Saia Inc Q3 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Saia Incorporated Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the conference over to Matthew Batteh, Saia's Executive Vice President and Chief Financial Officer. You may begin.

Thank you, Abby. Good morning, everyone. Welcome to Saia's Third Quarter 2024 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 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 third quarter results. While the underlying macro trends remain tepid in our view, our year-over-year results in the third quarter continue to reflect the growth experienced since last summer. In the quarter, we averaged approximately 37,200 shipments per day compared to approximately 34,300 per day last year, resulting in an increase of 8.5%. Our third quarter revenue of $842 million increased from last year's third quarter by 8.6% and is a record for any third quarter in our company's history. Yield or revenue per hundredweight, excluding fuel surcharge, increased 1.7%, reflecting a constructive pricing backdrop and the impact of changes in our mix of business. Revenue per shipment excluding fuel surcharge increased 0.9% despite a headwind from weight per shipment, which was down 0.8% in the quarter and length of haul, which decreased modestly. Our third quarter operating ratio of 85.1% deteriorated 170 basis points compared to our operating ratio of 83.4% posted in the third quarter last year. While weight per shipment stabilized into the third quarter, we continue to see some mixed headwinds from the softer industrial backdrop and the growth in retail business since last year's industry disruption. We remain intently focused on mix management and pricing initiatives, as seen in our contractual renewals, which remained strong at 7.9%. During the quarter, we opened 11 new terminals and relocated one other, continuing to execute our long-term strategy of improving our service and value proposition to the customer. Eleven new terminals in the quarter is a record for any quarter in company history, and I'm proud of the execution from our team. Each new opening represents its own unique challenges, especially those in new geographies. Most of the terminals opened in the quarter were in the Great Plains, a new geography for Saia. And in these locations, we are enabling the extension of our addressable market and providing direct service to customers in this area of the country. With these recent terminal openings, we're now able to provide direct service to all the contiguous 48 states, which significantly enhances our value proposition to our customers and confirms our position as a leading national LTL carrier. As with every new opening, these new terminals require investments in people, equipment, and technology while entering a completely new geography necessitates additional investments in customer experience. We are encouraged by early customer acceptance, and we're excited to expand our addressable market to better serve both new and existing customers. We are very pleased with the progress of our new terminal openings, especially those that opened in the second quarter. During the third quarter, these terminals continued to grow and become more efficient, having been open for less than six months. This group of terminals improved their operating ratio by more than 10 points sequentially, further supporting the long-term strategy of increasing our addressable market and investing in the customer experience. While these terminals may not yet be at the company’s market share or operating margin, they are profitable. Each terminal is a long-term investment that enables us to provide a solution to customers in each market. The terminals opened in the Great Plains in the third quarter allow us to directly service a new geography, and we're proud to bring the Saia name to new and existing customers in these communities. We remain committed to our training requirements for our team members in both new and existing markets, which is critical to building a Saia culture and enhancing the customer experience. Our teams are committed to accomplishing our growth strategy with an eye on always putting the customer first. Our Customer First initiatives have been the cornerstone of our success throughout our over 100-year journey, and we've seen our customer focus on display throughout each new terminal opening in the quarter. I'll now turn the call over to Matt for more details from our third quarter results.

