Q2 2021 Saia Inc Earnings Call

Good day and welcome to the Saia incorporated hosted second quarter 2021 earnings call. Today's conference is being recorded at the time I would like to turn the conference over to Doug Col. Please go ahead Sir.

Thank you.

Good morning, everyone and welcome to sigh of second quarter 2021 conference call.

With me for today's call of the size of President and Chief Executive Officer Fritzls growth.

Before we begin you should know the 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.

And all other statements and 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.

And for you to our press release, and our SEC filings for more information on the exact risk factors that could cause actual results to differ now I'll turn the call over to fruits from some opening comments.

Good morning, and thank you for joining us to discuss sigh of second quarter. Our results represented another quarter of record financial performance here at Saia. Following record quarterly results of the fourth quarter of 2020 and also in the first quarter of this year.

Second quarter revenues, a record 571 billion and surpassing last.

Second quarter revenue by 37% operating income grew by 132% to a record of 82.9 million and a record 85, 5 operating ratio and the quarter marked the fourth consecutive quarter of war or was sub 90. This the 8.

And 85, 5 or the single best quarter and.

Our company's long history.

The second quarter shipments per workday increased 15, 3% and surpassed $2 million and the quarter. Another record tonnage per work day increased 23, 1%, reflecting work, reflecting weight per shipment that was 6.7% higher on a year over year basis.

The strength of our shipment count.

And that was felt across all geographies and was achieved despite the impact of supply chain disruptions are creating for freight companies.

And we're actively recruiting and hiring across our network as we worked to take care of our customers freight needs and the face of a very tight labor market and lingering COVID-19 employee surge in the face of.

Tight labor market and the lingering COVID-19 employee challenges.

With all of the record financial record of metrics posted and this quarter I'm also pleased with the quality of service, we're able to deliver for our customers during the quarter, while experiencing record volume and labor shortages of labor challenges. Our cargo claims ratio was a record 50.

And 5.4% and we had of 97, 7% on time service standard. This performance is a testament to the talent and efforts of the entire team are customers increasingly recognize that we're providing leading quality and service and see we're focusing on reinvesting the maintained and further improve their experience and many markets.

Point, offering hiring and referral bonuses to build our team and a very competitive labor market to support ongoing hiring initiatives and the match the cost inflation. We're experiencing we continue to ask our customers. The share of these costs with us our pricing challenges might or must include consideration of all of these cost challenges pricing actions.

But are not limited to the base rate increases and in many cases and adjustment to market of various accessorial charges enables us to recoup our substantial investments and service we continue to optimize our mix of business with an emphasis on customers and support and recognize our value proposition. The combination of these efforts is driving the price of it.

That's where our pricing performance that we're achieving and overall yield excluding fuel surcharge improved by 5.7% revenue per shipment excluding fuel surcharge increased 12, 8% benefiting not only from pricing gains, but also from the 4% increase and length of haul and 6.7% increase and weight per shipment.

Contractual renewals averaged 10, 6% and the quarter ultimately the improvement and mix and pricing fuels, our revenue per shipment increase and is key to improving our operating margins and drove our record second quarter financial performance I will now turn the call over to Doug for further review of the record results.

Thanks.

And.

And it's mentioned second quarter revenue was $571.3 million up of $153.2 million or 36, 6% from last year.

Revenue, excluding fuel surcharge revenue grew 39% with the combination of factors, including a 23.23, 1% increase and <unk>.

What day of 5.7% increase and yield excluding fuel surcharge and a 4% increase and length of haul.

Fuel surcharge revenue increased by $37.8 million or 85, 2% and was 14, 4% of total revenue compared to 10, 6% of year ago.

Moving now to key expense.

<unk> and the quarter.

Salaries wages and benefits increased 19, 819, 8% compared to last year, reflecting our January 1 wage increase which average about 3.5% along with higher overtime compensation and additional recruitment costs.

<unk> based compensation is up meaningfully as well from the amount earned and the.

Slide 19 impacted second quarter of year ago.

Purchased transportation costs increased 136, 6% compared to last year and were 10, 9% of total revenue compared to 6.3% and the second quarter last year.

Truck and rail PT miles combined were 18, 4% of our total line haul miles in the quarter compared.

The COVID-19, 2% and the second quarter of 2020.

Salaries wages and benefits costs combined with the purchase transportation costs were 58% of revenue compared to 60% and the second quarter of 2020, and 59, 8% and the first quarter this year.

Fuel expense increased by 72% and the quarter while company.

And the miles increased 9.7% year over year increase.

The increase and fuel expense was the result of National average diesel prices. The continued to rise after the pandemic related drop in the prior year.

The average prices rising approximately 32% and the second quarter compared to last year.

As mentioned fuel surcharge revenue increased by 85%.

The ninth to offset the expense increase around fuel.

Claims and insurance expense decreased by 5.3% and the quarter as accident related expenses were actually down year over year offset somewhat by year over year increases and insurance premiums.

Depreciation expense of $34.7 million and the quarter was 3% higher year over year.

And held down sequentially from the first quarter as tractor and trailer deliveries have been later than our normal seasonal and delivery pattern.

Total operating expenses increased by 27, 7% and the quarter and with the year over year revenue increase of 36, 6% of our operating ratio improved 600 basis points from a year ago to 85.5.

But Dan and was 440 basis points improved from the first quarter of law.

Our tax rate for the second quarter was 24, 3% compared to 18, 3% last year and our diluted earnings per share were $2.34 compared to $1.7 last year.

