Good day, ladies and gentlemen and welcome to the Saia, Inc. Second Quarter 2022 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Doug Col, Saia Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Kyle. Good morning, everyone. Welcome to Saia's second quarter 2022 conference call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Before we begin, you should note that during this call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We refer you to our press release and our SEC filings for more information on the exact risk factors that could cause actual results to differ. 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 second quarter results. Our second quarter revenue of $746 million surpassed last year's second quarter revenue by 30.5%, a record for any quarter in our company's history. Shipments per workday grew by 1.8% and pricing and business mix management efforts drove an increase in yield, excluding fuel surcharge of nearly 15%. Our LTL revenue per shipment, excluding fuel surcharge, was 16% higher year-over-year. Business trends remained good through the quarter and our daily shipment activity across the quarter was roughly 32,000 shipments per day. Service levels continue to improve across all KPIs year-over-year and we posted another solid cargo claims ratio of 0.57% for the quarter. Keeping customers first is a core value for Saia. And in doing so, we're able to build upon our strong service reputation and enhance the value proposition we offer our customers. Getting closer to our customers to provide higher levels of service is an important part of this value proposition. And in the quarter, we opened 4 new terminals in new markets and we've opened a total of 5 year-to-date. Our customers appreciate our commitment to meeting their supply chain needs. And as a result, we realized an average increase in our contractual renewals in the second quarter of 11.7%. It's good to see when our customers win, we win. I'll touch on our outlook for the rest of the year and our planned terminal openings after Doug reviews second quarter financial performance.

Thanks, Fritz. Second quarter revenue increased by $174.2 million to $745.6 million. The components of revenue growth in the quarter were as follows: tonnage grew 2.8%, a combination of 1.8% shipment growth and a 1.1% increase in our average weight per shipment. Length of haul was essentially flat at 910 miles. Yield, excluding fuel surcharge, improved by 14.9% and yield increased by 26.3%, including fuel surcharge. Fuel surcharge revenue increased by 97.4% and was 21.7% of total revenue compared to 14.4% a year ago. Now let's discuss a few key expense items in the quarter. Salaries, wages and benefits increased 9.8%, driven by wage increases across our driver and dock workforce. Our headcount is up approximately 14% year-over-year. Additionally, our August 2021 wage increase of approximately 4.7% contributed to this increase on a year-over-year basis. Purchase transportation cost increased by 47% compared to the second quarter last year and were 12.3% of total revenue compared to 10.9% a year ago. Truck and rail PT miles combined were 19.3% of total line haul miles in the quarter compared to 18.4% in the second quarter of 2021. Fuel expense increased by 82.9% in the quarter, while company miles increased 6.8% year-over-year. The increase in fuel expense was primarily the result of national average diesel prices rising by over 70% on a year-over-year basis. Claims and insurance expense decreased by 18% in the quarter compared to the second quarter last year, reflecting decreased frequency and accident severity in that expense line. Claims and insurance expense was up 32.4% or $3.5 million sequentially from the first quarter. Depreciation expense of $36.9 million in the quarter was 6.6% higher year-over-year, driven by our investments in real estate, equipment and technology. Total operating expenses increased by 22.8% in the quarter and with the year-over-year revenue increase of 30.5%, our operating ratio improved by 510 basis points from a year ago to 80.4%. Our tax rate for the second quarter was 24.4% compared to 24.3% in the second quarter last year and our diluted earnings per share were $4.10 compared to $2.34 in the second quarter a year ago. We continue to anticipate capital expenditures for 2022 will be in excess of $500 million. We also anticipate an effective tax rate for the full year of approximately 24% to 25%. I will now turn the call back over to Fritz for some closing comments.

