Douglas Col - Treasurer Richard D. O'Dell - President, Chief Executive Officer & Director Frederick J. Holzgrefe - Chief Financial Officer & VP-Finance.

Thomas S. Albrecht - BB&T Capital Markets Brad Delco - Stephens, Inc. Jason H. Seidl - Cowen and Company, LLC David G. Ross - Stifel, Nicolaus & Co., Inc. Art W. Hatfield - Raymond James & Associates, Inc. Alexander Vecchio - Morgan Stanley & Co. LLC Scott H. Group - Wolfe Research LLC.

Good day, everyone, and welcome to the Saia Incorporated Third Quarter 2015 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Doug Col. Please go ahead..

Thank you, Ann. Welcome to Saia's third quarter 2015 conference call. Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer; and Fritz Holzgrefe, our Vice President of Finance and Chief Financial Officer.

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 most recent SEC filings for more information on the exact risk factors that could cause actual results to differ. Now, I would like to turn the call over to Rick O'Dell..

Good morning and thank you for joining us. This morning, we released our third quarter results, and I'm disappointed that we were not able to build on the fourth quarter's record earnings that preceded this quarter.

Although this was our 21 consecutive quarter of year-over-year LTL yield improvement, it was not enough to overcome the weak tonnage trends felt throughout the quarter.

Our previously announced market-based wage increase was effective July 1 and provided a significant cost headwind into weakening freight trends and was normally a strong seasonal period. These factors along with higher costs related to self-insurance were largely responsible for our 27% year-over-year decline in operating income to $19.8 million.

A few comparisons of the third quarter of this year's results compared to last year include; revenue decreased by 4.6% to $317 million as LTL tonnage fell 6.7%. LTL revenue per hundredweight increased by 2.2% despite the negative impact of lower year-over-year fuel surcharges. Operating ratio deteriorated by 190 basis points to 93.7.

Our diluted earnings per share of $0.46 compares to $0.64 in the third quarter of last year. LTL tonnage worsened in each month of the quarter against difficult year-over-year comparisons. We've remained diligent in our pricing stance, but I will say that it's a bit more competitive out there given current industry volume.

I'm going to go ahead and turn the call over to Fritz Holzgrefe to review our third quarter results in more detail.

Fritz?.

Thanks, Rick, and good morning, everyone. As Rick mentioned, the third quarter 2015 diluted earnings per share were $0.46. Total revenue of $317 million compares to $333 million in the third quarter last year. Operating income of $19.8 million compares to operating income of $27.1 million in last year's third quarter. Both periods included 64 work days.

Third quarter LTL yield rose 2.2%, reflecting the positive impact of our continued pricing actions partially offset by lower fuel surcharge contribution. Next, I'll mention a few key expense items and how they impacted third quarter results. Salaries, wages and benefits rose 6.8% to $177.6 million in the third quarter.

This figure includes a general wage increase implemented July 1, which averaged 4% across our employee base. Within the salary, wages and benefits expense line, we also experienced a 10% year-over-year increase in healthcare and pharmacy costs, which we self-insure.

Purchase transportation declined 30% to $19.3 million, or 6.1% of revenue versus 8.3% of revenue last year. Purchase transportation as a percentage of total line haul miles were 10.7% in the quarter compared to 14.7% in the third quarter last year. This comparison was affected by lower volumes in the quarter and better management of our own capacity.

Also, remember that as we decrease our use of purchase transportation in a given period, there's an increase to the salary, wages and benefits line as we run those miles with our own equipment and employees. Depreciation and amortization at $16.8 million compares to $15.3 million last year due to continued investments in tractors and trailers.

As our tractor fleet age continues to drop, we benefit from enhanced fuel efficiency. Fuel mileage improved by 1.5% to 6.9 miles per gallon in the quarter. Claims and insurance expense was $9.1 million in the quarter, compared to $7 million in the third quarter last year, or 2.9% of revenue, compared to 2.1% of revenue a year ago.

Expense related to accident severity was a negative in the quarter, while cargo claims improved by 22% year-over-year. Our cargo claims ratio of 0.86% compared favorably to 1.06% in the third quarter last year.

Our effective tax rate was 37.2% for the third quarter 2015, and we believe that 37.5% is a reasonable run rate to use for the remainder of the year. At September 30, 2015, total debt was $81.2 million. Net debt to total capital was 15.6%. This compares to the total debt of $83 million and net debt to capital of 17.7% at 12/31/2014.