We anticipate and effective tax.

Rate of approximately 24% for the remainder of the year.

The first 6 months and 2021, we made capital investments totaling a $100.2 million capital expenditures on equipment and the first 6 months were below our forecast and some of our suppliers of seeing delays and component shipments and production has been behind schedule and.

We expect.

Capital expenditures the step over the next couple of months as we take delivery of increasing numbers of tractors and trailers and we still expect full year 2020 capital expenditure will be approximately $275 million.

Our balance sheet remains strong with $52.9 million and cash on hand, and up to 300 million of of availability.

We will of revolving credit facility and additional outside borrowing sources.

Ill now turn the call back over to Fritz for some closing comments before questions.

We're very pleased with the performance here at <unk> through the first half of the year and of a very busy second half of ahead of US we will continue to focus on working with our customers.

Setting the our expect setting their expectation meeting their expectation and focusing on our operational execution and the second half and providing the quality and services our customers have come to expect maintaining improving these levels will require continued investment and recruiting and retention most significantly requires us to continuous share of these costs.

And <unk> customers, while equipment deliveries have been slower than we would have hoped or plan. We continue to take delivery of both and we'll continue to do so through the end of the year. Although the late deliveries of had operational and cost challenges most significantly of been able to maintain service for our customers. The equipment will provide important flexibility as we continue our growth plans are.

Our average tractor age is 4 years and the fleet is equipped with the latest clean diesel technology, we continue to seek opportunities to invest and next generation and clean and efficient technology and the second quarter. We began operating 2 all electric Volvo tractors and more recently put out of service 5 Freightliner CMG tractors getting these alternative.

The energy vehicles into our fleet is important as we build our experience and knowledge base and the viability of exciting new technologies and put ourselves and are positioned to evaluate broader adoption over time.

As we've navigated the challenges of the last 12 to 18 months, where sustained sustaining of very high level of execution and demand.

Demonstrable improvements across all areas of the company since the launch of the northeast initiatives in 2017, we've added 25 facilities and relocated or expanded several others companywide as we sought to establish size of leading national <unk> carrier. So far this year, we've opened 2 terminals 1 in Maryland and another in Delaware.

Delaware, We plan to open up to 5 new ones through the remainder of the year throughout this expansion, we have been able to replicate size commitment to service and quality and new markets, while enhancing it and others. Each expansion introduces some risk out of our time, we've built a playbook that has allowed us to manage through these challenges while meeting and exceeding customer.

Our expectations of longer term planning is focused on continuing to build our national network and to reach new customers and enhance service for our current customers looking into 2020.2 and beyond we have identified key metropolitan areas, where we can add service of our customers as well as expand our addressable market that supports our value.

Customers and we're focused on accelerating our pace of expansion of 10 to 15 locations of the year, we feel quite strongly about the capabilities of our teams we have proven and perhaps the most challenging times and <unk> can provide superior service and replicated.

Accelerating our pace of extent expansion is not without risk, but we're <unk>.

Added by our experience to date, we've positioned our business for this opportunity both financially and operationally and plan to accelerate the development with that said, we're now ready to open the lines for questions operator.

Thank you. Thank you I'd like to ask a question. Please signal by pressing star 1 on your telephone keypad and you're using a speaker phone please make sure.

Opposition and function is turned off to allow your signal to reach of our equipment.

And again press Star 1 to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

The first question comes from Jack Atkins with Stephens.

Great Good morning, and congratulations on a great quarter guys.

Sure. Thank you thanks Jack.

I guess if.

If I could maybe start Fritz I'd love to I'd love to get your take on some of the revenue management initiatives that you guys are are undertaking here obviously the.

And the LTM of market is very robust and Phoenix and accelerated through the second quarter.

And your 2 year sort of tonnage growth stack, maybe decelerated as the quarter went on and I'm guessing. That's because you guys were taking very targeted actions to.

To improve yield with certain types of customers could you talk about that for a moment.

And if you don't mind.

Absolutely Jack Thank you.

I think the way we think about.

And a couple of different ways, we've focused very long and hard over the years around our operational execution and providing that great service and understanding our cost structure and 1 of the things that was going on throughout that as our sales force stays very very close to the customer understands the.

And the customer what they need what they are.

And when you're in a position like we have been where we've been executing very well and providing great service and quality and some very challenging times.

We're in a position to the RMR salesforce to approach the customer and and and really look at it we're providing a range of service for the.

And the customer.

<unk> be limited access deliveries or maybe it's a.

Hazmat delivery all of these things these things all add cost we focus on what that is and if we do a good job with that we feel very strongly that we need to be paid.

Paid for its got to be reimbursed and now the responsibility we have.

As the execute from the customer and I think and this what <unk> seen over the last year as we've kind of worked through very difficult time, we have.

Executed for the customer they have seen that and.

Our sales forces now and a position where they can really focus on getting net pricing.

We look at it on a daily basis.

We are looking at what the mix of freight looks like.

And what the available sort of what the optimal mix of freight is through the network be it region, maybe its a longer length of haul whatever it might be.

But importantly, because we've been able to execute our sales forces are to make the approach to the.

Customer and explain these of the cost and this business, we're going to do a great job for you understanding net value proposition, there and a position of the customer can accept debt.

Higher levels of pricing because they're good at getting something for it.

And so that continuous focus that daily focus is what's driving that and.

Yes.

We think about this on.