Thanks, Fritz. As mentioned, third quarter revenue increased by $67 million to $842.1 million. Yield, excluding fuel surcharge, improved by 1.7%, while yield decreased by 0.9%, including fuel surcharge. Fuel surcharge revenue per workday decreased by 6.3% and was 14.8% of total revenue compared to 16.9% a year ago. Revenue per shipment, excluding fuel surcharge, increased 0.9% to $293.39 compared to $290.79 in the third quarter of 2023, and increased 0.9% sequentially from the second quarter of 2024. Tonnage per workday increased 7.7%, attributable to an 8.5% shipment per workday increase, partially offset by a 0.8% decrease in our average weight per shipment. Length of haul decreased modestly. Shifting to the expense side for a few key items to note in the quarter, salaries, wages, and benefits increased 15.5%, which is primarily driven by a combination of our employee headcount growth of approximately 13% year-over-year and the result of our July 2024 wage increase, which averaged approximately 4.1%. The growth in headcount is related to the increase in volume compared to the prior year, as well as the opening of 18 new facilities over the past 12 months. Additionally, other employee-related costs increased, including training for onboarded team members and unfavorable development of workers' compensation claims. Purchased transportation expense, including both non-asset truckload volume and LTL purchased transportation miles, decreased by 14.5% compared to the third quarter last year and was 7.8% of total revenue compared to 9.9% in the third quarter of 2023. Truck and Rail PT miles combined were 14.2% of our total line haul miles in the quarter. Fuel expense decreased by 1.3% in the quarter, while company line haul miles increased by 12.1%. The decrease in fuel expense was primarily the result of national average diesel prices decreasing by over 13% on a year-over-year basis. Claims and insurance expense increased by 6.9% year-over-year and was up 2% or $0.4 million sequentially from the second quarter of 2024. The increase compared to the third quarter of 2023 was primarily due to increased claims activity and development of open cases. Depreciation expense of $54.7 million in the quarter was 19.8% higher year-over-year, primarily due to ongoing investments in revenue equipment, real estate, and technology. Compared to the third quarter of 2023, cost per shipment increased 0.6% despite the headwinds from the wage increase and the costs associated with new terminal openings. We are pleased with the continued cost management and execution from our team in a challenging environment. Total operating expenses increased by 10.9% in the quarter, and with the year-over-year revenue increase of 8.6%, our operating ratio deteriorated to 85.1% compared to 83.4% a year ago. Our tax rate for the quarter was 24.4% compared to 24.6% in the third quarter last year, and our diluted earnings per share were $3.46 compared to $3.67 in the third quarter a year ago. I will now turn the call back over to Fritz for some closing comments.

Thanks, Matt. As we continue to celebrate our 100th year in business, I'm pleased with our ability to demonstrate our customer-first approach to both new and existing customers in our recently opened terminals across our network. Every new terminal opening is an opportunity to better position ourselves to provide additional value to our customers. While opening 11 new terminals in a quarter is a large undertaking, these investments are critical to creating long-term value for both our customers and shareholders. Having a comparable footprint to our peers is critical to our value proposition, and full national coverage allows us to offer solutions in every market. While the macroeconomic backdrop remains uncertain, we believe our operating trends support the continued execution of our long-term growth strategy. Earlier this week, we welcomed our team members in Akron, Ohio, and we plan to open three additional terminals in the remainder of the year. These openings will result in 21 new openings for the year, by far a record in our company's history. As we continue to invest in our network and expand our footprint to better serve our customers, we still anticipate capital expenditures for 2024 to be approximately $1 billion. We remain focused on measuring our performance for customers and onboarding team members that will reinforce our 100-year culture as we continue to execute our growth strategy. For last year, we've been intently focused on building our national platform, and with the culmination of 2024 investments and openings, we believe that will position the company for long-term growth across all geographies. We have stressed from the outset of this process that we approached these opportunities with a singular focus on the long-term prospects of this business. These investments were never about the current quarter, the next quarter, or frankly, next year, but an opportunity to transform our footprint and market positioning into the future. In the next year, we will focus on continuing to develop our new markets by introducing new customers through our service and continue to expand and support the success of current customers. We'll continue to invest in equipment, technology, and facility enhancements or relocations to support this value proposition. Because we've opened these facilities with a focus on the long-term, we've only begun to start capturing the value of these investments. As the LTL market develops, there will be opportunities for us to supplement our network with additional facilities. In the near term, we see great value and potential in the footprint that we have developed. We're now ready to open the line for questions, operator.

Thank you. We will now begin the question-and-answer session. Your first question comes from Ken Hoexter with Bank of America. Your line is open.

Hey, great, and great to see the contract renewals over 7%. So a great quarter. So Fritz or Matt, can you talk about the sequential growth in October? It looked like maybe tons and even weight per shipment revenue per hundredweight looked like, based on the numbers, started to accelerate at the end of September at the end of the quarter. Can you talk a little bit about how September or October shaping up? And then, Matt, did you mention a one-timer in Workers' Comp? Is that something you can put a scale on?

Hey, Ken. I'll go ahead and give the monthly numbers just so you have them. So in July, shipments per workday were up 10.6%, tonnage per day was up 5%. August shipments were up 7%, tonnage was up 8.2%. September shipments were up 8.6%, tonnage was up 10.1%. And October to date, shipments are up about 4%, tonnage is up about 6.5%. And keep in mind, in October, we're comping a period where a peer had a cyber issue, plus there was a hurricane in the early part of October as well. So comps are a little bit strange month to date just in that number as well. But in terms of September, I mean, we're starting to lap the Yellow period at this point in the industry disruption. So the movements around a little bit in Q3 based on when that really started happening in the back half of July. So that plays into it, but we're also opening a lot of new facilities, and we are expanding our addressable market and should be seeing that. So we feel good about our progress there. And then in terms of Work Comp, nothing one-off, just part of the business development of those open claims and things like that. So nothing to call out there.

