Q3 2020 Saia Inc Earnings Call

<unk> co. Please go ahead sir thank.

Thank you good morning.

Yeah, Ron welcome this highest third quarter 2020 conference call with me for today's call a size 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 995. 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'm going to go ahead and turn the call over to Fritz for some opening comments now.

Good morning, and thank you for joining us to discuss size results third quarter results include record revenue and operating income for any quarter in the company's history. This quarter rebound given the dramatic volatility business levels fell in the second quarter in which revenue ended down almost 10% compared to the year before.

The third quarter daily shipment activity continued on the improving trend that we saw develop in the middle of the second quarter shipments per workday were is nearly 1% compared to last year.

We also see shipment continued to see shifting shipping patterns geographically as customers flex their supply chains to adapt to the new normal at our.

Can pandemic stricken country weight per shipment was volatile throughout the quarter. It was down 1% for the full quarter. So tonnage per workday was flat year over year.

The pricing environment was remained stable throughout the pandemic the underlying cost structure. The industry remains inflationary with the pandemic heightening a challenging driver market, adding to the increased cost of purchase transportation.

Operators continue to focus on pricing in the face of these operating pressures I am extremely pleased to report that revenue per shipment, excluding fuel surcharge rose, 4.7%, despite fuel surcharge revenue being down 17% year over year, we still managed to improve revenue per shipment, including the surcharge by 1.6%.

This improvement in revenue per shipment plays a key role in improving margins and I'm proud to report that our third quarter operating ratio of 88.5% is a record for any quarter.

The unprecedented conditions brought on by the COVID-19 pandemic continued daily in all the markets. We operate the can did conditions requires to adjust our operations in unison and I remain very pleased with our team has come together and adopted to adapt as our new normal from the start we focused our efforts on keeping employees and customers sales.

Shout changes to our daily procedures that developed out of the necessity to become standard practice in many areas of the company operations employees that are able to work remotely are still doing so and plan to continue this practice for the future foreseeable future.

Im now going to turn the call over to Doug for few review of the third quarter financial results.

Thanks, Chris.

Ill start by providing some comparisons to the third quarter, a year ago revenue was 481.4 million up $12.5 million or 2.7% with.

Were flat tonnage per work day in the quarter. The revenue increase was driven by a 5.5% increase in yield excluding fuel surcharge as well as the 6.1% increase in length of haul.

As Fritz mentioned fuel surcharge revenue was a headwind to the growth being down 16.7% and was 10.4% of total revenue compared to 12.8% a year ago.

Moving now to some key expense items in the quarter salaries wages and benefits increased 2.8% our average employee count through the quarter was approximately 5.8% lower than the prior year health insurance costs were essentially flat year over year with inflationary costs being offset somewhat by lower usage of these benefits by our employee.

Yes.

Purchase transportation costs increased 11.7% compared to last year as a percentage of total revenue purchase transportation costs were 8.3 compared to 7.6% in the third quarter last year.

In the quarter, we used purchased transportation, we're faced with pandemic related driver shortages shortages or imbalance shift in some markets and where it was advanced advantageous from a cost standpoint and others.

Youll expense fell by 23.9% in the quarter while company miles.

Grew 1.4% year over year Nash.

National average diesel prices were approximately 20% lower throughout the quarter than in the same period a year ago.

Turning to insurance expense rose by 52.1% in the quarter, reflecting increased frequency and accident severity in that expense and higher premium costs versus the prior year.

But then perspective of the approximate 4% or $4 million expense variance to the prior year 2 million was related to premium increases also to illustrate the volatility in this expense line I would note that claims and insurance expense was down 34% or 6.4 million sequentially from the second quarter.

Depreciation expense of 34 $4.2 million in the quarter was 9.2% higher year over year. This is a continuation of the trend we have seen over the past few years as we have grown our terminal network investment in equipment to allow the lower the age of our tractor and trailer fleet and made meaningful investments in technology.

With total revenue of 2.7% in total operating expenses up only 2.6% in the quarter, our operating ratio improved by 180 basis points to 88.5% compared to the third quarter operating ratio of 90.3, a year ago, which was a record.

Operating income of 55.2 million was 21.7% higher than last year and with a reduction in interest expense and a slightly lower tax rate than last year, our net income rose, 26% to 41.5 million.

Our tax rate for the third quarter was 23.7% compared to 24.2% last year, and we expect fourth quarter tax rate to be between 24 and 25%.

Third quarter diluted earnings per share were $1.56 compared to $1.25 last year.

Year to date, we have made capital investments totaling 205.3 million of which revenue equipment group represents approximately 65% of that spend for the full year. We now expect capital expenditures will be approximately $225 million.

We ended the quarter with $120.9 million in total debt and with $25.5 million in cash on hand, our net debt stood at 95.4 million.

This compares to net debt of 131.6 million at the end of second quarter and $165 million at the end of the third quarter a year ago.

I will now turn the call back over to Fritz for some closing comments.

Thanks, Doug before we open the call for questions I'd like to again comment on the professionalism and effort given by our ploy employees through these volatile times, we've had several several hundred employees working remotely from home. The vast majority of our essential employees don't have that option. These dedicated professionals have worked steadily this year to continue to provide great.

Service for our customers are on touch on time service standard of 97% was met in the third quarter and our cargo claims ratio improved 25% from the prior year to a record 0.62% of sales.

On our current business our current business conditions, we continue to see solid volume trends our opportunity to improve pricing continues our contracts renewed with customers in the third quarter were up an average of 6.9% the sequential step up from an average of 4.5% in the second quarter.

We opened our new state of the art Memphis break operation in October the new facility is 60% bigger than the facility of replaces the operation will not only support our Memphis market, but also serve as an important hub operation supporting our national network growth, although smaller markets. We replaced two Texas facilities larger facilities and additional door to bear.

I see these investments continue to support our offering providing improved service for our customers.

Moving into the fourth quarter, our focus remains first and foremost on the health and safety of our employees and customers while coated remain challenges remain in hot spots continue to move through different terminals that our company as well as those of our competitors, we've been able to meet the challenge through diligent planning focus on execution and teamwork across the network with that said, we're now ready.

To open the line for questions operator.

Thank you you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure your mute button, it's turned off to allow your signal can we sell equipment again star one to ask the question well pause for just a moment to allow everyone an opportunity to signal for questions.

The first question will come from David Ross with Stifel. Please go ahead with your question.

Yes, good morning, gentlemen.

Good morning, good morning.

Let's maybe talk a little bit about the capacity situation, it's out there and the pressure on purchased transportation.

The main concern I know for the site network is just getting a truck more so than the price but if.

If you look across your PT providers or most of them under contract exit do you have essentially committed capacity data rate on those lanes for some time or is the predominant.

Capacity coming from spot.

Yes, David the on the PT side, we've got 90% to 95% probably of our of our PT models under contract. So we weren't exposed to the spot market in any to any great extent in the quarter. Our usage was just up.

I mean, it's.

Some markets throughout the quarter, we struggled to find drivers and most thats pandemic related and whether it's a line haul driver here their city drivers calling off because of the.

The Corona virus.

We found a need need was greater this year, but we're pretty good at it we use to our advantage when we can and certain lanes and we.

We stepped it up a little this quarter, but I think the way we operate in total shows that.

We view that our benefit in the past and had to do with this quarter, David I would add I think it's particularly important that we tap that resource right now simply because as the pandemic has evolved we see a lot of changes in our customer supply chain and shipment patterns. So this has given us flexibility to match that where we needed to.

And is there any.

Specific bubble period, where a lot of those contract rates are going to come up for renewal in the first quarter next year second quarter next year.

No then.

A lot of them are long standing relationships and they go kind of ratably through the year, but to give you an idea.

I know from from Q2 to Q3, there was a spike in truckload rates, but really as our average beating truck truck mile cost us about the same well really right on the number that we were spending in Q1, so step up from Q2, but because of our relationships. It was really flat our cost per mile.

With Q on Q.

That's terrific and just last question.

On the energy sector, because sales has got me.

More of a legacy operation there in oil and gas has been important over the years. What's your view of that currently how is that maybe holding back results a little bit if demand is yet to recover there.

Yes, if you look at our Houston region.

The year over year, that's that's actually down.

I would comment two things at some of our best density and cost structure that typically is great freight.

But we've been able to flex those operations to match those sort of changes so it hasn't really been a drag on the overall, our if we'd had this conversation say four or five years ago. Prior to the northeast you. It will be a much larger percentage of our book and it's shrunk would sure like to have that be growing is.

The energy sector would be gets good freight, but the reality of it is is that as we've become more of a national operator that is.

Closure to the energy sector is less.

Fortunately, we are able to flex a bit in that.

Those markets and adjust our model and grew other elements of the business to offset some of them.

Excellent. Thank you very much.

Thanks, Dave Thank.

Thank you for the question. The next question will come from Jordan Alexander with Goldman Sachs. Please go ahead with your question.

