Q3 2021 Saia Inc Earnings Call

Good day and welcome to the Science third quarter 2021 earnings call.

This conference is being recorded at this time I would like to turn the conference over to Doug Col. Please go ahead Sir.

Thanks Todd.

Morning, everyone welcome to <unk> third quarter 2021 conference call.

With me for today's call are <unk>, President and Chief Executive Officer Fritz holds great.

We began you should know that during the call. We may make certain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095. 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.

Also in the third quarter, we recorded a $4 $3 million gain from the sale of a terminal when we discuss adjusted operating ratio or adjusted diluted earnings per share in our comments that refers to adjusted results that exclude the gain from that sale see our press release announcing third quarter results for a reconciliation of non-GAAP.

GAAP financial measures that press release is available in the financial releases page of <unk> Investor Relations website as well.

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

Good morning, and thank you for joining us to discuss <unk> third quarter results.

Pleased to report that we continue to have record results across the board in 2021, our revenue during the third quarter was a record 616 million surpassing last year's revenue by 28% operating income also grew by 92% to a record 106 billion and a record $82 eight operating ratio in the quarter.

Mark the fifth consecutive quarter, where our or was sub 90, our adjusted operating ratio for the quarter is $83 five and this is the single best Oh are reported for a quarter in our company's long history.

The quarter was marked by consistent levels of demand from our shipper customers as we will all work through the supply challenges and tight labor markets that persist.

Our operations group continues to provide excellent service and with a three 2% increase in shipments per workday in the quarter, we still posted a 98, 1% on time delivery standards in the third quarter.

Dock productivity continues to face a bit of a headwind just based on the number of new associates still in various stages of continuous training across the company. However, even as we on boarded new employees and expanded our footprint. Our team was still able to maintain our cargo claims ratio of <unk>, 63% flat with last year and among the best.

And the industry.

Our focus on pricing remains a key pillar of the improving profitability results, we've been able to achieve again this year our L. T. L revenue per hundred weight increased 14, 9% in the quarter. This measure pricing is aided somewhat by our length of haul which increased by two 5%, but offset by an eight 6% increase in.

Wafer shipment this quarter.

The overall improvement in yield was driven by a continuing by continuing to provide great quality and service for our customers in our market based approach to pricing across not only base rate, but accessorial charges as well.

Strong yield gains and the accompanying improvements in freight mix enabled us to increase our revenue per shipment by 24, 8%, including fuel surcharge to a record $299 per shipment.

Cannot overestimate the importance of managing the freight mix for an LTE else carrier cube density length of haul and special handling charges are accessorial, all important factors to consider in our business. These factors have implications not only for pricing, but for optimal kept capacity utilization as well our performance in Q3 <unk>.

Flex, our continuing ability to improve not only pricing, but our mix of business with that said I'll turn the call over to Doug for a review of the third quarter financial results.

Thanks, Chris.

Third quarter revenue increased by $134 8 million to $616 2 million or 28% increase from the prior year.

The components of the revenue growth in the quarter were as follows.

Earnings grew 11% this quarter, a combination of two 3% shipment growth and an eight 6% increase in our average weight per shipment yields.

Yield excluding fuel surcharge improved by 10, 2%.

Fuel surcharge revenue increased by 72% and was 13, 9% of total revenue compared to 10, 4% a year ago.

Moving now to some key expense items in the quarter salary.

Salaries wages and benefits increased by nine 9% driven by wage increases across our driver and dock workforce as well as our hiring and referral bonuses that were paid in the quarter to attract new employees.

Additionally, our January and August wage increases of approximately three and a half and four 7% respectively contributed to this increase on a year over year basis.

Purchase transportation cost increased 82% compared to the third quarter last year and were 11, 7% of total revenue compared to eight 3% in the third quarter last year.

Trucking rail PT miles combined were 19, 7% of our total line haul miles in the quarter compared to 14, 3% in the third quarter of 2020.

Fuel expense increased by 49, 2% in the quarter, while company miles increased three 9% year over year. The increase in fuel expense was a result of national average diesel prices that continued to rise after the pandemic related drop in the prior period.

The third quarter prices rising, 38% compared to the prior year.

Claims and insurance expense increased by 30% in the quarter, reflecting increased frequency in accident severity in that expense line and higher premium costs versus the prior year for perspective, the $3 6 million expense increase compared to the prior year would've been $2 7 million if not for the premium increases.

Also to illustrate the volatility in this expense line I would note that claims and insurance expense was down 10, 4% or $1 8 million sequentially from the second quarter.

Depreciation expense of $35 7 million in the quarter was four 4% higher year over year. This was a continuation of the trend we've seen over the past few years as we've grown our terminal network invest in equipment to lower the age of the fleet and made meaningful investments in technology.

Total operating expenses increased by 19, 7% in the quarter and with a year over year revenue increase of 28% of our operating ratio improved 570 basis points from a year ago to 82.8 as.

As we mentioned earlier adjusting our results to exclude the impact of a $4 $3 million real estate gain our adjusted <unk> was 83, 5%.

Record for the company.

Our tax rate for the third quarter was 24, 3% compared to 23, 7% last year and our diluted earnings per share were $2 98.

Compared to $1 56 last year.

Adjusted diluted earnings per share in the third quarter or $2 86.

We anticipate an effective tax rate of approximately 24% for the remainder of the year.

For the first nine months of 2021, we've made capital investments totaling $154 $9 million.

Capital expenditures on equipment in the first nine months were below our forecast as some of our suppliers are seeing delays in components shipments and production has been behind schedule. All year, we have a number of real estate projects in the pipeline and the current quarter and we still expect full year 2021 capital expenditures will be about approximately $275 million.

Our balance sheet remains strong with $121 7 million cash on hand, and more than $300 million of availability from our revolving credit facility and additional outside borrowing sources.

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

Thanks, Doug along with the solid financial results produced by our team this quarter I'm, particularly pleased with our execution around new terminal openings in late September we opened a new terminal in Frederick Fredericksburg, Virginia, our fourth in the state and our third terminal opening of the year. Additionally in October we opened terminals in New Haven, Connecticut Young.

Set, Ohio, these new terminals allow us to provide our.

Allow us to provide our customers with more direct shipping points as we get closer to our customers. We're in a position to offer differentiated service. We plan to open two additional terminals before the end of the year for a total of seven new openings in 2021 that would put us at a 176 terminals compared to $1 69 at the end of 2020, we look forward to <unk>.

2022, our plan calls for 10 to 15, New terminal openings next year, we also target several relocations of existing terminals into larger or better positioned facilities as well and.

In order to support our pace of openings, our human resources group has continuously recruiting and onboarding. The talent that is required to open and operate these terminals, we're expanding our driver Academy program to more locations in the cabinet and the coming year and we're also partnering with driver's schools and technical colleges in select markets to increase our candidate.

Pipeline.

We continue to stick to our playbook in terms of growth our organic growth strategy kicked off in 2017 is changed the footprint and profile of the company are investments in people and technology has been an important catalyst for this successful strategy and will serve as the backbone for our continued growth with each new terminal opening we get closer to our <unk>.

<unk> based in doing so we give the customer the opportunity to choose our value proposition, which is appealing to new customers as well as existing customers familiar with our quality, we continue to position our real estate pipeline for multi year growth at the same time, our current operational execution and financial performance will allow us to fund these investments from opera.

<unk> cash flow with that said, we're now ready to open the line for questions operator.

Thank you.

To ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again to ask a question please press star one.

We will take our first question from Amit Mehrotra.

<unk> with Deutsche Bank.

Hey, Thanks, operator, congrats on the good results guys Fritz fee.

300 or so.

And revenue per Bill is.

Is that a new baseline for the company I know, it's been a real focus for you guys can you talk about if youre seeing that number trending how youre seeing that number trending over the next few quarters and what youre doing to drive that in terms of either pricing action.

Addressing things like minimum charges or things like that as well.

So amid I mean, this is a continuing opportunity for us.

We're not stopping at 299 I mean, there is a runway here and I think if you benchmark us against other sort of national best in class carriers, you see the opportunity still is out there.

Yeah.

Do we have initiatives around this absolutely I mean, you could.

Any sort of as we continue to better understand the impact of freight on our network and what it does to our capacities and what the market availability of pricing is we're going to continue to push that it could be access of length that could be minimum charge shipments. It could be complex deliveries can be any number of things, but the one thing thats clear.

Is that the underlying business is inflationary.

With that said, we're making big investments in our business and we're doing a great job for our customers. So what that means is that in our view that we got to continue to push the pricing.

Opportunity because it is still there.

We're excited about the progress we made in the third quarter.

But I can tell you we're not we're not we're not done.

There is more work to be done.

Our team is.

Very very focused on that initiative, continuing so I don't.

I don't expect us to let up but you know this is becoming more and more of our business process to be continuously looking at our mix opportunity in the pricing opportunity.

Okay. That's helpful and then.

Yes, Doug what's the right expectation for or in the fourth quarter I know typically deteriorates under 50 to 100 basis points sequentially can you speak to the expectation there and then just related to that obviously youre going to see something like 400 basis points of margin expansion this year or in that range, which is obviously incredible.

What's the right expectation for next year is it still kind of that 150 to 200 bps range that you talked about could it be even better given the.

