Saia Inc Q3 FY2022 Earnings Call

Good morning. My name is Sasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Saia, Inc. Third Quarter Conference Call. Today's conference is being recorded. I will now turn the call over to Doug Col, Saia’s Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Sasha. Good morning, everyone. Welcome to Saia's third quarter 2022 conference call. With me for today's call is Saia's President and Chief Executive Officer, Fritz Holzgrefe. Thanks for joining us today. We sincerely appreciate your patience as we had to work through some technical issues with our earnings call service provider yesterday. Before we begin today’s call, you should note that during the 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 third quarter results. Freight trends have moderated over the last couple of months, but I'm pleased to report this morning that Saia achieved record third-quarter revenue and operating income, topping last year's record results. In the quarter, we averaged approximately 30,500 shipments per day, about 800 fewer shipments per day than in the same quarter last year and down from a 32,000 shipments per day average in the second quarter. The Q2 to Q3 daily trends were below normal seasonality. Those shipments were down 2.5% in the quarter. Weight per shipment increased and tonnage was essentially flat to last year at down 0.4%. Our third-quarter revenue of $729 million surpassed last year's third-quarter revenue by 18.4%, and our LTL revenue per shipment increased by 20.1%. Our revenue growth ex-fuel surcharge continues to be the result of positive pricing and effective mix management. Our yield or revenue per hundredweight, excluding fuel surcharge rose 7.8%, reflecting a constructive pricing backdrop despite the moderating demand environment. Further evidence of stable industry pricing as seen in our average contractual renewal increase of 12.2% in the third quarter. We're committed to providing excellent service to our customers and are investing heavily in the business to expand coverage, and it is gratifying to see that our customers see the value in our service offering. Our third-quarter operating ratio of 82.4% was 110 basis points better than our adjusted operating ratio of 83.5% posted in the third quarter last year. You'll remember that the adjusted operating ratio excludes a $4.3 million real estate gain recorded in the third quarter of 2021. As you've likely seen from our numerous press releases, we successfully opened five new terminals in new markets. And with our Lafayette, Indiana terminal opening this week, we've now opened a total of 11 terminals this year. We do not have any additional openings planned. We're currently planning to open another 10 to 15 terminals in 2023 as part of our ongoing effort to offer new and existing customers more service options. I'll speak more on our outlook for the rest of the year and the next year after Doug reviews a few more details from our third-quarter financial results.

Thanks, Fritz. As mentioned, third-quarter revenue increased by $113.3 million to $729.6 million. The components of revenue growth in the quarter were as follows: our yield, excluding fuel surcharge, improved by 7.8% and yield increased by 17.5%, including the fuel surcharge. Tonnage decreased 0.4% attributable to a 2.5% shipment decline and a 2.2% increase in our average weight per shipment. Length of haul was down 2% at 897 miles. Fuel surcharge revenue increased by 74.6% and was 20.5% of total revenue compared to 13.9% a year ago. Shifting to the expense side for a few key items to note in the quarter. Our salaries, wages and benefits increased 7.3% from a combination of our July wage increase, which averaged 4.3% across our employee base and also the result of our employee count having grown by approximately 10% year-over-year. Purchased transportation costs increased by 18.4% compared to the third quarter last year and were 11.7% of total revenue compared to 11.7% in the third quarter of 2021. Truck and rail PT miles combined were 17.1% of our total line haul miles in the quarter compared to 19.7% in the third quarter of 2021. Fuel expense increased by 60% in the quarter, while company miles increased 8.2% year-over-year. The increase in fuel expense was primarily the result of national average diesel prices rising by over 53% on a year-over-year basis. Claims and insurance expense increased by 3% year-over-year in the quarter and was up 12.5% or $1.8 million sequentially from the second quarter. Depreciation expense of $40.7 million in the quarter was 13.8% higher year-over-year and $3.7 million more than in the second quarter, primarily due to the onboarding of new tractors and trailers. Total operating expenses increased by 17.9% in the quarter and with a year-over-year revenue increase of 18.4%. Our operating ratio improved to 82.4% compared to an adjusted operating ratio of 83.5%, a year ago. Our tax rate for the third quarter was 23.3% compared to 24.3% in the third quarter last year, and our diluted earnings per share were $3.67 compared to $2.98 in the third quarter a year ago. We anticipate an effective tax rate for the full year of approximately 24%. Capital expenditures through September totaled $279 million and will approach $500 million for the full year. I will now turn the call back over to Fritz for some closing comments.