Greater headcount.

That's right.

And just to wrap that up, the weight per shipment, sorry, that also accelerated in September, right?

Yes, just with those shipments and tonnage numbers, a little bit at the back. But I mean it's modest, right? We talked about it before, mix can move around a little bit. So any given period, based on what you're handling for customers, it can move around a little bit.

I appreciate that. My follow-up is about the environment. Fritz, you mentioned the mix and that you felt it was settled last quarter. How do you feel at this stage now that all the new facilities are ramped up? You mentioned last quarter that you thought it was done, but now you’re indicating a little industrial overhang. Is the market stabilizing in terms of looking beyond the new facility development?

Ken, I would say that Q2 and Q3 are likely comparable. There has been some fluctuation, but I don't believe there has been a significant improvement or decline. There may be some noise in the data. Typically, when you open new facilities, the initial volume tends to mirror the rest of the portfolio, and we haven't observed any notable impact either way.

Wonderful. Appreciate the thought. Thanks, guys.

Thanks.

And your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is open.

Hey, yeah, I was wondering if you could talk a little bit more about the revenue per hundredweight ex fuel was up 1.7%. I know you touched a little bit on mix and price, but maybe talk a little bit more about that and perhaps how that yield trended through the quarter and how we could think about it looking into the next quarter, the fourth quarter? Thank you.

We typically focus more on revenue per bill instead of yield because the mix affects that. However, we are confident in our current position. Our contractual renewals remain strong, although freight can fluctuate with rate increases. In the current macro environment, some customers might explore other options, and we are prepared to let them do that rather than chase after them. We believe that when the market demands quality service, those customers will return to us. Additionally, we implemented a General Rate Increase earlier this week at a rate of 7.9%. We remain focused on managing our mix and ensuring we achieve the expected margins from our customers. Our approach to General Rate Increases has been more proactive this year compared to last year, and we feel very positive about our market position and the addressable market we have established.

And I guess just sort of is there a way to think about how the yields, however way you look at it, could shape up as we go from the third quarter to the fourth quarter? Thanks.

Well, again, mix is going to impact that a little bit depending on what happens. Our view of the industrial backdrop, we're not seeing anything on our crystal ball that tells us that Q4 is going to all of a sudden turn and get better. If it does, great, but we really remain focused on the same thing. We put the, like I said, we put the GRI in place. Whenever we do that, there's a little bit of shipment shifting in the periods that follow. So we'll experience a little bit of that, but we remain focused on making sure that through contractual renewals or discussions with customers, we're focused and committed to driving price. We know that's our opportunity.

Thank you.

And your next question comes from the line of Daniel Imbro with Stephens. Your line is open.

Yeah, hey, good morning, guys. Thanks for taking our questions.

Good morning, Dan.

Maybe I'll start on a shorter focus one. Just following up on the October discussion. Can you remind us what maybe normal seasonality is from an OR standpoint from Q3 to Q4? And then maybe given the improving weight per shipment, just the tonnage growth, how do you see this year shaping up versus that normal range?

Sure. So what we try to do with this is look back at recent history and do our best to find some comparable periods. So if you look at that over the past handful of years, the sequential degradation is right around 250 basis points on average. There's obviously some years on either side of that, but that's the average if you look at some of the more recent periods. But with the momentum we have now and what we feel like from a customer acceptance standpoint with our new markets and our expansion, we feel like we should be able to beat that, and that's kind of where we're targeting at this point.

Super helpful. And then maybe stepping back a little bit, thinking about 2025. So this year has clearly been pressured about start-up costs. It sounds like execution is going well there with the new terminals. How should we think about or should we think about expense growth moderating in '25 as terminal growth moderates so these actually become good assets for incremental margins? Or what's the right way to think about incremental margins into 2025 as we start to lap really a couple of years of elevated investment across the network?