<unk> benefits from the new terminals just talk about what the right expectation there is for next year as well.

Good morning, Amit I'll take the first part so yes, I think 150 basis points into Q4 is probably still the right way to think about the deterioration I mean, we've got we've got three less working days in the period.

A couple of the working days you have around the holidays. They are light revenue days, because some businesses are a little different holiday schedule and then you do get the normal kind of November December fade in shipments per day. So those factors are all still there. So I think around 150 basis points, which has been.

Historic.

It's a good way to think about Q4.

And amid to think about the future around this.

We've always said that the range of this business is 150 to 200 basis point.

Sort of improvement year on year, and I think the environment doing right now.

There's certainly the opportunity for us to push that to the top end of the range and even above that potentially.

One of the things I think that we have successfully done since 2007.

<unk> steadily got better at.

The efficiency around how we do own terminal openings and how we scale those openings.

No.

I don't view that the 15 10 to 15 that we opened next year is a drag. It's that's work we're going to do we're going to get it done.

I think that'll be that'll be baked into that number as well. So that's sort of margin range into next year as well as the relocations, we do which will be an important part of the story as well over time.

So.

We feel like Thats.

In the environment that we're in as long as that continues with a favorable economic conditions certainly that that range is clearly in play and I think the top end of that range is very is within our reach.

Okay. Thank you very much guys congrats again.

Thank you we'll take our next question from Jason Seidl of Cowen.

Thank you, operator, Hey, Fritz Hey, Doug Good morning, guys.

I wanted to talk a little bit more about the ancillary.

Charges that you guys have been putting on how should we look at that in terms of what's the opportunity for 'twenty two is.

Is there further penetration to go of putting on these charges and then how should we think about maybe a year over year increase versus your expected year over year increase in pricing.

Yeah, Good morning, Jason.

I think one way to look at it I mean, if you look at our revenue per bill.

Improvement year over year in the third quarter somewhere around 20% of it is a.

A good estimate of what the impact of the accessorial improvements was.

And I like Fritz said I mean, we think there's a long runway to go there in some cases just to be at market and.

I don't.

Would consider some of the work we're doing now is early stages work.

Charge, you may have wave for a customer in the past in the past to get your foot in the door to do some business.

It's not the market these days.

This year in the conversation it might've been hey, we're going to put this charge on them, we can't wait any longer and then next year the conversation as well now the market's up here for that charge we need.

Need to raise the charge you can get to that ballpark. So I think we are in the early stages, there and like Fritz said I mean, they're all so impactful.

The other thing kind of on <unk> question as well looking into next year.

We use contractual renewals is kind of a basis for our outlook and our contractual renewals accelerated from Q2 to Q3, so year over year contractual renewals in the third quarter were up 14, 3%.

So again, you can't make that into your model is.

Your yield improvement, but it is an indication that the shipper expects this tightness to continue in the supply chain challenges to persist and we're able to price to compensate for that.

Yes.

Good color, where you said you have a long run rate where would you say you are as a percent of penetration to your customer base in terms of being at market for <unk>.

I don't know that I have.

Rate metric for that Jason, but what I would guide you to or point you to is you can take the other public carriers and you kind of lay our sort of operating statistics kind of length of haul weight per shipment against some of those folks and you look at the.

Where we are on a revenue per shipment basis, and where they are or where they were we will be reporting or have reported.

We look at that as the opportunity to close the gap, but I think that what's important there is that if you are providing best in class service overtime, you ought to be at a premium to some of those right. So I don't I think it's really important to emphasize that we don't view this as.

Kind of a stagnant, let's go get the target its more of all right. We're going to we're going to close the gap, but we got to keep pushing this because we do too good a job this is too expensive or business to not get paid.

Right.

Great color and just going back to the demand side.

It seems like it's still fairly robust out there what are your customers telling you to expect in 'twenty two.

I think that they.

Broadly I think they see this disruption.

The supply chain disruption carrying into next year I think they also see that there is still a FERC theres a fair amount of stimulus in the economy. Now. So you would expect to see sort of the economic environment to stay positive and well into the year as well.

To the extent that there is further stimulus or other spending maybe that.

It makes it a bit inflationary, but I think we see and what we're hearing is that.

This continues into next well into next year.

Okay.

My questions I appreciate the time as always gentlemen.

Yes.

Thank you.

Thank you we'll take our next question from Jon Chapell with Evercore ISI.

Thank you good morning.

Doug one last question.

Doug you said that.

Contract renewals and <unk> up 14, 3% I think in the last quarter, you said, 9%. So obviously there were seeing a lot of momentum is there any way to gauge where you are in the overall book of business as you've gone through these renewals. So if we think about this momentum being maintained is it full it further acceleration in <unk> in the first part of next year.

Well I mean, it's hard to say I think Q Q2, I think was up 10, six and like I said 2014 through this quarter I mean theres no.

Kind of narrow window that we look at as bid season, the contracts kind of renew ratably through the year.

We're seeing cost inflation in the business.

Even accounts that are receiving increases this year are likely to have to face them again next year, just based on some of the cost pressures that we see and depending on where the market's at and how the business operates for us.

It's Ben.

Pretty consistent path, we've been on to approach customers for for rate increases we were simply just not are in the proper returns. So.

I don't know that it accelerates from here, but I do think that we've already seen.

Some announcements about <unk>.

Early in next year and this is pretty early for folks to be.

Kind of.

Forecasting there there <unk> letting our customers know thats coming so.

It feels like kind of more of the same should be expected at least through the first half next year.

Okay, Great and then Chris you touched on something really important so you've grown the terminal base by a little bit less than 5% this year.

Next year, you're hoping for 10% to 15%, which would be basically double that pace on a percentage basis, but you noted that you've kind of gotten to that scale now where startup costs associated with bringing these terminals online.

It's a little bit less relevant can you speak a little bit to the margin impact when you're talking about land equipment.

Hiring people aggressively do you think you can bring 8% terminal growth on next year with kind of eliminate overall impact on the margin improvements you've made.

Yes, we think we can I think the way.

We're at the stage right now, where we're adding terminals now.

We're essentially we're moving closer to our customer or moving to markets that we were attempting to reach.

<unk> launched 10 times.

So you kind of have a little bit of a built in cost savings.

As you move closer to the customer in that regard and you're also in a position maybe you can do it is a little bit easier to modestly easier to recruit. So as example, we always safety Atlanta example, but when you open those facilities.

You are avoiding much of Atlanta traffic, but then you're also putting facilities in markets, where it's a little bit easier to recruit. So you can staff. Those we understand we've got an operating playbook that we use to initiate start hiring training.

Get the technology in place get the flag planted at the new facility that we can move pretty quickly with that the.

The infrastructure that we needed to build regions out for us when we first started as an example, the northeast that's already there.

And so we don't see us having to add corporate overheads to this so you had the big additions aren't there. So now it comes down to terminal operations.

And you can staff those get those up to speed in some cases and by way of example, you actually generated cost savings. So that helps you fund through this so when we look at it we don't see a.

A drag.

Related to openings of reopening this is part of the challenge and I think one of the things by doing this all organically, we understand how to pick the pace up slowed the pace down.

And do that in a way that's not disruptive to our own operation.

Customers that know us already they've got improved service when we make up opened a new facility. So.

That's an easy switch in those cases.

When we look at our more broadly across our whole network.

We typically don't say much about our sort of region profile, but the reality is is that.

The northeast, which we opened several years ago, starting in 2017 that operators just like the rest of the company now so it's for us it's.

You drop in dots on the map.

Around facilities and infrastructure, we already have so we feel pretty good about.

Not creating a drag with these openings.

That's great insight. Thanks, so much Fritz thanks, Doug.

Rob.

Thank you. Our next question comes from Scott Group Wolfe Research.

Hey, Thanks, Good morning, good morning, guys good.

I don't know if I missed this but can you give us the shipment and tonnage numbers for September October and just as we think about the terminal growth next year any way to think about door count growth and if that's maybe a better way to think about the potential for volume growth next year. Thank you.

Sure Good morning, Scott.

September shipments per workday were up one 6%.

And the tonnage was up 10, 6%.

And then so far in October shipments per day are up about 1% and tonnage is up in the 9% to 10% range.

And then from a door count growth, yes in terms of the door count I mean.

15 openings on the base.

What we think will be a 176 at year end.

885% I guess.

I think you know door count in the range of 8% to 10% is probably right. When you think about some of the work will also have going on in the year with relocations. So just like we do every year, we've got some terminals, where we move out into something bigger so probably 8% to 10% on a door door count basis is there.

The way to think about it.

And then once they got to think about the Georgetown. So we're making those investments that's just not for next year's volumes.

That we should be able to grow into that right over time.

Yes got it.

And then Fritz you made a comment.

That we can't underestimate or overestimate the importance of mix and utilization. So maybe just talk about.

On that and where you are what the opportunity is and maybe just along those lines that weight per shipment has been a nice tailwind. This.

This year, if you think that there is.

Further room to go on weight per shipment.

Yes, so one of the things that we are continuously studying Scott as well.

But what the freight impact is on our network. So if.

If we have a category of freight states excessive length.

That can be difficult to handle that can tick up a fair amount of capacity and you've got to manage that.