Thanks, Doug. Well, as I stated earlier, business levels remained steady through the quarter and our plan for terminal openings this year is on track. Along with the 5 new openings we completed already this year, we'll open a new facility Monday in Binghamton, New York and a new facility in the Chicago land area later in August. Beyond these facilities, we expect to open an additional 5 to 7 through the end of the year. These openings are critical to our strategy of enhancing our service offering. Our pipeline for terminal openings carries well into 2025. We'll update you more on detailed opening and relocation plans for 2023 as part of our Q3 conference call. One of the benefits of our organic expansion process over the last several years is that we can adjust it depending on market conditions. However, our growth through the end of the year and beyond is not dependent exclusively upon new market openings. Openings within existing markets are especially attractive because they can increase the efficiency of our operations. We continue to build on successful openings over the course of several years. As we open these facilities, we're seeing strong customer acceptance and opportunities to continue to focus our efforts on customers that find value in our service offerings. In Atlanta, for example, we've seen higher growth and improved profitability in the market because of our new terminal in the Northeast side of town. We opened the facility just last December and we're already seeing significantly improved service for our customers and synergies for sales and operations. We expect the Atlanta market to benefit further from the June openings of terminals in Macon and Valdosta to the south of Atlanta, along with an additional Metro Atlanta terminal opening planned for 2023. The success seen in these recent openings is only in the early stages. Each new opening confirms our strategy of getting closer to the customer and adding value to their supply chain. We continue to see great responses from our existing customers who ask us to handle their freight needs in the new markets and then as our brands grow in the market, new customers are onboarded. Internally, we track customer satisfaction on a daily basis and KPIs are focused on customer satisfaction. Our Net Promoter Scores have improved for 5 consecutive quarters, further validating our customer first strategy, a testament to the exceptional service provided by our team members across our growing map. In total, as Doug mentioned, we expect to invest over $0.5 billion this year in real estate, equipment and technology. Equipment deliveries continue. And while I wouldn't say the supply chain is back to normal, it does seem that the disruption has slowed. So before moving on to questions, I'll just say that our view of the current environment remains constructive and our customers overall appear to be positive for the second half of the year. You see in our results and recent contract renewals, so we're able to price to meet the inflationary costs in our business and we'll continue to focus on providing the best customer experience and providing differentiated service. With that said, we're now ready to open the line for questions, operator.

We'll take our first question from Scott Group with Wolfe Research.

Can you just start with the monthly tonnage trends in July and then maybe the typical question you get on the sequential OR trend for Q3?

Sure. The numbers for April and May were released in early June. For the entire month of June, shipments increased by 1% and tonnage also rose by 1%. So far in July, we are seeing shipments decrease by about 1.5%, while tonnage has increased by approximately 2.5%. Regarding our usual guidance on sequential operating ratio from Q2 to Q3, we expect it to align with our historical trend of around 100 basis points, which is typically influenced by our wage increase in July. This year's increase is right around 4.7%, marking a record rise. We're early in the quarter, but we aim to maintain our historical goal of 100 basis points.

Okay. So is the weight per shipment increasing based on comparison, or are we seeing actual trends of higher weight per shipment?

Yes, weight per shipment trends have trended a little bit higher out of Q2 into July. And on a year-over-year basis, it's up nicely and that's primarily our efforts around pricing and controlling the mix of business we bring in.

Right. And also maybe just about the...

It may point to a little bit different dynamic. It works for industrial customers versus some of the things we hear on retail. Right? So, LTL carriers are exposed to the industrial economy, and it seems to have been doing a little better maybe than what we've seen on some of the retail reports. So that would help weigh too for all of us, if that was the case.

Right. That makes sense. And then maybe just last thing. So it sounds like the contractual renewals accelerated. Do you think you can maintain double-digit yield growth excluding fuel into the back half of the year given the renewal trend that you're seeing?

Well, I mean, it's been positive and we continue to be surprised at how well our customers are able to accept it and, I guess, pass it along. Right? I mean, the inflation is not good across the economy. But the contractual renewals, as you know, have always kind of signaled to us what the customer expects, and they agree to it because they feel like they can absorb it, I think. So we don't give a lot of guidance on the yield outlook. But we're seeing enough cost inflation in the business that we think it's the right path. Now, it will be interesting to see as some of the larger carriers come out in the fall with their expectations or guidance on a GRI, where that goes. I mean, last year was a record GRI for most of us. So that will be the next kind of big sign on pricing, I think, when we start to see with some of the largest carriers come out with GRI guidance.

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

How do you think about capacity growth into the back half of this year and into next year, especially if there's a recession? Do you feel like it's time to pull back and tighten the belt? Or do you think there's an opportunity to actually push forward your advantage?