Yes, there are several aspects to consider. We will not be opening 21 new facilities next year like we did this year; that was a significant undertaking for us. However, we recognized this as a substantial opportunity and felt it was essential to seize it, which we have done. Looking ahead to next year, our company is now considerably larger than it was a few years ago. This will result in a higher level of ongoing maintenance capital due to our expanded fleet and facility footprint. While we may open a few new facilities next year—perhaps five or six—they will be limited. We also plan to relocate some facilities, which we consider a minimal cost since these are typically sites where we have maximized capacity and are moving to locations with more operational flexibility. As we conclude this year, we expect to have 214 strategically located facilities nationwide that are well-positioned to enhance value for our customers. This, in turn, gives us the opportunity to create value within our business. We have made investments this year with a focus on long-term value generation. It’s important to note that while our investments are geared toward value creation, they do come with costs. Opening 21 terminals entails expenses. However, when these facilities are operational, they allow us to deliver excellent service to our customers, enabling us to earn returns. We are very optimistic about the new facilities we launched in the second quarter—they are already generating profit, although they have yet to reach our average levels, indicating room for growth. As we move into next year, our focus will shift toward realizing the value of these facilities. If the freight market strengthens next year, we could see significant acceleration. We made these investments with clear intentions, and now is the time to leverage that value.

Thanks so much.

And your next question comes from the line of Tom Wadewitz with UBS. Your line is open.

Good morning. I know you mentioned some high-level thoughts about 2025 and the new terminals, particularly regarding whether the focus will be on value or margin. How do you view the potential for margin improvement if the macroeconomic environment remains stable? It would be great to have some external support, but given your traction with customers, it seems likely that you'll enhance the utilization of the terminals opened in the second or third quarter. Your contractual renewals sound strong, and maybe the mix is stable. Can you achieve the usual 100 to 150 basis points of improvement even without macroeconomic support in 2025?

Thank you, Tom. I believe this is a chance for us to return to our usual operations. I want to emphasize that a terminal network like ours, which spans the country and offers high-quality service, should not just be viewed as valuable; it deserves to be compensated accordingly. We are positioned to do that. In a somewhat neutral environment, I believe we can increase our operating ratio in the coming year. The exciting part is that if we enter a stronger economic climate, our business has the potential to scale. We are not focused on growth for its own sake, but rather on understanding the addressable market to truly serve our customers. When we achieve that, we open doors for returns. I see next year as the start of that journey, and I don't foresee any barriers for us. If the environment remains reasonable, I believe we can grow our operating ratio. The range you suggested, 100 to 150 basis points, is definitely achievable. It could exceed that, especially considering that historically, in tighter markets or during periods of economic growth, we have demonstrated our capability. We follow that strategy, and that’s how we function.

Okay. And then for the second question, how do we think about the levers on mix? I guess if I go pre your big expansion of the terminals, it seemed like you pretty consistently focused on improving weight per shipment and mix, and that was part of the margin improvement equation. Is that something you can fairly quickly address and kind of go back to that in, say, first quarter, second quarter next year? Or does that take longer? Just because recognizing that the mix has changed a lot as you brought on more retail freight and more terminals?

Tom, I believe that our primary focus should remain on pricing, which we have been actively managing. Observing our contractual renewals and the General Rate Increase from Monday, we are determined to maintain our pricing strategy. For our business to reach its potential, it's essential that rates increase across the board in all aspects. Additionally, we are continuously seeking customers and market opportunities where clients recognize the exceptional value provided by Saia, particularly in terms of our high level of service and the extensive reach of our national network. We can offer our services to 214 facilities, which enhances our appeal to customers. This presents a chance for us to strengthen our relationships with them. As we implement the right pricing strategies, we will attract customers who appreciate the value of our assets, ultimately improving our mix over time.

How much of the freight were you handing off just to understand that part of that comment previously. At what percent?

We haven't given a percent out. I mean those markets aren't necessarily the largest one. But I mean it's impactful, right? We think about it as an opportunity to improve that portion of it, certainly. But more importantly, we can offer direct service in those markets, and we know that our customers want us to handle it all the way through. And that's very important to us in making sure that we can address that, and that's big. That's why we push those facilities and open them in the period. So and then I think in terms of the mix, too, keep in mind, every new terminal opening is an opportunity to speak with our existing customers about what we do for them. So it's an opportunity to talk about a business that we may not have had an opportunity to get a shot at in the past because we couldn't handle it direct in and out of those markets, and now we can at full nationwide coverage. So you may not necessarily get that the next day when you open, but when we get the opportunity to share with our customers that we can provide a solution for everything, that's impactful.

Okay. Makes sense. Thank you.

And your next question comes from the line of Fadi Chamoun with BMO Capital Markets. Your line is open.