Yes, hi, good morning, just curious if you could give a little more color on what you're seeing from a volume perspective as you went through September and thus far into October as it.

I know, we have where the recovery is certainly.

Well underway Im just curious is it.

And the like but I.

I would say that our contractual renewals being up six 9% in the quarter, which was a step up from Q3.

Definitely shows me that the shipper feels pretty good about their business and I wanted to make sure. They have capacity next year, whether it's truckload intermodal lower LCL. So.

I'd say, the shippers, probably cautiously optimistic, but but a lot of a lot of news coming out in the next few weeks for sure with the election and vaccine things like that.

Great. Thanks, Thanks very much.

Sure.

Thank you and the next question will come from my Roku with Deutsche Bank. Please go ahead with your question.

Thanks, Hi, France Haydock Hope you guys are well quick question on the six 9% contract renewals.

That's obviously, a big number and I'm just trying to understand how much of that is cyclical in terms of you know the opportunity to raise prices on a certain segment of your customers. I know you guys have implemented more technology and tools to get better on pricing and so I wanted to kind of if you can help us.

Deconstruct that between kind of a cyclical and what you guys are just getting better at doing and then what the run way is there to kind of further optimise the.

The pricing via you know technology, and maybe more dynamic pricing tools.

So it made the when we quote the contractual renewal those are all the contracts that came up for renewal in the quarter. So it's reflective of the data analytics that we went through.

The contracts that came up in the period, so those kind of come up ratably during the year.

So we pushed pretty hard on those.

Largely the cost structure and the businesses, we've got a cover that into next year. So it's as we looked at our pricing opportunity and we've got a better understanding of the customers freight movements, what the freight looks like those characteristics, we've tried to price accordingly.

You know if I look at.

Where we stand from a revenue per bill perspective versus the the market and what the opportunity.

Still a lot of runway for us so I don't know that I can characterize.

Where we are in that cycle, but that alone tells us that we have opportunity and you know as we extend this network into more of a national network, that's going to drive the pricing and margin opportunity for us as well so.

I think that's reflective of the business. So they go back to your question that's reflected the business it was available to us in the quarter.

The analytics supported that and.

We keep pushing that because we see that this is an expensive business operates so every opportunity we can to capture that generate that returned is important.

Hey, Thanks for that answer and then just a follow up [noise].

Excuse me I'm the O or.

One maybe near term and then kind of more like over the next 12 months question related to D. O. R. You know the operating momentum you saw in the third quarter does that extend into the fourth quarter in terms of maybe muting. The the typical step up that you C. N O R and the Fourthquarter. If you just talk about that and then you know Fritz and dark I think next year.

No. Both volume you know boats shipments in and we should kind of be on the right side of the ledger, hopefully crossing our fingers that that should happen.

You know, what's what's the right kind of you know he'd asking the incremental margin question. It seems like that's always what I ask about but like what's the right way to think about the incremental margin on that opportunity in the context of pricing and then all the productivity initiatives you guys have implemented.

Well I'll take I'll take the first part in.

Tell you how we're thinking about Q3 in the queue for I mean.

Typically for us.

Step up there.

Oh are degradation, so 150 to 200 basis points and our views kind of our adjusted sequential move when you when you get into the queue for.

Usually not only.

You lose a couple of days, but you also end up with some half days here and there around the holidays. So that typically explains and that's that's no different this year.

I'd say in a couple of things, we're thinking about depreciation for us we'll probably.

Step up in the fourth quarter, we took some equipment later in the third quarter and.

<unk> didn't get hit with the full impact of depreciation so there's going to be it's stephane depreciation.

We have seen our employee usage of our healthcare benefits.

Trent trend back to normal.

Typically happens in the fourth quarter anyways spoke to meet their deductible and stuff but.

Walking into it thinking about 150 200 basis points with some headwinds in those areas.

For the fourth quarter.

Yet a.

The minute I think one of the things that was particularly exciting about the third quarter and frankly year today, even even the challenges we had to deal with in the second quarter and I'd go back to the first quarter. Our plan at the beginning of the year was it was really about focus on execution.

And capitalizing on the data analytics and driving the pricing driving our.

Cost optimization, and I think we've done a pretty good job with that so far this year. So as I think in the next year. We have long said that you know in a reasonable sort of macro environment Sortal GDP growth, we ought to be in 100 to 150 basis points sort of improvement year on year now depending on where we end.

This year, you know maybe that changes a bit higher side or if the environment next year stronger I think what's important is that as we have managed through this pandemic we have.

Sort of tested the kind of our capabilities around how we can plan and adjust to this and I think the exciting thing is is that it's confirmation to us that are longer term strategy is something we can execute on and we have the opportunity to kind of can drive the.

Drive the O R.

Over time, and I don't see anything that would block is that.

The macro environment, what's going on there that would be the chief impediment, but if I focus on the things we can control we feel pretty good about what we can do to execute.

Yeah, Yeah, but Doug you've talked about you know fixed variable being kind of like that 35% fixed costs before is that come down a little bit as you guys have made some progress on the productivity side like it's what's the new baseline in terms of thinking about the overhead costs in the business.

I mean.

With the growth we've had an unlimited I mean, it's kind of a moving target for us.

Plans next year to step up our capital investments, even further probably closer to.

13, or 14% of revenue from the 12th at 12 and a half we've been running so it's kind of a moving target so.

You can look at it in a vacuum either the environment is having a happening around around you will help the time and.

Whether it's economic manufacturing pandemic.

I, just I don't like to go.

Go from quarter to quarter talking about how it's moved because it's kind of.

And moved around a lot depending on the macro.

Okay, Alright, guys. Thanks, a lot congrats on like a quarter appreciate it.

Thank you for the question and the next question will come from Jack Atkins with Stevens incorporated. Please go ahead, hey, guys. Good morning, and thank you for the time just.

Just maybe going back to the October commentary from him. It could could you maybe and I don't know maybe I just missed it.

Could you could you give the tonnage trends you're seeing so foreign October and maybe what you saw in September as well.

If that's possible.

Sure Jack.

On September shipments were up 1.4%.

And tonnage was up 2.1%.

A slight increase in labor schimming up about 7%.

And so far on October shipped.

Shipments around three 8% year over year and tonnage up six 3%. So we talk about how volatile way it's been I mean, the trend. So far on October has been favorable way for shipments up 2.4%, but but just in the last two or three days, we continue to see the volatility there but.

Okay.

Well that's great. That's fantastic and then then I I guess, maybe kind of shifting gears and thinking about 2021 for a moment just kind of going back to the commentary a moment ago about capex as a percentage of revenue stepping up next year, how how should we think about I guess, a couple of things one where do you think available capacity.

<unk> sort of a standard in the network today to be able to sort of take advantage of industry growth as we go into next year and then secondly, how are you guys thinking about terminal expansion plans, just just kind of broadly in 2021, I know 2020 has been sort of muted from a terminal growth perspective for obvious reasons, but is the plan to sort of reaccelerate that.

Sure and maybe it sounds like it is.

Yeah in terms of.

<unk>.

Through and into next year on the terminal side I mean, we've got we've got a pretty healthy real estate budget out there and so.

So far we've got one planned opening in the northeast in the first quarter beyond that we've got a number of things we're looking at but we'd like to step it up yeah I would add on the pipeline in the next year, we've got opening in North Atlanta Terminal and then we've got opportunities across network around.

We'll be looking at replacing some facilities and legacy markets and then.

We're very very vigilant two opportunities to kind of improve service moved closer to the customer point to the Atlanta example is a great.

Great. One that has long been pursued and there are other markets like that where we pursue similar strategies.

Not quite in a position to kind of communicate where those are yet we're still working on that but there is a list of.

That we we kind of monitor in.

Assess as they become available.

Jack.

Caught on that last part of the question I forgot the first part.

I would say that in terms of capacity I mean, we think we've added a lot of doors in the last few years I think in terms of the door standpoint, probably 15% to 20% capacity and when you've got your pressure points, but in general we've got capacity. There we've invested alarm equipment, we feel like we've got the power, but the third component of capacity.

His drivers.

I think we're not the only one that's going to be challenge on that front over the next.

Several years so.

That would be a factor now, but that's where we feel like our experienced in our relationships on the P. T side.

Help us there I mean, we would have used more rail in the quarter. If we could have could have could have gotten it from the providers.

That's a really advantageous cost per mile.

We we've seen some shift and kind of the lead balance some of that is probably pandemic related lanes. It used to be head hall.

Flip to backhaul.

Oftentimes, we use more BT, if we could have could have you know.

Found it.

Okay that makes sense. Thanks again for the time guys.

Thanks Jack.

Thank you for the question. The next question will come from God Group with Wolf Research We'd go ahead.

Hey, Thanks morning, guys. So.

I'll go back to the P. T discussion just for a second so in past periods, where we have seen.

Tightness and truck markets, we have seen some headwinds from P. T. In the past is there anything that you're doing differently to protect you from P. T. I understand third quarter was non issue anything youre doing differently from a Pts standpoint for next year and is.