So for US, it's really important that we identify those that sort of category of freight.

Sure we charge for it some of it we may want to keep but at the same time, we absolutely need to get paid for the capacity that were providing with that so.

As we analyze different segments of the business that would be an example of that's an area that we will we will take action we are taking action on Sip.

Simply because that utilizes a fair amount of capacity and if it does it better generate a fair return.

In relation to that capacity so.

Those sorts of things you heard us in the quarters past, we've talked a lot about.

Minimum charge shipments we've talked about.

Limited access our delivery sort of.

Shipments all of those are adding complexity to their business and your cost structure. So you look at paid or you decide you're not going to be in that part of the.

The market so that would be a mix change you exit that and we're comfortable doing it.

That's part of the kind of ongoing focus on pricing and analytics and making sure we understand what the impact of the freight is on our network and our capacity, particularly in this environment.

It's the best time to make sure that Youre managing both.

Thank you I'm, sorry, I was I mean, just the weight per shipment.

Pardon.

Just your thoughts on.

Weight per shipment.

Turning to Mexico I.

I think thats reflective of our focus on making sure we get the right mix of business right. So that's.

Targeting parts of the available market that we feel like we can.

Handled the best and that we can generate the best return so you see that with the.

With our mix of business trends I think that that probably continues.

Into next year.

Yes, the world changes certainly that could change, but I think right now I think thats.

That's our focus that's continuing that's a mix of business focus.

Okay. Thank you guys appreciate it.

Thank you we'll take our next question from Tom <unk> with UBS.

Yes, good morning.

Wanted to I guess.

Continue a little bit on that debt kind of theme of the weight per shipment versus shipment. How do you think about the use of capacity.

Do you think about that driven like door capacity. Your terminal capacity is that driven more by your shipments.

Or do you think of that more driven by weight and I guess, the reason I ask because youre seeing really strong tonnage growth, but the shipment growth is more muted.

And then youre, adding significant capacity, so I wonder if that kind of capacity adds versus shipments. That's a fairly wide gap is that the right way to look at it and it's just kind of opening up more future capacity.

Or do you look at terminal utilization more by the tonnage that goes through then the shipments.

Yes, probably in our view, we look at it probably more so on a tonnage basis, especially in our line haul network.

<unk>.

Okay.

I'd say for us, it's probably the same across the docks to I mean, I think when we're thinking about dollar pressure, we think about tonnage through the doors.

So, yes, I mean, our capacity additions both across the fleet and across the terminal network.

It really preparing us for continued tonnage growth.

Yes, Okay alright.

I know, it's a nuanced question, but I appreciate that.

On the labor side.

You don't sound like Youre being constrained on labor I guess some of the comments on location of terminals seems constructive in terms of maybe it's easier to get labor, but can you give us a little more sense of.

How youre doing in the labor market in and is that a constraint at all on your.

On your growth certainly something we're hearing from other transports that that is the constraint.

It just to underscore it's challenging right. So I offered the new facilities that essentially introduce us to new labor market. So that's an incremental benefit but by no means is it.

Not a challenge.

We have a referral we have referral bonuses sign on bonuses.

Recruiting fairs opportunity ongoing across the country some market is hotter than others.

We had we've got a TV AD that we've put out that if you really pay attention to it it's as much about sire branding, but then it's also about.

Identifying.

And target marketing around drivers and employs so yes. It is.

It's a challenged markets out there and I think that gets you to the place where it's critical that you really utilize your capacity. The best you can and drivers are an important part of that capacity constraint right. So you've got to be able to price accordingly, because that's a scarce resource and you need to optimize all resources and Thats important.

Part of our capacity so yeah, no it's challenging we've been able to.

We saw some improvements in hiring here in the last couple of quarters.

<unk> doubled down on some focus and referral bonuses and things but.

That's a continuing challenge for sure.

Is that limiting your growth there not not really.

In some places I think it does limit our growth.

But what it comes down to is that we have to identify.

What business, we can serve and what we can serve well for our customers. So in that case.

Our focus on building density, making sure you've got the right route structures youre not taking a.

Scarce driver and having them take try to serve a customer 100 miles from the terminal youre focusing it them into markets, where we can best serve them.

Service the customers, but then at the same time best leverage their capabilities and their capacity.

Right, Okay makes sense, thanks for the time.

Yeah.

Yes.

Thank you we'll take our next question from Jack Atkins of Stephens.

Okay, great. Good morning, Thanks for taking my questions.

So Greg I guess as you're thinking about and executing on.

These these.

Larger structural changes in terms of how you guys are thinking about getting paid for the services, you're providing and it clearly.

It's going very well just looking at your results.

You incentivize the sales force too.

Go after that incremental dollar, whether it's an accessorial or just making sure you're getting paid for.

For the little things that Youre doing to service the customer.

You guys made changes to your sales force incentive structure to better align how they get paid with how you want to to be compensated at the consolidated company.

Absolutely so our sales force the measurements that we instituted in this year.

Yes.

Think about those two variables to axis once revenue growth or improvement year over year. So both of those are targeted to.

Driving revenue.

And most significantly margin so.

Yes, I'd say its a greatest setup incentive for them they participate in the <unk>.

The performance of the company and they're a big part of why we've achieved the success. We have on our operations guys are getting it done the sales team are getting in front of the customer and their solid right in making the.

Pointing out to the customer what we're doing for them and that that's been great. The incentive lines up for them. So they participate in the upside and I.

I can tell you I think that from the results I think it works.

Okay. Okay now that makes it makes sense and I guess going back to something you were saying Fritz in your in your prepared remarks around dock productivity and maybe some headwinds that you've just seen there with with all the.

The new hires you've been making.

Could you maybe kind of help us think about it.

About that a bit more.

Would you expect to see some tailwind from that as you kind of move maybe into next year as those folks get season, then and I guess from a bigger picture perspective kind of revisiting the technology theme.

I think what's on everyone's mind last year can you maybe talk a bit more about.

Ways to leverage technology to drive greater dock efficiency and productivity.

Sure so.

One of the first and foremost our focus with our operations team is make sure we deliver the freight.

Take good care of it so no claims.

And part of that obviously Doc product Doc team is critical to that.

We're more focused on service and save cost productivity because in the end.

Certainly we will have a little bit of tailwind as we get a little bit more efficient with our dock productivity.

We will see that I don't know that it will be.

The huge callout for our or improvement into next year, but what will be the or improvement in next year will be driven by pricing and our ability to service customers. So the ops team can continue to get that done that's most critical and that's most valuable to us.

So one of the what we look at on our dock production, we have a technology that we've rolled out and we continue to enhance our pacer technology, which on.

The tablet for each one of our dock workers.

<unk>.

Basically.

Our scorecard or a bar that tells them. If they are on on task are behind.

And thats they can see that in their supervisors and the terminal managers can see that if there is somebody that maybe is not keeping pace or somebody that's new and add some uncertainty about performing their duties.

There can be some intervention in real time to to influence those results. So that's a key part of rolling out technology, and hopefully drive a little bit of dock productivity, there and we will continue to that and look for ways to enhance it but ultimately.

First and foremost I got to take care of the customers' freight and Thats critical.

Okay sure thing makes sense, thanks again for the time.

Thank you we'll take our next question from Jordan Alegar with Goldman Sachs.

Yeah, Hi, just a question again on the labor front, just thinking in terms of next year, and obviously theres been a lot of inflationary pressures around wages. How is the best way to think about 2022 is it best to look at it like compensation per ton growth or just rate of change.

Year over year relative to revenues.

Give me some sense. Thanks.

Yes.

Well.

This year keep in mind, we've had that to wage increases this year one in January and then another one in mid August.

So at the moment, we wouldn't it wouldn't.

We're seeing two of those next year.

But I think the right way is just to think about.

The percentage range increase we've seen over the last few years, which is three five to four 5% it feels like a pure.

Pure wage inflation and then on that same line, you've got benefits inflation, which has been.

Low single digit year end and year out.

That's probably right way to think about it just off of that.

This year's base run rate of expense.

Okay. Thank you very much.

Thanks Jordan.

We'll take our next question from Allison <unk> of Wells Fargo.

Hi, good morning.

Let me go back to the conversation on the new terminals. It sounds like from your comments that the expected new terminals are certainly starting off in a more favorable position versus some of the older lines.

Impacting it a lot, but how should we think about it maybe pass that first year in terms of adding to that sort of underlying expansion does that start to accelerate to some extent as this new terminals become more productive.

Yes, yes.

Kind of how you would think about it as they become more efficient.

I think the other critical part about those <unk>.

<unk> is that we this.

This is about moving closer to the customer. So there is embedded cost savings in there, but more significantly when you close to that.

Customer you can provide that services the customer expects.

Reached that they expect.

It does longer term provide us not only or.

Expansion opportunities, but then it's also supports further pricing.

Differentiated service versus our competition.

I think I think the best example to Allison for that is if you just.

Think about the northeast we started our expansion up there in 2017 and it took US a couple of years to get to breakeven.

I'll tell you another couple of years into it that region's operating sub 90.

So once you get that kind of base built as we continue to drop terminals and as we've been doing up there.

It's very much a contributing factor to the improvement we're seeing.