Thank you. Good morning. Thank you for taking my question. So in the last couple of quarters, you've outperformed your kind of 5 to 10 year average in terms of shipment per day by maybe 200 to 250 basis points quarter-over-quarter, just looking at it. I mean if we apply the same principle going into Q4, that would put you in the high single-digit kind of shipment per day. I just want to kind of test this assumption, how do you feel about it?

Yes, Fadi, what I would say is that we experience some shipment disruption whenever we implement a General Rate Increase, which causes some fluctuation. This quarter, we began with a comparable performance, but last year we indicated that we faced a challenging comparison due to issues experienced by a competitor. Additionally, we started the quarter dealing with the aftermath of one hurricane and another on the way. All these factors contribute to a significant amount of noise regarding shipments this quarter, and it's also a seasonal period with holidays affecting our operations. However, it’s crucial to note that over time, and as reflected in our shipment growth, our revenue is increasingly becoming a larger portion of our overall performance. This indicates a shift in our historical baseline, and I am optimistic about our continued growth in this context.

Okay. Okay. Just going back to the OR seasonality question.

Fadi, are you still on the call?

Yes. Can you hear me?

Yes. We are still connected. Can you hear me?

I'm on the line. Can you hear me?

Hey, Fadi, we can hear you loud and clear. Can you hear us?

Sure, we can. Thank you.

All right. What part of the question did we drop off?

I heard your entire answer, so I think we're fine from my perspective. My follow-up was...

Do you hear the part about how disappointed we were that the phone wasn't working?

I guess we heard that too.

All right. Perfect. So that will go down in history as a kind of a great moment there. All right. Got it.

So, yes, you're going to give us perspective on the volume side. But I mean, I think it feels like there's no reason for you to continue to kind of build that momentum with the new terminal opening, which could put your shipments kind of quarter-over-quarter at a pretty solid pace. And with that perspective, I'm just wondering that why wouldn't the operating ratio seasonality kind of follow a little bit closer to the shipment seasonality given that your start-up cost is kind of in the rearview mirror at this point? And we should start to see that operating leverage beginning in Q4. I just wanted to see if we can narrow the range or just thinking about what OR could look like in the first quarter?

Well, Fadi, I apologize for the connectivity issues. It's Q4, which is typically a slower season, and there are always challenges that come with it. However, we still have openings this quarter, although they are not as significant as the ones from Q3. Openings are still present in the fourth quarter. As Fritz mentioned, as we move further away from the openings like we did from Q2 to Q3, conditions tend to improve. We do face typical fourth quarter challenges related to customer closures, but we still have openings that will impact costs in Q4. They are still present.

Okay. Appreciate it. Thank you.

And your next question comes from the line of Brian Ossenbeck with JPMorgan. Your line is open.

Hey, good morning, guys. Thanks for taking my question.

Hey, Brian.

I wanted to ask about the Mastio survey that just came out. Obviously, there's a little bit of a backslide in some of the performance on a relative basis. But I think it was done through June through September time frame. So clearly, a lot of start-ups that were going on there. So it's just one data point. Obviously, you look at service and everything internally pretty well, but it's one that we can all see from the outside. So I just wanted to get your perspective on what the most recent results mean from your vantage point?

That's a good question, Brian. To start, the Mastio data for the entire industry shows an overall improvement in customer performance, which is positive for our customer base. When examining industry growth, public competitors are experiencing declines in shipments and tonnage, except for Saia. We've increased our share of the industry and expanded into new markets, with 21 openings by the end of the year, leading to new customers and demands. Over the past year, we've also hired around 1,500 to 2,000 new employees to support this growth. It has been a challenging environment, but we consistently analyze the data and focus on improvement in our regions and terminals. Our internal metrics have shown favorable trends, which indicates the need to continue our efforts and not lose sight of pricing. The positive feedback highlights the importance of doubling down on our initiatives. As we gain experience with our customers and explore new markets, I believe they will come to expect the exceptional service that Saia provides.

I appreciate that perspective. Fritz, I have a quick follow-up for you, Matt. It might be difficult to tell, but the hurricane has certainly disrupted many transportation networks and affected some of your customers. Do you think this is contributing to the challenges you're experiencing in October? It may be a bit hard to assess, but do you believe there could be a bit of a recovery as the month progresses and efforts to get back on track begin to gain momentum?

Well, I mean, thankfully, we haven't had any impact on our people or terminals or major issues, but there absolutely is an impact in that month to date, right? I mean, you have a pretty big storm that rolls across the Southeast geography, those are pretty big markets for us and make up a good chunk of our revenue. So there is an impact in there. One of the things that we see is that sometimes that volume doesn't always come back. You're really dependent on order flow at times. And really, we may be operational, but some customers may still be closed, so you face that a little bit. So things are coming back online certainly, and we saw that in the week or so after that. So it is in the October month-to-date numbers, but just part of the challenge in the business, but you don't always get all of that back just based on patterns and different order flow.