Everyone thinks about benchmarking versus O D right. They do very little Petey do you think about making any longer term changes to meaningfully reduce your exposure.

A lot of the ability to reduce the petey comes from the maturity of your network.

If you've got density and you're running.

Four schedules out of a market.

And.

The last one is only.

The last schedule is only 60% load factor or something like that.

If you add another scheduled to it that partial load.

Becomes a smaller percentage because you know you are on fire schedule. So your parcels.

Become smaller so the benefits the way to drive that number down as to build density I'm more of your own equipment out of a market, but until you have that you don't want to run schedules empty and a market and have to pay to bring him back to the head home market. So I mean one.

One of the ways to move that number is just maturity, but but.

Not.

We're not upset when we have to use it I mean, we've we've got great relationships are cost per miles.

Pretty stable force the rail cost for miles very advantageous so.

Time, I suspect that naturally probably comes down, but it's not it's not an urgency to bring it down to the key thing Scott is to build on Dutch point is I mean, it's part of the optimization decision, you're making as you are assessing what the market opportunity is from a revenue perspective, you build Whitehall network around the cost of it.

Had been tangents way.

So there will be times, where the quarter to provide service to a customer maybe we had a lean balanced change, let's take advantage of the P. T. A but if that becomes a sustainable long. The permanent change then you're you maybe re factor how you hire how you deploy road assets there.

So as we go through it gross.

Stage here become more of a national network those are decisions that we have to make ongoing.

And the third quarter workforce utilized petey is Doug describe the cost piece of it made sense.

Pricing was there we can provide the service and we.

When the customer so that's that's important to optimize from here.

Okay, Great and then can I just wait for shipment was up a little bit in September up a lot in October just some thoughts on what's what's driving that acceleration is that a comp or is the overall weeper shipment picking up and just thoughts on line that's happening. Thank you.

Yeah, I mean across our book a business I mean, our field customers were pretty much flat on our way for shipment basis in the quarter and.

Actually we've been taken some pricing action with both national accounts entry Pls, just as we do.

Across the year is the business.

Requires at the <unk> layperson actually improved and a quarter and.

National was down just slightly so.

We can't really put a finger on anything driving it but I mean ISF numbers were strong again in September so.

It could be discontinued replenishment of inventories in the manufacturing base kind of coming back to life.

Okay. Thank you guys.

Hey, Scott.

Thank you for the question and the next question will come from thought bothered with Keybanc capital market. Please go ahead.

Great Thanks, and good morning.

Fix the contract renewals here, the six 9% I guess.

Looking out do you see any reason why 2021 can't shape up to be like.

2018 year, where you were able to see high single digit low double digit type contract renewals.

I think in the past you talked about the differential with some of your pricing.

Yeah, I think that I think what you'll see it so it's a little bit of a.

Walk Todd go forward I think those sort of mid single digit numbers totally or I think we are within reach I think some of it has impacted by what the book of business that comes up in a given quarter around what what the opportunity is there, but I can say this.

Quickly the underlying cost structure of the businesses inflationary. So we have to keep pushing the pricing and the better we had the better data and understanding we have of our customers freight.

What the requirements are for us that's an opportunity for us to continue to push not only the base rates, but then the related as assoil rates and such those are is so critically important because it's.

It's a complex business coster underneath are challenging drivers are challenging and it's.

It's just important to keep keep pushing it.

Yeah.

And is there a reason why I mean, it put the acceleration the contract renewals feels like that you could set up for more than the typical margin improvement that you would expect to see that 100 150 basis points annually is that just the cost inflation that you're expecting there's kind of something else, that's holding back maybe the ability to expand margins improving pricing environment.

I'll keep in mind, a couple of things is a contractual renewables that's sort of indicative. It as you will know that these.

These contracts are effectively pricing agreements and you don't have a committed volume that comes along with that but I think it does give a very very strong indication with the pricing environment is going forward I think that if we have a favorable I assume.

Sort of macro environment I don't see any reason why we couldn't continue that trend, but there are a lot of factors that come into play there.

But.

I think the.

Everybody in the market sees the same issues that we do around costs and I think I'd say, it's a discipline place to operate a business right out it needs to be frankly based on the underlying cost structure.

Yeah got it okay that makes sense just just the last quick follow up as you think about the environment that you've moved through this year I know for the last couple of years, you've been working on some productivity initiatives within the organization.

Can you give me just an update on kind of the ability to drive more productivity and if there's any you know things that are front and center here in the near term basis or is it more gradual improvements and I know that the operating environments, obviously pretty choppy right now, but just just character thoughts on the ability to drive more productivity going forward. Thanks.

I think the opportunity remains there for us to continue to make better decisions around everything from using our line all the scheduling our city operations. Those are all tools that are building into our sort of DNA. If you will if you'll look back that Q1 or Q2, I should say one of the one of the great benefits that we had.

The quarter, that's tough to see the results that we had them because you saw the debate decline, but we were able to manage down the cost structure in a way that we can maintain productivity that historically has been a challenge for us to deal with the open down there right and those tools allowed us to kind of operate at a very volatile environment, there and it allowed us to.

As we've grown out of that you see the margin improvement so it's not necessarily a parrot in the sense that.

It's a big flow through on cost per se, but it's certainly around efficiency, we're able to support the customer and I think as we grow out of this I think that's what's going to help drive those incrementals.

And over time.

Really excited about how those tools have helped us through this process this volatile period.

And it will continue to allow us to execute into the future.

Okay makes sense, thanks for the time.

Thanks.

Thank you and the next question will come from already Rossa with Bank of America. Please go ahead.

Hey, good morning, guys in.

Congrats on the nice results here.

Maybe you could talk about specifically dig into a little bit more what you're seeing in terms of that cost inflation and seeing.

To the extent it is possible to quantify that.

Terms of what your expectations are for the for the next couple of quarters and particularly on the wage pressure front. We're hearing a lot of talk about just difficulty to find drivers and.

Dock workers, maybe you could talk a little bit about what you're seeing there.

Sure I mean, the cost inflation I mean, some of them. The numbers, we talk about the same numbers kind every year I mean, we're seeing high single digit.

To low double digit healthcare inflation around health and farm.

For us depreciation will will step up again next year.

Part of that's higher spend but part of it.

And then a little bit more for everything.

On the wage side I mean, that's a constant pressure, that's that's not going away and it's not just drivers.

Fine and mechanics, finding supervisors managers.

There's cost pressure there and.

We haven't announced anything on the wavefront, but but we're not going to fall behind in a market we've got to be competitive in.

Provide a proper wage in the market.

The number that will attract good people so.

It's becoming increasingly difficult on driver's side, there's just besides the demographics, there's just other pressures there and.

We'll see inflation and those are the main items.

That come to mind.

Got it Okay. That's helpful. And then maybe you could talk about the terminal footprint as well obviously, we saw what you did there with Memphis and you mentioned something in the northeast that's that's scheduled for first quarter, but.

Maybe you can talk about what you're seeing in the marketplace in terms of where real estate prices are.

For industrial space.

And if there are some opportunities maybe to preemptively get ahead of that or how you're thinking about maybe adding to the to the service center footprint for the for the next couple of quarters.

Yes.

The opportunity investments around real estate certainly on if you look at sort of edge markets on the coast clearly a lot of inflation there around underlying real estate costs I mean for if you're looking at a sort of green space Opera tour Greenfield opportunity in many cases, you're competing against industrial real estate investor.

Maybe putting the.

Last smile warehouse or something like that in there. So that those are pretty challenging markets, yet and the zoning pressures that are out there.

So over time, though what we have found is a bit opportunities to.

Participate in sort of these are network expansion by pursuing opportunities maybe have been exited by some of our larger competitors in many cases other cases, where we haven't been able to find.

Those sort of legacy assets, we have.

Moved in and built North of land is a Prime example, but those are challenging right you've got to get the zoning along with that and.

That.

Boot cycle there it takes quite a bit of time often to get those things bill, but I wouldn't say this that similarly, if you go back to 2019, we saw northeast competitor exit the market and we quickly jumped into that and.

And took advantage of the assets that became available.

And I would say if you look at our balance sheet, we're in a position where although we're going to continue to invest where we need to to support our growth. We are also in a position that if those assets become available either.

Industry change or a shakeout or something where where somebody that's available to take those assets and we have the bandwidth to handle that.

So we're actively.

Looking both that.

Existing assets as well as.

Looking at new space are full and the footprint. So there's there's a lot of opportunity off or is it just takes time to execute real estate transactions.

Is there a particular region that you think.

Is it still focused on the northeast or are there other regions that you're looking at in terms of where where you'd most where you see kind of growth as being most advantageous.

We're kind of at a stage ache when we started the northeast expansion we've talked about.

