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spk15: Hello, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q2 2023 SIA Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. Thank you. Doug Cole, Executive Vice President and Chief Financial Officer. You may begin.
spk17: Thanks, Chris. Good morning, everyone. Welcome to SIA's second quarter 2023 conference call. With me for today's call is SIA's president and chief executive officer, Fritz Holzgriff. Before we begin, you should know that during this call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We refer you to our press release and our SEC filings for more information on the exact risk factors that could cause actual results to differ. I'll now turn the call over to Fritz for some opening comments.
spk10: Good morning, and thank you for joining us to discuss SIAS second quarter results. While continuing to manage through an ongoing softer economic environment, I'm proud to present what I view as very solid results produced by our team in the second quarter of 2023. On a bright note against easing year-over-year comparisons, the pace of volume declines moderated each month as we move through the quarter and have actually turned positive so far in July. We believe changing industry dynamics over the last several weeks have played a role in this. Internally, we monitor our customer satisfaction metrics on a daily basis. For the quarter, our trends continue to progress favorably as customers are increasingly satisfied with our service both in our legacy facilities as well as the new facilities opened in the last couple of years. It is gratifying to see our team's commitment reflected in the financial results. Despite an overall freight environment down compared to the prior year, we saw solid results in the quarter. Total revenue of $694.6 million was down only 6.8% compared to last year's record second quarter revenue, despite a 3.8% fewer shipments and a fuel surcharge revenue being down nearly 32%. Our focus on service, pricing, and mix of business has been key to offsetting these factors, and our yield excluding fuel surcharge revenue improved by 2.7% compared to last year, even with the headwind created by an increase in weight per shipment and a decline in length of haul. We continue to highlight the importance of business mix and freight selectivity and closely monitor our revenue per shipment, a key metric for our team. In the quarter, revenue per shipment excluding fuel surcharge increased by 4.8%, benefiting from a 2.2% increase in average weight per shipment. Industry pricing continues to be resilient in the face of negative tonnage trends, and we saw an average contractual renewal increase of 5.3% in the second quarter. Our second quarter operating ratio of 82.7 deteriorated 230 basis points compared to our operating ratio of 80.4 posted in the second quarter last year. But again, that was a record quarter for both revenue and OR, and the industrial economy has changed meaningfully since then. I'll now turn the call over to Doug for more details from our second quarter results.
spk17: Thanks, Fritz. Second quarter revenue decreased by $50.9 million to $694.6 million. Yield excluding fuel surcharge improved by 2.7%, while yield decreased by 4.8%, including the fuel surcharge. Fuel surcharge revenue decreased by 31.7% and was 15.9% of total revenue compared to 21.7% a year ago. Revenue per shipment ex-fuel surcharge increased 4.8% to $287.9 compared to $274.6 in the second quarter of 2022. Tendencies decreased 1.7%, attributable to a 3.8% shipment decline, slightly offset by a 2.2% increase in our average weight per shipment. Our length of haul decreased 2% to 892 miles. Shifting to the expense side for a few key items in the quarter. Salaries, wages, and benefits increased 5.7% from a combination of our July 2022 wage increase, which averaged 4.3% across our employee base, and also the result of our employee headcount having grown by approximately 1.1% year over year to support our network expansion over the last 12 months. Purchase transportation expense decreased by 45.8% compared to the second quarter last year and was 7.2% of total revenue compared to 12.3% in the second quarter of 2022. Truck and rail purchase transportation miles combined were 11.8% of our total line haul miles in the quarter compared to 19.3% in the second quarter of 2022. Fuel expense decreased by 25.8% in the quarter in spite of company miles increasing 6.6% year-over-year. The decrease in fuel expense was primarily the result of national average diesel prices decreasing by over 28% on a year-over-year basis. Claims and insurance expense increased by 19.3% year-over-year in the quarter and was up 20.6% or 2.9 million sequentially from the first quarter of 2023. The increase reflects a combination of premium cost inflation and some expense related to development on older claims. Appreciation expense of $44.7 million in the quarter was 20.9% higher year-over-year, primarily due to the acquisition of terminals, tractors, and trailers. Our total operating expenses decreased by 4.2% in the quarter, and with the year-over-year revenue decrease of 6.8%, our operating ratio deteriorated to an 82.7% compared to 80.4% a year ago. Our tax rate for the second quarter was 24.7% compared to 24.4% in the second quarter last year. And our diluted earnings per share were $3.42 compared to $4.10 in the second quarter a year ago. I'll now turn the call back over to Fritz for some closing comments.
spk10: Thanks, Doug. So below last year's first half results, overall I'm very pleased with our first half financial results. To operate with an OR in the low to mid 80s at this point in the freight cycle is a testament to the improved operating performance of our team over the last few years. Our customer first focus is yielding tangible results across our organization. A singular focus on the customer is a rallying point for our employees, and it's reflected in the record employee engagement survey we completed recently. With a talented and engaged workforce, the value proposition to our customers continues to grow. A key component of our market share opportunity is to get closer to the customer and give them a chance to choose SIA for their LTL needs more often. I'm excited about the five new terminals we've managed so far this year. We're on track to open three to four more by the end of the year. At the same time, we continue to develop the markets around the other 20-plus terminals we've opened over the last two years. Although we're excited about the early success of these locations, we see considerable runway to continue to penetrate those markets. While our pipeline for terminal openings carries us well into 2025 and beyond, keep in mind that a key benefit of our organic expansion strategies is it allows us to go at the pace that suits us. Our business cycle is subject to cyclicality, and depending on where we are in the cycle, we may see an opportunity to accelerate or even slow down our terminal expansion activity. Importantly, we have positioned the company to execute on organic expansions quickly as opportunities become available. Finally, before opening the call for questions, I would say there's still a lot of uncertainty around the strength of the economy we've faced in the second half and beyond. That uncertainty is heightened for the LTL industry through the current well-documented disruption. At SCIA, we've emphasized the importance of the customer and focusing on things that we can control. So as our industry adjusts to the current disruption and adapts to the evolving economic environment over the coming months, My conviction about the long-term prospects of SIA remains steadfast. Great employees, great service, and a growing footprint, all key to securing our position as a long-term share gainer in our industry. With that said, we're now ready to open the line for questions, Operator.