It's not an hour of and it goes by the day that how we can improve on that so it's a constant continuous work what you saw in the quarter was kind of the fruits of the labor over the last year intensified as we worked through.

<unk> supply chain environment.

Okay. Okay.

That's great great to hear and I guess, Doug a question for you.

On the operating ratio as you sort of look look forward.

How are you thinking about that the <unk> progression.

I would imagine youre going to be taking a lot more equipment and the second half of the year just because of.

Of the OEM delays, so maybe there is higher depreciation and <unk> the headwind some inflationary cost pressures.

Could you just maybe walk through how we should be thinking about <unk> operating ratio progression relative to normal seasonality, which seems like normally it's about 100 basis points of degradation or so.

Sure.

All of things there you are right I mean, thats our number 2 when we go back and.

And look at the sequential deterioration and usual influenced by July 1 wage increase which had been our history for a number of years.

There will be of wage increase and the period, it's not July 1 though it's.

Add into this quarter of little bit so.

Given the strength and the and the business on the.

The demand levels are still there I mean, our shipments per day and July historically stepped down a little bit of 1.5% to 3% and historically.

Not seeing that seasonality or shipment trends here in July.

Pushed out and look very similar to the run rates on a per day basis that we exited June.

So good volumes, yes, the depreciation cost we expect the step up sequentially, probably mid single digit percentage over the over the remainder of the year each quarter.

But thinking about all of that and the progress we're making.

<unk> on the pricing and revenue per bill side.

The productivity has been good with ops team has done a great job keeping and the network and good shape throughout the last few months managing through the labor tightness and all so our expectation is to try to hold it flat.

2 of the Q3.

And on them.

We don't see the <unk>.

Wage things and normal annual move its just pushed out a little bit and.

And.

Our pricing action is taking hold and.

And on your earlier question.

I appreciate the use of the the comparisons last year was kind of of whack a year and a compare again.

And I understand I understand the 2 year stack comparison, but the business Hasnt felt like that as we move through Q2, I know what the you know the tonnage number and shipment numbers of what they look like and print, but the demand out there is good.

We really haven't seen normal month to month sequential.

Seasonality like like we try to think about when we forecast and when we give guidance to you all of that's it's been a little different because of all of the pricing action.

March was really strong versus the historical step up from February but that was probably due to weather and then April was was not as big of a.

The step up because March was so strong and then as we moved into May and lot of the pricing action with some of our transactional customers early in may so the.

The the May number wasn't as strong the step up from April wasn't as strong as it was historically so it's hard just to lean on those.

And I'm sure, you're looking at and and really see what's going on the demand out there still very strong.

All of that's great to hear thanks, so much for the time and the color guys. Thanks.

Thanks, Ed.

We'll take our next question from Todd Fowler with Keybanc capital markets.

Hey, great Thanks, and good morning, Doug.

Just for clarification to what you answered with Jack Youre, saying that you think that the third quarter or can be flat sequentially with the second quarter or.

That's our that's our goal.

I wasn't sure if you are saying hold it constant with the 5 year with the through the second quarter. So thank you for that.

And Chris on your comments on accelerating.

The growth going forward 10 to 15 locations annually based on your current base and I know that not all service centers are created equal but to me that's about mid single digit growth from our from our service centre of terminal accounts is there an algorithm to think about how you would think about growing tonnage in the context of the ads and then with <unk>.

That sort of growth.

Do you think that the business is at the <unk>.

Size, where you can absorb that sort of expansion and then still see of normal cadence of or improvement.

Assuming that the environment of course.

Outside of the cyclic cyclical factors and the underlying environment.

Yes, thanks for that question Todd.

And we start with sort.

Sort of our philosophy around this is really about growing profitability and the business right. So over time.

As we think about those incremental opportunities.

I think we look back at our playbook and we say we've kind of learned how to do the organic expansion, we feel like we can build.

That into the operating model and the long game here is to provide incremental service and reach for our customers. So we can we think that's a natural progression of developing growth of around this but we're going to be at the same time. This is an expensive business to operate and so we will focus on developing continues.

And to develop that or I don't.

As we think about the longer term opportunity around that this is part of it.

We feel then that geography, if we add incremental turtle terminals.

<unk> coverage and a city like Atlanta, Theres going to be operating efficiencies that come out of that that should help fund some of that growth.

At the same time, we've shown that we can replicate.

That service the seamless to the customer so I don't think that.

Would impede our ore development over time and our growth as we continue to look to grow our bottom line I don't know what thats going to all of that's going to mean for shipment.

Growth or tonnage growth over time, but I think we will continue to track and.

Youll see that grow with the economy growth or expansion, but really for us. It's a focus on making sure we get a return for that investment.

Yes, that's helpful.

Great great color.

Samsung and kind of the success that you had and growing into the northeast. So just a follow up you know and.

The the near term then you know with the labor availability of the labor situation how.

Does that play out for the back half of the year is that a situation where it's at.

It will constrain some of some short term growth and.

And Doug I understand your comments about debt shipment levels remained strong, but how is the labor market playing into your near term ability to grow into the back half. Thanks.

I think we're in a position we are of plan, we can execute on on top of that to achieve our sort of objectives for the second half of the year, but I think we're also at the same time understand.

And this is a challenging market right I think you all of the labor sort of of.

Reporting that you see you see the.

And particularly around sort of industrial jobs.

<unk> CDL drops or even dockworker the jobs I mean, it's incumbent upon us.