Yes. It's important to note that Florida, Georgia, and the Carolinas are becoming an increasingly significant part of Saia's business, reflecting the investments we have made over the past few years. The hurricane hitting right at the end of the quarter definitely affected our results for the third quarter. We began to recover, and then experienced another hurricane the following week. So yes, that has contributed to the challenges we face. It's part of our business, and we need to be able to adapt to it, but it really did impact our performance in the third quarter and the early parts of this quarter.

Okay. Thanks for the time. Appreciate it.

And your next question comes from the line of Eric Morgan with Barclays. Your line is open.

Hey, good morning. Thanks for taking the question. I wanted to follow up on pricing. You've had at least a few quarters now with those high single-digit contract renewals. Obviously, the 7.5% GRI last year, I think almost 8% this year. So if mix doesn't move around too much substantially from here, should we start to be seeing some of these types of increases in your realized yields as we get into 2025 at some point? Or what are some of the other variables we should be considering as we think about modeling that?

Thank you for the question, Eric. One of the key challenges in our industry is that contracts typically do not have volume commitments, so we need to ensure we are receiving what we anticipate from customers. Currently, shippers have various options and may choose to switch providers during this period, and we will not chase them. However, we are setting rates at the expected levels, and as the macro environment improves, we anticipate being able to advance those rates. While it’s not always a straightforward process, we view this as an opportunity to present the necessary rates to our customers, and our sales team is effectively negotiating and communicating the value we offer. Additionally, having a national footprint enables us to provide more services to our customers than ever before, which should help us capture a larger share of spending and optimize our customer relationships where possible. We are optimistic about what we are implementing, and despite the current challenges, we are confident we will achieve some gains.

Appreciate that. And maybe just a quick follow-up on the CapEx discussion. I think you've mentioned some normalization next year after the bigger year this year. Any early thoughts on where that could land in 2025 and kind of what the big buckets would be? I appreciate it.

Yes. I mean we're still working to finalize what that number looks like. But if you think about the number this year, less the one-time transaction at the beginning of the year. I think that's probably a fair range to start with. The business is bigger now. So that CapEx number is going to stay elevated. We've got to support the teams with equipment and there continue to be real estate investments. But I think if you normalize for that big transaction at the beginning of the year, that's a fair range to start with.

Great. Thanks a lot.

And your next question comes from the line of Jonathan Chappell with Evercore ISI. Your line is open.

Thank you. Good morning. Fritz, you called out specifically. You were pleased with the terminals you opened in the second quarter. So as we think about the seasoning of these terminals and as you have a full quarter of implementation, is there any way to kind of frame out what the utilization of the terminal that you opened up in the first half of the year looked like relative to these 11 that you opened in the third quarter to help us kind of frame out when those can get to a level where you feel is closer to full utilization?

It will likely take a few years before we see full utilization because, as we've mentioned before, our investments are not aimed at immediate returns. We plan with a multi-year perspective to support the market. The facilities we opened in the second quarter were significantly larger than those we launched in the third quarter. Comparing a top-notch facility in Butte, Montana to facilities in Laredo, Texas, Garland, Texas, or Trenton is not straightforward since they serve different functions within our network. We are committed to finding customers who align with what we offer, and we continue to grow in that regard. We are genuinely pleased with the large facilities we have introduced, and it's important to note that all of them are contributing to our operating income within a quarter, which is a noteworthy achievement given the challenging environment in which we are making these investments. Although there will be a seasonal decline in performance, so we may not see the same improvement levels in the fourth quarter, we are highly optimistic about the new facilities in the Great Plains. They significantly enhance our value proposition for customers, ensuring that when Saia transports freight, it reaches its intended destination. Over time, these facilities will play a vital complementary role in our overall network and will be instrumental in delivering substantial value to our customers.

Keep in mind, too, Jon, that's a brand-new geography for us, right? Entering a new geography is very different than putting a second facility in the Garland, Texas area, where we've been. So like Fritz said, it's not overnight, and we don't design them to be overnight, but that's a different animal in terms of brand recognition and sharing with customers that we were in a completely new geography. So they're a little bit different.