spk15: Thank you. And as a reminder, please press star 1 if you'd like to ask a question. The first question is from Jack Atkins with Stevens. Your line is open.
spk20: Okay, great. Good morning, and thanks for taking my questions, guys. So I guess I'm going to ask the obvious one. I would really appreciate maybe if we could get a little update on July tonnage and shipment trends. You know, Doug, I don't know if you want to take that or Fritz, but, you know, obviously I would imagine the first half of the month is different than what you've been seeing over the last week to 10 days. So if you could maybe quantify that a bit, I think that would be helpful as well.
spk17: Sure, Jack. First of all, congrats on your summer activities. Thanks, thanks. Glad to be married. Glad to be married. All right, buddy. Happy for you. So June, you guys have April and May numbers. We put that out in the early June press release. So the June numbers, our shipments were down 1.8% year over year, while tonnage was down 2.2%. So weight per shipment dipped in June. by 0.4%. So, you know, kind of mid-June, I'd say, we started seeing some lighter-weighted shipments. Some of that, you know, some of the activities we were working on over the course of the year, and probably some of that already seeing some, you know, freight flow into the network from newer customers as well. So that weight per shipment kind of trend started in June. It's continued here in July in terms of lighter weight. So for July, you know, month today through yesterday,
spk20: shipments are up about five percent and tonnage is up about two and a half percent again you know that average weight for shipments trended down but um you know it makes sense to us versus you know what's going on out there got it and then in terms of just the you know what you've been seeing you know in the last couple of couple of weeks maybe last week how does that differ versus versus that that you know the month to date day trends and i guess kind of bigger picture for my follow-up question. For instance, you're sort of thinking about maintaining high levels of service. It's critically important to the size story and your value proposition. With this disruption in the marketplace broadly, can you walk us through how you and the team are really trying to make sure that you're protecting the network from any disruption from all this? Your own network.
spk10: Sure. Yeah, good questions. What I would say is that first on July 3rd is sort of the hanging holiday right before the 4th. That was a Monday, if you recall. So that was a little bit of a lighter shipment day. It was a bit challenging, you know, from a cost perspective and such. And so that first week of July was sort of holiday impacted, but, you know, it is every year. And I think we've seen the business levels trend more favorably up in the last two weeks. So that's been a positive trend. I think the And it's been a big contributor to what we're seeing so far in our results in July. But I think the key thing for us is that focus on customer and maintaining the service levels, picking up the freight, managing our customer base to make sure we understand what it is we're picking up, what the requirements are, what can we execute on that, and significantly making sure that the economics work with this. We feel very strongly that we've got a tremendous service offering, so it is critical to us to maintain that service offering. And it's also critical to us to make sure that, you know, we're compensated appropriately for that high level of service. Customers, this is a unique opportunity, you know, in a disrupted time that we could show customers, hey, this is what you get with SCIA. And that's differentiated high level of service. And, you know, we think that if we execute on that well, we can hang on to this or this share will come to us over time. It's really been our long-term strategy, and maybe the disruption here in the last couple of weeks has helped us accelerate that a bit. But, you know, we'll see how it plays out. There's a lot that still could change here in the next number of weeks. But our focus on customer first, I think, is going to lead us through this.
spk20: Okay. Thanks, guys. I'll pass it on.
spk15: The next question is from Amit Mehotra with Deutsche Bank. Your line is open.
spk16: Thanks. Hi, Fritz. Hi, Doug. I guess maybe I'll just ask a quick one on the operating ratio as you move from 2Q to 3Q. I know you guys probably have a wage increase in the third quarter that maybe pulls the line, but you've obviously got some some momentum on volume. So, Doug, if you can just talk about our expectations in 3Q. And then, Fritz, what is what's happening at Yellow to the overall price of the book of business? As you guys see contract rate renewals, I know you talked about 5% last quarter, but does this give you an opportunity to kind of accelerate the narrowing of that revenue per bill to peers that you've been so focused on? And just trying to think what the pricing opportunity is on the existing book of business.
spk17: Sure, I'll take that first one. So, yeah, you're right. You know, July is kind of annually our time. We think about, you know, wage increases and things like that. So that's taken place. The average, we'll call it right around four and a half percent across the workforce. And historically, I mean, if I'm just thinking about the last five years, you know, you got to take out, you know, the 2020 COVID year Q2 to Q3 doesn't make sense. You know, 2021 was a pretty unique year in the back half as we really, you know, saw an opportunity to work on some things and improve things around accessorials and all. You know, we took a really big step up there. And there's still opportunity there. We're still grinding that out each quarter. But that was kind of a unique quarter. But if I look at the other quarters, it's usually meant something like a mid-100 BIPs kind of deterioration. So I think, you know, look, we've got one month, and like Fred said, a lot of uncertainty on the top line, certainly over the next few weeks. But with a month under our belt, you know, 100 to 150 basis points in our view, Q2 to Q3 would be pretty solid work. So, you know, like I said, with less than a month in our belt, that's what we're comfortable with.