Thanks, Doug. As I mentioned earlier, business levels have slowed down over the past few months, and we are entering some of the weaker seasonal months of the year. That said, we are pleased with the progress in identifying and securing new locations in targeted expansion markets. We expect to open a few terminals in the first quarter of 2023 and plan to launch between 10 and 15 locations throughout the year. Similar to our four terminals this year, we intend to relocate around 10 terminals next year to better align operations strategically. All of these new and relocated terminals play a crucial role in our strategy to enhance our service offerings. Our pipeline for terminal openings extends well into 2025, and a significant advantage of our organic expansion strategy is that we can proceed at a pace that suits us. Our business is subject to cyclical changes, and depending on where we are in the cycle, we might have the chance to either accelerate or slow our terminal expansion activities. For 2023, we are currently planning for business as usual and will provide quarterly updates on any changes to our opening plans. Each new terminal opening is aligned with our strategy to get closer to our customers and add value to the supply chain. We are receiving positive feedback from existing customers who want us to manage their freight needs in new markets. Additionally, as our brand gains recognition, we attract new customers who were previously unfamiliar with Saia. We monitor customer satisfaction daily, focusing on key performance indicators related to the customer experience. Our Net Promoter Scores have improved for seven consecutive quarters, reinforcing our customer-first approach and reflecting the exceptional service our team members provide across our expanding reach. As we move to questions, I want to note that we view the current pricing environment positively, and it appears that cost inflation will continue. Maintaining and improving margins through pricing is essential in an inflationary environment, and we are committed to delivering quality and differentiated service to justify our pricing. With that, we’re now ready to take questions. Operator?

Thank you, sir. Our first question today comes from Jon Chappell of Evercore. Please go ahead.

Thank you and good morning. Fritz, one of the last things you said was the inflationary cost environment. So, I just wanted to focus on two parts there. You said your headcount is down 10% year-over-year, which makes sense given the growth over the last 12 months. As you think about labor and if we layer in PT, which is still elevated by your historical standards, which one of those levers gets pulled first? And can you match them to kind of the slowing tonnage or shipment backdrop that you're seeing today?

Yes, the first thing we want to do is leverage our internal workforce where possible. So, I think over time, you'll see us work through the PT and that will continue to come down over time. We contract our PT rates. So, as a result, you didn't see necessarily the impact of what you see with current spot rates. So, it's a contractual rate. So, it's incumbent upon us then to leverage our internal assets, our driver network wherever we can to build density. And so that's something that we'll continue to work on in Q3 well into Q4 into next year, and that will be an important opportunity for us as we kind of fill in our geography and build needed density across the network.

That makes sense. And then a super quick follow-up. Just if you can, any update on the trends in October? I know it will be in your Q, but we're through the month now, any commentary you can give on either the shipment or tonnage or even the price environment?

Yes, I’ll take this. October has been the first month in some time where we experienced a more typical flow from September into October. In October, our shipments decreased by about 4.5%, and our tonnage dropped by roughly 3%. However, we are still seeing an improvement in our year-over-year weight per shipment. This is the first month we returned to a normal seasonal pattern after bucking seasonality all year.

Okay. That's super helpful.

That will be our expectation going through the rest of the year, and we'll see how that pans out.

Thank you. We now move on to Jack Atkins from Stephens with our next question. Please go ahead.

Okay, great. Good morning. Thank you for taking my questions. So I guess, Fritz, if we could maybe go back to the pricing and cost discussion for a moment. In the quarter, Doug, I believe you said that contractual rate renewals were up, I think, 12.2% in the third quarter. Any kind of color you can provide us on sort of how that specific metric has trended in October? And do you feel like that you're seeing rate increases that are covering your cost inflation at this point?

Yes. I mean, I think we see a continuing trend around pricing being favorable. The environment is good. But I think what's for Saia in particular, which is critical is I'll point to what we're doing for the customer. Our service trends are as good as they've ever been. So when you're in that situation, that allows you to continue to support the longer-term proposition around making sure we get paid for that service. So, I think they go hand in hand. So I think the trends are positive. Our service standards are high. So I think that is kind of foundational to be able to continue that pricing trend. And it's based on differentiated service. So I think that helps us, that's supporting our thesis specifically to what's the opportunity at Saia.

Okay. Okay. Understood. And then I guess maybe kind of thinking bigger picture about your growth plans here. Fritz, I think you said that the plan for 2023 is sort of business as usual, bringing on 10 to 15 new facilities. When we kind of think about the last year or so, we've been adding a good bit of capacity in terms of new doors coming online, new facilities, upgrading facilities. The shipment growth really has it sort of been keeping up with the door growth and we're adding more doors into next year. At what point do you need to see the shipment growth kind of catch up to the footprint that you've been adding, or before you start thinking about maybe pulling back a bit on the expansion plans to sort of let the market catch up with what you already put in place?