Yes. Good question. I mean, I commented in the earlier notes that we're marching ahead with our second half plan with openings. And I think we're very focused on providing service to customers, and those openings are an important part of that. I would also add that the openings that we have on the docket for the balance of the year and, frankly, many of the next year are ones that we're thinking about as long-term, sort of 10- to 15-year facilities. So growth for us isn't dependent on that. But when we look at these facilities, at markets that we're already in, these are interesting opportunities for us because not only do they provide incremental service to the customer, but there's an efficiency for us as well. So, I think that many of these we actually are going to benefit from. So I think the environment as is right now, I would say that we continue to march on. We'll remain disciplined around this. And then maybe asset prices come down in the future, I don't know, but we continue to see opportunities and we'll execute our plan because we can control that.

Got it. And maybe a related follow-up. I mean you guys can afford to do that because you're doing 20% op margins but a lot of your smaller peers don't have the bandwidth to do that. And so how do you think this plays out in the next few quarters? Are you hearing signs that maybe there's some pressure on some of the smaller players and they might have to exit the industry because of new regulations and inflation costs and such? And kind of what's the opportunity for you guys to pick up on some of that share?

We don't necessarily compete in super-regional or closed-end markets, but there may be available assets as some smaller operators have exited recently. This business is capital-intensive and requires continuous investment. Customers expect excellent service, and without the ability to make those investments or a commitment to them, success in this market is unlikely. This situation might create opportunities for us in real estate or locations. Our main focus is on what we can control: delivering exceptional products and services to our customers and seeing where that leads. The results have been promising, and for those who lack capital and cannot invest or commit to their customers, it will likely be more difficult.

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

So I guess, first sticking with the network expansion commentary, I guess maybe kind of 2 questions on that to start. Number one, as we think about the start-up costs, it seems like with the size of the business, when we think about the expansion in the second half of the year, you're not really signaling any drag on the margins as you open these new facilities. So I want to make sure I got that piece right. And then number two, when we think about kind of the volume opportunity or the tonnage opportunity, would you expect as you're opening these new facilities to be able to outgrow the market? Or is there some trade-off within the network where you're pruning some freight or doing some things differently? I'm just trying to think about the growth that these facilities can contribute.

Yes, Todd, those are good questions. The facilities we are opening fall into two categories. Some are in new markets, where we may be addressing a remote area or replacing a cartage carrier with Saia service, which upgrades the service for customers and offers some cost savings for us. We've entered these markets directly without relying on cartage carriers, which is a positive change. In other areas, like Chicago, we have a strong presence. Adding these new facilities allows us to elevate the level of service to customers in the vicinity of the new terminal. We’ve added three facilities in Chicago, increasing our total from two. While there are some incremental costs involved, there are also savings and synergies that arise. By building density in our existing terminals, we can reduce or eliminate stem times in new facilities, which ultimately benefits our customers. We don’t emphasize the drag on margins because we believe it is minimal and, as I outlined, there are opportunities for us to enhance our operations over time.

And any thoughts on kind of the volume or the tonnage ramp with the facilities?

It depends. In the early stages for some of these intramarket situations, we may simply replace the existing services from the legacy Chicago terminals with a new terminal. This may not necessarily represent an increase in volume, but it will improve efficiency and potentially lead to growth in the future. I can't provide specific numbers on that right now, but initially there will definitely be cost savings.

Yes, I understand. That makes sense. I have a follow-up question, and I know you've addressed this multiple times, but I'd like to revisit it. Considering the significant growth you've experienced in the operating ratio over the last three to four years, could you share your perspective on maintaining the operating ratio at these levels? You're approaching a sub-80 operating ratio, which is impressive and marks a significant improvement from the company's historical performance. Can you provide insights on how to sustain the business at these levels in a potentially different economic environment or if pricing stabilizes or conditions shift?