Got it thanks, and then just on the balance sheet, obviously, a favorable leverage position here you know understanding certainly in high growth mode, and obviously, some cyclicality in the business longer term.

How should we think about what that optimal range. Andrew how are you guys thinking about that optimal leverage range for that business here.

Well.

We don't we don't think about it a whole lot I mean, we're in a strong cash generating position so.

We'd like to have more opportunities on the real estate side, and we certainly could use the balance sheet.

Get aggressive there but.

I think in terms of Capex.

There is a willingness on our end I mean, we could see capex.

Around 15% to 20% of revenue for the next couple of years, if we can put the right pieces together so.

But even at that rate I think we're going to.

At the current run rate of profitability, we would be able to cash flow that so it's not really a question of what managements comfortable with its just that we don't really foresee an opportunity to have that.

And have that opportunity to put something on the balance sheet.

I understand thank you.

Thank you we'll take our next question from Todd Fowler with Keybanc capital markets.

Hey, Good morning, guys. This is zack on for Todd.

Wanted to first ask about purchase transportation I guess, how should we think about that maybe moving into 2022 is that something that probably stays elevated as a percentage of revenue in the first half and then trails off as new employees are brought on board in productivity increases or.

Just would like to hear your general thoughts there. Thanks.

I'd say just leave it at the first part of your question it probably stays at that elevated level.

Going to say it tails off.

We are in the growth mode. Like this I mean, we're not adding drivers, but as Fritz said.

It's a challenge and we'd love to have more drivers so I won't commit to a tailing down but I think it I think it is going to stay at this level through the first half of the year and okay assumption in your model.

Okay. That's helpful. And then just with terminals do you guys have any visit.

Visibility as to what the cadence could be on those ads in 2022 should we assume maybe.

Kind of a steady additions through through the year or is it weighted.

One way or the other it's probably weighted a little bit to the second half but.

That's kind of where we are right now in terms of.

Some of the.

The final touches on getting things in place, but I've waited to the second half.

Alright, thanks, guys.

Thanks Zack.

Thank you we'll take our next question from Ken Huckster of Bank of America.

Hey, great good.

Morning, Fritz and Doug.

Thank you John you wanted to call and nice job on the quarter and on the ops.

Just wanted to actually maybe just a follow up to that question there.

How do you think strategically about in sourcing line haul versus rail and truck. Obviously I know you just mentioned on the employees, but maybe what do you have a thought in terms of what you want to get that to a max level on terms that we are outsourcing.

Or kind of goals of bringing it back online.

Yes.

We'd like to do as much of it internally as we can but we also think about balancing the network.

If.

Got it.

Imbalance, meaning in a lot of.

Our head haul lane in the backhaul market.

Only so many of your drivers.

Want to run in that direction, there is always going to need going to be.

Need for PT in the way, we view network connectivity.

<unk>.

Its probably its more than optimal right now, but it's not something that we can't manage through so over time I think is as we build density and as there's more balance in the network I think you'd naturally drift more of it in source, but.

We're in a growth mode, now and Youre going to have some imbalance, where you need to use it and it makes sense.

Perfect.

And then you mentioned that 10 to 15 service centers, obviously a lot of.

Discussion on that but.

Your thoughts in terms of the ability to really scale that so just given is that a pretty set 8% to 10% per year or with opportunities can you can you accelerate that or is just the lead time planning.

Multiple years, so you've just got it that's kind of more of a fixed growth.

Just to kind of just kind of give you some color around that.

Have a team thats pretty focused on this as you might expect so we are building a pipeline that looks out two and three years.

So there is a we know I've got a pretty good idea of what.

That 2022 with 2023 might look like so that.

We're kind of building that kind of cadence now if you've watched us closely if the opportunity presents itself, we'll accelerated right. If we can do that and it's it fits and we can make.

I think that work at the same time.

This kind of organic strategy.

Let's say, we get to the second half of the year and the kind of the world slows down or wherever we can slow the cadence of this down as well that's what we like about the strategy we could.

<unk> inventory facility, meaning you don't open up wait a year and those sorts of things are you pulling forward. If you feel the timing is right or perhaps you're in a position where I really like to be where we're saying hey, there's a customer opportunity our market opportunity. Let's move this thing forward because we can better serve the customer more rapidly so.

I'd say its a bit of a fluid number.

We will real solid lumber 10 to 15.

We know what that looks like both for this year.

Into 2023 as well.

Alright, and then last one just the weight per shipment and I just want to clarify that is that just a factor of truckload overflow or is that a shifting kind of more fundamental shift to e-commerce moves and the like that are driving your weight per shipment.

Yes, I would think about it more in terms of our our efforts around mix. So as much of that there is a lot of that weight gain.

It's been just a function of us taken lighter weight shipments out right. So that's part of what we call. The working on mix. So as you move the lighter weight shipments if youre not able to get the revenue per shipment you need maybe it's gone a length of haul that that doesn't make sense or something some of those shipments have come out and that has helped.

Fuel the increase in the weight per shipment I would say there is less of it.

Kind of each quarter that was truckloads spillover that came about during the pandemic.

Wonderful I appreciate the time thanks, guys.

Thank you we'll take our next question from Stephanie more of truest.

I wanted to maybe touch on that just on the top line trends in the corner and if he saw any particular industry vertical.

Outside performance sorry, the same token.

Their performance and really how you would characterize where we are with some of your industrial customers.

Great.

<unk> Bank.

Hi, good morning, Stephanie.

I mean in terms of geographically I mean, obviously the west coast is still very.

Very very strong markets for all of us.

The Texas region Houston.

A nice quarter and nice activity levels down there. So I guess you could say some of that's <unk>.

Energy related.

Not only other real industrial callouts I mean, we've got markets just because of capacity were.

No we're not able to.

Serve all of the business. That's there so the industrial demand fills fill solid to us.

I didn't see that GDP number out this morning, but but to us it feels it still feels like a pretty solid backdrop moving into the.

At the end of the year and into next year.

From a customer standpoint, that's what we're here.

Great and then on the other part of that I think everything Youre hearing is shaping up to be a pretty robust holiday season, and a lot of ecommerce growth in particular, maybe just now that these days.

This year versus prior years, you might be a little bit more exposed to some of these e-commerce related shipments and the benefit that might have or what are customers, saying.

On to the holiday.

Yes.

I guess, we're in a position probably to benefit somewhat from that growing trend of you know.

Online buying and residential deliveries, but that's that's not really.

Our space, we weren't industrial freight haul or not as much retailer, it's probably that.

A truckload carrier on dealing with the big box retailers is probably in a better position to answer that but I think <unk> in a good position to handle more of that we just have to make sure we get paid for it.

Got it thanks, so much.

Thank you we'll take our next question from Bruce Chan of Stifel.

Okay, Great Doug.

Thanks for the question.

Question just to follow up on that.

Not sure I can quote percentage breakdown could trucking rail and then just on that rail line haul component conceptually how are you thinking about that as a long term part of your network is that number tick back up as rail service starts to improve or is there may be less room for that in your network. As you are targeting slightly higher service levels.

Yes, and historically, it's run about 60 40 in terms of the split of miles.

60 trucks 40 rail this quarter is closer to 70 trucks 30 rail.

So I think it will it will probably drift back to that normal historical 60 40 split.

You just saw limited on now.

The capacity that you can get from a rail carrier service has been okay. You just you can't get as much of it as you want so in terms of our network I think for quite a while it's been 60 40 kind of balance and I guess, that's where it will probably drift back to when we can get the rail capacity.

Great. Thank you that's all for me thanks.

Thanks, Bruce Thanks, Bruce.

Okay.

Thank you, we'll take our last question from Amit Mehrotra with Deutsche Bank.

Hey, thanks for the follow up.

Sorry, I was hopping between calls, but did you guys talk about the sale.

Of the terminal.

In the quarter.

Wondering why that was a good sales candidate given youre trying to grow the footprint and are there any other opportunities to dispose of maybe smaller terminals is given some of the bigger ones that you've added over the last year or so.

Yes, Amit.

<unk> moved into the Memphis facility.

Which is a significant increase will better position on that terminal. It's twice the size of what we exited so.

The legacy facility in that market.

We didn't need to keep it so that one was one that led to the exit.

I wouldnt interpret that anything beyond that.

That was surplus to met new Memphis facility is well positioned in two important ways. One is it's a connection point for our.

Line haul or a big break operation for us.

It's well positioned to do a great job.

Market that is Memphis, so yes it.

Just sort of special I don't call. It a special situation, but that's kind of how that will develop there could be some other markets, where maybe its a one terminal market and we go in and.

Find something larger and we exited an older facility, but that could happen I frankly, I would expect that to happen over time.

But.

In general most markets the big ones the ones that have the big.

Addressable markets, you'll see us adding.

Additional facilities, there could be a scenario in which you exited a smaller one.

Got it.

Atlanta.

We will have three here, but maybe down the road you grow to 5% and you say well maybe optimal for something like that that could happen as well.

Okay got it thank you.

Thanks.

Thank you and that concludes our questions I'll turn it back to Fritz for closing remarks.

Thank you everyone for.

Participating in today's call and your interest in <unk> continuing growth story.

Really excited about 2022, and what that has in store for us.