And provide not only competitive pay and benefits, but most.

It's critically provide an environment, where somebody feels like they can be successful and growth the company and that.

This business is we've got roughly 11000 employees and this business runs and those 11000 employees without that.

The channel we can have all of the great assets terminals trucks, all of that stuff technology, but it's about the people.

When you hear us talk about that it's just emphasizing that sort of recruiting and retention to help build the business to continue the the model and we've executed on which is about replicating that service and it's really that's about replicating and building. The team. So we think we can do it and the second half of the year, we've got the game of the playbook for it but.

And I think I'll say, that's not a challenge.

Yeah understood. Okay. Thanks for the time. This morning, we will talk to you soon.

We will take our next question from Amit Mehrotra with Deutsche Bank.

Thanks, operator, good morning, everybody.

I wanted to ask about the operating ratio.

Obviously, youre now and and and a new neighborhood so to speak and just wondering if you're kind of of here to stay and and is this the mid 80 <unk>. How we should think about the the annual run rate as we look out to 2020.2.

So I think and just you just kind of pivoted a little bit in terms of accelerating growth and 2020.

2 from of real estate footprint perspective, typically that's led to more of a transition period as you kind of grow into a higher fixed cost base. So I'm just trying to understand you know relative to the hundreds of 200 basis points of annual improvement you've kind of talked about the higher end of that and AR and AR and the and a good market, which I think you should have in 2000.

To sort of can we see that type of growth and or improvement of our and 2022 of burst of what you do and 21 are you maybe pulling forward. Some of this given the environment today and the investments you're making next year.

Thanks for the question of it the way we think about this as you know we hit our growth of the nature of.

Of our growth is a little bit different now the terminal growth and maybe it was well you heard us talk about the northeast expansion. So think about the northeast expansion for us that was Inc.

The incremental new territory. So we're building out and infrastructure ahead of it.

And that was those were important events and the investments and they certainly have.

And 20 dividends going forward and now the next wave for us as we think about filling and the geography.

And it's adding places like second and third terminal in Atlanta, and what that does and that growth model you youre leveraging.

The the infrastructure you have.

And so yes, those aren't as efficient as you'd like to be when you open them.

But at the same time if were better April the service this market from 2 northern and terminals.

There is a cost savings there too so I think with that in mind, we continue to March on on the or improvement over time.

Not stopping at $85.5 it is we see Theres a map.

Out there for us.

The map starts with we continue to execute and replicate this quality and service game across incremental terminals that arms of our sales force to continue to push.

Our product our value proposition and ultimately there is an opportunity for us to get paid for that and continue to.

To accelerate that growth so.

I am excited about debt I think we are well positioned for that.

Not without challenges, though right we understand the growth is.

And the real estate is not any easier than it has been that'll be a challenge, but we have also.

Seeing that we can execute on it when we find it so we feel.

And about it we don't think theres of back off on sort of the or trend over time.

That's helpful and then just as a follow up.

You guys have made a lot of progress on your revenue per Bill I know that's been a huge focus for you guys in terms of narrowing the gap versus peers, and it's certainly showing up and the O R and you've made tremendous.

This progress to date and I'm just trying to understand you know if there's further improvement from where we are today above and beyond you know market and cycle dynamics. When you look at your business. When you look at how you guys understand the cost structure of the business on the shipment by shipment level is there more idiosyncratic opportunity sigh of specific opportunity.

Pretty good net revenue per bill up or have you kind of chopped is much of what as you can and now you're all about filling and the network and gaining density. If you can just talk about that as well.

No.

And I think your benchmark sire I'd encourage you to do 2 things if you benchmark sigh of service versus sort of the rest of the national carriers.

And you see we do we do really well and our claims ratios, but better than just about everybody.

That's a great differentiator.

Providing incremental service to a customer and new markets and enhanced market penetration, that's incremental value to the customer and.

And to get looked at the broader picture that our sales force has got more at bats, now more customers. They can touch and we're going to get paid for that the replicating that great quality and service.

I don't think that there is a slowdown all of the revenue per bill side I think in fact, maybe it steps up over time, but most importantly.

And the more we get to a national basis like that.

And there's really no reason for side it'd be a discount.

And I would add and I.

Adam It though you know that.

With all of our work around pricing and the improvement revenue per Bill I mean for all of that service the Brent spoke of we.

We still see ourselves at a discount to the folks we think of our closest competitor. So yes, we've improved our pricing. So you know theres kind of a cost plus component when you think about pricing, but there's also where's the market at you know and if.

Can you provide the service level and what's the market paying for that and and that's the opportunity.

Okay. Thank you very much everybody appreciate it.

Thanks, Amit.

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

Thank you and good morning.

Thank you for at the back in April you talked about 10% to 15% of spare capacity and the network, but pinch points and certain terminals.

And I think we're all well aware of the labor issues and even equipment delays, but obviously most important is your network.

And how's the spare capacity sit today and what's your comfort level and the ability to take on new business and the second half just based on the doors you have today and your growth plan for the next 6 months.

Yeah, I think we have.

And to do that but our first and sort of primary objective is finding the customers that really value what we're doing for them. So we're.

We can handle the incremental opportunities where they become available and as you know there are different categories of sort of capacity and the <unk> can be drivers be.

Doors.

Those are all things that could influence this and I would tell you the different terminals just like back in April where we're probably not have much in the way of spare capacity and we're trying to address those but 1 of the ways. You first address those of you say, let's make sure we understand what the mix of business.

