, or can that be accelerated depending on opportunities? Or is it primarily tied to the lead time and requires multiple years of planning for growth?

We have a dedicated team focused on this initiative, and we're developing a pipeline that extends two to three years into the future. I have a good sense of what 2023 might look like. We're establishing a steady pace for our growth, but if a favorable opportunity arises, we’re ready to accelerate our plans. Conversely, if the market slows down in the latter half of the year, we can also adjust our pace accordingly. This strategy provides us with flexibility; for instance, we can delay opening a facility or expedite it based on market conditions or customer demand. We have a strong understanding of our target of 10 to 15 service centers, both for this year and into 2023.

Great. And then last one, just weight per shipment, I just want to clarify that. Is that just a factor of truckload overflow or is that a shifting kind of more fundamental shift of e-commerce moves and the like that are driving your weight per shipment?

Yes. I would consider it more in terms of our efforts regarding mix. A significant part of the weight gain is due to us reducing lighter weight shipments. This is part of what we refer to as working on mix. When we remove the lighter weight shipments, if we are unable to achieve the necessary revenue per shipment, possibly due to longer haul distances that are not justified, some of those shipments have been excluded, which has contributed to the increase in weight per shipment. I would say there is less truckload spillover each quarter compared to what we experienced during the pandemic.

We'll take our last question from Stephanie Moore of Truist.

I wanted to discuss the top line trends in the quarter. Did you notice any specific industry verticals performing particularly well or underperforming? Also, how would you assess the situation with your industrial customers and their recovery from the pandemic?

Stephanie, I mean, in terms of geographically, I mean, obviously, the West Coast is still very, very strong markets for all of us. The Texas region, Houston had a nice quarter and nice activity levels down there. So I guess you could say some of that's energy related. Not only other real industrial call-outs. I mean, we've got markets just because of capacity where we're not able to serve all the ship to businesses there. So the industrial demand feels solid to us. I didn't see the GDP number out this morning, but to us, it still feels like a pretty solid backdrop moving into the end of the year and into next year. From a customer standpoint, that's what we hear.

Great. And then on the other side of that, I think everything you're hearing is shaping up to be a pretty robust holiday season and a lot of e-commerce growth in particular. So maybe just if you view that this year versus prior years, you might be a little bit more exposed to some of these e-commerce-related shipments and the benefit that might have or what are some of these customers saying just as we go into the holidays?

Yes. I guess we're in a position probably to benefit somewhat from that growing trend of online buying and residential deliveries, but that's not really our space. We're an industrial freight hauler not as much retailer. It's probably a truckload carrier on dealing with the big-box retailers is probably in a better position to answer that. But I think LTL is in a good position to handle more of that. We just have to make sure we get paid for it.

We'll take our last question from Bruce Chan of Stifel.

Just a follow-up on the PT. Not sure if you gave the percentage breakdown between truck and rail. And then just on that rail line haul component, conceptually, how are you thinking about that as a long-term part of your network? Does that number tick back up as rail service starts to improve or is there may be less room for that in your network as you're targeting some of these higher service levels?

Historically, the split between truck and rail has been about 60-40, with 60% of miles by truck and 40% by rail. This quarter, however, it shifted to around 70% trucks and 30% rail. I believe it will likely return to the usual 60-40 split in the future when rail capacity improves. Currently, the capacity from rail carriers is very limited. The service has been satisfactory, but you can't access as much of it as you would like. For a significant period, our network has maintained a 60-40 balance, and I expect it will return to that when we can secure more rail capacity.

We'll take our last question from Amit Mehrotra with Deutsche Bank.

Sorry, I was hopping in between calls, but did you guys talk about the sale of the terminal in the quarter? I'm just wondering why that was a good sales candidate given you're trying to grow the footprint and are there any other opportunities to dispose of maybe smaller terminals as given some of the bigger ones you've added over the last year or so?

Yes, we have moved into the Memphis facility, which represents a significant increase in size and is an improved position for that terminal. It's about twice the size of the facility we left behind. We decided we no longer needed the legacy facility in that market, so that was the reason for our exit. This shouldn't be interpreted as anything more than it being surplus. The new Memphis facility is well situated in two key aspects: first, it's a connection point for our line haul operations, and secondly, it is positioned effectively to serve the Memphis market. This is a somewhat unique situation in how it developed. There may be other markets where we find a larger facility while exiting an older one, and I would expect this to happen over time. However, in general, for most of the larger markets with significant opportunities, we will likely continue to add more facilities, though there could be a situation where we exit a smaller one. For example, in Atlanta, if we add a facility and increase our count from three to five, we might find that an optimal strategy. That scenario is also possible. Thank you, everyone, for participating in today's call and your interest in Saia's continuing growth story. We're really excited about 2022 and what that has in store for us. And I feel like we've got the plan in place to execute and deliver results. So thank you all, and have a great day.

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