spk10: Yeah, just to answer your question regarding pricing environment, you know, I think that if you know, under the current sort of disruption, if you have a low-price competitor exit the market, I think that that, you know, the first thing is that customers, as that gets shifted around, customers that have service expectations naturally, I think, would gravitate towards SIAC, because I think we're doing a great job. For us, it doubles down our, you know, frankly, our responsibility to make sure that we're paid for that high level of service. capturing those charges. I think it's because I think the customer gets a lot of value for that. So we've got to be very, very diligent around that. I think what will happen over time in the industry, I mean, seeing the discipline that across the space, I think that probably continues. I think that to the extent that the underlying costs in this business remain inflationary, I think those factors are still key to all operators, not just science. paid for those investments. And I think that it's, you know, as we look for ways to continue to close the gap to make sure we're getting paid at market or above market because of the service levels, you know, I think that's an opportunity that we've got to continue to push for and drive for. I think the environment with this disruption that's there now, you know, maybe that helps us that people will have the opportunity to experience what great service is.
spk16: Yeah, and I guess just as a follow-up, kind of very big picture, Fritz, because over the last five years, the performance, the fundamental performance has been so great, and obviously the equity value of the company has responded accordingly. If there are people that are new to SIA today, new to the stock, new to the company, new to you guys, what would you frame kind of the three-, four-, five-year opportunity to be from a revenue perspective, from a margin perspective? Because You guys have accomplished a lot, but you talk about the runway. I'm hoping you can kind of like help us crystallize that a little bit in terms of what you think the opportunity is.
spk10: Amit, I think the opportunity for science is significant. And I think if somebody studies the industry and you study, you know, what the sort of margin opportunities are, what best in class looks like, and you look at our progress over the last couple of years and you look at our performance through, you know, a bit of a slower part of the freight cycle right now. We're able to operate in the sort of low 80s OR. That's a significant executional accomplishment for SIA. Now, and I think in a market where maybe we see a little bit more economic growth, I think the opportunity for SIA to grow this business well into the 70s OR is meaningful. I mean, it's something within our reach. What's critical that, and we talk about this all the time, it's about taking care of the customer. Customer's gotta get what they need from SIA, and when those customers get that, they understand what that value is. That helps our pricing story, that helps us close our pricing gap versus the larger players in the industry, and I don't see any impediment to us getting into the mid-70s OR or better. And we're excited about that opportunity.
spk17: Hey, Amit, and I know you know this. Hey, Amit, just to close the loop, I know you know this and I know what you were asking, but just for everybody on the call to be clear, Q2 to Q3, OR usually deteriorates a little bit because of that, primarily because of that wage increase we discussed. So when I said 100, 150 basis points, Q2 to Q3, that's a degradation in OR. So thanks, Amit. We've got to get on to the next one.
spk15: Yep.
spk16: Thank you. Bye-bye.
spk15: The next question is from Chris Weatherby with Citi. Your line is open.
spk08: Hey, thanks, guys. Maybe you just want to pick up on the shipment comments that you're making about the month of July. Maybe if you could get a little bit more granular. It seems like with the run rate or the acceleration you saw somewhere in the 1,000 to 2,000 shipments per day type of level, just wanted to get a sense of maybe what the exit rate was here in the month of July so we can get a sense of what the market inflection might be looking like.
spk17: You know, like Fred said, I mean, really, you know, the last couple weeks looks a lot different than the first couple weeks of July. But, you know, normally, seasonally, we see a little bit of a step down from June and July. And obviously, you know, that hasn't been the case this month. But, you know, it's hard to parse everything out. The last week of the month should be better, you know, and it was. And then you've got some freight going on out there that's coming into us new. So, it's been a meaningful step up. but probably have to wait till you get the full month trends in early September before we can really care to say any more on it.
spk08: Okay, that's helpful. And then when you think about facility openings and obviously the potential for some assets maybe to be available, I guess, as you look out into the back half of the year, can you give us a sense of what your plans are? Do you have 3Q plans that are specific that you can run through and maybe what the opportunity could be from a footprint expansion standpoint?
spk10: Yeah, it's early to make the call on what the real big opportunity could be. The three to four, I will give you a little bit of color. The three to four that we're opening the balance of the year, two of those were ones that became available to us in the last few months. So this is a pretty fluid environment that we're in where the assets become available. We feel really good about our ability to identify and purchase facilities, close them, get them into our system. So if more opportunities were to become available, and I think we can move on those pretty quickly. I think we can integrate those opportunities into our network pretty quickly. I would suspect if there were an influx of real estate that became available in the second half of the year, likely wouldn't get into the system, if you will, this year. It probably turns into a next year assets. And the other thing I would point out is that as we look at our pipeline of opportunities going forward, we have a number of pins on the map, if you will, that we have identified that maybe it's an opportunity. But if new assets become available, we may switch to something else that gets us into the market sooner. Or we may have to pause and say, well, we want to access to a piece of property or a location that is kind of going through transition, it may take us longer to get there just simply because of administrative challenges or seller challenges, whatever that might be. But I think that what's important to take away out of this is that we have the ability to operate pretty quickly around identifying facilities, opening them, getting them in line with SIAC culture and service, and pretty well, that's a core competency for us.
spk15: Okay, that's helpful. Thank you. Appreciate it. The next question is from Tom Wadowitz with UBS. Your line is open.
spk09: Yeah, good morning. Wanted to see if you could, you know, Fritz, if you could offer a little bit of more perspective on how you think this transition and the disruption takes place. Do you think that it's, you know, some of this flows through brokers or uh and you know it's kind of a we got to get the freight covered quickly but then you know what flows through could shift around again um or do you think it's like it's really important to lock in these shipments uh and then they'll kind of be sticky with you and and you can maybe you know show the service and price up a bit over time i guess the other piece within that is you know if we assume this was less service sensitive freight you know, can you just price it where you want to, or is that, you know, kind of how does that work? I think the assumption is the yellow freight would have been less service sensitive. So I guess that's a couple elements, but just trying to understand how you think about that process of the freight coming in and the quality of freight.