June 20 to 25 terminals properly fills in that geography, and we're right around 19, and so I think that if we're fighting a few more of that market there more tuck in fill in sort of facilities. If you look at our broader sort of landscape where to 169 terminals and if you look at some of the high quality operators that are larger than some.

They're they're.

Sort of the over 200 anywhere up to 230 or 40 sort of terminals across the country. So for US. The next opportunities are more about doing things like in Atlanta, where we've added the second terminal. There are we will be adding a second terminal Chicago would be one where we could add a couple potentially Houston is a gray.

Market for US we've got great recognition name recognition, we do an excellent job that great customer relationships potentially down the road. There's this second terminal opportunity you go back to.

Dallas, Texas and other strong market for Si.

We've added over the last couple of year or last two years ago added Fort worth.

So gave us three terminals of that market. So for us it's as much about building density and perhaps in some of our legacy Geography's. If you will.

Move closer to the customer do a better job of servicing customer and then it gives us opportunity to charge for that so it's kind of a.

It's become more of a away from a region two maybe more of filling in space, where we'd have opportunity to grow.

That's great color thanks for the time.

I don't know how I forgot to mention.

Auto insurance is another pressure point on the inflation side, I mean, along with the volatility see there I mean premiums have been going up anywhere from 20 to 30 or more percent. It seems like the last couple of years Ah renewals not till the end of February but I've actually got a renewal kickoff meeting in two weeks. So you really gotta get in front of that one.

But.

We're doing a lot of things there to try to protect us as best we can on those inflationary costs.

Okay. Thanks have a follow up.

Sure.

Thank you for the question. The next question will come from stepping Benjamin withdrew. Please go ahead.

Hey, Hey, Hey.

Oh.

I wanted to catch up a little bit and then the same vein minority expansion, maybe that you've seen it in terms of seven days nearly open terminals from the end of last Sherry anything in terms of improved productivity and profitability after the third quarter.

Sure I mean.

Our run rate in the northeast exit in Q3 is now over $300 million closer to a $340 million actually an annualized basis. If you think about frey going in and out of the market.

The growth rate there as you might expect has been pretty strong and.

Definitely in the newest markets, we opened last year, but also the the original openings harrisburgh's and fill in the region they've been good performers too in terms of growth.

The last round of terminals, we open where a lot smaller so we have been able to get back to break even quicker than we did with the original four or five that we open back in 2017, so in the quarter fully allocated the northeast operated a little bit better than break even for us So that's encouraging but the brand.

<unk> to grow up there and be recognized.

Will open and one more market up there in the in the first quarter and.

Will probably continue to put a couple dots on the map.

Market remains the environment remains good next year, and we're not bogged down in the pandemic.

I got the opportunity to put down a couple more doubts on that map next year as well.

Got it well that's all I had thanks, so much thanks Evan.

Thank you for the question. The next question will come from Jason side with talent. Please go ahead.

Hey, guys. This morning, everyone's well two quick questions and I apologize if one has been asked.

<unk> dropped a.

A little bit.

Think about a general rate increase in terms of both timing and full amount as we look forward.

Yeah I mean.

We generally.

The biggest carrier in the industry. So we can't move that on our own and get customer acceptance. So we tend to follow after a couple of fall in place I know.

No. There's there's one out there getting ready to go on January 1st for the Gtri and ours was early February last year. So I certainly think it will be within that annual kind of cadence.

Markets.

The shippers out there <unk>.

Care capacity good carriers and.

They have seen spikes in their truckloads spend in our conversations are more consistent annually, we try to partner with our customers and discuss the environment costs and their needs and we tried to come at it annually. So I expect it will be similar cadence this year.

Okay fair enough.

Back to Kiki when I when I look at it as a percent of rows of August totally hide this quarter.

It takes time to pull it over the network to look more like with the right. So how should we think about P. T. As a percent of revenue in 2021.

Various Jason I mean, this year, we didn't walk into the air expecting to spend what we spend but conditions changed when it was on the driver side and a tightness in TL an intermodal aver.

<unk> ability for that kind of drive that for us I don't think structurally the thing.

We're doing this quarter and early next year is going to change our spend as a percent of revenue.

It's a lot of times, it's market driven I mean, if we'd add more drivers this quarter, probably would've probably would've been lower but if I could account more rail capacity.

That's a better cause for model proposition Ivy is more so it's kind of market driven we believe banana.

Fairly tight band overtime.

Okay. So you think you'll stay within that band, but you've had overtime.

Jason I think I would add I mean, just it simple slow or.

Driven so if there's an opportunity for us to utilize.

Petey to drive ror down or improve DLR, we're going to do that so.

So one of the points. We made earlier is that that's an optimization decision for US right. So you got to go through the the dynamic of is it cheaper to use rail is it cheaper to use petey assets versus our own in a particular market or particular opportunity. So to the extent that we continue to make that kind of data driven.

Decision, we're in a position we can drive vor. So although it would be good to have potentially a PT target I guess really hard prime target is really about driving O R.

Nah I understand that and what's rental though don't you have a limit on how much can use in terms of just even from a service perspective.

Sure Yes.

Yeah, what sort of that limit that you would think.

There's only certain lines.

Where it's really helpful. I mean, when you think of our kind of trans continental moves.

From the Iron Bell over the coast, whether it's the Pacific northwest or Southern California, I mean.

The primary places, where we can really use it to our advantage so.

We're not we're not able to use it in any kind of.

Short hallways.

To help us standing soon.

Right.

Okay, well listen gentlemen, I appreciate the time is always thanks for the car.

Thanks, guys.

Thank you and the next question will come from Tyler Brown with Raymond James. Please go ahead.

Hey, good morning, guys.

Or hunter.

Hey, Doug great quarter on the margin side, but I was hoping that you could help me parse out the 180 basis point improvement. So I was going to be tough moment, asking anyway, but is there any way that you can parse out maybe one how much did lapping the heightened costs from last year's terminals help too how much did the lack of the 401k.

Match help and then three how much what were the PTO and I think you paid 250 dollar July payment.

How much were those headwinds any help there.

A little help Tyler probably not as much as you want but I'll give you a little help I mean first of all we're really pleased to say that our 401k reinstatement was for the whole course, so that numbers in material. Okay. There's only one quarter gap there.

The $250 you mentioned that was a second quarter event.

The extra PTO days I mean, there's the dollar impact there and we said I think that was about $10 million spread across the three quarters, but a bigger impact there's a.

A lot of our employees use their PTO and that's that's a great thing for them, but like some of our busier weeks in July and August.

We have people taken the extra PTO not on vacation and and getting a break from the craziness. So there was an additional little costs are there.

I'm not sure either one, but we all know that.

Yeah. That's helpful. Those are just kind of some of the idiosyncratic things at least that I that I see but maybe to switch gears, yeah, we view.

View of the quarter is kind of pretty much back to normal in terms of okay.

Puts and takes on expenses okay. Okay. That's helpful and then.

On the 7% renewals and maybe you guys address this but specifically how much of that was from layering and ask the soils versus base tariff increases.

Live break that out I would just the way we look at it is that's what we're getting from the customer until right. So if if we can get it on us soil, we're going to get it there if it's on the base, we're gonna get it there at the end of it.

Got to get paid for all we're providing the customer.

Right right, Okay, and my last one so Fritz it's Memphis Ah key east-west break.

It is.

Do you have any idea how much freight flows through there I mean 200 doors seems like a really big facility.

Kind of pushing the limits.

So let's see here.

As well.

We might be able to get back to you with that.

Well here's my.

You have my Big question. When my Big question is what's the door pressure they are holding up some of the connections on the east West and does that gives you an opportunity to Lincoln out the hall.

Listen if facilitates all that it was not a constraint for US. This is this was more about hey, this is an opportunity we got the real estate here, let's get in front of this make sure we got ample power as we continue to push grows here. So I don't I wouldn't say that it was a at immediate constraints.

One of those maybe look more to over the horizon, a better okay and that was an owned Greenfield site yes.

Yes, so we owned and then we're slipping.

Bought a parcel of built from there.

Okay. Good deal thanks, guys.

Thank you there are no further questions at this time I'll turn the conference back over to our speakers for clothing.

Well. Thank you everyone for calling in we're excited about our third quarter results.

I think that it really speaks to what the longer term opportunity is for sire, and we will continue to focus on execution and look forward to the continued growing the business and drive in value for our shareholders. Thank you much.

Thank you ladies and gentlemen. This concludes today's event you may now disconnect your lines for the rest of your day.

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Good day and welcome to the site incorporated hosted third quarter of 2020 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to size Executive Vice President and CFO Dutko. Please go ahead, sir thank.

Thank you.

Hello, and welcome to Science third quarter of 2020 conference call with me for today's call Assize, President and Chief Executive Officer Fritzls Greg.

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 an actual results may differ materially.

We refer you to our press release in our SEC filings for more information on exact risk factors that could cause actual results to differ I'm Gonna go ahead, and turn the call over to France for some opening comments now.