Yes, that makes complete sense. Matt, just a quick one for you. I know it's minutiae, and I know the fuel is a pass-through, but your fuel surcharge revenue was almost flat quarter-over-quarter despite fuel dropping, and you mentioned that diesel prices are down 13% year-over-year. Fuel surcharge revenue was down less than 5% year-over-year. Some of your peers have already reported at much bigger step downs, both sequentially and year-over-year. Do you just have like a better surcharge mechanism? Or is there some lag where this decline in fuel prices that we've seen basically over the last couple of months kind of catches up in Q4?

Fuel is not something we simply pass through. We invest in every aspect of our business, which is subject to inflation, and we aim to earn a return on all of it. The fuel surcharge mechanism we use is comparable to what other less-than-truckload carriers have in place. However, the composition of our business has influenced our results. It's important to remember that the surcharge is based on a percentage of revenue. Therefore, when we increase rates for customers, it provides us the chance to collect more through fuel surcharges. Our volumes have risen compared to some competitors, which factors into this as well, but we don’t have any changes to announce regarding fuel.

Okay. Got it. Thanks, Matt. Thanks, Fritz.

And your next question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.

Hey, thanks. Good morning, guys. Fritz, I think on the last call, you mentioned that facilities opened in the last three years kind of were operating at about a 95 OR. You talked about 2Q fiscal openings turning positive in the third quarter. I guess I'm just kind of curious, as you think about that metric that you gave last quarter, does it change at all? I know it's only a quarter, but I'm kind of curious if you feel like you're making more or less progress relative to what you have seen in the past, just given the sort of density that you're adding to the network, these new regions and creating a sort of 48-state contiguous network?

We are very pleased with our progress. The key factor is that terminal openings can have different requirements. Some facilities may offer high-level solutions for customers at the end of the line, which means it takes longer to reach our average operating ratio or become significant contributors. Historically, some of the terminals we've opened fit this definition, and the ones we opened in the third quarter also align with it. What excites us about the facilities from the second quarter, and all of them, is their advancement. The second quarter facilities are substantial investments we've made in asset acquisitions, and it's encouraging to see their progress and scalability in large freight markets, as they contribute to creating value at those end-of-the-line facilities. For instance, in the Great Plains states, we have a customer transporting freight from Mexico into Laredo, allowing us to go directly from Laredo to various locations in Montana and the Dakotas, presenting valuable opportunities for the customer. As we build out our network, Laredo is scaling faster due to its size, but we'll also benefit from the smaller facilities by delivering quality service in those markets. Previously, we encountered customers who appreciated us but were hesitant due to our freight handoffs in those regions. Now that we've addressed this concern, they are fully onboard. As a result of this dynamic, the impact of the larger second quarter openings is evident, but we are also thrilled with the progress made across all facilities over the past couple of years. This success will continue to unfold in the coming years as we further develop our network.

Yes, and keep in mind too, we’re in a brand-new geography for us, right? Entering a new geography is very different than putting a second facility in the Garland, Texas area, where we've been. So like Fritz said, it's not overnight, and we don't design them to be overnight, but that's a different animal in terms of brand recognition and sharing with customers that we are in a completely new geography. So they're a little bit different.

Yes, that makes complete sense. Matt, just a quick one for you. I know it's minutiae, and I know the fuel is a pass-through, but your fuel surcharge revenue was almost flat quarter-over-quarter despite fuel dropping, and you mentioned that diesel prices are down 13% year-over-year. Fuel surcharge revenue was down less than 5% year-over-year. Some of your peers have already reported at much bigger step downs, both sequentially and year-over-year. Do you just have like a better surcharge mechanism? Or is there some lag where this decline in fuel prices that we've seen basically over the last couple of months kind of catches up in Q4?

Fuel is not a pass-through. We invest across every part of this business, which is affected by inflation, and we expect to earn returns from each segment. The fuel surcharge mechanism we use is similar to what other LTLs have. However, the mix of business has had an impact, and it's important to note that the surcharge is a percentage of revenue. When we increase rates for customers, there’s an opportunity to gain more from fuel surcharges. Additionally, our volumes are up compared to others, which contributes to the situation, but there’s no specific update regarding fuel on our end.

Okay. Got it. Thanks, Matt. Thanks, Fritz.

And your next question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.

Hey, thanks. Good morning, guys. Fritz, I think on the last call, you mentioned that facilities opened in the last three years kind of were operating at about a 95 OR. You talked about 2Q fiscal openings turning positive in the third quarter. I guess I'm just kind of curious, as you think about that metric that you gave last quarter, does it change at all? I know it's only a quarter, but I'm kind of curious if you feel like you're making more or less progress relative to what you have seen in the past, just given the sort of density that you're adding to the network, these new regions and creating a sort of 48-state contiguous network?