spk10: Yeah, so I think what we've mentioned earlier that, you know, there's still, as we're thinking about revenue for the balance of the quarter, you know, there could be a little bit of flux there is the that displaced freight or disruption kind of plays out. Because listen, our view of this is certainly there are accounts that we have today that have approved several LTL providers in that mix. So if one of the providers exits, certainly that freight gets distributed around to others. And that's an opportunity for us to show you have some pickup economies, an opportunity provide that service to the customer and sell and earn that business and keep that business. So those are certainly possible. There are also a fair amount of that business that has gone through sort of 3PLs and brokerage opportunities. To the extent that those make sense for us, maybe that's something that stays with us. So it's really important for us in this time, in this sort of, is to find that freight that makes the most sense for SIA. You know, we're not in the market to chase volume. We're in the market to find profitability and to drive returns. And I think that that will be our focus. And I think what you would see is that as we pick up freight, if we think it makes sense over time, we'll keep it. If we think we need to make adjustments to the rate or make sure that we get all the accessorial charges that are required, we'll do that. And if that works, then I think that benefits us over time.
spk09: Right. Okay. And then I appreciate that. And I guess for the second question would be, you know, it seems like you're from a balance sheet perspective, you have very little debt, you got a lot of cash. That's despite having a pretty strong CapEx program this year. I'm wondering if you said, well, okay, that, you know, 24, they're just a bunch of attractive terminals and we really got to hit the gas on this. Would you consider, you know, kind of ramping up further and issuing debt to kind of go beyond the, what your strong cash generation allows, or how aggressive could you be in terms of being opportunistic on terminals, you know, maybe in 24, not necessarily 23?
spk10: You know, Tom, that's a great point you bring up. I mean, listen, this balance sheet is positioned to grow, right? So we generate a fair amount of cash. We have a cash position right now. The idea with that is they provide us the sufficient resources powder, if you will, to accelerate our growth if we see that opportunity. So if the opportunity was attractive enough that it perhaps warranted leverage, we'd certainly consider that. But at the same time, we're generating cash. We found that we've been able to fund and find facilities and build facilities, frankly, out of our cash generation. What we have right now is really an eye to not only the real estate that we'd have to purchase, but also the equipment that we'd have to supplement our fleet to be able to match that with growth.
spk09: Okay. Yeah, great. Seems like you're really well positioned on this. Thanks for the time.
spk05: Thanks, Tom.
spk15: The next question is from James Monaghan with Wells Fargo. Your line is open.
spk04: Hey, guys. Good morning. Just actually wanted to sort of talk about some of the volume trends you'd called out. The idea is sort of how much of that might have been cyclical versus sort of what is sort of like essentially more of the market-driven part of it, but yellow. And then also, as we sort of like think through the sort of reallocation of share from yellow, is it it's been a source of share over the past decade and a half. As we think past it, do you sort of think that the LTL environment will have to slow its growth a little bit, given that there won't be that source of share, or are there still sort of opportunities in modal share or other weaker competitors where sort of volume growth can continue to grow at an impressive rate?
spk17: Yeah, I mean, it's, it's, I mean, you know the current environment in terms of the competitive landscape is certainly you know fuels this pickup we've seen there's no question i mean we've got some internal scia focus opportunities this year that we think we're starting to materialize in terms of you know new customers some some different you know verticals and we think we're starting to get a foothold uh remember we've opened 22 terminals in the last three years and some of those in middle markets where we've had selling initiatives that we're gaining traction on so you know, we'd like to think some of our initiatives are starting to fuel, you know, the volume we're seeing and kind of offset some of that cyclicality that you mentioned. But in terms of green shoots and the economic backdrop we were seeing, you know, over the last couple months, I mean, we haven't been calling out any bright spots on the underlying industrial economy. Now, going forward, you know, in terms of how LTL is positioned, you know, we think We think LTL stands to benefit, really, over some of the supply chain trends over the next decade and beyond. As you think about nearshoring and what that might mean, you know, in more, you know, cross-border moves with Mexico and even Canada and the role LTL will play in smaller, more frequent shipments, we think that bodes well. We think LTL is well positioned to continue to benefit from the growth of, you know, residential deliveries and final mile activities. As consumers have gotten more and more comfortable ordering things online instead of visiting bricks and mortar retail, for example, some of those things are heavier weighted and beyond what a parcel carrier can do. So LTL ends up playing a role in that. So I think we're well positioned secularly to participate, but in terms of the immediate kind of economic backdrop, We weren't calling out any green shoots.
spk10: I think to add to Doug's comments, I think if you looked at our relative performance versus our peers and the rest of the space in the last, you know, quarters or year, you know, you've seen that we've been in a position where our service is differentiated in our performance. We probably outperform some of our peers from a shipments and tonnage perspective, and I think That momentum, I think, going forward is a significant part of what will drive our success. So I think that that's an important distinction as well.
spk18: Got it.
spk10: Thank you.
spk15: The next question is from Jordan Elger with Goldman Sachs. Your line is open.
spk05: Yeah, hi. I guess a couple questions. I was wondering if you could maybe give some sense for how your yield ex-fuel looked as we moved through the quarter and how it feels in July, maybe even especially with that step up in volume. That would be the first question. Thanks.