Yes, that's a great question. The key point is that when we add new doors, we're not just thinking about the immediate future; we're considering a long-term horizon of about 10 years. This expansion allows us to enhance our service offerings for customers and creates opportunities for businesses to utilize our expanded network. We're looking at our business mix within a broader, growing portfolio. It's important to note that with our geographic expansion plans, we have the flexibility to slow down or even accelerate based on market conditions. Currently, we see potential opportunities for the full year ahead. However, in the next few months or next year, we may decide to pause if necessary. This decision wouldn't significantly impact our business because we have the financial capacity to postpone new openings. We view this as a long-term chance to continue improving our service map. If we identify opportunities, we will pursue them; if the market isn't ready, we will adjust accordingly. I appreciate the flexibility we have in this situation.

Okay. Thank you again for the time.

Thank you. We now have Ken Hoexter of Bank of America with our next question. Please go ahead.

Hi, good morning, Fritz and Doug, and thanks for putting up with all the questions on moving the call. Maybe just talk about how you think about the progression of the operating ratio here. So, if we start thinking about a deterioration in volumes, it looks like you're working to hold price pretty well. Maybe just talk about how we should think about it, if you're jumping back to seasonality where tonnage is down 3% and shipments down 4.5%. How should we start thinking about that into the fourth quarter and next year?

Hey, Ken, good morning. I'd say for the fourth quarter, I mean, like I said, we're pretty pleased with October or just that it was something we expected finally kind of occurred this year. So we're going to expect normal seasonality through the end of the year. And with that, we would expect that our historical margin degradation would come in pretty much in line. So historically, we've seen around 200 basis points as you move from Q3 to Q4 of deterioration or degradation in the OR. And based on what we saw in October, we would think we could hit it. There's a fall off in volume, or we don't get kind of the end of the month normal pickup in one of the months remaining and maybe it's a little worse than that, but I think about 200 basis points is our target as we sit today with one month under our belt. And then moving into next year, I mean, we've always said, because we felt like, we've really improved our service and had a valuable product to our customers, but yet, still had a pricing gap. So walking into a year, we expect to be able to improve margins by providing good service and then charging a fair price, which is market. And as we do that, that's generated a lot of the margin improvement we've seen. So as we move into 2023, that would be our goal. Now, look, if shipments and tonnage are going to be negative all year, then that's going to be challenging to do. I don't know, everybody's got a different economic model and when do things stabilize or turn positive across the industrial and retail economy. But our view is that we've got an opportunity to continue to raise the borrower service, charge more for it to improve margins, and we'll just see what kind of a macro environment were dealt as we move into 2023.

I'm sorry if I missed this earlier, but did you discuss whether it's too soon for pricing discussions or timing for GRI and how you anticipate that will evolve as we enter a slowing freight environment, especially considering that you mentioned the need to align your pricing with peers?

Our perspective is that we cannot afford to fall behind. We haven't made any announcements yet, as we usually don't take the lead on this. However, the largest carrier in our industry has already revealed their plans for next year, which include a price increase starting January 1. We will monitor the market closely. If other players increase their prices and we remain stagnant, we will be at a disadvantage. This situation will not improve our standing, and a flat market does not allow us to adjust prices in line with the cost inflation we have been discussing.

Yes. I would like to add that we are renewing contracts throughout the year for national accounts. The third quarter renewals reflected the mix of contracts that were due in that period. While I'm not certain if this rate will be maintained, we do expect to continue negotiating with our customers, emphasizing that our service offerings and underlying costs are being affected by inflation. Therefore, we will need to maintain our focus on pricing during contractual negotiations as well.

Thanks, Fritz. Thanks, Doug. Appreciate the time.

Thank you. We now move on to Jason Seidl of Cowen with our next question. Please go ahead.

Thank you, operator. Fritz, Doug, good morning, gentlemen. I wanted to talk a little bit about how we should view the quarter. Obviously, you saw a degradation in seasonality in 3Q and then, you've seen the return to normal seasonality here in October. How much of that degradation of seasonality do you think was just a pull forward of people shipping audits this year?