So like we've got the plan in place to execute and deliver results. So thank you all and have a great day.

This concludes today's call. Thank you for your participation you may now disconnect.

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Good day and welcome to the <unk> third quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Doug Col. Please go ahead Sir.

Thanks Todd.

Good morning, everyone welcome to <unk> third quarter 2021 conference call with me for today's call SaaS, President and Chief Executive Officer Fritzls Greg.

Before we begin you should know that during the call. We may make certain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095. 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.

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.

Also in the third quarter, we recorded a $4 $3 million gain from the sale of a terminal when we discuss adjusted operating ratio or adjusted diluted earnings per share in our comments that refers to the adjusted results that exclude the gain from that sale see our press release announcing third quarter results for a reconciliation of non.

Non-GAAP financial measures that press release is available on the financial releases page of <unk> Investor Relations website as well.

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

Good morning, and thank you for joining us to discuss <unk> third quarter results I am pleased to report that we continue to have record results across the board in 2021, our revenue during the third quarter was a record 616 million surpassing last year's revenue by 28% operating income also grew by 92% to a.

A record of $106 million and a record $82 eight operating ratio in the quarter marked the fifth consecutive quarter, where our or was sub 90, our adjusted operating ratio for the quarter is 83 five and this is the single best or reported for a quarter in our company's long history.

Quarter was marked by consistent levels of demand from our shipper customers as we will all work through the supply challenges and tight labor markets that persist.

Our operations group continues to provide excellent service and with a three 2% increase in shipments per workday in the quarter, we still posted a 98, 1% on time delivery standards in the third quarter.

Dock productivity continues to face a bit of a headwind just based on a number of new associates still in various stages of continuous training across the company. However, even as we on boarded new employees and expanded our footprint. Our team was still able to maintain our cargo claims ratio of <unk>, 63% flat with last year and among the best.

And the industry.

Our focus on pricing remains a key pillar of the improving profitability of results we've been able to achieve again this year, our <unk> revenue per hundredweight increased 14, 9% in the quarter. This measure pricing is aided somewhat by our length of haul which increased by two 5%, but offset by an eight 6% increase in <unk>.

Wafer shipment this quarter. The overall improvement in yield is driven by continuing by continuing to provide great quality and service for our customers in our market based approach to pricing across not only base rate, but accessorial charges as well.

Strong yield gains and the accompanying improvements in freight mix enabled us to increase our revenue per shipment by 24, 8%, including fuel surcharge to a record $299 per shipment I cannot overestimate the importance of managing the freight mix for an <unk> carrier cube density length of haul and spa.

Actual handling charges are accessorial, all important factors to consider in our business. These factors have implications not only for pricing, but for optimal capacity utilization as well our performance in Q3 reflects our continuing ability to improve not only pricing, but our mix of business with that said I'll turn the call over to Doug.

For a review of the third quarter financial results.

Thanks, Chris.

Quarter revenue increased by $134 8 million to $616 2 million.

8% increase from the prior year.

The components of the revenue growth in the quarter were as follows.

Tonnage grew 11% this quarter, a combination of two 3% shipment growth and an eight 6% increase in our average weight per shipment.

Excluding fuel surcharge improved by 10, 2%.

Fuel surcharge revenue increased by 72% and was 13, 9% of total revenue compared to 10, 4% a year ago.

Moving now to some key expense items in the quarter.

Salaries wages and benefits increased by nine 9% driven by wage increases across our driver and dock workforce as well as the hiring and referral bonuses that were paid in the quarter to attract new employees.

Additionally, our January and August wage increases of approximately three five and four 7% respectively contributed to this increase on a year over year basis.

Purchase transportation cost increased 82% compared to the third quarter last year and were 11, 7% of total revenue compared to eight 3% in the third quarter last year.

Trucking rail PT miles combined were 19, 7% of our total line haul miles in the quarter compared to 14, 3% in the third quarter of 2020.

Fuel expense increased by 49, 2% in the quarter, while company miles increased three 9% year over year. The increase in fuel expense was the result of national average diesel prices that continued to rise after the pandemic related drop in the prior period.

The third quarter prices rising, 38% compared to the prior year.

Claims and insurance expense increased by 30% quarter, reflecting increased frequency in accident severity in that expense line and higher premium costs versus the prior year for perspective, the $3 6 million expense increase compared to the prior year would have been $2 $7 million if not for the premium increases.

Also to illustrate the volatility in this expense line I would note that claims and insurance expense was down 10, 4% or $1 8 million sequentially from the second quarter.

Depreciation expense of $35 7 million in the quarter was four 4% higher year over year. This is a continuation of the trend we've seen over the past few years as we've grown our terminal network invest in equipment to lower the age of the fleet and made meaningful investments in technology.

Total operating expenses increased by 19, 7% in the quarter and with a year over year revenue increase of 28% our operating ratio improved 570 basis points from a year ago to 82 eight as.

As we mentioned earlier adjusting our results to exclude the impact of a $4 $3 million real estate gain our adjusted or is 83, 5%.

Record for the company.

Our tax rate for the third quarter was 24, 3% compared to 23, 7% last year and our diluted earnings per share were $2 98.

Compared to $1 56 last year.

Adjusted diluted earnings per share in the third quarter or $2 86.

We anticipate an effective tax rate of approximately 24% for the remainder of the year.

For the first nine months of 2021, we've made capital investments totaling $154 9 million.

Capital expenditures on equipment in the first nine months were below our forecast as some of our suppliers are seeing delays in component shipments and production has been behind schedule. All year, we have a number of real estate projects in the pipeline and the current quarter and we still expect full year 2021 capital expenditures will be about approximately $275 million.

Our balance sheet remains strong with $121 7 million cash on hand, and more than $300 million of availability from our revolving credit facility and additional outside borrowing sources.

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

Thanks, Doug along with the solid financial results produced by our team this quarter I'm, particularly pleased with our execution around new terminal openings in late September we opened a new terminal in Frederick Fredericksburg, Virginia, our fourth in the state and our third terminal opening of the year. Additionally in October we opened terminals in New Haven, Connecticut Young.

Set, Ohio, these new terminals allow us to provide our.

Allow us to provide our customers with more direct shipping points as we get closer to our customers. We are in a position to offer differentiated service. We plan to open two additional terminals before the end of the year for a total of seven new openings in 2021 that would put us at a 176 terminals compared to $1 69 at the end of 2020, we look forward to.

2022, our plan calls for 10 to 15, New terminal openings next year, we also target several relocations of existing terminals into larger or better positioned facilities as well.

In order to support our pace of openings, our human resources group has continuously recruiting and onboarding. The talent that is required to open and operate these terminals, we're expanding our driver Academy program to more locations in the cabinet and the coming year and we're also partnering with driver's schools and technical colleges in select markets to increase our candidate.

Pipeline.

We continue to stick to our playbook in terms of growth our organic growth strategy kicked off in 2017 is changed the footprint and profile of the company are investments in people and technology has been an important catalyst for the successful strategy and will serve as the backbone for our continued growth with each new terminal opening we get closer to our COO.

Customer base in doing so we give the customer the opportunity to choose our value proposition, which is appealing to new customers as well as existing customers familiar with our quality.

We continue to position our real estate pipeline for multi year growth at the same time, our current operational execution and financial performance will allow us to fund these investments from operating cash flow with that said, we're now ready to open the line for questions operator.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again to ask a question please press star one.

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

Hey, Thanks, operator, congrats on the good results guys Fritz.

The 300 or so.

And revenue per bill.

Is that is that a new baseline for the company I know it's been a real focus for you guys can you talk about if youre seeing that number trending how youre seeing that number trending over the next few quarters and what youre doing to drive that in terms of.

Pricing action or maybe.

Addressing things like minimum charges or things like that as well.

So I mean, this is a continuing opportunity for us.

We're not stopping at 299.

As a runway here and I think if you benchmark us against other sort of national best in class carriers, you see the opportunity still is out there.

Do we have initiatives around this absolutely I mean.

Any sort of as we continue to better understand the impact of freight on our network and what it does to our capacities and what the market availability of pricing as we're going to continue to push that it could be access of length that could be minimum charge shipments. It could be complex deliveries can be any number of things, but the one thing thats clear.

Is that the underlying business is inflationary.

With that said, we're making big investments in our business and we're doing a great job for our customers. So what that means is that in our view that we got to continue to push the pricing.

Opportunity because it is still there.

We're excited about the progress we've made in the third quarter.

But I can tell you we're not we're not we're not done.

There is more work to be done.

Our team is.

Very very focused on that initiative, continuing so I don't.

I don't expect us to let up but this is becoming more and more of our business process to be continuously looking at our mix opportunity in the pricing opportunity.

Okay. That's helpful and then.

Yes, Doug what's the right expectations for or in the fourth quarter I know it typically deteriorates under 50 to 100 basis points sequentially can you speak to the expectation there and then just related to that with obviously youre going to see something like 400 basis points of margin expansion this year or in that range, which is obviously incredible.

What is the right expectation for next year is it still kind of that 150 to 200 bps range that you talked about could it be even better given the.

Density benefits and the new terminals just talk about what the right expectation there is for next year as well.