spk17: Yeah, in terms of yield, I mean, you know, as the weight per shipment, you know, came down, you know, there was a, you know, kind of a positive tailwind, call it, like later in June when we started seeing that. and on here into July. Now that's, you know, the weight per shipment coming down, it's a negative, right, to revenue per shipment. So we have to keep an eye on that and make sure that, you know, we're getting properly concentrated. But so much of that yield is mixed related, and that could be, you know, weight and length of haul, but it can also be, you know, geography and direction the freight's moving and all. So a lot of things flow into yield. But like Fred said, I mean, What we think about is the pricing environment, and that's remained good. Is the yield up as much as the GRI or as our contractual renewals are running? No, but pricing is positive, and that's what we're bringing to the bottom line. I'd say you've got to watch that weight for shipment, for example. If that continues to trend negative in the quarter, like we've seen in July, that helps your reporting yields.
spk05: right and then sort of the second question is you mentioned sort of the normal degradation on or tq to 3q but just curious what what could what could make it work i would think there's a chance for it to do potentially a decent amount better as as there's this sudden volume step up and i imagine at least some floor on price given potentially uplifting prices maybe a competitor kind of goes away so Curious your thoughts on the variability around that normal OR trajectory. Thanks.
spk10: That's a fair point. I think one of the things we're pretty early into this, but certainly there's a path to beat that. If we continue our core execution, continue to manage mix, keep our costs in line, I certainly think there's an opportunity we could beat that. Our shipments and tonnage trends, we kind of keep that in perspective, in the right place, I feel pretty good that we could. On the other hand, because it's a period of disruption, we've got to be real careful about what the mix of business looks like and what the relative profitability of any freight that we pick up or new customers are. That's pretty significant to our value proposition is that we match those customers with know they understand what that service level is and what that what that means from a you know sort of pricing perspective so yeah i think there's a possibility we could beat it and you know it's but it's not we still got to go execute it thank you the next question is from ken hoekster with bank of america your line is open hey great good morning fredson doug um and congrats on great results and working through this process here um
spk07: Do you still feel like you have 20% excess capacity? Is that kind of, you know, after adding the five service centers and looking at more, maybe just talk about the capacity ability to grow here.
spk17: Hey, real quick, Ken, apologies on that pronunciation. We all know it's Hexter, but you weren't in the queue early, so I didn't give a chance to give Chris the heads up. I apologize.
spk07: I've heard all different sides.
spk17: I know, buddy. That's on me.
spk10: All right. If we, you know, we think about it right now, we've probably got around 15% capacity across the entire network. And, Ken, I think what's important to focus on there, because of where we are in our sort of network maturity, there are some facilities in there that might have lower capacity levels. And we've got some that have been open the last two years that, you know, may have 60% capacity. The opportunity right now for us is to continue to fully utilize the facilities that we've got in place that we've invested in. And that's a great opportunity for us to differentiate in a market and find that new customer. So that's there for us. And then it's, you know, in the larger areas in the network where we, you know, we're fully utilizing those assets or approaching full utilization, you know, we've got investments in place that you know, we'll upgrade some of those facilities even this year. So, you know, we feel pretty good about where we are. You know, in a disrupted environment like this, the challenge, and this is not unlike what we've experienced over the last several years, which is that you don't always know where the freight's going to come from. So if I give you that network capacity number, that's an average across a bunch. And in some places, we might say, you know what, we're going to have to manage the capacity. In other places, we'll say, let's go get the freight.
spk07: So, you know, I guess I want to follow up on an earlier question, right, which is really some business gets assigned right away, and maybe from your experience, and how long does it really take to settle in, right? Because there's this chaos that needs to be assigned right away, and then freight, you know, gets distributed. And maybe talk about how much business is on, I don't know, multi-year contracts versus, you know, how quick you can move that pricing in the basement.
spk10: Yeah, so some of this, they're obviously existing customers, and everybody in our book, I mean, by and large, everybody's on a one-year sort of pricing agreement. So I think that we've got to make sure that the pricing that's in place, we feel good about it, but as we pick up the revenue on an account, we may not have had the account earlier or a larger percentage of the uh business because we didn't have the pricing that was maybe attractive to the customer now they're you know they've moved the shift the freight to us it's that's our pricing and we're satisfied with it so um you know the other piece and that's probably more like the national account type business but then the other the new customer or the customer we've done a little business with or maybe we've um you know opened up new uh lanes with a customer those are the ones that you got to keep an eye on to make sure you understand what it is the freight characteristics look like, what the freight you're handling, what that customer looks like. And in that case, you might manage that out or try to manage it differently in the short term. So I think it's, you know, as we go through, the industry goes through a settling process around this disruption and the freight kind of moves around, you know, the other competitors or to us, I think you'll see a fair amount of, I don't know if I'd say churn, but you, movement over the next several weeks.
spk15: Great. Thanks for the thoughts, Chris. Appreciate it.
spk10: Thanks, Ken.
spk15: The next question is from John Chappell with Evercore ISI. Your line is open.
spk12: Thank you. Good morning. Fritz, to your answer for the previous question about capacity being different in different locations, most of these new terminals that you brought on, there's been a lot of them, haven't been running at the profitability of the entirety of the network, and there was a thought process that over time it would ramp to that. Does what's going on in the market today accelerate the market of the profitability across the new terminals, or is it completely dependent on the geographic mix of the freight?
spk10: Listen, it is dependent on both, but the fact of the matter is that the opportunity to grow the business more at an accelerated pace right now, that helps us drive that You know, leveraging those investments, building the density around our line haul network, our pickup economies, all those sorts of things. So, yeah, the additional well-managed growth here is potentially a real adder for us.
spk12: Okay. And then my second one, kind of mixing the short term with the long term, the word disruption has been thrown around a lot. I'd imagine you're going to flex PT as you get this acceleration of shipments. But as you think about more permanent resourcing, whether that be headcount, you know, equipment, et cetera, how are you thinking about, you know, what's been happening over the last couple of weeks and how you're investing above and beyond, you know, just the terminal expansion that's been on the radar for some time?