Net capital expenditures in the first nine months of the year were $92.1 million, including equipment acquired with capital leases, and excluding the February 2015 purchase of LinkEx. This compares to $85.5 million of net capital expenditures in the first nine months of 2014.

Full year 2015 net capital expenditures are forecasted to be approximately $125 million, including some additional equipment replacement and ongoing real estate projects during the remainder of the year. Now, I'd like to turn the call back to Rick..

Thank you, Fritz. So to summarize the quarter, I'd say that we're obviously dissatisfied with the financial results, but we are not swayed from our belief that success will be measured over the long term, and our improved value proposition and pricing hold great potential.

In the quarter, Saia associates achieved our goal of 98% on-time delivery and also successfully lowered our cargo claims ratio. Our focus on pricing may have somewhat exacerbated the decline that we saw in volumes in the short term.

But pricing for improved profitability and to reflect our value proposition will remain the cornerstone of our model at Saia.

Seasonal volumes did not develop as expected, and we've taken action to rightsize our labor force to match volume levels which are currently running 3% to 4% below what we have expected with normal seasonality just 90 days ago.

We're committed to proactively managing all costs across our network and in our administrative offices in order to maximize margins in a softer freight environment.

Though we're disappointed with the results, we'll not stray from our strategy which requires that we appropriately price our service and value proposition at a rate which provides an adequate return in what remains an inflationary cost environment. With these comments, we're ready to answer your questions.

Operator?.

We'll go first to Tom Albrecht from BB&T Bank..

Hey, guys. Sorry about that. It caught me off guard there. So, Rick, I wanted to kind of – let me ask a factual question first.

PT miles, what percentage of your miles did PT represent and how did that compare a year ago?.

PT miles, total line haul miles were 10.7% compared to 14.7% last year..

Okay. All right. And then, I guess, Rick, when I look at salaries, wages, and benefits, the $177 million, obviously, you alluded to the fact that you're in a process of adjusting your workforce. That was up about $7 million sequentially. How quickly can you adjust? I mean, because you had given public updates on July and August tonnage.

I'm guessing that September's tonnage was down close to 8%.

How much of that SW&B is going to be fixed because you did raise driver pay and did the sign-on bonuses versus flexibility on the docks in that?.

I don't know if you're on trucking boards and what not, but – or you have someone who covers that type of stuff. But, we did....

I've looked at it, but not in the last week or so..

Yeah. We actually did a reduction in force to kind of make some corrections from a volume standpoint of what we're seeing today and the reduced outlook. It's approximately 4% of our workforce. And it was done performance-based.

Obviously, we value our employees and the quality drivers, but we had – it was probably over 90% where we had some documented performance issues. So, we've made some near-term adjustments. And, in hindsight, we probably could have and should have made some adjustments a little bit sooner.

But when things – you kind of hit a soft patch, I think the West Coast port thing was kind of booming out there for a little while and then it kind of softened up, at the same time, things appeared to soften up a little bit across the rest of our network.

And so, we probably took that action maybe a little bit later than we could have and could have managed things a little better through the quarter. We did give a larger increase than normal. Just to adjust the market, we're committed to investing in our employees and our market-based compensation.

And I think we commented those increases were more in the 5% range versus kind of 3% historical, so it was a bigger cost headwind than we would normally see..

Right. So, historically, your OR from Q3 to Q4 deteriorates depending on how many years you look at, maybe 170 bps to 200 bps. But after what happened here I don't know if that normal pattern would hold? I mean, it would seem like it could be less if you're getting on top or maybe it holds because freight is just that much worse.

How should we look at that?.

Yeah. I think your assessment is probably right. I mean, we're going to manage our cost better. Our yields didn't step up as kind of linearly during the quarter as what we've been trending. So, compared to kind of our expectations 90 days ago, that was probably a little softer.

Some of that just really depends on how many contracts you come up for renewals and which ones are whether they need a material increase or not. So, it's not always linear. October has actually been a little bit better yield month for us, but volumes have actually stepped down again a little bit.

So, I think your view kind of as we manage through it at this point in time that probably history which, I mean, I would say 150 basis point to 200 basis point deterioration is probably in the ballpark the best as we can tell at this point..

Okay. And then lastly and certainly I have other questions, but I just ask one and then jump back in the queue for others. So, I missed the first two or three minutes.