Good morning, Jason. It's difficult to determine exactly. Typically, the normal seasonality from Q2 to Q3 would have shown a decline of about 1.5% to 2%. However, we experienced a decline of approximately 5% in shipments per day during that transition. This significantly deviated from the seasonal pattern. We believe that the weight per shipment reflects both the health and strength of our industrial customers, who likely didn't face the same inventory challenges that some retailers did. If our network had reduced retail volume, that might have contributed to the increased weight per shipment we observed. Overall, we are satisfied with the quarter, considering the shipment trends. Some of those trends are self-inflicted, which we can accept, as they align with our strategy of selecting freight that benefits us and our customers. The value of our service has proven to be a positive direction, and we plan to continue on this path. We are happy with Q3 and will see if the seasonal trends we noticed in October persist.

Okay. Fair enough. And directionally, how should we think about CapEx into 2023 and sort of a more stabilized environment, not one which you have to pull back anything.

I believe you will likely see similar levels of capital expenditures. We still have a solid pipeline of real estate opportunities. As Fritz mentioned, we may take action on some real estate activities, whether that involves land or terminals, without necessarily needing to open them right away. It could benefit us to stockpile a few assets. Therefore, I don't anticipate us hesitating to make good investments, even if we don't initiate operations immediately. If we find properties that enhance our position or allow us to enter new markets, we will likely proceed because our balance sheet is strong. I'm uncertain about the cyclicality we might face in the upcoming quarters, but I believe that Saia's balance sheet is more equipped to prosper in a cyclical industry now than it has been since our spin out 20 years ago.

That's for sure. If I could sneak one more in here, Fritz, you mentioned plans to open more terminals as we look into 2023, but you said that you would be flexible about that. What type of environment would you need to see that's out there for you to pullback in your expansion lines?

I believe there are two main factors to consider. First, there could be a significant economic contraction, and second, there might be specific conditions in certain markets where we don't see enough ongoing activity to justify an opening. In such cases, instead of proceeding, we would simply delay the opening. Overall, it's a combination of general macroeconomic conditions and unique circumstances in particular markets.

Okay. Fair enough. Gentlemen, I appreciate the time as always.

Thanks, Jason.

Thank you. Next up is Scott Group from Wolfe Research. Please go ahead.

Hey thanks. Good morning guys. So I don't think I got the September tonnage and shipments, if you can give us that. And do you think there was much of a hurricane impact in September, and do you think that's impacting the September to October seasonality here?

Hey, good morning Scott. I'll run through the monthly numbers. I know we put them out mid-quarter that I always go ahead and run through them. So on the shipment side, in July, shipments were down 1.1% per day. In August, shipments per workday were down 1.9%, and in September, shipments for work, they were down 4.5%. And as I mentioned, the trend here in October is running down about 4.5%. Moving out of tonnage in July, tonnage per workday was up 2.9%. In August, tonnage per workday was up 0.4%. And in September, tonnage per workday was down 4.1%. And again, in October, tonnage per day was down about 3%. For us, I think I remember it was towards the end of the month, I'd say, given the markets that were impacted and the way we prepared for them, I don't think it was a driver of the results. I mean, the shipment trends in September were pretty well established at down 4% or so. So I don't think it had a big impact on the business. It's certainly disruptive to all of our employees and their families in that area. And when those things happen, that's the thing we think about most, but it wasn't that impactful to the volumes, I don't think.

Okay. And then in terms of the fourth-quarter operating ratio, Doug, you talked about 200 basis points. You look back over the last eight years or so, I think there's only been one year where it's been 20 basis points or more, it's typically better than that. So any additional color there? And then maybe just separately, there's so much focus on LTL and the impact of fuel. Just maybe how you think about the impact of fuel in the third quarter, and how do you think the impact would be if we go into a period of lower fuel prices? I know that's not happening right now, but just people are focused…?

When I look back and give our guide on these quarterly sequential moves, we use an adjusted number. We try to adjust for accident volatility. You'll remember with our level of retention or deductible that that can swing some quarters. So the number we speak to is an adjusted number. But in terms of the current outlook, I think given the volumes we're seeing today and our ability to work on optimization and taking out major costs around things like PT and all that, I think we feel pretty good about it.

Yes, it's definitely a cost to the business that we need to ensure we factor into our pricing. This is part of the ongoing cost structure. When fuel prices are lower, the surcharge decreases, which can create some challenges. Ultimately, it is our responsibility to set the right pricing overall. That’s our main focus. We understand that during times of volatility, profitability can fluctuate. However, as we evaluate the business, we concentrate on the total cost and total price. We just have to navigate through these cycles.

Okay. Thank you, guys.

Thank you. We now have Chris Wetherbee of Citi next. Please go ahead.