spk10: Yeah, so this is where I think that our ability to manage our line haul costs is important. It's an advantage for us. we feel pretty good and very comfortable fluxing our PT up and down as we need to to meet the service requirements of our customers. If you follow us over the last couple of quarters, you saw us in-source as many miles as we could as we saw volume declines in the sort of the Q3, Q4, and the Q1 period. And now, as you ramp back out of the you know, kind of more in a growth mode, you've got to be able to scale that line haul network. And that means you've got to fully utilize the drivers that you have. You've got to add drivers in markets, because now if we're at these growth rates, you know, with these new markets, we have the opportunity to scale that and add drivers. So that's good. But in the interim, we're going to meet service where we need to, utilizing our purchase transportation partners. But the key part of that model is it's got to make sense to meeting customer expectation and it's got to be cost effective and those we put those two things together we feel pretty good with our ability to flex up and then we'll continue to supplement that with adding more of our own drivers got it thank you fred the next question is from eric morgan with barclays your line is open hey good morning uh thanks for taking my question
spk19: I wanted to come back to your comment on closing the pricing gap to the peer group. Just curious, you know, how big of a focus that is for you right now and can some of this disruption going on be a catalyst to get there, you know, to parity faster than you might have thought otherwise? You know, not saying really near term or anything, more as the dust settles. Is that an opportunity or is it going to be kind of a steady approach over time?
spk10: Well, listen. we think about the service that we provide to our customers on a daily basis. And as a result, we think about making sure that we get paid for that service on a daily basis. Now, if you're following us closely, we know that we have our organic expansion that's going on. We're adding terminals, providing greater, which is really about providing higher levels of service to our customer, moving closer to the customer, providing that hitting those touch points and those pickup and delivery times that are important to the customer and making their transit times. When you do all that, you have the opportunity to get paid for it. And as we continue to grow, we become closer and closer at closer parity to our larger national peers. We see what their average revenue per bill is, and we look at our service levels. We know what it looks like with the competition. So the opportunity for us to continue to drive closing that gap it's critical. I mean, that's part of the value proposition of what we're doing. So if anything, this environment, I would expect that we'll double down on that effort. I would expect our peers would also do that. And I think the environment will continue with what we've seen here in the last number of quarters, even as things have slowed down. You know, we've seen the discipline around the competitive set around pricing, and I think that's important.
spk15: Thank you. The next question is from Jason Seidel with TD Cowen. Your line is open.
spk03: Hey, thank you, Robert. Hey, Doug. Hey, Fritz. Doug, I wanted to make sure I understood what you said about the OR on a sequential basis. You're coming up with 100 to 150 basis points of degradation. That is the typical OR that you see, or that's what you guys are assuming? And if that's the assumption, does that include more freight from a yellow bankruptcy?
spk17: It's pretty typical, you know, like I said, I, you know, if you go back and you want an average, you got to start taking a couple of things out. So that's what I tried to do. I think the math of it says it's been 150 to 200 worse. If you adjust and take out the code year and 21, but. You know, just based on what we've seen in July, we have very little clarity on where this goes over the next few weeks actually, but based on what we've seen. you know, we think we can do that. So maybe 100 to 150 basis points makes sense. I mean, we've, you know, maybe it's a little better than the historical average, but like I said, that average is kind of our math because we take out a couple things. But driven, you know, we know the wage increase has been in place. We're starting to use some driver hiring bonuses. Again, we haven't used in a few quarters. So factoring in what we know now, month to date in July, we think 100 to 150 basis points is is doable, you know, given what happens on revenue, is still, you know, not clear to us.
spk03: Okay. Well, I appreciate the clarification. And follow-up on pricing, you know, we were hearing back in June that LTL carriers were sort of pushing off some of the negotiations with customers based on the fact that they thought there could be an issue with yellow. Was this the case? And has that borne any fruits on the pushback?
spk10: You know, we weren't pushing anything back. I mean, listen, our view of this is that we've got to get the pricing in place. You know, I don't know that we – there may be some anecdotes out there, but we haven't seen anything like that. I know that there were customers that, you know, maybe saw some of the disruption and were looking to secure their capacity, and certainly we were part of that. making sure that that was all to the extent that it made sense for us. We negotiated those opportunities.
spk03: Okay. Makes sense. Appreciate the time as always, gentlemen.
spk18: See you, Jason.
spk15: The next question is from Ravi Shankar with Morgan Stanley. Your line is open.
spk01: Thanks, everyone. Doug and Fred, obviously this is a potentially fairly large business opportunity for everybody. and maybe kind of jump ball right now. Obviously, you guys are staying pretty disciplined on your price and returns, but are you seeing any other players in the space who are fairly aggressively going after this business, or do you think everyone's sort of waiting for it to settle in?
spk10: Yeah, I don't have a call out there for you. I would tell you that I think we're probably still early innings on how things shake out, but I think the one thing that's fundamental for all LTL providers, regardless of where you're positioned in the market, This is an inflationary business, and volume does not generate incremental return unless you get the appropriate pricing with it. I think we've seen how the industry has played out over the last few quarters as volumes have declined. You see a lot of discipline around that, and I think it's because of the underlying sort of basis of the business. So I don't anticipate any price-led sort of volume chase, if you will.
spk01: Got it. And maybe kind of switching gears and talking about the cycle, you guys, I think, hinted that you're not seeing too much out there in terms of just cyclical improvement. Can you give us some goalposts? Like what are you going to be looking for? What are your customers telling you in terms of inventory level? When do you think the pure cycle-driven core business grows as well?