Did you go through the monthly tons per day, July, August, September, October? I know you're on the record as 5.7% for July and 6.5% for August, but what about September, October?.

So, Tom, just to add, September tonnage was down 8% year-over-year. Shipments for September was down 5.9%. And then if you look at October, tonnage is down 8.5% and shipments are down 7.7%. And this is all LTL..

Sure.

And then do you have the shipments for July and August per day?.

Sure. So, the July tonnage, this is LTL minus 5.7% year-over-year, the related shipments were down 2.6%. Then August was minus 6.5% tonnage and then the related shipments down 4.0%..

Okay. Thank you. I'll jump back in the queue..

Thanks, Tom..

We'll go next to Brad Delco with Stephens..

Good morning, Rick. Good morning, Fritz.

How are you doing?.

Good morning..

We're hanging in there..

Yeah. It was probably a bad question. I apologize..

No. No. It's okay..

You made a comment that many people probably will going to be pretty concerned about regarding the pricing environment as more competitive.

Can you elaborate on that a little bit? It doesn't seem like margins in the industry are healthy enough for us to try to repeat what happened in 2009 or 2010, I just want to make sure that we have a very clear understanding of kind of what that comment implied..

Yeah. I mean, first of all, I totally agree with kind of your return comment. I also think we're fighting some headwinds in our industry from a cost perspective and the driver market, I think, continues to be tight, so I think that's going to continue into the future.

And I think it's very important that this granular pricing to make sure that customers and shipments are operating properly when your network remains the cornerstone. So, we're going to continue to stick and manage through that.

I guess, I would just say, we've seen a couple of what you might call early signs of people cutting some rates with 3PLs for volumes, a couple of competitive bids that have come out with people pricing materially below where we would see things would work for us. A little concerning that everyone doesn't necessarily share that philosophy.

I would tell you, for us, during the quarter, our contract renewals were up 6% for the quarter and that compares to up 7% last quarter. So, we've continued to have success kind of moving rates up in lanes and with the business that we need to.

So, now, it's not – I don't think you've seen things kind of fall off, not really crazy things going on out there in the marketplace and I think there's a large pool of people that are being very rational, but there may be a little bit of a chink in the armor with a couple players..

Got you. That's good context..

I don't understand because some of the players that you see that with – and they're still paying – you see and they're still hanging signs out in front of their terminal to pay signing bonuses.

I mean, what kind of sense does that make?.

That makes sense to me. And then, Rick, sort of my second question, a lot of people view sort of LTLs having a lot more fixed costs than some other transportation modes.

Can you kind of give a view as to what you think in your cost structure is fixed versus variable, and maybe that will help, kind of continue on maybe Tom's line of questioning is to how quickly – if we do need to lower costs, how quickly we can do that and to what extent we could cut?.

Yeah. A lot of our terminal labor costs on an hourly perspective is variable, and we have to manage that from a production standpoint. We didn't do a very good job of that in the quarter. Quite frankly, we were a little reluctant.

We were a little slow to react, and some of our margin deterioration is self-inflicted, but that and some of the self-insurance things from a safety perspective are kind of our near-term opportunity. We've targeted next year about $25 million worth of savings. Half of that probably is on the labor side.

We also have a further cargo claim reduction, which I'm confident that our execution can continue to improve in that area with a couple of programs that we have. And then a portion of it is – a pretty big bucket is also on the maintenance side. And then we have kind of daily variable cost, and then over time, you have kind of semi-fixed cost, too.

I mean, we've made some investments in employee relations, safety, some sales resources that you kind of have to reevaluate over a period of time if you're getting a return on those. We did – with our staff adjustments, we're in the 4% range and we did reduce some sales resources by about that same 4% kind of performance-based.

But, our benchmarks show that we're still a little bit underrepresented in the marketplace. And over time, obviously, we're committed to our market share and selling our value proposition, so you don't want to be particularly short-sided with that either..

No. That makes sense.

If I were to try to just put big numbers around that, would you say fixed and variable is 50/50 overall for the business model or you think it's 60/40? Any kind of way to put it in that terminology?.

About 50/50..

Okay..

You do have some challenges, right? I mean, if you run a network and your bill count goes down, you can manage your load average in your big heavy-type lanes. But it's hard to make up when you lose three bills and – three and four bills in Savannah.

You're still going to run those schedules, right, so I could adjust my variable labor cost around the terminal, but you're going to still incur some line haul cost. You get in a bigger terminal and it becomes a more variable.