It's going through these assets and the service levels and we're providing we focus on that.

So this is at this stage, we have spare capacity.

And the network, but we have more.

More capacity to change freight where.

We think there is a better opportunity from rider.

Debt service that we can be reimbursed for and.

And I think right now for us that is ultimately the biggest value driver.

I think that positions us for future growth I think as we see opportunities certainly we can take on additional business.

Okay that makes sense and then second on the pricing environment.

And pricing of justified service. It was a phrase you used a couple of times.

In past calls and and you said intensify accessorial charges I'm just wondering if we look at the you know real strong result, and you put up and <unk> how much of that is kind of pure core sticky pricing versus our accessorial charges that may or may.

I have been flow a little bit is the tightness and the entire supply chain uses a little bit over time.

From our view accessorial charges or cost of doing business right. So those are so if a customer needs that incremental service that we need to get.

Paid for their right and that needs to be covered.

Not costs need to be cover that as part of business, we think that's actually quite sticky.

We think as we look forward and again this is about the long game for US we look at that and we say that's becomes part of the equation around doing business for side of this is when it's going to and we're going to get paid at market.

And that that's kind of what needs to happen for us to be.

I'm going to continue that level of service so we.

We don't find that we our view of that is it's not transactional is not good.

And then take our come and go on Accessorial charges and that's part of the program.

That's great to hear alright, thanks, Brett.

Our next question comes from Tom <unk> of UBS.

Hi, yes, good morning so.

I wanted to ask the little more on the kind of ramping up the.

Of terminal expansion and it seems like a pretty big deal too.

And you take that step.

Positive thing certainly.

Part of why I know terminal count is not the same as door count or not the same as terminal capacity and network capacity expansion. So is it fair to kind of extrapolate this and say you know you're stepping up the overall pace of network capacity expansion or is it.

You know focusing a little more on new facilities versus expanding existing facilities and all of its kind of a perhaps a nuanced question, but how do you think about that.

And then I guess do you will you know should we model of a higher pace of tonnage growth you know given the increased focus on terminal expansion.

And it seems natural but just you know is the is.

Is that the right way to look at it.

Yeah. So.

It's actually a little bit of both right, so and I say, both it and our.

Legacy network. If you will there are certainly opportunities for us to expand.

Facilities that we've even some of the ones that we have recently purchased are built.

And that's kind of and ongoing nature of the business, that's kind of part of what we have to do.

And the 10 to 15 and incremental <unk>.

Facilities I think about this and 2 way so I think about it as sort of new addressable market for us and the sense of.

Providing enhanced reaching new.

New customers and markets that we don't service, particularly well now.

So think about it is yes, that's providing incremental service to a customer maybe we're doing business with them now maybe we're not quite as flexible on delivery times as wed like to be or is that.

Windows is we'd like to be.

Those things.

So it's a bit service, it's a big addressable market. So as we think about this we tend to not.

Consider specifically sort of tonnage targets internally and we think about it getting getting fairly or finding the right addressable market to get.

And the appropriate sort of.

The revenue that.

We expect out of that kind of expansion. So I think we grow probably at a rate faster than.

Sort of what your macro assumption is.

And I think we do that because we're providing incremental sort of service and address.

Focusing on new addressable markets.

So just to be clear.

So is your network capacity expansion. If you think about if you were expanding.

5% of your 10% of year before or whatever the number was is that number of higher number or is it more of like hey, we're just doing more on new facilities and the last non existing.

And we're doing the same on existing.

<unk> in terms of adding capacity as we go to the facilities. So places like India. We added but eventually we will add capacity there and same with the.

Harrisburg, So youre going to naturally grow those markets and then you had the 10% to 15 sort of incremental opportunities.

As part of add debt on top of the mix of terminals that we have.

Some of them will be big some of them will be small, but most importantly the.

Provide us the opportunity the touch.

New markets provide great service.

Okay.

As the faster pace of expansion and presumably cost per passenger signage.

Tonnage grad with that okay. Yeah.

Thanks for your.

The net on the questions I appreciate it.

Thanks, Tom.

Our next question comes from Scott Group with Wolfe Research.

Hey, Thanks, Good morning, guys just sticking on the the expansion of the network is this 10% to 15 a year going.

Or is this sort of a 1 year of 10 to 15 bump and then and any thoughts Doug what this means for Capex next year, and then would you think about doing any of this through acquisition and instead of organically.

Thanks Scott.

Listen.

Think this is for the next few years kind.

Kind of the sort of rate of growth provided.

Provided the environment is supportive of the idea and.

The thing that we find particularly compelling is that if we look back of the 25 terminals that we've opened since starting in the northeast.

That's a lot of experience that we've developed.

Around opening optimizing everything from the customer experience all.

All the way to the sort of the.

How we run the operations. So we like the idea of organic expansion certainly there's always the opportunity maybe for a tuck in acquisition, but.

And that organic piece.

<unk> is a is a good 1 for us.

It's something we replicate on and we all we thrive on execution. So it's a.

We think thats very workable and I think we do that next year year. After maybe a third year somewhere and there I don't know, but throughout this we're going to be assessing whether or not whats the optimal maybe a year.

Slows down to the low end of that range and we focus more on building capacity and legacy that could happen, but I think that that sort of pace and cadence we start to reach that addressable.

Market, where our stem times are much closer to the customer that puts you on a very very equal footing and that only drives the sort.