Good morning, Amit I'll take the first part so I think the 150 basis points into Q4 is probably still the right way to think about the deterioration I mean, we've got we've got three less working days in the period.

A couple of the working days you have around the holidays. They are light revenue days, because some businesses are a little different holiday schedule and then you do get the normal kind of November to December fade in shipments per day. So those factors are all still there. So I think around 150 basis points, which has been.

Historic.

It's a good way to think about Q4.

In a minute to think about the future around this.

We've always said that the range of this business is 150 to 200 basis point.

Sort of improvement year on year, and I think the environment doing right now.

There's certainly the opportunity for us to push that to the top end of the range even above that potentially.

One of the things I think that we have successfully done since 2007.

<unk> steadily got better at.

The efficiency around how we do own terminal openings and how we scale those openings.

I don't view that the 15 10 to 15 that we open next year is a drag.

We're going to do we're going to get it done.

I think that'll be that'll be baked into that number as well. So that's sort of margin range into next year as well as any relocations, we do which will be an important part of the story as well over time.

So.

We feel like Thats.

In the environment that we're in as long as that continues with a favorable economic conditions certainly that that range is clearly in play and I think the top end of that range is very is within our reach.

Okay. Thank you very much guys congrats again.

Thank you we'll take our next question from Jason Seidl of Cowen.

Thank you, operator, Hey, Fritz Hey, Doug Good morning, guys.

I wanted to talk a little bit more about the ancillary.

Charges that you guys have been putting on how should we look at that in terms of what's the opportunity for 'twenty two is.

Is there further penetration to go of putting on these charges and then how should we think about maybe a year over year increase versus your expected year over year increase in pricing.

Yes, good morning, Jason.

I think one way to look at it I mean, if you look at our revenue per bill.

Improvement year over year in the third quarter somewhere around 20% of it is.

A good estimate.

What the impact of the Accessorial improvement was.

And like Fritz said I mean, we think there's a long runway to go there in some cases just to be at market and.

I don't.

I would consider some of the work we're doing now is early stages work.

Charge, you may have waived for a customer in the past in the past to get your foot in the door to do some business.

It's not the market these days.

This year in the conversation it might've been hey, we're going to put this charge on we can't wave in any longer and then next year the conversation as well now the market's up here for that charge, we need we need to raise the charge you can get to that ballpark. So I think we are in the early stages, there and like Fritz said I mean, they're all so impactful.

The other thing kind of on this question as well looking into next year.

We use contractual renewals is kind of a basis for our outlook and our contractual renewals accelerated from Q2 to Q3, so year over year contractual renewals in the third quarter were up 14, 3%.

So again, you can't make that into your model is.

Your yield improvement, but it is an indication that the shipper expects this tightness to continue in the supply chain challenges to persist and we're able to price to compensate for that.

Yes.

Good color you said you have a long run rate where would you say you are as a percent of penetration to your customer base in terms of being at market for <unk>.

I don't know that I have.

Eight metric for that Jason, but what I would guide you to point you to is you can take the other public carriers and you kind of lay our sort of operating statistics kind of like the haul weight per shipment against some of those folks and you look at the.

Where we are on a revenue per shipment basis, and where they are or where they were we will be reporting or have reported.

We look at that as the opportunity to close the gap right, but I think that what's important there is that if you are providing best in class service overtime, you ought to be at a premium to some of those right. So I don't I think it's really important to emphasize that we don't view this as.

Kind of a stagnant, let's go get the target it's more of all right. We're going to we're going to close the gap, but we got to keep pushing this because we do too good a job this is too expensive or business to not get paid.

Right.

Great color and just going back to the demand side.

It seems like it's still fairly robust out there what are your customers telling you to expect in 'twenty two.

I think that they.

Broadly I think they see this disruption.

The supply chain disruption carrying into next year I think they also see that there's still a there's a fair amount of stimulus in the economy. Now. So you would expect to see sort of the economic environment to stay positive and well into the year as well.

To the extent that there is further stimulus or other spending maybe that.

It makes it a bit inflationary, but I think we see and what we're hearing is that there is.

This continues into next well into next year.

Okay.

My questions I appreciate the time as always gentlemen.

Yes.

Thank you.

Thank you we'll take our next question from Jon Chapell with Evercore ISI.

Thank you good morning.

Doug one last question.

Doug you said that.

Contract renewals and <unk> up 14, 3% I think in the last quarter, you said, 9%. So obviously there were seeing a lot of momentum is there any way to gauge where you are in the overall book of business as you've gone through these renewals. So if we think about this momentum being maintained is the further acceleration in <unk> in the first part of next year.

Well I mean, it's hard to say as in Q Q2, I think it was up 10, six and like I said 14 through this quarter.

Theres no.

Kind of narrow window that we look at as bid season, you know the contracts kind of renew ratably through the year.

We're seeing cost inflation in the business.

Even accounts that are receiving increases this year are likely to have to face them again next year, just based on some of the cost pressures that we see and depending on where the market's at and how the business operates for us.

It's Ben.

Pretty consistent path, we've been on to approach customers for for rate increases we were simply just not earning a proper return so.

I don't know that it accelerates from here, but I do think that we've already seen.

Some announcements about <unk>.

Early in next year and this is pretty early for folks to be.

You know kind of.

Forecasting there.

Our letting our customers know that's coming so.

It feels like kind of more of the same should be expected at least through the first half next year.

Okay great.

Chris you touched on something really important so you've grown the terminal base by a little bit less than 5%. This year up eight next year, you're hoping for 10% to 15%, which would be basically double that pace on a percentage basis, but you noted that you've kind of gotten to that scale now where startup costs associated with bringing these terminals on.

Mine.

It's a little bit less relevant can you speak a little bit to the margin impact when you're talking about land equipment.

Hiring people aggressively you think you can bring 8% terminal growth on next year with kind of eliminate overall impact on the margin improvements you've made.

Yes, we think we can I think the way we're at the stage right now where we're adding terminals now.

We're essentially we're moving closer to our customer or moving to markets that we were attempting to reach.

<unk> launched stem times.

So you kind of have a little bit of a built in cost savings.

As you move closer to the customer in that regard and you're also in a position maybe you can do it is a little bit easier to modestly easier to recruit so as an example, we always cite the Atlanta example, but when you open those facilities.

Youre avoiding much of Atlanta traffic, but then you're also putting facilities in markets, where it's a little bit easier to recruit. So you can staff. Those we understand we've got an operating playbook that we use to initiate start hiring training.

Get the technology in place get the flag planted at the new facility that we can move pretty quickly with that the.

The infrastructure that we needed to build regions out for us when we first started as an example, the northeast that's already there.

And so we don't see us having to add corporate overheads at us see that.

The big additions aren't there so now it comes down to terminal operations.

And you can staff those get those up to speed in some cases and by Atlanta example, you actually generated cost savings. So that helps you fund through this so when we look at it we don't see a.

A drag.

Related to openings of reopening this is part of the challenge and I think one of the things by doing this all organically, we understand how to pick the pace up slowed the pace down.

And do that in a way that's not disruptive to our own operation.

Customers that no its already they've got improved service when we make up opened a new facility. So.

That's an easy switch in those cases.

When we look at our more broadly across our whole network.

We typically don't say much about our sort of region profile, but the reality is is that.

The northeast, which we opened several years ago, starting in 2017 that operators just like the rest of the company now so it's for us it's.

You drop in dots on the map.

Around facilities and infrastructure, we already have so we feel pretty good about.

Not creating a drag with these openings.

That's great insight. Thanks, so much Fritz thanks Pat.

Rob.

Thank you. Our next question comes from Scott Group Wolfe Research.

Hey, Thanks, Good morning, good morning, guys.

I don't know if I missed this but can you give us the shipment and tonnage numbers for September October and just as we think about the terminal growth next year any way to think about door count growth and if that's maybe a better way to think about the potential for volume growth next year. Thank you.

Sure Good morning, Scott.

September shipments per workday were up one 6%.

And the tonnage was up 10, 6%.

And then so far in October shipments per day are up about 1% and tonnage is up in the 9% to 10% range.

And then it took door count growth in terms of the door count I mean.

15 openings on the base of our <unk>.

What we think will be 176 at year end.

885% I guess.

I think door count in the rain.

<unk>.

8% to 10% is probably right. When you think about some of the work will also have going on in the year with relocations. So just like we do every year, we've got some terminals, where we move out into something bigger so probably 8% to 10% on a door door count basis is the right way to think about it.

One thing to think about the door count So we're making those investments that's just not for next year's volumes.

That we should be able to grow into that over time.

Yes got it.

And then Fritz you made a comment.

That we can't.

<unk> made or overestimate the importance of mix and utilization. So maybe just talk about.

On that and where you are what the opportunity is and maybe just along those lines wafer shipment has been a nice tailwind. This.

This year, if you think that there is.

Further room to go on weight per shipment.

Yes, so one of the things that we are continuously studying Scott as well.

But what the freight impact is on our network. So if.

We have a category of freight states excessive legs.

That can be difficult to handle that can tick up a fair amount of capacity and you've got to manage that.

So for US, it's really important that we identify those that sort of category of freight.

Sure we charge for it some of it we may want to keep but at the same time, we absolutely need to get paid for the capacity that were providing with that so.