spk10: Well, I think the underlying growth that we have in our business before kind of this sort of last few weeks is has been on our own competitive differentiation. So I think that that's been positive. I think that, you know, as we look at the more sort of macro indicators are out there, as you know, I think the GDP numbers look, you know, it's probably favorable right now. And I think if we see that develop in the second half of the year, I think that's probably the green shoots that folks are looking for. I think that our customer set You know, we don't hear anything particularly new one way or the other. It's more of sort of a tempered environment. I don't think it's a recessionary environment or anything like that. I think it's just a tempered environment versus the prior year, kind of where we were. So, you know, I don't think we have anything new to report there. But, you know, I think as the second half develops, I mean, if we keep the recent sort of economic trends, I think it's positive.
spk20: Understood. Thank you.
spk15: The next question is from Bascom Majors with Susquehanna. Your line is open.
spk14: Fritz, Doug, you've probably spoken about the yellow situation with investors in every meeting since the beginning of June. You've heard what we're asking on conference calls this quarter, both within LTL and outside of it. I'm curious from your perspective, what is the investment community getting right on how this situation is could and may impact your business? And are there places where we're kind of missing the forest for the trees on short-term, mid-term, long-term impacts from the way you see it? Thank you.
spk10: Well, I think at the highest level in the industry, when you have a potential top three player exiting, potentially, I'm still waiting for the final kind of verdict there, but I think that obviously that freight is going to go elsewhere in the business. It's going to find its way not necessarily evenly to everybody. It's going to match the service requirement of the customer. And I think maybe there's a player that's got a lower service level. Maybe they take an outsized percentage of that business potentially. Maybe it displaces a customer that you know, has a bit higher expectation around service, and then that kind of makes its way around to other players in the market. But I think generally people understand that, you know, if you displace the, disrupt the large player, it's going to get redistributed in the industry. I think the key thing to understand is that whatever the fundamental value proposition is of the remaining players, I think that that will match to where the freight ends up. And I think for SIA, I think the fundamentals for SIA are quite straightforward. We have an opportunity to continue to maintain high levels of service, continue to get the pricing and margin structure right in the business. There's a significant growth opportunity for us. In this environment, there's probably an opportunity for us to grow at a bit faster rate than what we have been.
spk14: You've been so adamant in mentioning service and revenue quality in all of your answers to this situation. Is the message that you'd probably rather take less than more of your pro rata share initially and hope some of that comes back when they're not satisfied with the service they're getting at Brand X? Is that really what we should take away here?
spk10: I think that if you followed SIA over time, I think the fundamentals of our business, we have never been one that are in business to chase market share or volume. Our focus has been on generating returns in this business. And so, you know, we talk a lot about, you know, our internally around how we're managing profitability. So this is exactly the same sort of scenario. Maintain that high level of service. customers expect that, and the customers expect that we'll be willing to pay for that service. And that's the winning proposition for us. So it's not necessarily who can get to be biggest, fastest. It's about generating those returns. And we see, and it's pretty apparent when you look at the other sort of public peers that are out there, you see what that level of performance looks like. And there's no reason for us not to try to pursue that. And that's where we think the big value is in our business.
spk15: Thank you, Fritz. The next question is from Stephanie Moore with Jefferies. Your line is open.
spk11: Hi, good morning. Thank you. I wanted to touch on actually the OR performance for the second quarter. You know, I was hoping that maybe you could give a little bit more color on just I think, you know, just given the weak top line environment, and it seems like you, you know, certainly exceeded our expectations, but I think a little bit better than you probably called out back in 1Q2 with the performance falling more in line with the historical seasonal average. So maybe if you touch a little bit on the dynamics or levers that you guys pulled or what happened to kind of be more in line with seasonal trends, despite what, you know, kind of continued to be a weak top line. Thanks.
spk17: Yeah, I mean, I'd say, you know, primarily we were really pleased with, you know, how we, you know, to the extent we could, how we controlled mix and revenue per shipment came in real positive. The ex-fuel revenue per shipment number up 4.8 in the quarter was really solid. you know, I think, you know, we had a solid May, and then, like I said, you know, the back half of June, you know, you normally get that month end, quarter end kind of step up, but it was solid, and we might not have baked that into our expectations, so to the extent that you got some more of that volume and, you know, from addition, from, you know, more shipments that pick up from customers, things like that, give you some opportunities to be a little more productive, and you get some cost economies in the network when you do things like that, so um you know heck you know you get some favorability here and there on some things but um i think it primarily was just probably a little bit better activity and operational success than we might have seen you know four weeks into the quarter great that's helpful and then just a quick follow-up um you talked a lot today just about the ability to be opportunistic with terminal expansion here in the coming
spk11: in the coming months, any change in strategy or opportunity between your decision to lease or buy additional terminals?
spk10: Our first priority is if we find a market that we want to be in or an opportunity we'd like to own, if it's a strategic facility that's got sort of maybe a 10-year life. We think about volume trends over 10 years when we make a decision to buy an asset. If for whatever reason we can't buy the asset, you know, if there's an opportunity to get an attractive lease, we're willing to do that. It's not our preference, but if we're willing to do that, and an attractive lease would be something that, you know, we can kind of, we've got a view as to what the longer-term costs are, and we can kind of build a business around it. But strategic assets, for sure, we want to buy those. Maybe one's in an end-of-the-line market. Maybe it's a little It's not available for sale. The investor would like to hold on to it. In that case, we're fine at the least so long as the economics work.
spk13: Great. Thank you so much.
spk15: The next question is from Bruce Chan with Stiefel. Your line is open.