Good morning, and thank you for joining us to discuss size results third quarter results include record revenue in operating income for any quarter in the company's history is quite a rebound given the dramatic volatility business levels felt the second quarter, and which revenue handed down almost 10% compared to the year before.

And the third quarter daily shipment activity continued on the improving trend that we saw develop in the middle of the second quarter shipments per work there was nearly 1% compared to last year.

Also see shifted continue to see shifting shipping patterns geographically as customers flexor supply change to adapt to the new normal a R.

Pandemic stricken country wait for shipment it was volatile throughout the quarter was down what percent for the full quarter. So tonnage per workday was flip year over year.

The pricing environment remains stable throughout the pandemic the underlying cost structure of the industry remains inflationary with the pandemic heightening a challenging driver market, adding to the increased cost of purchase transportation operators continue to focus on pricing in the face of these operating pressures I am extremely pleased to report that revenue per ship.

Excluding fuel surcharge rose four 7% despite fuel surcharge revenue.

17% year over year, we still managed to improve revenue per shipment, including the surcharge by one 6%. This improvement in revenue per shipment plays a key role in improving margins and I'm proud and report the third quarter operating ratio of 88, 5% is a record for any quarter.

Unprecedented conditions brought on by the COVID-19 pandemic continued daily and all the market. So we operate that can did conditions requires to adjust our operations in unison and I remain very pleased with our team has come together and adopted adapters, our new normal from the start we focused our efforts on keeping employees and customers say.

Chow changes to our daily procedures that developed out of necessity become standard practice in many areas of company operations and poison are able to work remotely are still doing so and plan to continue this practice for the future foreseeable future.

I'm now going to turn the call over to Doug for a few review of the third quarter financial results.

Thanks, Chris.

I'll start by providing some comparisons to the third quarter, a year ago revenue was $481.4 million up $12.5 million or two 7%.

Flat tunnel for work down a quarter of the revenue increase was driven by a five 5% increase in yield excluding fuel surcharge as well as the 6.1% increase in length of hall.

As Fritz mentioned fuel surcharge revenue was a headwind to the growth being down 16 point.

7% and was 10, 4% of total revenue compared to 12, 8% a year ago.

Moving out of some key expense items and a quarter salaries wages and benefits increased 8% are average employee count through the quarter was approximately five 8% lower than the prior year health insurance costs were essentially flat year over year with inflationary costs being offset somewhat by lower use usage of these benefits by our employees.

Purchased transportation costs increased 11.7% compared to last year as a percent of total revenue purchase transportation costs are eight three compared to 7.6% in the third quarter last year.

In the quarter, we used to purchase transportation, we're faced with pandemic related driver shortage shortages or unbalanced shift in some markets and where it was advantageous real cost standpoint and others.

You'll expense fell by 23.9% in the quarter while company miles.

314% year over year Nash.

National average diesel prices, where approximately 20% lower throughout the quarter and in the same period a year ago.

Thanks, and insurance expense rose by 52.1% in the quarter reflect the increased frequency an accident severity and that expense and higher premium costs versus the prior year.

Put that in perspective of the approximately 4% or $4 million expense variance to the prior year $2 million was related to premium increases also to illustrate the volatility in this expense fine I would note that claims an insurance expense was down 34% or six 4 million sequentially from the second quarter.

Appreciation expense of $34 $2 million and a quarter was 9.2% higher year over year. This is a continuation of the trend we've seen over the past few years as we've grown our carnal network invested in equipment to load lower the age of our tractor trailer fleet and made meaningful investments in technology.

Total revenue up to 7% in total operating expenses up all my 0.6% in the quarter are operating ratio improved by 190 basis points 288, 5% compared to the third quarter operating ratio of 93, a year ago, which was a record.

Operating income of $55 2 million was 21.7% higher than last year and when a reduction in interest expense in a slightly lower tax rate and last year, our net income rose, 26% to 41.5 million.

Our tax rate for the third quarter was 23, 7% compared to $24, 10% last year, and we expect fourth quarter tax rate between between 24 and 25%.

Third quarter diluted earnings per share $1.56 compared to $1.25 last year.

Year to date were made capital investments totaling 205, 3 million of which revenue equipment represents approximately 65% of that spent for the full year when aspect capital expenditures will be approximately 225 million.

We ended the quarter with $129 million total debt and with $25 $5 million in cash on hand, or net that stood at $95 4 million.

This compares to net of 131 six.

And the second quarter and $165 million at the end of the third quarter a year ago.

I will now turn the call back over to Fritz for some closing comments.

Thanks, Doc before we open the call for questions I would like to again comment on the professionalism and effort given by our employ employees through these volatile times. When we've had several several hundred employees working remotely from out of the vast majority of our essential employees don't have that option. These dedicated professionals have worked steadily this year to continue to provide great.

Service for our customers are on tubs on top of service standards of 97% was met in the third quarter and our cargo claims ratio improved 25% from the prior year to a record 0.62% sales.

On our current business are current business conditions, we continue to see solid volume trends that are opportunity to improve pricing continues our contracts renewed was customers in the third quarter were up an average of six 9% of sequential step up from an average of four 5% in the second quarter.

We opened our new state of the art Memphis break operation in October the new facility is 60% bigger than a facility. It replaces the operation will not only support our Memphis markets, but also serve as an important hub operation supporting our national network growth, although a smaller markets, we replace to Texas facilities larger facilities, an additional door goodbye.

City. These investments continue to support are offering providing improved service for our customers.

Moving into the fourth quarter, our focus remains first and foremost on the health and safety of our employees and customers. While Covid remains challenges remain in hot spots continue to move through different terminals that our company as well as those of our competitors, we've been able to meet the challenge through diligent planning focus on execution and teamwork across the network with that said we are now ready.

Open the line for questions operator.

Thank you you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure your new books and it turned off to allow your signal to reach our equipment again press star one to ask a question what path for just a moment to allow everyone an opportunity to signal for questions.

The first question will come from David Roth with equal we'd go ahead with your question.

Yes, good morning, gentlemen.

Good morning, good morning.

It's maybe talk a little bit about the capacity situation that's out there and the pressure on purchase transportation.

The main concern I know for the site network is just getting a truck more so than the price but.

If you look across here petey providers are most of them under contract.

You have essentially committed capacity to right on those lanes for some time or is the predominant.

Capacity coming from spot.

Yes, David on the Bt's high we've got 90% to 95% probably a R. P T miles under contract. So we weren't exposed to the spot market in any.

Any great extent and a quarter or usage was just up.

I mean in some markets throughout the core struggling to find driver and most of that pandemic related and whether it's.

I'll drive or hear their city drivers call and off because.

The Corona virus.

We found that need need was greater this year, but we're pretty good at it we used.

To our advantage when we can in certain lanes and.

Steppedup almost quarter, but I think the way we operate in total shows that.

We use that are benefit in the past and had to deal with this quarter, David I would add it I think it is particularly important that we tap that resource right now simply because as the pandemic has evolved we see a lot of changes in our customers supply chain and shipment patterns. So this is giving us flexibility to match that where we do too.

And is there any.

Specific bubble period, where a lot of those contract rates are going to come up for renewal in the first quarter next year second quarter next year.

No then.

A lot of them are long standing relationships and then go kind of randomly through the year, but to give you an idea.

I know from from Q2 Q3, there was a spike in truckload range, but really are average between truck truck mile cost us about the same well really right on the number that we were spending in Q1, so step up from Q2, but because of our relationships that was really flat our cost per mile.

Q1.

That's terrific and just last question on.

On the energy sector, because say has got.

More of a legacy operation there in oil and gas has been important over the years. What's your view of that currently how is that may be holding back results a little bit of demand as yet to recover there.

Yeah, if you look at our he's Houston region.

Year over year, that's that's actually down.

I would comment two things that some of our best density cost structure that typically is great great.

But we've been able to flex those operations to match those sort of changes so it hasn't really been a drag on the O. R. If we'd had this conversation say four or five years ago prior to the northeast it would be a much larger percentage of our book and it's shrunk would sure like to have that be growing is.

The energy sector would be good phrase, but the reality of it is is that as we've become more of a national.

Operators that exposure to the energy sectors less.

Unfortunately, we are able to flex a bit in that.

Those markets and adjust our model of grew other elements of the business to offset some of that.

Excellent. Thank you very much.

Thanks.

Thank you for the question. The next question will come from Jordan Alegar with Goldman Sachs. Please go ahead with your question.

Yeah, Hi morning, just curious if you could give a little more color on them, what you're seeing from a volume perspective as you went through September and thus far in October is it.

I know we have.

Cover is certainly.

Well under way I'm, just curious as it.

You could give some additional color the exact trend or or is it running better than normal versus what you might have thought through October.

Yeah. Thanks Jordan.

Throughout the quarter was.

Terms of shipments.

Sure.

There were some swings, but they were kind of a very low base in July was up 1.5% in August was down just fractionally in in September of back up one, 4% and normally seasonally for US you see kind of a low single digit decline shipments per day. When you go from September October.