Hey, thanks. Good morning, guys. One of your competitors talked about cost inflation on certain shipments running, kind of, 7% to 9%. And as we carry into the end of this year, maybe the beginning of next year, I wanted to get your sense, that sounds sort of right what you're seeing in your network? And I guess when you think about that potential level of cost inflation, do you think that sort of contract resets as we think about next year likely to kind of get close to that, maybe be a little bit below or above? What are your, kind of, general thoughts about that price cost dynamic?

Yes, those numbers make sense to us. We are currently experiencing high single-digit cost increases, excluding fuel. We feel confident in our ability to showcase value to our customers, who are also facing inflationary pressures in their businesses. Our goal is to partner with them, provide excellent service, and navigate cost challenges effectively. As Fritz mentioned, fuel is one aspect that factors into our negotiations. Not all of our contractual customers pay the same fuel surcharge as seen in national benchmarks; many pay significantly less. Therefore, negotiations need to consider the overall pricing we offer in comparison to the market. We will continue to aim for pricing that exceeds inflation, and we believe we will succeed.

Okay. Its helpful.

It's important to emphasize that we are certainly exploring opportunities to increase productivity in our operations to run our line haul and city operations more efficiently. However, it's likely that we won't be able to fully offset the current level of inflation through productivity improvements alone. Therefore, it becomes crucial to focus on delivering exceptional service and value to our customers, which supports our ability to implement necessary pricing strategies, especially since the underlying costs in our business remain subject to inflation. There are limits to what we can do to manage these costs internally.

Okay. That's helpful. And then just following up maybe along those lines, what are your thoughts around labor, I guess, labor availability and maybe your thoughts for hiring as you're thinking about some of those terminals potentially coming online in the first quarter. How does the pipeline look? And what are your thoughts in terms of headcount as we think about next year?

Yes, I believe the recruiting environment is somewhat improved. For many years, we've discussed the challenges of hiring drivers and finding skilled dock professionals. However, it appears to be a bit easier than it has been in recent years, which is beneficial overall. Additionally, when we open facilities in new markets, we gain advantages as the new player and can attract business by offering qualitative benefits to drivers, such as shorter commutes or flexibility in start times. These factors contribute positively to our recruiting efforts, making it somewhat easier to hire new drivers in those markets. Therefore, I am confident that we will be able to staff our facilities as needed.

We now move to Amit Mehrotra of Deutsche Bank. Please go ahead.

Thanks operator. Hi, everyone. First, my first question, so if I look at revenue per shipment ex fuel, it was up like 10.2% in the quarter. And then if I look at cost ex fuel per shipment, they were up like 13.7%. So there was a negative spread between rev per shipment ex fuel and costs per shipment ex fuel, which is like the first time that's happened in a long time. And so I guess the question I have is, are we just at the point in the cycle where pricing off of this high base is just obviously a little bit harder, the cost inflation is still unabated. So the right expectation is, as we move kind of over the next fourth quarter in 2023, we take a pause in margin expansion, because of this dynamic with where pricing is relative to cost inflation? Just to get your thoughts on that.

Well, thank you, Amit. Sure, we go in terms of exact margin numbers, but I wouldn't pin it all to a fuel discussion, fuels, very inflationary. We don't break out the exact fuel costs for you. I know you've done some analysis, but we don't give you the fuel expense discretely. So it's hard to put a fine point on it. But if I think about our OpEx per shipment in the quarter, fuel and other expenses in that line was explained more than 50% of the increase. So labor was another probably a quarter of it. And underneath that, you've got things like purchase transportation where we see some cost inflation all. We don't expect that to continue depreciation for us because of the investments in the business is running up as well. But if you think about the fuel component, that enters into that pricing discussion and there's kind of a compounding benefit over time of the work we've already done.

I'm not talking about fuel. I'm excluding fuel. I'm not talking about fuel. I'm trying to exclude fuel from the discussion.

Yes. So the cost inflation is running in that high single, low double-digit range. And to your point, revenue per shipment ex the fuel up 10% is covering that. Where we go from here, we'll have to see. But our intent is to continue to price to keep up with that underlying cost expense ex fuel.

Yes. If anything, you have to double down on that now, right? We understand the underlying cost pressures that we have. We understand that there's only so much we're going to be able to take out productivity. And then we know what we're doing for the customer. Listen, that just drives the thesis of, listen, we've got to charge for that sort of level of service. And that's where our focus has got to be.

Yes. That's a perfect segue to my second question, because I want to understand the opportunity to further improve the mix of business as a proxy for revenue per shipment. So when I look across the sector, I see Saia as length of haul, weight per shipment, higher or longer than certain peers, but then the revenue per shipment is 5% to 10% lower. And to me, that speaks to the prospective opportunity in my mind. I just want to get your thoughts on kind of your ability to be somewhat acyclical. I mean you're not immune to the cycle, obviously, but there just seems to be this gap between where your mix should be and where it is today that it's outside of the macro? And do you still feel like the macro is not is turning, but there's still opportunity to kind of more than offset that with some of the idiosyncratic mix opportunities.