Sure I think thesis at the at the.

At the beginning of this which is really about providing great quality and service you do that youre in the place you can do that for the customer you should get returns.

So that's kind of how we focus on and over the next couple of years as I mentioned earlier I think it stays within our kind of guidance over time, what are kind of objectives.

And that's part of the reason why we like the.

And the idea of the organic expansion.

So to get capital and yet.

Hey, Scott on the.

Capex.

Definitely hope that the next couple of years, you do see a step up and we've kind of been.

And on point and our lifecycle.

And we're thinking about a 13% 14% of revenue kind of pace, but hopefully that steps up to 17 or 18% over the next couple of years, we'd like to own a lot of these terminals that we add especially and some of the key markets.

And for its mentioned, what we have going on and Atlanta.

1 when you get into some of these.

Saar and a hyper competitive real estate market and so I'd say at least for a couple of years I hope it steps up to 17 and 18% of the revenue if we can find stuff to buy versus lease.

But we'd like to we will get them opened 1 way or another and then after that I think it would step down to something more in the 14% range beyond that.

Very helpful. And then we got good color from 1 of the other <unk> yesterday about percentage of there.

Shipments right now that are call. It TL spot quoted or however, you think about it.

Any any color you can give us there.

Well sure I mean.

There's.

A couple of other income and Theres spot quotes and.

And that's less than 5% of our shipments on any given day.

There's heavier weighted shipments to as kind of another components some of those move of spot quotes but.

Heavier weighted shipments are.

And.

115% of our daily shipments and and Thats down in July on a run rate, it's probably down 15% 20%.

And what we're running in June so.

Some of those of our TL spillover and.

They're down a little bit but.

All in all of that's about the magnitude.

Yeah.

And maybe I didn't ask I mean, basically they were trying to say there they're trying to deemphasize. This truckload spillover to prevent any risk for next year, if the truckload market loosens.

And our patent you'd get a little bit more truckload capacity or are you guys. It sounds like maybe your comment and July that you guys are doing the same thing.

Some of.

Of our pricing action, obviously is targeted at the way the.

And the shipments of that just arent typical L T L or they're not our core customers, who were trying to serve and a tight environment.

And we certainly know what a good customer is and if they have a need and they have some heavier weight of freight that they need help with we will certainly try.

2 of the nominate a minor and our system, but in terms of.

Your description of TL spillover freight I think is in line with.

How we view it.

And we're not we're not targeting that as the growth area for shipment growth.

Okay, great. Thank you guys appreciate.

Okay.

Our next question comes from Jason Seidl with Cowen.

Thank you operator, Fritz and Doug Hope you guys of well this morning.

I wanted to talk a little bit about your renewal rates. Obviously, you were talking about some of them were very targeted at $10.6 that's a very healthy.

A healthy number.

Post and the quarter of the most I remember in recent times at least.

And what percent of the business did that encompass and do you think that they'll stay at those elevated levels for the remainder of the year.

Yeah.

Hum.

I mean, and certainly seem to accelerate not just for us, but I mean, you know Q1.

And on acceleration across the public <unk> on what they reported as contractual renewals and it looks like it's.

The increased a little bit here again in Q2.

Most of our national account customers.

They renew on an annual basis with us but.

Not like its a specific bid window.

So every year. So there is a normal cadence to it its kind of ratably through the year. So if the.

National account business is roughly say half of our business.

<unk>.

<unk> got.

That kind of pro rate pro rata spread over the year so to speak.

And your assumption of the number of contracts you're looking at in a given quarter.

Got you.

That makes sense.

And wanted to jump out of follow up.

And this is kind of relates to something somebody asked before but you know really strong cash balance of and you were talking about stepping capex up.

Okay and out years, 2017, and 18% of revenue.

Given your current margins and your trajectory Thats, probably still means even at those levels are generating some cash flow.

What are your thoughts of of utilizing the cash sort of beyond your free cash flow and beyond 2021 here.

And the.

And then you know we're in.

Well investing at a pretty healthy clip not only across the our discussion around terminals, but equipment and technology and.

<unk>.

Tools and investments on the dock things like that that we're always looking at new opportunities to put some capital to work, where we will see again and.

<unk> safety of efficiency, but.

And that I think.

And a cyclical business I think is a good position to be and to be strongly.

Free cash flow positive. So I don't think we're at a point, where we're having a lot of discussion around the dividend.

Potentially.

Prototypes buyback.

Makes sense, depending on what the cycle looks like over the next couple of years, we do know and and.

And you've followed the industry long enough to know Jason that there will be another round of cyclicality, I mean, we're and industrial base business and.

We like to be conservatively positioned to deal with any cyclicality.

And hopefully take take advantage of some opportunities that may arise in AR and AR.

And the downturn, depending on how hard it is so no. Other plans really that then the invest back in the business at the moment.

Okay Fair enough I appreciate the time as always and nice quarter.

Thanks, Jason.

The next question comes from Jordan, and Alger with Goldman Sachs.

Yeah, Hi, just a question on purchase transport and sort of your thoughts around that specifically.

And how hard is it to ensure that you have that third party capacity of these days is it and then secondly, I'm just curious do you typically the pay like the spot rate or do you have more.

And ships contractual deals with these people thanks.

Sure.

Yes in terms of the relationships I mean, we've tried to move as much of it as we can with kind of core partner carriers, we were in the spot market, a little bit more and Q2 than.

And then we typically are.

And that and that explains some of the cost there but.