And it's still down on the shipments per day basis, but it's running down the less so.

Seasonally it's a little better than normal so far in October, but we've been hit with some recent.

Whether the last few days I mean, we've all been hit with that so unusual to have ice and snow in October in Denver, and in Texas Big markets like that but.

Whether every year in the fourth quarter, but that that's caused some volatility this week and our shipment counts.

Just as a quick follow up.

Think ahead past October and November and December and then next year's you talk to your customers is there.

A sense of.

Optimism about continuing improvement or is it still.

Uncertainty out there and kind of.

Hard to get a full read on what may happen from volume standpoint.

Yeah, I mean, there's still a great deal of uncertainty for all of us customers employees and and.

<unk>, but I.

I would say that our contractual renewals being out 6.9% in the quarter, which was a step up from Q3.

Definitely shows me that the shipper feels pretty good about their business and they want to make sure. They have capacity next year with its truckload intermodal lower LCL. So.

I'd say, the shippers, probably cautiously optimistic, but but a lot of a lot of news coming out in the next few weeks for sure with the election and vaccine things like that.

Great. Thanks, Thanks very much.

Sure.

Thank you and the next question will come from a mid May wrote down with what's your bank. Please go ahead with your question.

Thanks, Hi, France had dogs hope you guys are well quick question on the six 9% contract renewals.

That's obviously, a big number and I'm just trying to understand how much of that is cyclical in terms of.

The opportunity to raise prices on a certain segment of your customers. I know you guys have implemented more technology and tools to get better on pricing and so I wanted to kind of if you could help us deconstruct back between kind of cyclical and what you guys are just getting better at doing and then what the runway it's there to.

Further optimise the.

The pricing via you know technology, and maybe more dynamic pricing tools.

So it made the when we quote to.

Contractual renewal those are all the contracts that came up for renewal in the quarter. So it's reflective of the data analytics that we went through.

Assess the contracts that came up in the period, so those kind of come up ratably during the year.

So we pushed pretty hard on those.

Largely the cost structure and the businesses, we've got a cover that into next year. So it's as we looked at our pricing opportunity and we've got a better understanding of the customers freight movements, what the freight looks like those characteristics, we've tried to price accordingly.

If I look at.

Where we stand from a revenue per bill perspective versus the the market and what the opportunity yet.

Still a lot of runaway for us So I don't know that I can characterize.

Where we are in that cycle, but.

That alone tells us that we have opportunity and you know as we extend this network into more of a national network, that's going to drive the pricing and margin opportunity for us as well so.

I think that's reflective of the business. So go back to your question that's reflected the business it was available to us in the quarter.

And the analytics supported that and.

We keep pushing that because we see that this is an expensive business operates so every opportunity we can to capture that generate that returned is important.

Hey, Thanks for that answer and then just a follow up.

Excuse me I'm the O or.

One maybe near term and then kind of more like over the next 12 months question related to the O R.

The operating momentum you saw in the third quarter does that extend into the fourth quarter in terms of maybe muting. The typical step up do you see an hour in the fourth quarter. You just talk about that and then Fritz and dark I think next year.

Both volume, but shipments and we should kind of be on the right side of the ledger.

Hopefully crossing our fingers if that should happen.

What's what's the right kind of you know I hate asking the incremental margin question. It seems like that's always what I asked about but like what's the right way to think about the incremental margin on that opportunity in the context of pricing and then all the productivity initiatives you guys have implemented.

Well I'll take I'll take the first part and tell you how we're thinking about Q3 in the queue for I mean.

Typically for us.

There is a step up there.

Terms of or degradation, so 150 to 200 basis points and our views kind of our adjusted sequential move when you when you get into the queue for.

Usually not only mess.

Messing lose a couple of days, but you also end up with some half days here and there around the holidays. So that typically explains and that's that's no different this year.

I'd say in a couple of things, we're thinking about depreciation for US, we'll probably will step up in the fourth quarter. We took some equipment later in the third quarter and quarter didn't get hit with the full impact of depreciation so there's going to be it's stephane depreciation.

We have seen are employing.

Usage of our healthcare benefits.

<unk> trend back to normal and that that's typically happens in the fourth quarter anyway, his folks meet the deductible and stuff but.

I think we're walking into it thinking about 150 200 basis points with some headwinds in those areas.

For the fourth quarter.

Yet the minute.

I think one of the things that was particularly exciting about the third quarter and frankly here today and even even the challenges we had to deal with in the second quarter and I'd go back to the first quarter. Our plan at the beginning of the year was it was really about focus on execution.

Capitalizing on the data analytics and driving the pricing driving or.

Cost optimization, and I think we've done a pretty good job with that so far this year. So as I think in the next year, we've launched said that at a reasonable.

A macro environment Sortal GDP growth, we ought to be in 100, 150 basis points sort of improvement year on year now depending on where we ended up this year, you know maybe that changes a bit.

Higher side or if the environment next year stronger I think what's important is that as we have managed through this pandemic we have.

Sort of tested.

Kind of our capabilities around how we can plan and adjust to this and I think the exciting thing is is that it's confirmation to us that are longer term strategies is something we can execute on and we have the opportunity to kind of can drive the D.

<unk> D O R.

Over time, and I don't see anything that would block is that.

The macro environment, what's going on there that would be the chief impediment, but if I focus on the things we can control we feel pretty good about what we can do to execute.

Yeah, Yeah, but Doug you've talked about you know fixed variable being kind of like that 35% fixed costs before is that come down a little bit as you guys have made some progress on the productivity side like what's the new baseline in terms of thinking about the overhead costs in the business.

I mean.

With the growth we've had an unlimited I mean, it's kind of a moving target for us.

We've got plans next year to step up our capital investments, even further probably closer to.

13, or 14% of revenue from the 12 to 12 and a half fish, we've been running so it's kind of a move and target. So.

And then you can look at it in a vacuum either the environment is having a happening around around you all the time and.

Whether it's economic manufacturing pandemic.

I just I don't like.

To go from quarter to quarter talking about how it's moved because.

Just kind of.

And moved around a lot depending on the macro.

Okay, Alright, guys. Thanks, a lot congrats on like a quarter appreciate it.

Thank you for the question and the next question will come from Jack Atkins with Stevens incorporated. Please go ahead, hey, guys. Good morning, and thank you for the time.

Maybe going back to the October commentary for a moment could could you maybe.

Maybe I just missed it.

Could you could you give the tonnage trends you're seeing so foreign October maybe what you saw in September as well.

If that's possible.

Sure Jack.

September shipments were up 1.4%.

And tonnage was up to 1%.

So a slight increase in labor schimming up about 7%.

And so far on October.

Shipments around three 8% year over year and tonnage up six 3% so.

Talk about how volatile way, it's been I mean, the trend so far on October has been favorable way for shipments up to 4%, but but just in the last two or three days, we continue to see the volatility there but.

Okay.

That's great that's fantastic and then I I guess, maybe kind of shifting.

Shifting gears and thinking about 2021 for a moment just kind of going back to the.

The commentary a moment ago about capex as a percentage of revenue stepping up next year, how how should we think about I guess a couple of things one where do you think available capacity sort of standard in the network today.

To be able to sort of take advantage of industry growth as we go into next year and then secondly, how are you guys thinking about terminal expansion plans, just just kind of broadly in 2021, I know 2020 has been sort of muted from a terminal growth perspective for obvious reasons, but is the plan to sort of reaccelerate that next year and maybe it sounds like it is.

Yeah in terms of.

Through and into next year on the terminal side I mean.

We've got we've got a pretty healthy real estate budget out there and.

So far we've got one planned opening in the northeast in the first quarter and beyond that we've got a number of things, we're looking at but we'd like to step it up yeah I would ask.

On the pipeline into next year, we've got opening in order to Atlanta Terminal and then we've got opportunities across networks around.

We'll we'll be looking at replacing some facilities and legacy markets and then.

We're very very vigilant two opportunities to kind of improve service moved closer to the customer off point to the Atlanta example is a.

Great. One that has long been pursued and there are other markets like that where we pursue similar strategies.

Not quite the physician to kind of communicate where those are yet we're still working on that but there is a.

A list of.

We we kind of monitor in.

Assess as they become available.

Jack.

Caught on that last part of the question I forgot the first part.

I would say that in terms of capacity and we think we've added a lot of doors in the last few years I think in terms with doors standpoint, probably 15% to 20% capacity and when you got the pressure points, but in general we've got capacity. There. We've invested a lot of equipment, we feel like we've got the power, but the third component of the <unk>.

Past these drivers.

We're not the only one that's going to be challenged on that front lower the next.

Several years so.

That would be a factor now, but that's where we feel like our experienced in our relationships on the P. T side.

Really help us there I mean, we would have used more rail in the quarter.

We could have could have gotten it from the providers.

That's a really have intelligence cost per mile.

We've seen some shift and kind of delay balance some of that's probably pandemic related.