As we analyze different segments of the business that would be an example of that's an area that we will we will take action or we are taking action on Sip.

Simply because that utilizes a fair amount of capacity and if it does it better generate a fair return.

In relation to that capacity so.

Those sorts of things that you heard us in the quarters past, we've talked a lot about.

Minimum charge shipments we've talked about.

Limited access our delivery sort of.

Shipments all of those are adding complexity to their business and your cost structure. So you look at paid or you decide you're not going to be in that part of.

The market so that would be a mix change you exit that and we're comfortable doing it.

That's part of the kind of ongoing focus on pricing and analytics and making sure we understand what the impact of the freight is on our network and our capacities, particularly in this environment.

It's the best time to make sure that Youre managing both.

Thank you I'm, sorry, I was I mean, just the weight per shipment.

Pardon.

Just your thoughts on on.

On weight per shipment.

Into next year.

Think that's reflective of our focus on making sure we get the right mix of business right. So that's.

Targeting parts of the available market that we feel like we can.

<unk> handles the best and that we can generate the best return so you see that with the.

With our mix of business trends I think that that probably continues.

Into next year.

Yes, the world changes certainly that could change, but I think right now I think thats.

That's our focus that's continuous that's a mix of business focus.

Okay. Thank you guys I appreciate it.

Thank you we'll take our next question from Tom <unk> with UBS.

Yes, good morning.

Wanted to I guess.

Continue a little bit on that that kind of a theme in the weight per shipment versus shipments.

Do you think about the use of capacity.

Do you think about that driven like door capacity. Your terminal capacity is that driven more by your shipments.

Or do you think of that more driven by weight and I guess, the reason I ask because youre seeing really strong tonnage growth, but the shipment growth is more muted.

And then youre, adding significant capacity, so I wonder if that kind of capacity adds versus shipments. That's a fairly wide gap is that the right way to look at it and it's just kind of opening up more future capacity.

Or do you look at terminal utilization more by the tonnage that goes through then the shipments.

Yes, probably in our view, we look at it probably more so on a tonnage basis, especially in our line haul network.

<unk>.

<unk>.

I'd say for us, it's probably the same across the docks to I mean, I think when we're thinking about door pressure, we think about tonnage through the doors.

So, yes, I mean.

Our capacity additions both across the fleet and across the terminal network.

Really preparing us for continued tonnage growth.

Yes, Okay alright.

On the labor side.

You don't sound like Youre being constrained on labor I guess some of the comments on location of terminals seems constructive in terms of maybe it's easier to get labor, but can you give us a little more sense of.

How youre doing in the labor market in and is that a constraint at all on your.

On your growth certainly something we're hearing from other transports that that is the constraint.

This to underscore it's challenging right so.

Offered the new facilities that essentially introduce us to new labor market. So that's an incremental benefit but by no means is it not.

Not a challenge.

We have a referral we have referral bonuses sign on bonuses.

Recruiting fairs opportunity ongoing across the country some market is hotter than others.

We had we've got a TV AD that we've put out that if you really pay attention to it it's as much about sire branding, but then it's also about.

Identifying.

And target marketing around drivers and employs so yes. It is.

Hey, it's a challenged markets out there and I think that gets you to the place where it's critical that you really utilize your capacity. The best you can and drivers are an important part of that capacity constraint right. So you've got to be able to price accordingly, because that's a scarce resource and you need to optimize all resources and Thats important.

Part of our capacity so yes, it's true.

<unk>, we've been able to.

We saw some improvements in hiring here in the last couple of quarters of.

Double down on some focus and referral bonuses and things but.

That's a continuing challenge for sure.

Is that limiting your growth or not not really.

In some places.

It does limit our growth.

But what it comes down to is that we have the identified.

What business, we can serve and what we can serve well for our customers. So in that case.

<unk> on building density, making sure you've got the right route structures youre not taking a <unk>.

Scarce driver and having them take try to serve a customer 100 miles from the terminal youre focusing it them into markets, where you can best serve them.

Service the customers, but then at the same time best leverage their capabilities and their capacity.

Right, Okay makes sense, thanks for the time.

Yeah.

Yeah.

Thank you we will take our next question from Jack Atkins of Stephens.

Okay, great. Good morning, Thanks for taking my questions.

So I.

I guess as you're as you're thinking about and executing on.

These these.

Larger structural changes in terms of how you guys are thinking about getting paid for the services, you're providing and it clearly.

It's going very well just looking at your results.

Are you incentivize the sales force to go.

Go after that incremental dollar whether it's an accessorial, just making sure you're getting paid for.

For.

The little things that Youre doing to service the customer.

Have you guys made changes to your sales force incentive structure to better align how they get paid with how you want to to be compensated at the consolidated company.

Yeah, absolutely so our sales force the measurements that we instituted in this year.

You think about those two variables to axis once revenue growth.

Our improvement year over year.

So both of those are targeted to.

Driving revenue.

And most significantly margin so.

Yes, I'd say, so greatest setup, an incentive for them they participate in the <unk>.

The performance of the company and they're a big part of why we've achieved the success that we have on our operations guys are getting it done the sales team are getting in front of the customer and they are solid right in making the.

Pointing out to the customer what we're doing for them and that that's been great. The incentives lined up for them. So they participate in the upside and I.

I can tell you I think that from the results I think it works.

Okay. Okay now that makes it makes sense and I guess going back to something you were saying Fritz in your in your prepared remarks around dock productivity and maybe some headwinds that you've just seen there with that with all the.

The new hires you've been making.

Could you maybe kind of help us think about.

About that a bit more.

Would you expect to see some tailwind from that as you kind of move maybe into next year as those folks get season, then and I guess from a bigger picture perspective kind of revisiting the technology theme.

I think what's on everyone's mind last year can you can you maybe talk a bit more about.

Ways to leverage technology to drive greater dock efficiency and productivity.

Sure so.

One of the first and foremost our focus with our operations team is make sure we deliver the freight.

Take good care of it so no claims.

And part of that obviously, a doc product.

<unk> team is critical to that.

We're more focused on service and save cost productivity because in the Ed.

Certainly we will have a little bit of tailwind as we get a little bit more efficient with our dock productivity.

We will see that you know I don't know that it will be.

The huge callouts for our or improvement into next year, but what will be the or improvement in next years will be driven by pricing and our ability to service customers. So that our ops team can continue to get that done that's most critical and that's most valuable to us.

So one of the what we look at on our dock production, we have a technology that we've rolled out and we continue to enhance our pacer technology, which on.

On the tablet for each one of our dock workers.

Basically.

Our scorecard or a bar that tells them. If they are on on task are behind.

And they can see that in their supervisors and the terminal managers can see that if there is somebody that maybe is not keeping pace or somebody thats new in his estimate uncertainty about performing their duties.

There can be some intervention in real time to to influence those results. So that's a key part of rolling out technology, and hopefully drive a little bit of dock productivity, there and we'll continue to that and look for ways to enhance it but ultimately.

First and foremost I got to take care of the customers' freight and that's critical.

Okay sure thing makes sense, thanks again for the time.

Thank you we'll take our next question from Jordan <unk> with Goldman Sachs.

Yes, Hi, just a question again on the labor front, just thinking in terms of next year, and obviously theres been a lot of inflationary pressures around wages. How is the best way to think about 2022 is it best to look at it like compensation per ton growth or just rate of change.

Year over year relative to revenues, if you could give me some sense. Thanks.

Well.

This year keep in mind, we've got that to wage increases this year one in January and then another one in mid August.

So at the moment, we wouldn't it wouldn't foresee two of those next year.

But I think the right way is just to think about.

The percentage range increase we've seen over the last few years, which is three five to four 5% it feels like a pure.

Pure wage inflation and then on that same line, you've got benefits inflation, which has been.

Low single digit year end and year out.

That's probably right way to think about it just off of that.

This year's base run rate of expense.

Okay. Thank you very much.

Thanks Jordan.

We will take our next question from Allison <unk> of Wells Fargo.

Hi, good morning.

Let me go back to the conversation on the new terminals. It sounds like Fritz in your comments that the expected new terminals are certainly starting off in a more favorable position versus some of the older lines.

Impacting it a lot, but how should we think about it maybe pass that first year in terms of adding to that sort of expansion does that start to accelerate to some extent as this new terminals become more productive.

Yes, yes.

Kind of how you would think about it as they become more efficient.

I think the other critical part about those <unk>.

Terminals is that.

This is about moving closer to the customer. So there is embedded cost savings in there, but more significantly when you close to that.

Customer you can provide that service to the customer expects.

That reach that they expect.

It does longer term provide us not only or.

Expansion opportunities, but then it's also supports further pricing.

And differentiated service versus our competition.

I think I think the best example to Allison for that is if you just.

Think about the northeast we started our expansion up there in 2017 and it took US a couple of years to get to breakeven.

I'll tell you another couple of years into it that region's operating sub 90.

So.

Once you get that kind of base built as we continue to drop terminals and as we've been doing up there.

It's very much a contributing factor to the improvement we're seeing.

Got it thanks, and then just on the balance sheet, obviously, a favorable leverage position here you know understanding certainly in that growth mode now.

Obviously, some cyclicality in the business longer term.