Again, we use the real effectively we wouldn't have been able to serve our customers.

And at a level that we like to do if we wouldn't have been able to use PT.

It's pretty tight out there I mean, we'd of use used more rail if we could have got it so everybody is.

The relationship of the different modes of everybody's kind of and the same boat in terms of the tightness with demand and with the labor. So.

Yeah.

We hope to get out of the spot market.

And we're typically like I said, we're typically 90, 95% with partner carriers.

And I would add.

Quite importantly around this is the.

And we fully expect to maintain and service standard when we use PT so debt.

And that is a core part of our value proposition. So if it is a PT partner it needs to that performance needs to be consistent with everything else that we're doing from the customer.

And because thats part of the VAT.

Value proposition.

And that's critical so yes, it costs more but it also.

And we don't compromise on the standard there.

Thank you.

Thanks Jordan.

We'll take our next question from.

Stephanie Miller with true list.

Hi, Good morning, Hi, Fred Hi, Doug.

Good morning.

Hi, I'm wondering if you could provide and update on what youre seeing in terms of some of the profit the profitability and your newest terminals and specifically up in the northeast.

Given.

And volume trends, we're seeing and I would see the the progress of building up the density just kind of where those terminals are trending now more so versus the corporate average or how we should think about that thank you.

Yeah. Thanks, Kevin.

You know, we're kind of at the point, we've been talking about it for the last few.

The start of the.

<unk> to US is just 1 of our regions now and really.

We're going to start kind of breaking out kind of specific northeast details, but I will tell you I mean, it's the.

The northeast region of 21, I think terminals, we've opened up there since mid 2017.

Are nicely profitable now.

And we.

Don't breakout, which regions are of the company average or not I mean, if we're trying to get to 85% and then 80%.

And like we said, they all need to get better but.

It has ramped up nicely we've been pleased with the share gains we have made there and a short time.

Our customers really trusted us with their business going into.

And to a new region and that's how we've grown the business and now it's nice and <unk> and our sales grew because of the service has been so good there now and are positioned to start introducing.

Themselves inside of new customers in that region and.

And then we'll have the benefit of both of our customers that have used us for a long long time, and then we'll find some new customers of their so.

We're pleased with the margin progression up there.

Great really helpful. Thank you.

We will take our next question from Tyler Brown with Raymond James.

Hey, good morning, guys.

Good morning, Tyler.

So I wanted to come back to freight characteristics, but I think you guys are maybe the longest and heaviest you've ever been so I'm curious how much of that is a function of the market or has that been of driven focus by your sales effort and do you think that this length of haul and this weight per shipment can kind of hang around this neighborhood.

As we as we become more of a national footprint.

Tyler I think that those statistics continue to shore up as we continue to deploy our data analytics around finding the optimal freight that we can best service.

For our customers I think we can support the statistics over time.

This is for US it's as you well know this is a continuous sort of optimization sort of approach and the data analytics approach. So.

That may ebb and flow over time, but ultimately the focus is on.

What freight operates best in the <unk> and the network and those characteristics could.

It could be different by.

Parts of the country or lanes and such but over time, we think we firmed those up as we continue to build that sort of diverse national network.

Right and so what's important is this revenue per bill ex fuel is kind of more of a jumping off point.

It should continue to improve.

Yes, absolutely.

The key think tellers and this is an expensive business and we're doing a good job. So we focus.

Very closely on what market pricing is and that's where we need to be more so than maybe cost plus.

And that market, if we're exceeding and the market and providing our sales.

With that those sort of tools and that sort of <unk>.

Service, we ought to be at market prices.

Okay, and then on the 10 to 15 service centers.

And frankly, how much line of sight that you have here I mean 10 to 15 is the very big number frankly for anyone.

Yes, so we've got a pretty good pipe.

The team and that we work on the debt, we know that there's going to be some wins and losses and that pipeline and I can assure you of the type of pipeline is in excess of that and really the the end game here is it's not really about the 10 or 15 per se next year, but it's more about building that pipeline that gets you. The the next couple of years right to fill.

Pipe water network.

So thats the focus they sometimes they turn and.

You've heard us talk about Atlanta for a long time, and the north of Atlanta, and northeast Atlanta has taken us years to get there and then northwest Atlanta, which will open up later this year it took us months to get there. So it's we're combing.

<unk> and kind of read doubling down of our investment and our real estate pipeline, but it's it's about continuing to build that pipeline. So we can deliver the 10% to 15 next year and in the years after.

Okay, and then just lastly, I mean do you envision.

How do you envision the mix between owned and leased is it going to be it seems like its own somewhat.

Yes, sorry, sorry go ahead of what's.

I was going to say it seems it seems like to do that youre going to have the lease quite a bit but I know you prefer 1 and I'm sure everybody does but.

It's a much different animals and leasing.

Totally agree and it.

It has been as you will know followed us through the northeast.

We're going to be up we're going to buy wherever we can of its strategic and it's something we've got some runway with it makes sense to own strategically.

But if we can get of long term lease to get us and the market establish our presence we're going to do that.

The and some cases, we know that on as we look and we continue to grow the business. We're.

East more organic or sort of develop ourselves by.

Facilities and add capacity and that way.

So I think we're more focused on adding the locations then maybe opportunistic around finding somebody else's.

The facility's somebody might be exiting.

So it's going to be a combination.

Good of Bose, we're going to want to and the strategic facilities and I'll tell you that 1 of the things that is built into that capital number as some of the ones that we leased now.