Listen, Amit, regardless of the environment, and particularly in a more competitive situation, it might be a bit clearer how to bridge the gap. However, when we compare our revenue per bill and business mix to national competitors, along with our service levels and trends, we recognize the need to expand geographically to tap into the addressable market that will support higher market-based rates. I believe the opportunity is still there for us. While growth may slow or not proceed as quickly, I feel our prospects remain strong even during a downturn. It’s crucial for us to maintain service levels to ensure this and also manage our costs effectively; where we can improve productivity, we must. However, we cannot compromise on service levels because ultimately, we must be able to charge for that service.

Keep in mind, too, and then we've got a bunch of people in the queue. We'll have to get you want to follow-up with additional ones. But keep in mind too, part of our pricing story, I mean, it's a path we've been on, but all of our high-quality competitors have been doing the same thing. So there's still an opportunity to close that gap. And if you think about accessorials, again, for example, in the quarter, I mean if our revenue per bill or per shipment increase in the quarter, 40% of that or so was just from an improvement in the accessorial. And we still see the data and feel like we're below market there. So we'll continue to push that opportunity to be paid fairly.

Thanks a lot. I appreciate it.

Thanks and good morning, and thanks for the extra time to think about the questions here today. I guess sticking with the pricing conversation. First, as I look at the contract renewals, I'm actually a little bit surprised to see the acceleration to that 12.2% in the third quarter. It's been moving up from first quarter to second quarter now into third quarter, and you've got some more challenging comps, it's probably difficult to tease out how much of that is service versus how much of that is some changes that you've been doing internally with the comp structure. But I guess, can you give some sense on how much you think is related to those two buckets? And then is there a way to think about maybe how much of your book still needs to reprice? I know it comes up pretty ratably, but when you think about the large national accounts and kind of the service changes that you've been making kind of that sustainability of the contract levels, the contract renewals at these levels? Thanks.

Thanks, Todd. To gain any competitive advantage for our customers, we need a strong service offering, and our team is excelling in that area. This sets the stage for a focused and well-prepared sales team to effectively pitch and secure contract renewals. It's important that these two elements work together to achieve our renewal targets. However, as you know, customers do not guarantee volume commitments, so ongoing performance is crucial after securing contracts to avoid losing customers to competitors in the future. I don’t have a clear sense of where we are at this point in time, but when I compare our revenue per bill, adjusted for weight and distance, with that of our peers, I still see potential for growth. Notably, we are differentiating ourselves through our service quality. We believe we are providing better service than some of the well-known national competitors. This means we must continue delivering excellent service to our customers and empower our sales team with the message that they are receiving outstanding service at competitive market rates. I still believe we are in the early to middle stages of our journey compared to others, and the trend in service quality is vital to our success.

Okay. And Fritz, I don't want to put words in your mouth, but it sounds like your feeling is it's more service than some of the changes you've done internally to compensate the sales force?

I think it's service for sure. And I think that a successful sales professional has got a great product to sell and then properly incentive those things work pretty well.

Yes. Okay. All right. I'll turn it over. I know you've got a lot of people to get to. Thanks.

Thank you. And we now have Allison Poliniak of Wells Fargo. Please go ahead.

Hey, guys. It's James on. I just wanted to sort of follow-up on that question around the pricing gap. In the down environment or a weaker – down environment, how should we think about your ability to close that gap? Obviously, you're probably outperforming peers on pricing, but will you get essentially less pricing in a weaker environment? And then sort of on the cost side, are there any discrete items, the cost that would come out, like the slow terminal expansion, should we expect sort of essentially some costs to fall out or sort of CapEx to follow? Just sort of trying to understand sort of the puts and takes in pricing and discrete cost items in a weaker environment?

Yeah. On the pricing side, I mean, we'll have to see how it plays out, but you think there might even be an opportunity. If we – lower price to start with and entering into a negotiation with a customer, you think our service would be a pretty attractive option for them. So you think that perhaps, whatever volume trends are out there, maybe we do a little less worse, right, because maybe we're an option for a customer that they hadn't used us enough before and they see the quality we provide. And maybe we're a little bit lower priced, even though we're raising prices. So, we'll have to see how that plays out. On the openings, like Fritz mentioned in his commentary, I think if we get into the back half of the year, we really saw unstable trends or deterioration in volume trends. There are some terminals that we could kind of put on the shelf and even though they're ready to open, maybe not put the OpEx into them. But a lot of these smaller terminals, they get to breakeven pretty quickly these days. And there's not huge cost dollars to pull out. But activity-wise, people-wise, workload wise, we could choose to slow them down and wait for a better opportunity.