How should we think about what that optimal range. Andrew how are you guys thinking about that optimal leverage range for that business here.

Well.

We don't think about it a whole lot I mean, we're in a strong cash generating position so.

We'd like to have more opportunities on the real estate side, and we certainly could use the balance sheet.

Get aggressive there but.

I think in terms of Capex.

There is a willingness on our end I mean, we could see capex.

Around 15% to 20% of revenue for the next couple of years, if we can put the right pieces together so.

But even at that rate I think we're going to.

At the current run rate of profitability, we would be able to cash flow of that so it's not really a question of what management is comfortable with its just that we don't really foresee an opportunity to have that.

You have that opportunity to put something on the balance sheet.

I understand thank you.

Thank you we'll take our next question from Todd Fowler with Keybanc capital markets.

Hey, Good morning, guys. This is Eric on for Todd just wanted to first ask about purchase transportation I guess, how should we think about that maybe moving into 2022 is that the thing that probably stays elevated as a percentage of revenue in the first half and then trails off as new employees are brought on board in productivity increases or.

Just would like to hear your general thoughts there. Thanks.

I'd say just leave it at the first part of your question it probably stays at that elevated level.

Im going to say it tails off.

While we are in the growth mode. Like this I mean, we're not adding drivers, but as Fritz said, it's a challenge and we'd love to have more drivers. So I won't commit to a tailing down but I think I think it's going to stay at this level through the first half of the year, Okay assumption in your model.

Okay. That's helpful. And then just with terminals do you guys have any visit.

Visibility as to what the cadence could be on those ads in 2022 should we assume maybe kind.

Kind of a steady additions through through the year or is it weighted.

One way or the other.

It's probably weighted a little bit to the second half but.

That's kind of where we are right now in terms of.

Getting some of the <unk>.

Final touches on getting things in place, but I'd waited to the second half.

Alright, thanks, guys.

Thanks Zack.

Thank you we'll take our next question from Ken Huckster of Bank of America.

Hey, great good morning, Fritz and Doug.

Thanks, John you wanted to call and nice job on the quarter and in the ops.

Just wanted to actually maybe just a follow up to that question there.

How do you think strategically about in sourcing line haul versus rail and truck. Obviously I know you just mentioned on the employees, but maybe what do you have a thought in terms of what you want to get that to a max level alone challenges that they are outsourcing.

Or kind of goals of bringing it back online.

Yes.

We'd like to do as much of it internally as we can but we also think about balancing the network.

If if you've got.

Imbalance, meaning a lot of.

Head haul lane into.

Our backhaul market.

Theres only so many of your drivers.

You want to run in that direction.

Theres always going to need going to be.

Need for PT in the way, we view network connectivity.

Its probably.

It's more than optimal right now, but it's not something that we can't manage through this over time I think is as we build density and as there's more balance in the network I think you'd naturally drift more of it in source, but.

We are in the growth mode, now and Youre going to have some imbalance, where you need to use it and it makes sense.

Perfect.

And then you mentioned that 10 to 15 service centers, obviously a lot of.

Discussion on that but what are your thoughts in terms of the ability to really scale that so just given is that a pretty set 8% to 10% per year or opportunities can you can you accelerate that or is just the lead time planning.

Multiple years, so you've just got that's kind of more of a fixed growth.

Just to kind of just kind of give you some color around that.

Have a team that's pretty focused on this as you might expect so we're building a pipeline that looks out two and three years.

So there is a we know I've got a pretty good idea of what.

Not 2022 with 2023 might look like so.

<unk>.

Kind of building that kind of cadence now if you've watched us closely it if the opportunity presents itself, we'll accelerated right. If we can do that and it's it fits and we can make.

Make that work at the same time.

This kind of organic strategy, where.

Let's say, we get to the second half of the year and the kind of the world slows down or wherever we can slow the cadence of this down as well that's what we like about the strategy we could.

Inventory of facility meeting you don't open it wait a year I mean, those sorts of things are you pulling forward. If you feel the timing is right or perhaps you're in a position where I really like to be where we're saying hey, there's a customer opportunity our market opportunity. Let's move this thing forward because we can better serve the customer more rapidly so.

I'd say its a bit of a fluid number.

We're real solid 10 to 15.

We know what that looks like both for this year.

And into 2023 as well.

Great and then last one just the weight per shipment and I just want to clarify that is that just a factor of truckload overflow or is that a shifting kind of more fundamental shift to e-commerce moves and the like that are driving your weight per se.

Yes.

Think about it more in terms of our efforts around mix. So as much of that there's a lot of that weight gain.

It's been just a function of us taken lighter weight shipments out right. So that's part of what we call. The working on mix. So as you move the lighter weight shipments if youre not able to get the revenue per shipment you need maybe it's gone a length of haul that it doesn't make sense or something some of those shipments have come out and that has helped.

<unk>.

Fuel the increase in the weight per shipment.

Say there is there is less of it.

Kind of each quarter that was truckload spillover that came about during the pandemic.

Wonderful I appreciate the time thanks, guys.

Thank you we'll take our next question from Stephanie more of truest.

I wanted to maybe touch on just on the top line trends in the quarter and if you saw any particular industry vertical with outsized performance are the same token.

Their performance and really how you would characterize where we are with some of your industrial customers.

Great.

That bank.

Hi, good morning, Stephanie.

I mean in terms of geographically I mean, obviously the west coast is still.

Very very strong markets for all of us.

The Texas region Houston.

Had a nice quarter and nice activity levels down there. So I guess you could say some of that.

Energy related.

No we're not able to.

Serve all of the businesses there so the industrial demand feels still solid to us.

I didn't see that GDP number out this morning, but but to us it feels it still feels like a pretty solid backdrop moving into the.

You know at the end of the year and into next year.

From a customer standpoint, that's what we're here.

Great and then on the other side of that I think everything Youre hearing is shaping up to be a pretty robust holiday season, and a lot of ecommerce growth in particular, maybe just now that.

Have you seen that this year versus prior years, you might be a little bit more exposed to some of these e-commerce related shipments and the benefit that might have or what are your customers, saying, let me go on to the holiday.

Yes.

I guess, we're in a position probably to benefit somewhat from that growing trend of <unk>.

Online buying and residential deliveries, but that's you know that's not really.

Our space, we were in industrial freight haul or not as much retailer, it's probably huh.

A truckload carrier.

Dealing with the big box retailers is probably in a better position to answer that but I think <unk> in a good position to handle more of that we just have to make sure we get paid for it.

Got it thanks, so much.

Thank you we'll take our next question from Bruce Chan of Stifel.

Okay great.

Good morning, Thanks for the question.

My question just to follow up on the <unk>.

Not sure I can quote percentage breakdown could trucking rail and then just on that rail line haul component conceptually how are you thinking about that as a long term part of your network is that number tick back up as rail service starts to improve or is there may be less room for that in your network as you were targeting something higher service levels. Thanks.

Yes.

Yes, and historically, it's run about 60 40 in terms of the split of miles.

60 trucks 40 rail this quarter is closer to 70 trucks 30 rail.

So I think it will it will probably drift back to that normal historical 60 40 split.

So limited on now.

The capacity that you can get from a rail carrier service has been okay. You just you can't get as much of it as you want.

In terms of our network I think for quite a while it's been 60 40 kind of balance and I guess, that's where it will probably drift back to when we can get the rail capacity.

Great. Thank you that's all for me.

Thanks, Bruce Thanks, Bruce.

Okay.

Thank you, we'll take our last question from Amit Mehrotra with Deutsche Bank.

Hey, thanks for the follow up.

Sorry, I was hopping between calls, but did you guys talk about the sale.

Of the terminal.

In the quarter.

Wondering why that was a good sales candidate given youre trying to grow the footprint and are there any other opportunities to dispose of maybe smaller terminals is given some of the bigger ones that you've added over the last year or so.

Yes, Amit.

<unk> moved into the Memphis facility.

Which is a significant increase will better position on that terminal. It's twice the size of what we exited so.

The legacy facility in that market.

We didn't need to keep it so that one was one that that led to the exit.

I wouldnt interpret that anything beyond that.

That was surplus to met new Memphis facility is well positioned in two important ways. One is it's a connection point for our.

Line haul or a big break operation for us.

It's well positioned to do a great job.

Market that is Memphis, so that's just.

Just sort of special I don't call. It a special situation, but that's kind of how that will develop there could be some other markets, where maybe its a one terminal market and we go in and.

Flights up to larger and we exited an older facility, but that could happen I frankly, I would expect that to happen over time.

But.

In general most markets the big ones the ones that have the big.

Russell markets, you'll see us adding.

Additional facilities, there could be a scenario in which you exited a smaller one.

Got to Atlanta.

Atlanta.

<unk> added we will have three here, but maybe down the road.

You grow to five and you say well, maybe optimal for something like that that could happen as well.

Okay got it thank you.

Thanks.

Thank you and that concludes our questions I'll turn it back to Fritz for closing remarks.

Thank you everyone for.

Participating in today's call and your interest in <unk> continuing growth story.

We're really excited about 2022, and what that has in store for us and we feel like we've got the plan in place to execute and deliver results. So thank you all and have a great day.

This concludes today's call. Thank you for your participation you may now disconnect.