Yes, we are very pleased with our progress. The key factor here is that terminal openings can vary based on different rules. Some facilities might offer high-level solutions for customers at the end of the line, which means they will take longer to reach our company average operating ratio or make a significant contribution. Historically, some of the facilities we've opened fit this category, including those from the third quarter. It's exciting to see the advancements with the facilities opened in the second quarter, particularly because they represent major investments in purchasing assets. It’s rewarding to observe their progress and scalability in large freight markets, which helps enhance the value of our end-of-the-line facilities. A specific example is the customer transporting freight from Mexico to Laredo, allowing us to ship directly to various locations in Montana and the Dakotas, creating valuable opportunities for our customers. As we build this network, Laredo will expand more quickly due to its size, while the smaller facilities will also provide value, improving our service in those markets. Previously, we had customers who appreciated our service but understood we handed off freight in those areas, and now they are fully on board with us. This dynamic influences the trend over time; the larger second quarter openings have a significant impact now, but I'm also excited about the collective progress over the past couple of years. This will continue to unfold as we further develop our network.

Yes, and keep in mind too, we’re in a brand-new geography for us, right? Entering a new geography is very different than putting a second facility in the Garland, Texas area, where we've been. So like Fritz said, it's not overnight, and we don't design them to be overnight, but that's a different animal in terms of brand recognition and sharing with customers that we are in a completely new geography. So they're a little bit different.

Yes, that makes complete sense. Matt, just a quick one for you. I know it's minutiae, and I know the fuel is a pass-through, but your fuel surcharge revenue was almost flat quarter-over-quarter despite fuel dropping, and you mentioned that diesel prices are down 13% year-over-year. Fuel surcharge revenue was down less than 5% year-over-year. Some of your peers have already reported at much bigger step downs, both sequentially and year-over-year. Do you just have like a better surcharge mechanism? Or is there some lag where this decline in fuel prices that we've seen basically over the last couple of months kind of catches up in Q4?

Fuel is not simply a pass-through for us. We invest in every part of this business, which is subject to inflation, and we expect to earn a return on all aspects of it. The fuel surcharge mechanism we use is similar to those used by other LTL providers. However, the mix of our business has affected this. It's important to remember that the surcharge is based on a percentage of revenue. When we increase rates for customers, it allows us to generate more revenue from fuel surcharges. Our volume is up compared to some others, and that also factors in, but I don’t have any updates on the fuel side at this time.

Okay. Got it. Thanks, Matt. Thanks, Fritz.

And your next question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.

Hey, thanks. Good morning, guys. Fritz, I think on the last call, you mentioned that facilities opened in the last three years kind of were operating at about a 95 OR. You talked about 2Q fiscal openings turning positive in the third quarter. I guess I'm just kind of curious, as you think about that metric that you gave last quarter, does it change at all? I know it's only a quarter, but I'm kind of curious if you feel like you're making more or less progress relative to what you have seen in the past, just given the sort of density that you're adding to the network, these new regions and creating a sort of 48-state contiguous network?

We are really pleased with what we're observing. A key factor here, as I previously mentioned, is that terminal openings can have varying rules. Some facilities may offer high-level solutions for customers at the end of the line, which means they will take longer to reach the company average operating ratio or become significant contributors. Some of those we have historically opened fit that definition, and certainly, the ones we launched in the third quarter do as well. What is particularly exciting about the second quarter facilities, and all of them really, is that they are making progress. The second quarter locations are substantial, representing some of our largest investments in asset purchases, and it’s encouraging to see that progress and their scaling within large freight markets. These facilities also contribute to the value generation at the end-of-the-line sites. For example, in the Great Plains states, we have a customer bringing freight from Mexico into Laredo, and now we have the opportunity to transport directly from Laredo to various locations in Montana and the Dakotas. This creates great value-enhancing opportunities for our customers. While Laredo will scale more quickly because of its size, we will also benefit from the value of our smaller facilities since we can now serve customers effectively in those markets. In the past, customers appreciated our service but knew we had to hand off freight to access those markets. Now they are on board with us. This dynamic means that, over time, the second quarter facilities will have a greater impact due to their size, but it is also thrilling to see the progress made by all facilities over the last few years. This development will unfold over the coming years as we continue to enhance our network.