Sure. We are primarily focused on the customer. We prioritize providing excellent service, strong coverage, and a low claims ratio, which sets us apart. We monitor market pricing, and while we have seen significant improvement in the second quarter and our contractual renewals appear favorable, we recognize that we are not yet at our desired market position. Although we may experience a slower pace of improvement going forward, I believe we are well-positioned because our team consistently delivers reliable service. Regardless of market conditions, we need to ensure we are compensated for our offerings. While the rate of increases might not be as rapid, there are still opportunities available to us. We are pleased with the 80.4 operational ratio this quarter, but the capital demands of the business necessitate that we continue to reduce this ratio. Currently, although the pace of improvement may decelerate, I don't see any indication that we won't have opportunities for growth moving forward.

Next question from Amit Mehrotra with Deutsche Bank.

I'm trying to reconcile the decline in shipments with the footprint expansion. I would have just thought there maybe was opportunity to show us a little bit of acyclicality on shipments given the expansion. Maybe it's just a little bit too early. Also, I know that you guys are kind of proactively managing the mix of freight until maybe that has something to do with it. But Fritz, can you just give us a peek under the hood a little bit in terms of what's happening and why shipments are declining in the footprint spending?

We're very focused on growing profitability in this business. And you'll see that we spend a lot of time internally on driving mix of business. And the mix of business involves identifying customers that say, Saia is doing a great job, and it's appropriate to pay for this outstanding service. And that's our focus. So there may be times where we exit businesses even in legacy terminals or not accept business in new terminals because the pricing is not appropriate for the service levels being provided. So we don't spend a tremendous amount of time concerned about shipments. We spend a tremendous amount of time focused on driving profitability so we can continue to invest in the business and maintain the service levels. So as I look at what's just happened in July, it's the trend in July, I don't necessarily worry about that. I focus more on what are we doing to drive incremental value in the business and finding those customers that really embrace what they get from Saia.

I would like to highlight that, as we consider terminal openings, there are locations like Atlanta and the Northwest or Northeast that will offer significant opportunities next year in strong freight markets. We are actively adding terminals to our network in these promising freight markets because our customers have expressed interest in using Saia if we expand our services to those areas. This isn't solely based on the size of the market for outbound shipments, which is how we gauge shipment growth, but rather on the service points we can provide. As Fritz mentioned, being present in these markets and delivering high-quality service allows us to charge for it. When we open new terminals, our customers readily accept us because we are managing their business effectively. Our sales team can then inform customers that we can now serve additional locations, making it convenient for them. This ease of access can justify higher pricing as we enter these new markets. As our brand grows, we expect to capture a share of whatever outbound shipments exist in these areas, although not every terminal will significantly impact our overall volumes, especially if they are located in smaller trade markets.

Yes. Okay, that makes sense. And then just a quick one for me. So Fritz, historically, you've talked about this 100 to 200 and then 100 to 200 basis points of margin improvement. It seemed like margin expansion opportunity even in a freight environment that was less accommodated or positive as it has been over the last couple of years. So as we think about this potential market that we're in right now or entering, do you still see opportunity to expand margins after this pretty impressive run that Saia has had? Or do we take a little bit of a pause relative to the 100 to 200 basis point margin improvement target?

Yes, we do not plan to take a pause. We believe there are still opportunities for best-in-class services, which are currently priced below the seventies. We aim to deliver excellent service while being competitive on pricing, as our service and quality are above market standards. We have concentrated over the past few years on core execution, managing cost efficiencies and productivity despite the challenges posed by the pandemic. We are proud of the capabilities we've developed and feel equipped to navigate any potential challenges in the macro environment. By maintaining high levels of service, we anticipate continued improvement in operating ratio over time.

Next question from Amit Mehrotra with Deutsche Bank.

Yes. I was thinking more of a kind of typical freight cycle, not a 2Q '20 shock to the system but more of a, hey, the market is weaker and you see down 4%, 5% tonnage for a couple of quarters. So even in that backdrop, do you think you can get yields up pretty well and margin response to that favorably? Is that what you're saying?

I believe we will be able to achieve yield. The industry has been effectively pricing to address inflation, and when major players in our sector focus on this, it positively influences the others. In the last couple of freight cycles where we experienced declines in tonnage, we successfully raised our prices. We are responsive to costs across our business model and implement adjustments weekly at our 181 terminals. We manage daily labor costs throughout every terminal. Our approach is to build and manage our business for the long term, recognizing that our industry is subject to industrial cycles. To assume there won't be any dips in tonnage or shipments would be unrealistic. We will navigate through these challenges as we have in previous cycles. Our goal is to foster growth for the next 20 to 50 years, building on our nearly 100-year history. We aim to operate as effectively as possible, and given the current pricing environment, we believe we can sustain and possibly improve our margins.

