Growing pains from building out a national network hampered Saia’s second-quarter results, sending shares of the less-than-truckload carrier more than 20% lower briefly on Friday. Incremental operating costs from the company’s terminal additions and a mix shift to lower-weight, retail freight were a drag on margins during the period.
Saia (NASDAQ: SAIA) reported second-quarter earnings per share of $3.83, which was 4% below the consensus estimate ($4) but 12% higher than the year-ago quarter ($3.42). Higher interest expense from debt incurred to acquire terminals was a 7-cent headwind year over year while a lower tax rate was a 2-cent tailwind.
Revenue increased 19% y/y to $823 million as tonnage improved 10% and revenue per hundredweight, or yield, increased 8% (9% higher excluding fuel surcharges). The tonnage increase was a combination of an 18% y/y increase in shipments partially offset by a 7% decline in weight per shipment.
Saia’s tonnage was up 7.6% y/y in April, 9.8% in May, 12.2% in June and approximately 4% so far in July. The company is now facing tougher tonnage comps as it has been a full year since it began benefitting from a shipper defection from Yellow Corp. (OTC: YELLQ) ahead of its eventual shutdown on July 30.
The decline in shipment weight boosted the yield calculation. Net yield, which backs out the benefit from lower shipments weights, was just 1.5% higher y/y in the period (excluding fuel surcharges). Revenue per shipment (excluding fuel) was up just 1% y/y but down 1% from the first quarter. Management was adamant that unfavorable changes in yield are not an indication that it has cut rates to fill its growing network.
“There’s nothing in our fiber that says we’re going to lead with price. … [W]e don’t operate that way,” said Fritz Holzgrefe, Saia’s president and CEO, on a Friday call with analysts. “The reality of it is, we’re not in the business to chase volume, we’re in the business to build profitability.”
Renewals on contractual business resulted in an 8.4% average price increase compared to a 9.2% increase in the first quarter. Management said it expects similar results for the remainder of the year but noted the renewals do not carry volume commitments.
Saia has taken on a larger mix of retail freight, most of which was picked up from Yellow. It has also seen an uptick in demand from national accounts, where shipments are priced on thinner margins. The new freight is mostly in the one- and two-day markets, with shorter lengths of haul.
A 9% increase in revenue from the first quarter was ahead of management’s guidance calling for a mid-single-digit increase.
The carrier posted an 83.3% operating ratio, which was 60 basis points worse y/y. OR improved 110 bps from the first quarter, but that was light of management’s guide of 150 to 200 bps of improvement. Management said the change in freight profile was likely a 150-to-200-bp margin drag in the quarter.
Terminals opened in the past three years operated at a 95% OR on average versus the 82.2% OR recorded by the company’s locations that have been open for more than three years. Saia opened eight locations in the second quarter (two of which were site relocations), which operated at a loss. The cost headwind from the terminal openings was said to be a 130-bp hit to OR in the quarter.
“There’s cost associated with them, but there’s also a cost of not being in the market,” CFO Matt Batteh said.
The company has opened eight new terminals and relocated two others so far this year. It expects to add 10 to 13 more new terminals before the year ends. It acquired 28 terminals from bankrupt Yellow’s estate. In total, the changes are expected to push the carrier’s terminal count to 214 by year-end, which would represent a low- to midteen-percentage increase in network door count.
Saia has added 50 terminals since an expansion project in the Northeast began in 2017.
During the quarter, the increase in average cost per shipment was greater than the increase in average revenue per shipment by 80 bps.
Salaries, wages and benefits, and purchased transportation expenses were 30 bps higher y/y as a percentage of revenue. Head count was up 19% y/y to accommodate the volume growth, and there was also an annual wage increase (4.1% on average last July).
The carrier normally sees 150 bps of OR deterioration from the second to the third quarter each year. It expects the third-quarter OR to be 100 to 200 bps worse sequentially this year. Given the recent mix shift and cost headwinds, it pulled its 2024 OR guidance calling for 100 to 150 bps of improvement. Saia now expects a flat result y/y. However, it said the long-term goal is to achieve 100 to 200 bps of OR improvement annually.
“The important thing is, you’ve got to open these facilities so when the economy comes back … we’re in a footprint that we can take advantage of it. This thing scales at that point,” Holzgrefe said. “We lose sight of that when we focus strictly on Q2.”
The company reiterated a $1 billion capital expenditures plan for 2024. The outlay calls for $550 million on real estate, $400 million to $450 million for equipment and approximately $50 million on IT projects. It has already spent $235.7 million to acquire properties from Yellow.
Shares of SAIA were off 18.4% at 2:38 p.m. EDT on Friday compared to the S&P 500, which was up 1.2%. The sell-off was similar to the reaction shares saw following an earnings miss in the first quarter.