Means it used to be head hall flip.

Flip to backhaul.

Oftentimes, we have used more BT, if we could.

Found it.

Okay that makes sense. Thanks again for the time guys.

Thanks Jack.

Thank you for the question. The next question will come from Scott Group with Wolf Research. Please go ahead.

Hey, Thanks morning, guys. So.

I'll go back to that Petey discussion just for a second so in past periods, where we have seen.

Tightness and truck markets, we have seen some headwinds from P. T. In the past is there anything that you're doing differently to protect you from P. T. I understand third quarter was non issue anything youre doing differently from a Pts standpoint for next year and is.

Everyone thinks about benchmarking versus O D. Like they do very little Petey do you think about making any longer term changes to meaningfully reduce your exposure.

A lot of the ability to reduce the petey comes from the maturity of your network.

If you've got density and you're running.

Four schedules out of a market.

And.

The last one is only.

The last schedule is only 60% load factor or something like that.

If you add another scheduled to it that partial load.

Becomes a smaller percentage because you know you are on fire schedule. So your parcels.

Become smaller so the benefits the way to drive that number down as to build density on more of your own equipment out of a market, but until you have that you don't want to run schedules empty and a market and have to pay to bring him back to the head home market. So I mean, one of the ways to move that number is just.

Maturity, but but we're not we're.

We're not upset when we have to use it I mean, we've got great relationships are cost per miles.

Pretty stable force the rail cost for miles very advantageous so overtime I suspect that naturally probably comes down but it's not there's not an urgency to bring it down that a key thing scratches to below Dutch point is I mean, it's part of the optimization decision you begging us.

You are assessing with the market opportunity is from a revenue perspective, you built.

Hall network around the cost of it advantageous way.

So there will be times, where.

The court to provide service to a customer maybe we had a lean balanced change, let's take advantage of the P. T. A but if that becomes a sustainable long term permanent change then you're you maybe re factor how you hire how you deploy road assets there.

So as we go through it gross.

Stage here become more of a national network those are decisions that we have to make ongoing.

And the third quarter workforce utilized Petey is Doug described the cost piece of it made sense.

Pricing was there we can provide the service and we.

When the customer so that's that's important to optimize from here.

Okay, Great and then can I just wait for shipment was up a little bit in September up a lot in October just some thoughts on what's what's driving that acceleration is that a comp or is the overall wait for shipment picking up and just thoughts on line that's happening. Thank you.

Yeah, I mean across our book a business I mean, our field customers were pretty much flat on our way for shipment basis in the quarter and.

Actually we've been taken some pricing action with both national accounts entry Pls, just as we do.

Across the year is the business.

Requires at the <unk> wait for shipping actually improved and a quarter and.

National was down just slightly so.

We can't really put our finger on anything driving it but I mean ISF numbers were strong again in September so.

It could be just continued replenishment of inventories in the manufacturing base kind of coming back to life.

Okay. Thank you guys.

Hi, Scott.

Thank you for the question. The next question will come from Ballard with Keybanc capital market. Please go ahead.

Great Thanks, and good morning.

Fritz on the contract renewals here, the six 9% I guess.

Looking out do you see any reason why 2021 can't shape up to be like a 2018 year were you able to see high single digit low double digit type contract renewals.

I think in the past you've talked about the differential with someone of your pricing.

Yeah, I think that I think what you'll see it so it's a little bit of.

Walk Todd go forward I think those sort of mid single digit numbers totally or I think we are within reach I think some of it has impacted by with the book of business that comes up in a given quarter around what what the opportunity is there, but I can say this.

Quickly the underlying cost structure of the businesses inflationary. So we have to keep pushing the pricing and the better we had the better data and understanding we have of our customers freight.

What the requirements are for us that's an opportunity for us to continue to push not only the base rates, but then the related as assoil rates and such those are is so critically important because it's.

It is a complex business coster underneath are challenging drivers are challenging it's.

It's just important to keep keep pushing it.

Yeah.

And is there a reason why I mean, it put the acceleration the contract renewals feels like that you could set up for more than the typical margin improvement that you would expect to see that 100 150 basis points annually is that just the cost inflation that you're expecting or there's kind of something else. That's holding back maybe the ability to expand margins improving pricing environment well.

Keep in mind, a couple of things of the contractual renewables, that's sort of indicative it as you well know that these.

These contracts are effectively pricing agreements and you don't have a committed volume that comes along with that but I think it does give a very very strong indication of what the pricing environment is going forward I think that if we have a favorable I assume.

Sort of macro environment I don't see any reason why we couldn't continue that trend, but those are a lot of factors that come into play there.

But.

I think the.

Everybody in the market sees the same issues that we do Rob cost and I think I'd say, it's a discipline place to operated business right out of needs to be frankly based on the underlying cost structure.

Yeah got it okay that makes sense just the last quick follow up if you think about the environment that you've moved through this year I know for the last couple of years, you've been working on some productivity initiatives within the organization.

Can you give me just an update on kind of the ability to drive more productivity and if there's any things that are front and center here in the near term basis or is it more gradual improvements and I know that the operating environments, obviously pretty choppy right now, but just just curious your thoughts on the ability to drive more productivity going forward. Thanks.

Yeah, I took the opportunity remains there for us to continue to make better decisions around everything from using our line all the scheduling our city operations. Those are all tools that or building into our sort of DNA. If you will if you'll look back to Q1 or Q2, I should say one of the one of the great benefits that we had.

In the quarter, that's tough to see the results that we had them because you saw the break decline, but we were able to manage down the cost structure in a way that we can maintain productivity historically has been a challenge for us to deal with the up and down there right and those tools allowed us to kind of operate at a very volatile environment, there and it allowed us to.

As we've grown out of that you see the margin improvement so it's not necessarily apparent in the sense that.

It's a big flow through on cost per se, but it's certainly around efficiency, we're able to support the customer and I think as we grow out of this I think that's what's going to help drive those incrementals.

And over time.

Excited about how those tools have helped us through this process this volatile period.

It will continue to allow us to execute into the future.

Okay makes sense, thanks for the time.

Thanks.

Thank you and the next question will come from already Rossa with Bank of America. Please go ahead.

Hey, good morning, guys and.

Congrats on the nice results here.

Maybe you can talk about specifically dig into a little bit more what you're seeing in terms of that cost inflation and see.

Can you extend it is possible to quantify that.

Terms of what your expectations are for.

For the for the next couple of quarters, and particularly on the wage pressure front Ah. We're hearing a lot of talk about just difficulty to find drivers and.

Dock workers, maybe you can talk a little bit about what you're seeing there.

Sure I mean, the cost inflation I mean, some of them. The numbers, we talk about the same numbers kind of every year I mean, we're seeing high single digit.

Low double digit healthcare inflation around health and farm.

For us depreciation will will step up again next year.

Part of that's higher spend but part of it.

And then a little bit more for everything.

On the wage side I mean, that's a constant pressure, that's that's not going away and it's not just drivers.

Find and mechanics, finding supervisors managers.

There's cost pressure there and.

We haven't announced anything on the wavefront, but but we're not going to fall behind in a market we've got to be competitive in.

Provided proper wage in a market.

The number that will attract good people so.

It's becoming increasingly difficult on driver's side, there's just besides the demographics, there's just other pressures there and.

We'll see inflation I mean, those are the main items.

That come to mind.

Got it Okay. That's helpful. And then maybe if you could talk about the terminal footprint as well obviously, we saw what you did there with Memphis and you mentioned something in the northeast that's that's scheduled for first quarter, but maybe.

Maybe if you can talk about what you're seeing in the marketplace in terms of where real estate prices are for.

For industrial space.

And if there are some opportunities maybe to preemptively get ahead of that or how you're thinking about maybe adding to the to the service center footprint for the for the next couple of quarters.

Yes.

The opportunity investments around real estate certainly on if you look at sort of edge markets on the coast clearly a lot of inflation there around underlying real estate costs domain for if you're looking at a sort of green space.

<unk> Greenfield opportunity in many cases, you're competing against industrial real estate investor maybe putting the.

A last smile warehouse or something like that in there. So that those are pretty challenging markets, yet and the zoning pressures that are out there.

So over time, though what we have found is that have been opportunities to.

Participate in sort of these are network expansion by pursuing opportunities maybe in a bit exited by some of our larger competitors in many cases other cases, where we haven't been able to find.

Those sort of legacy assets, we have.

Moved in and built North of land is a Prime example, but those are challenging right you've got to get the zoning along with that and.

Cycle there it takes quite a bit of time often to get those things bill, but I wouldn't say this that similarly, if you go back to 2019, we saw northeast competitor exit the market and we quickly jumped into that.

And took advantage of the assets that became available.

And I would say if you look at our balance sheet, we're in a position where although we're going to continue to invest where we need to to support our growth. We are also a position that.

Those assets become available either.

Through.

Industry change or a shakeout or something where where somebody that's available to take those assets and we have the bandwidth to handle that.