Got it. And just to follow-up on a point you made earlier in the call. I think you had called out some weakness by end market – among retail have those specific sort of end market trends moderated at all, or is it sort of continuing even though the overall book of business is gone seasonality?

There wasn't any specific call out just in general, what you read, and we saw some of the retail customers. But no specific end markets. But no, it's just kind of been there for a few months that way. We haven't seen any further deterioration or anything like that.

Thank you very much.

Thanks, James.

Thank you. And we now move over to Ravi Shanker of Morgan Stanley. Please go ahead.

Great. Thanks. Good morning, everyone. So just a quick question on service versus price because you and your peers have all been saying that, hey, we're getting better pricing for service. How do we think about the kind of long-term trajectory there? Kind of does that mean there's like a max cap on the pricing you can get because the industry service can only get so good? I mean you're going to be better than perfect or does that mean that you can get better price over time because like not everyone can reach that level. So just trying to get a sense of whether that pricing power can accelerate or kind of tapers off here a little bit as your service keeps getting better and better.

Yes. I think specifically to Saia, if I look at our – how we assess and measure service and compare that to the peer group, we stack up pretty well – and then I look at our relative pricing versus that same peer group and I see that we have an opportunity to close that gap. So, I think for Saia discreetly, I think we have some runway there for sure, right? I just think that as we continue to increase our addressable market as we continue to execute on that repeatable service, customer expectation is going to be there, and we can be in a position to continue to first push the pricing thesis. Now the industry in total, I think that I think overtime, what's going to happen is that you're going to differentiate on service. I think it's already happening today. And I think that those that can continue to provide high levels of service and value to the customer, I think those will differentiate and gain share over time. So I think that as the supply chains onshore change, adjust to e-commerce, etcetera, I think that LTL is probably in a good position generally for our market to continue to grow and then I think the differentiation there is going to be who can do the best job for the customer, and that's where the growth is going to be.

Got it. And maybe as a follow-up, can you just unpack some of the differences you're seeing in the end markets out there kind of consumer or industrial which ones potentially kind of more at a kind of macro risk going into '23. Can you also briefly comment on what you're seeing out there in the energy markets obviously, where you want it right now?

Yes. I think generally, I would tell you Ravi, that we don't have a call out for a particular end market or even energy for that matter. I think what I would say is that the result that we have posted and highlighted a really been sort of uniform across our book of business. So, there isn't really a call out for a region or even an end market per se. I think we've seen it kind of trend in that way. So, I don't have any insight that we can provide for you there.

Very good. Thank you.

And up next, we have Tom Wadewitz at UBS. Please go ahead.

Good morning. You mentioned in October that the seasonal pattern improved slightly compared to September, but you're still down about 4.5% year-over-year. How do you view the full quarter? Should we expect a mid-single-digit decline in tonnage for the fourth quarter?

Normal seasonality from here would be the months kind of get weaker as you go, right? But in terms of a year-over-year comparison, the comps get a little bit tougher. So, I expect if normal seasonality plays out, maybe trends to look similar in terms of per workday analysis and potentially down just based on the comps.

Okay. So something down kind of mid-single-digits tonnage-wise would be consistent with the comments you're providing.

Yes, low to mid-single-digit probably.

I understand you've been asked several questions about cost compared to price. I noticed that headcount hasn't been discussed much. Doug mentioned headcount increased by about 10% this quarter. Considering the new terminals, do you anticipate a more modest increase in headcount for 2023? If tonnage remains flat, would headcount rise by 5% instead of 10%? What flexibility do you have on this, as it would certainly impact your cost structure?

Yes, I believe it will moderate into next year. In an environment like this, it's important to manage productivity effectively, which often involves reducing hours to optimize our resources. We may see a slight increase in our driver count as we focus on strengthening our line haul network through increased in-sourcing of primary transportation. However, compared to our recent headcount growth, I expect that growth to decelerate next year.

Thanks, Tom.

Right. Okay. Thanks for the time.

Thank you. And we now move to Jordan Alliger of Goldman Sachs. Please go ahead.

Yes, hi. I have a couple of quick questions regarding your discussion on costs. Can you provide an update on your current fixed costs compared to variable costs? Also, do you have any insights on how revenue per day has been trending as we've progressed through October? Thank you.