spk06: Hey, Fritz. Doug, good morning, and congrats on the result here. Just want to follow up on an earlier comment where you mentioned the national accounts business. And I'm just curious on that topic, are you seeing any more, I guess, early activity or early demand on the national account side, on the field account side, or the 3PL side, or has it all been pretty balanced so far?
spk10: You know, I think that it's, you know, a little bit of color there is if we're in an account that maybe we share across multiple providers, those maybe we saw, you know, that volume come maybe a little bit more sooner than If it's a field account, maybe those accounts maybe don't have multiple providers. I think we're probably still seeing where that's going to develop. So it's still early on that. We're only two weeks or three weeks into this.
spk06: Okay, that makes a lot of sense. But when everything kind of settles out and the dust clears, you wouldn't expect any outside share gain in any one of those categories necessarily.
spk10: It's way too early for me to make a call on something like that.
spk06: Okay, fair enough. And then just, you know, a quick follow-up here. You brought up the nearshoring opportunity, and you also talked about, you know, planning for 10-year volume trends. As we think about nearshoring and, you know, potential expansion beyond your current plan, can you talk about, you know, maybe what kind of cross-border presence you have and whether there's any appetite to ramp that up?
spk10: You know, we do have a cross-border presence. It's particularly south. It's smaller than we're – I think over time there's an opportunity for us to grow that. You know, that's part of the long-term strategy for sure.
spk06: Okay, great. Thanks for the time.
spk15: The next question is from Christopher Coon with the Benchmark Company. Your line is open.
spk02: Yeah, good morning. Hey, Chris. Hey, Doug. Get me in here. Just Doug, you and I have talked about your focus on increasing weight revenue per shipment. Some of this newer volume is lower weight and lower revenue per shipment. So how do you balance that with sort of your longest term strategy and your ability to manage profitability?
spk17: Yeah, I mean, our weight's still up quite a bit over the last couple of years. And like you said, I mean, some of that was you know, really driven by, you know, a focus on that good industrial-weighted freight, as we call it. But, you know, we increasingly have, you know, national count customers that may be in retail, for example, that see the quality in the service we provide, you know, with maybe some limited choices on folks that can handle, you know, increasing volumes with that kind of service. You know, they're asking us to do more and more from them, and sometimes that's lighter-weighted shipments. So it's not that it's, you know, dramatically lighter weighted in terms of moving the average. But, you know, like Fred said, I mean, we're going to haul the business form, but it needs to be, you know, at the appropriate rate. So, you know, I don't think weight in itself is the sole factor in that negotiation. It's the mix of business. It's the volume you get when you show up to pick up a shipment. If they're lighter weight, but you can get two or three of them, that's usually pretty good business. So a lot of things factor into it.
spk05: Okay, thanks.
spk15: The next question is from Tyler Brown with Raymond James. Your line is open.
spk18: Hey, good morning, guys. Hey, Tyler. Hey, Fritz, curious on what the labor markets look like right now. How tight are they? And then given all the work that you've done from a cultural perspective over the last couple of years, how do you feel as an employer of choice, and do you think you can add human capital quickly?
spk10: Yeah, good question, Tyler. You know, I think certainly the labor market around, you know, drivers and such is competitive. And, you know, I don't know that that's changed. The demographics aren't necessarily in our favor. But I would tell you that I think one of the things that SIA has done a pretty good job of over the last several years is that, you know, success kind of compounds a little bit and people see, kind of what the opportunity is and what our trajectory is. So around being able to recruit people, that's been helpful. We've also made a pretty substantial investment in our human resources and recruiting effort and really sought to professionalize that and to give us the opportunity to scale the business. And those have been important investments. And then the emphasis, the key thing is that Throughout all this, employees want to be able to see, you know, we can talk about values and those sorts of things, but they want to see values in action. And that, I think we've done a good job with that, and that's helped us in the recruiting front. People know what they're going to get when they come here, and I think that that's been positive, and I think that's going to help us through. This will be a challenging time, you know, as we grow volume through this disruption. You know, being able to replicate that's going to be important.
spk18: Yeah, absolutely. It's been a good story. But hey, real quick, I want to, you kind of touched on this, and this is a bit of a technical question. But again, you guys, you guys have put so much work into the network and line haul design over the last couple of years. You know, I'm just curious how much flexibility you and Patrick sugar think there really is, if market conditions change quickly. You mentioned excess capacity in some markets, brightness and others. Do you feel like you can tack and maybe add breaks and less like call it traditional markets? Basically, what I'm asking is, can you create additional capacity maybe with what you have if you supplement that with PT, at least in the near term?
spk10: Oh, absolutely. I mean, we absolutely are doing that as we speak. So this is where I think this is a little bit of the SIA secret sauce here is our line haul team and We know how to scale this. We know how to place the PT. We know how to schedule this. The advanced sort of data analytics we put in place to be able to handle this, hey, this is challenging for that team, but it's well within our tool set to be able to adapt to this. I mean, there was a time, you know, five, six, seven years ago where if you had an event like this happen, I don't think we would be able to operate through it. And As you saw during the pandemic and even all the way through now, our ability to adjust up and down and match what demand patterns is, that's allowed us to be successful and meet those customer expectations. So I think that that's what's going to help us get through this. So I'm excited about us deploying those skills and kind of adapting our line haul network to what our customers need. Yep, love it. All right, thank you. Thanks, Kyle.
spk15: We have no further questions at this time. We'll turn it back to the presenters for any closing remarks.
spk10: Terrific. Thank you, everyone, for calling in and taking the opportunity to hear about the SIA story. We're really excited about the next couple of chapters in this story and look forward to giving everybody an update at the end of the next quarter. Thank you.
spk15: This concludes today's conference call. You may now disconnect.
spk10: about the next couple of chapters in this story and look forward to giving everybody an update at the end of the next quarter. Thank you.
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