So we're actively.

Looking both that.

Existing assets as well as.

Looking at new space are full of the footprint. So there's there's a lot of opportunity off or is it just takes time to execute real estate transactions.

Is there a particular region that you think is.

It's still focused on the northeast or are there other regions that you're looking at in terms of where where you'd most where you see kind of growth as being most advantageous.

We're kind of at a stage when we started the northeast expansion we've talked about.

June 20 to 25 terminals properly fills in that geography, and we're right around 19, and so I think that if we were fighting a few more of that market, they're more tuck in fill in sort of facilities. If you look at our broader sort of landscape where to 169 terminals and if you look at some of the high quality operators that are larger than side.

They're.

They're sort of the over 200 anywhere up to 230 or 40 sort of terminals across the country. So for US. The next opportunities are more about doing things like in Atlanta, where we've added the second terminal. There are we will be adding a second terminal Chicago would be one where we could add a couple potentially Houston as a group.

Eight market for US we've got great recognition name recognition, we do an excellent job that great customer relationships potentially down the road. There is second terminal opportunity you go back to.

Dallas, Texas and other strong market for Si.

We've added over the last couple of year or less two years ago added Fort worth.

So gave us three terminals of that market. So for us it's as much about building density and perhaps in some of our legacy Geography's. If you will.

Move closer to the customer do a better job of servicing customer and then it gives us opportunity to charge for that so it's kind of a.

It's become more of a away from a region two maybe more of filling in space, where we have opportunity to grow.

That's great color thanks for the time.

Hey.

Don't know how I forgot to mention.

Auto insurance is another pressure point on the inflation side, I mean, along with the volatility see there I mean premiums have been going up anywhere from 20 to 30 or more percent. It seems like the last couple of years Ah renewals not till the end of February but I've actually got a renewal kickoff meeting in two weeks. So you really gotta get in front of that one.

But.

We're doing a lot of things there to try to protect us as best we can on those inflationary costs.

Okay. Thanks have a follow up.

Sure.

Thank you for the question. The next question will come from stepping Benjamin with Truth. Please go ahead.

Hey, Hey, Hey.

I wanted to catch up a little bit even in the same vein a minority expansion, maybe but you've seen it in terms of some of those newly opened terminals from the end of last Sherry anything in terms of improved productivity and profitability as to the third quarter.

Sure I mean.

Our run rate in the northeast exit in Q3 is now over $300 million closer to 340 million actually an annualized basis. If you think about frey going in and out of the market.

The growth rate there as you might expect has been pretty strong and.

Definitely in the newest markets, we opened last year, but also the the original openings the harrisburgh's and fill in the region they've been good performers too in terms of growth.

The last round of terminals, we open where a lot smaller so we have been able to get back to break even quicker than we did with the original four or five that we open back in 2017, so in the quarter fully allocated the northeast operated a little bit better than break even for us So that's encouraging but the brand.

<unk> to grow up there and be recognized in.

Will open and one more market of there in the in the first quarter and.

Will probably continue to put a couple dots on the map if the <unk>.

Market remains the environment remains good next year, and we're not bogged down in the pandemic.

I got the opportunity to put down a couple more doubts on that next year as well.

Got it well that's all I had thanks, so much thanks.

Thank you for the question. The next question will come from Jason type of talent. Please go ahead.

He has this morning everyone's well two quick questions and I apologize. If one has been asked my that's one dropped his call for a little bit.

<unk>, what you think about.

General rate increase in terms with both timing and full amount as we look forward.

Yeah, I mean, we.

We generally.

The biggest carrier in the industry. So we can't move that on our own and get customer acceptance. So we tend to follow after a couple of fall in place I know I know, there's there's one out there getting ready to go on January 1st with a G. R. I and ours was early February last year. So I, certainly think it will be within that annual kind of cadence.

The markets.

Shippers out there and I want them to care capacity good carriers and.

They have seen spikes in their truckloads spend in our conversations are more consistent annually, we try to partner with our customers and discuss environment costs and their needs and we tried to come at it annually. So I expect it will be similar cadence this year.

Okay fair enough.

Back to P T. When I when I look at it as a per cent of rows of August fairly high this quarter.

It takes time to change over the network to look more like goodwill right. So how should we think about P. T as a percent of revenue 2021.

It's.

Various Jason I mean, this year, we didn't walk into the air expecting to spend what we spend but conditions changed when it was on the driver side and the tightness and TL.

Intermodal availability for that kind of drive that for us I don't think structurally the thing we're doing this quarter and early next year is going to change our spend as a percent of revenue.

It's a lot of times, it's market driven I mean, if we'd add more drivers this quarter, probably would've probably would've been lower but if I could account more rail capacity.

That's a better cost per mile proposition Ivy is more so it's kind of market driven we've we've been in Ah.

Fairly tight band overtime.

Okay. So you think you'll stay within that band that you've had over time.

Jason I think I would add I mean, just at the simplest level where are driven so if there's an opportunity for us to utilize.

Petey to drive Ror down.

Improve DLR, we're going to do that so so one of the points. We made earlier is that that's an optimization decision for US right. So you've got to go through the the dynamic of as a cheaper use rail is it cheaper to use petey assets versus our own in a particular market or particular opportunity so to the extent that we can.

<unk> to make that kind of data driven.

Decision, we're in a position we can drive vor. So although it would be good to have potentially a PT target I guess really are prime charges is really about drive N O R.

Nah I understand that and what's rental though don't you have a limit on how much can use in terms of just even from a service perspective.

Sure Yes.

What sort of that limit that you would think.

There's only certain lines, where it's where it's really helpful. I mean, when you think of our kind of trans continental moves.

From the Iron Bell over the coast, whether it's the Pacific northwest or Southern California. I mean, those are those are the primary places where we can really use it to our advantage. So.

We're not we're not able to use it in any kind of.

Sure short hallways.

To help us to any extent.

Right, Okay, well listen gentlemen, I appreciate the time is always thanks for the car.

Thanks, guys.

Thank you. The next question will come from Tyler Brown with Raymond James. Please go ahead.

Good morning, guys.

Alright.

Hey, Doug great quarter on the margin side, but I was hoping that you could help me parse out the 180 basis point improvement. So I was going to be tough moment, asking any way, but is there any way that you can parse out maybe one how much did lapping the heightened costs from last year's terminals help too how much did the lack of the 400.

<unk> K match help and then three how much what were the PTO and I think you paid 250 dollar July payment.

Think how.

How much were those headwinds any help there.

A little help Tyler probably not as much as you want but I'll give you a little help I mean first of all we're really pleased to say that our 401k reinstatement was for the whole course, so that numbers in material.

Okay, there's only one quarter gap there.

The $250 you mentioned that was a second quarter event.

The extra PTO days I mean, there's the dollar impact there and we said I think that was about $10 million spread across the three quarters, but a bigger impact bears.

A lot of our employees user PTO and that's that's a great thing for them, but like some of our busier weeks in July and August.

We have people, taking the extra PTO and on vacation and getting a break from the craziness. So.

There was an additional little costs there.

I'm not sure either one, but we would know that.

Yes. That's helpful. Those are just kind of some of the idiosyncratic things at least that I that I see but maybe just switch gears, yeah, we view.

The quarter is kind of pretty much back to normal in terms of okay.

Puts and takes on expenses okay. Okay. That's helpful and then.

The 7% renewals and maybe you guys address this but specifically how much of that was from layering and ask the soils versus base tariff increases.

We are break that out I would just the way we look at it is that's what we're getting from the customer in total right. So if if we can get it on that soils, we're going to get it there if it's on the base, we're going to get it there at the end of it.

Got to get paid for all we're providing the customer.

Right right, Okay, and my last one so Fritz.

Memphis Ah key east-west break.

It is.

Do you have any idea how much freight flows through there I mean 200 doors seems like a really big facility.

Kind of pushing the limits.

Let's see here.

As well.

We might be able to get back to you with that.

Well my.

Yep My Big question well My Big question is what's the door pressure they are holding up some of the connections on the east West and does that give you an opportunity to Lincoln out the hall.

Listen if facilitate so all of that it was not a constraint for US. This is this was more about hey, this is an opportunity we got the real estate here, let's get in front of this make sure. We've got ample power as we continue to push grows here. So I don't I wouldn't say that it was a an immediate and strength.

This one is maybe look more for over the horizon a barrier.

Okay that was an owned Greenfield site.

Yes, so we owned and then we're flipping.

Bought a parcel of built from there.

Okay. Good deal thanks, guys.

Thank you there are no further questions at this time I will turn the conference back over to our speakers for clothing.

Oh, Thank you everyone for calling in we're excited about our third quarter results.

I think that it really speaks to what the longer term opportunity is for siad will continue to focus on the execution of look forward to the continued growing the business and driving value for our shareholders.

Thank you much.

Thank you ladies and gentlemen. This concludes today's events you may now disconnect your lines and enjoy the rest of your day.