Yes. I mean the fixed cost conversation really doesn't change quarter-to-quarter. I mean, 35% or so of our costs are fixed. And we've got some blended costs in there that move it around a little bit depending on where you're at with your network and all, but that hasn't changed much. And then, we don't have any pricing still positive in our view, and we don't have a revenue guidance after the month of October.

All right. I’ll leave it there. Thanks.

Thank you. And we'll move to Bascome Majors of Susquehana with our next question. Please go ahead.

Can you clarify if a 10% increase in headcount by year-end is a reasonable estimate based on the numbers you've reported this year? Looking at the employees per shipment per day and other metrics, it still seems to be around 12% to 15% lower than the levels seen in 2018 and 2019. Is there some cyclical variation in growth that could bring that number back up, or does the expansion into more markets naturally require a lower ratio than what was historically observed? Thank you.

In terms of the year-end number, I think that's probably about the trend right trend. Like it said, we don't have any other new terminals planned for this year. We've got some relocations, we're doing in terms of the longer-term trend, we have to invest not only in the new terminals, but the infrastructure somewhat to support them back here. But like Fritz said, at least into next year, I think the pace of growth even with the terminal as we planned will probably moderate some from what we've seen this year.

And I think part of it is where it could – could adjust still, we're looking at opportunities to build density around line-haul. So that's in-sourcing that would be adding headcount there. So that's in the mix and you essentially replacing one cost stream with an internal cost stream when you do that. So that would be part of our sort of medium-term view.

But it sounds like with the additions and expansions even with a moderate decline in tonnage next year, headcount will probably be up just not nearly as much as the last few years.

Yes, it could be.

Thank you. And next up is Chris Kuhn of Benchmark. Please go ahead.

Good morning, Fritz. Good morning, Doug. Thanks for squeezing me in at the end here. Hey, just first, a quick question on the pricing. You talked about the pricing gap between peers. I mean is that both base in accessorials? And do some of the accessorial fees go down in the supply chain solution and some of those fees maybe get less as we go forward? Thanks.

No, the accessorial fees are a reflection of the service provided. As we have focused on incorporating these fees into our pricing structure, if we are offering liftgate service or inside delivery in high-cost areas, those are legitimate expenses that need to be passed on to the customer and become part of their supply chain costs. We believe one of the key differences in our pricing compared to other national competitors is specifically related to accessorials. As we continue to implement these pricing structures, we have the chance to align them more closely with the market. Even in a less stringent environment, the pace of change may slow, but these costs are genuine, and there is a certain level of persistence associated with them.

Okay, okay. Great. Thanks, guys.

Thank you. And next is Ariel Rosa of Credit Suisse. Please go ahead.

Good morning, Doug and Fritz. I'd like to revisit an earlier question. You've added 11 service centers this year, yet system-wide shipments and tonnage remain flat. While you've seen improvement in operational results, can you explain the dynamics regarding what the operational results might have been for this quarter without the additional terminals? Additionally, what are the added costs of maintaining these extra terminals? Or is that not the right approach to consider, especially when we look at the incremental costs of adding more terminals next year, given that volumes might remain flat?

It's important to consider the long-term perspective when it comes to adding terminals. Our decision to add a terminal is not based on immediate quarterly results but rather on the belief that there is a seven to ten-year opportunity in a specific market. The terminals we are currently adding serve different purposes based on their locations. For instance, we opened the Atlanta Northwest terminal in December, which was crucial for enhancing service in the Atlanta market and allowed us to reduce costs while improving efficiency. This has yielded quick returns, and the Atlanta market is currently performing better than it ever has in our company's history. Similarly, we just opened a new terminal in Lafayette, Indiana, which allows us to service the area more effectively, as previously we were managing it from Indianapolis, which was challenging due to the distance. This new terminal will enable us to increase shipments and improve service for our customers. Although opening new terminals involves some investment, it's relatively minor compared to the overall operation. The terminals we've opened have not been a burden; instead, they have had a neutral to positive impact. This is why, even in slower periods, we continue to view these openings as opportunities. They not only offer short-term benefits but also align well with our long-term strategy.

Got it. So just to clarify, and I understand, of course, the terminal additions are a long-term investment, but you don't see yourself necessarily as carrying additional costs associated with those terminal openings.

The terminals I described, especially the one we opened 10 days ago, are not performing up to our company average yet because they are new. We understand there is a drag on performance, but we believe that in a short amount of time, this won't significantly affect our financials. Therefore, we decided to open it and will continue to operate it.

Thank you. That concludes today's call. You may now disconnect.