But, I mean, that's one of the challenges that you have in managing a network like this, right?.

No. No. Exactly. I definitely understand that. Well, that's great color. I appreciate the time, Rick. Thanks very much..

Okay..

We'll go next to Jason Seidl from Cowen & Company..

Thank you, operator. Hey, Rick. Hey, guys.

Just sticking on the pricing theme, you were kind enough to give us your contractual pricing in the quarter given some of the, let's say, unreasonable pricing practices you described here recently by some of your competition, do you think that 6% is going to fall even further in the fourth quarter?.

Probably a little bit. I don't know. It'll be interesting. I mean our comps get tougher because if you remember in last year, we weren't very satisfied with our margins and we began to take a more aggressive pricing stance, and so we're overlapping some quarters that have some higher absolute numbers in them.

But, I mean, October sequentially was a good step-up month for us. So from a base period, we're kind of off to a good start, better than any month I had in the last quarter. So, part of that is just a magnitude of contract renewals and then also the fourth quarter is the largest quarter that we have in contract renewals.

They are a little bit heavier weighted to 4Q, so that could be some opportunity as well..

Has this price aggressiveness been sort of across the board or has it been focused more on 3PL freight?.

Yes, I just said there's been a couple of examples of when people go into 3PLs for volume, which to me that's kind of the first sign of kind of a crack in the armor so to speak, but it could also just be somebody's strategy too, right? I mean I don't – it could be an isolated incident..

How should we look at CapEx for next year? I know you guys don't have a number out there yet, but what should we be thinking about in the model? I'm assuming probably down somewhat from this year..

Yeah.

For next year pricing you're talking about?.

The capital..

No. CapEx..

Oh, capital? We see value in continuing to lower our fleet age and having some cost benefits for that. So, we'll probably make some investments in the same ballpark as this year..

Yeah. I mean, you get – the two primary returns out of the fleet investment are obviously maintenance cost and fuel – well, three actually, maintenance, fuel efficiency, and then safety, the latest, bring even more current safety equipment. So, I think there's a continued focus on those sorts of investments that give us a pretty quick return..

And then, we just have to look at it over a period of time. I mean, it depends kind of what the outlook is. We have good cash flow, strong balance sheet, and we think we continue to make prudent investments.

And then, if we need to make adjustments to our fleet size, we just take out the old stuff, which is the most costly and less efficient as well, right?.

Well, that makes sense. I guess the last question I'll have, I was having a back and forth with a client this morning over sort of the state of the economy. And his contention was that we're probably in a recession just based on what the transports are seeing right now. I'd love your feel for what you believe the economy is doing right now..

I mean, it feels like it's softened up, obviously, quite a bit over the last 60 to 90 days. I mean, to me it's a pretty big change in our outlook. And I think, once you kind of get the rest of the LTLs out there, we'll see kind of what their tonnage trends look like.

And then, we'll have to figure out if it's a soft patch versus something a little more serious. And these guys talked about inventory build, you have some – maybe some of the West Coast port activity was the backlog and we got a little, probably a little benefit there. I mean, I don't know.

It might be a little early to get a big read on it, but it does feel soft; I don't disagree with you..

Okay. Fantastic. Gentlemen, thank you for the time as always..

We'll go next to David Ross with Stifel..

Yes. Good morning, gentlemen..

Good morning..

Good morning..

Rick, can you talk a little bit about dimensioners and how you're currently looking to roll those out in the network and what benefit they may bring?.

Yeah. I mean, we have pretty good coverage across our network. We run about – we have 27 of them. We run about 30% of our freight in a week through the network of dimensioners. We use those that are misclassified. There is a certain percentage of those. You can kind of adjust pricing on.

And then to the extent you have FAKs or a range of pricing, you can adjust immediately on those. But you know what the dims are and you reflect it in your costing activities and your pricing over a period of time. We have a pretty sophisticated network setup where we periodically run customers through there.

And if it's generating adjustments and whatnot, then we'll keep running that freight through there. And if the freight is properly classified and we're not having issue, we quit taking it over to the machine.

So, it's a – obviously not only you have the tool, right, you kind of have the system and network build around it, and those are two key things that we do..

Is there any estimations to what the yield benefit may have been over the past year with increasing the use of the dimensioners, kind of like how – when forklift scales became more prevalent and there was the increased weight and inspection and chargebacks to the customers.

The dimensioners have seen anything similar?.