Wanted to ask you a little bit about the mix of shipments. I think you referred to it in July that you thought maybe retail was a little bit weaker in your shipments and industrial a little stronger. Have you seen a meaningful falloff in your shipments with the kind of consumer retail bucket yet? Or is that something you think might be occurring?

Well, in terms of a B2C kind of consumer, I mean, our residential deliveries are still running in the high single-digit range most weeks. I don't know if the consumer patterns change or something and they're still buying; I don't think it impacts us if the consumer goes to the big-box retailer and picks up their product or whatever, I mean, that doesn't change for us. But overall, I guess, there's consumer spend...

Yes. And just recall that we don't have anything in our book of business that's over 3% of the total. So maybe it's on the margin somewhere but we wouldn't have a call out.

Okay. It hasn't been something that's been very noticeable. If we encounter a situation similar to 2015, 2016, or 2019, where there's a slight decline in industry tonnage, say in the mid-single digits, do you believe it would be possible to maintain a flat operating ratio in that scenario? I understand this is a hypothetical situation, but what do you think might happen to the operating ratio if the market were to experience a mid-single-digit decrease in tonnage?

Well, I mean, I don't know what time period you're talking about the decline occurring over. I mean you can go back to the second quarter of 2020 and you've got a real life example, right? I mean in that sudden shock to the macro environment, margins didn't remain flat, but it was a pretty good quarter. I mean, tonnage was down, I think in that particular quarter, 8% or 9%. We're still able to raise prices. So there's more kind of gradual declines. I mean if you go back to 2019, tonnage was down most of the year. It ended up flattish for us because we opened a bunch of terminals. But even in that year, we pushed about 8% across on the yield side in a flat to down tonnage environment. So there's an opportunity certainly to hold margins flat in that kind of scenario and potentially improve them.

Fritz, just going back to that Net Promoter Score increase, which is great, by the way. I'm wondering how that absolute score compares with the rest of the industry, assuming you get that data from Mastio? And then maybe just a follow-up. I hope I didn't miss it but any updates on where you think you are in terms of how much ground you need to make up on pricing versus the market given your level of service?

The Net Promoter Score I mentioned is our internal measurement based on customer feedback. We haven't conducted a Mastio exercise yet, but that will happen later this year. From our own customer surveys, the feedback has been increasingly positive, which is a good sign for our performance. I don't have data on how we compare to others at this time, but our internal measurements are critical, and what our customers are telling us is encouraging. To address the other part of your question, a straightforward approach is to look at the revenue per bill metric of other national LTL carriers. I believe we compare very favorably, if not better than most, with some even suggesting we are the best. However, if our average revenue per bill is lower than that of national competitors, it indicates an opportunity for us.

We'll take our last question from Jack Atkins with Stephens.

I wanted to revisit the topic of pricing opportunities for a moment. Fritz or Doug, perhaps you would like to address this. I understand that changes were made to the incentive compensation plans for the sales force, which started at the beginning of last year, to encourage better pricing strategies for the overall company. I'm curious about how far along we are in implementing this and whether there are any additional adjustments you might consider to enhance its effectiveness, especially if you see any further opportunities.

I think it's been a great plan. I think it's rewarded folks that have embraced the great quality and service that we've provided and they're making sure that we get compensated for it and we share that with our team; that's important. I think the most recent enhancement we've made this year is around putting incentives in place that tie our operating folks to servicing the customer. And you can see how they've embraced that with the service attributes and what we've been able to provide to customers for now the fifth consecutive quarter of sort of Net Promoter Score improvement. That's important. Those things all kind of go together and that syncs operations and sales together within a focus clearly on the customer. And I think we drive that. I think that is something that we can continue in an environment that may be more challenging. We may make some tweaks on the edges here. But what's most important is that we're getting the entire organization focused on taking care of the customer and that seems to be working.

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