They were long term leases that were in place and now.

And where the potential buyer now so that will take ownership of some of the ones we leased now as well.

Combination of Okay perfect. Thanks, guys.

Our next question comes from Ari Rosa with Bank of America.

Hey, good morning, Doug and Fred Congrats on a nice quarter here.

So it sounds like customers have been pretty responsive.

<unk> are pretty.

Responded well to rate increases.

Wanted to get some color on the nature of those discussions kind of historically of what point do your customers start to push back on on those things kind of if customers start to see some sort of inability in terms of passing on price to their end consumers.

Do they come back to you and start to get a little more aggressive or is it just kind of a function of of market supply and demand in terms of the <unk>.

And for LPL carriers.

Well I think the 1 observation I would make is that I don't think theres probably of customer anywhere that wants a rate increase alright and.

And the environment.

They're dealing with right now, which in many cases similar to ours.

But.

And maybe as a modestly easier and and environment. What it is challenged environment and you've been able to execute for the customer and you can provide the this is what we're doing for you and this is how well this is going or this is we've been able.

To meet these expectations. We've developed our team has developed some great relationships with customers over time.

We're back and that with that serve quality and service, so that that pricing opportunity or that debt discussion is no doubt challenged.

But we're better armed with that and we ever have been and I.

I think that.

They certainly they pushed back if we get and improvement, particularly on picking up assets soil charges, because that's of course significant costs of doing business.

And the customers see that we can point to what service we're providing.

And they know that and some cases, we probably were below market and this.

Yes.

Delivering the results you need to be paid at market. So.

That's kind of the.

That's kind of the discussion.

The it's a challenge for the team, but I think were and are better positioned to have that discussion than we ever have.

Got it understood and from a second question you know you guys have laid out of pretty.

Pretty compelling cases, and why you think you can continue to get improvement on the operating ratio, but looking at kind of the industry as a whole it seems like a lot of your competitors are also reporting kind of record levels in terms of margins and obviously we're seeing.

And what some people of suggested might be kind of peak freight conditions.

This is so looking about.

12, 18 months down the road do you think this kind of environment can sustain itself and kind of what are the implications of that kind of for industry wide margins.

I think when we look at the industry, we look at it and a couple of ways certainly we look at that some of the.

And it's it's been out there that's been published.

Certainly we see that as a roadmap for us right and we say listen these are we need to get there we're providing the same level of service or in some cases better service for our customers and we would fully expect that we are able to drive our performance too.

The best in class so that's.

Performed and we want to do over time, we think we of the game to do that.

Think of it as we've kind of manage through even a slowdown we've shown that we've been able to generate sort of pricing over time, and we've been very disciplined about that and maybe more so recently as well as we've become more focused on the data and the analytics, but.

We've.

Shown that we can do it we provide the service and even in a slower economic environment customers that maybe value of that quality and service day or Theres, a stickiness that comes with debt and I think that debt.

That plays to our strengths and we continue to execute through this.

Got.

Very helpful. Thanks for the time.

We will take our final question from Bruce Chan with Stifel.

Okay.

Hey, good morning Gents.

Appreciate you squeezing me in here just wanted to get a couple of more.

And I could on the PT side.

And maybe if I could get your thoughts on what you think of normalized level of our target level.

As a percentage of revenue and your network is it something back in that mid to high single digit range and.

Is there any inflation to think about as you kind of growth that terminal count.

Yes.

And it.

I've said over and over time that I think it will and general kind of migrate lower in terms of b and a percentage of our mile of <unk>.

Your line haul miles.

How quickly it gets back into the low.

You know the low double digits I am not sure and this environment, but.

And over time as we build the network and build density our team has an opportunity every day to <unk>.

Connect the network more efficiently with our equipment and the opportunities there, but you know.

We love the use of PT, where it's using our driver and tractor and trailers node of around 1 way.

The full and the return empty.

<unk> is a great tool to have and your toolkit. So yes, I think it will.

Kind of trend down over time, but no near term expectation that our reliance on it or use of it is going to come down over the next quarter or 2.

Okay.

Fair enough and then.

And just the final 1 here, Doug you talked about pricing action and you also mentioned some of the puts and takes with fuel maybe you could give us some thoughts on how you are feeling about the surcharge tables right now and whether you see any need for adjustment as you move through some of those customer conversations.

And the surcharge.

We all use of the as a hedge against rising fuel cost.

Is pretty much in line with our peers and and kept that way across the cycle with the national average diesel prices.

You know the fuel.

Surcharge mechanism doesn't always go lock step with where fuel's going but over.

Over time, it's a pretty good hedge and and allows us to recoup the not only the added expense, but the you know the cost of the investments we make to.

Refuel ourselves and build and you know fueling stations and our own terminals and things like that so I think our surcharge.

You know it gets updated and look.

And like our peers across the cycle.

Okay fair enough. Thank you.

Thanks Bruce.

This concludes today's question and answer session I will now turn it back to France holds true for closing.

ARX <unk>.

Thank you and thank you everyone for calling in.

And I appreciate the interest and sire.

We're excited about the performance that we saw and the second quarter, we're looking to replicate that in the third quarter and going on as we build upon that success and accelerate the growth of the business over the coming years.

And thank you again for your time and have the <unk>.

<unk> day.

Looks a lot ladies and gentlemen. This concludes today's call. Thank you for your participation and you may now disconnect your phone lines.

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