Yeah. I mean, our average class is up. I guess I'd have to look at it and see how much of it, it is. I mean, over a two-year time period, the number would be much larger than just last year, right, because what we added, I think 10% last year.

But it's a pretty – I would tell you just the rate adjustments that we're doing alone is a very meaningful percentage of our revenue from the dimensioning machines. It's greater than 1%..

Yeah..

Probably 1.5% everyday..

Well, it's a....

Well, if somebody doesn't – so if somebody's not using that, that's not very smart..

Certainly some. I think we're going to see more folks roll out and let's hope that bouys the pricing environment a little bit. Switching over to the expense side, insurance and claims over the years has been kind of a thorn in your side when it comes to kind of quarterly reporting.

Is there any reevaluation being done of the self-insured retention level? And where it makes sense to fall out on the premium versus self insurance?.

We always look at that and where that runs in. Unfortunately, historically, when we've looked at that, the opportunities to reduce the volatility basically assures you one of the worst years you've ever had. So, I don't think it makes a whole lot of sense, right.

And while this quarter was – I think part of the reason this quarter feels it's not a good quarter, but it feels particularly bad because it compares against the very good quarter last year. So, the year-over-year delta is....

That's – if you add in all the self-insurance, it's up to $0.10 to $0.15 a share..

And again, we had some healthcare expenses which is largely, for us, was a pharmaceutical issue primarily with a new, very expensive drug that came out that's available to people. So, hopefully that bubble may go. It's supposed to be a cure for a significant disease, but it's very expensive on a monthly basis for three to six months.

And so, we're seeing some inflation related to that where people are coming out and taking advantage of that. And over time, if it helps with the disease, that's a plus, but near-term that should create a challenge for us as well..

Thank you very much..

Thanks, David..

We'll go next to Art Hatfield with Raymond James..

Morning. Hey, thanks for taking my questions this morning. Hey, Rick, when you look at your tonnage, where it's gone, where it's kind of October, you talked about the softness in the economy and you also talked about a couple of examples of maybe some more aggressive pricing.

Where would you characterize your tonnage downdraft from this standpoint? How much do you think of it is just the economy, one? And how much do you think it is your focus on maintaining price at current levels?.

I mean, you just have to – I'm going to have to get everybody else's numbers for the quarter and then I'll compare our tonnage trends to how they're doing, right? I mean, I think we have, on the UPS Freight, I believe, their numbers were up.

Where were they, Fritz?.

Tonnage were down 10%, I think..

I mean, I think when everyone else comes out, then we'll have to see kind of, like I said, how much of it is – I mean, I think, we probably have a little more exposure to the oil patch than some of our competitors just because we don't have 48-state coverage.

So, by definition, we got a strong share there in Texas, Oklahoma, Louisiana where the company kind of grew up. Comps are difficult because of last year's deal spillover.

But, I mean, I would tell you the biggest frustration I have is last quarter I wasn't particularly pleased with the tonnage, but with the yield and the cost management, we were able to overcome that and have a pretty good quarter, that being a record. And then it changed pretty dramatically.

The timing is a little bit unfortunate because we made a significant investment in employees that I think was necessary and the driver market is tight. We're not going to hold down driver wages while we're reporting record earnings. I mean, that's not going to make – doesn't make any sense and that's not the kind of company that we are.

Based on our market study, we made a significant investment. And then a little bit of our issues were somewhat self-inflicted, with us not executing as well as we could have on the reduced volume environment. But I think over time, it'll work.

The yield didn't go up in a linear fashion that we've kind of had estimated, so left us a little short on that side, too. So I think it's just a combination of factors that created the situation that we're in.

Very disappointed in it and committed to getting the cost management – more focus on the cost management side while we continue to manage through our revenue mix and yield opportunities as well. And I would tell you there's still a – there's deal flow out there, business is coming to market and going through RFQs.

We're diligently mining those opportunities for growth opportunities. We're going to open a second terminal in Chicago in the first quarter, which should be a positive for us. We're underrepresented with terminal coverage there. In big cities like that, you get closer to customer.

We should be able to generate at least incremental business there, $40,000, $50,000 a day in the first year, which would be 1% growth. So we're not just conceding the market.

I mean, what you have to do is you have to mine the market for the customers that value what you're doing out there in terms of service quality, cargo claims ratio, the responsiveness that we have in our organization to the customer. So we're continuing to pursue those things.

And I'm confident over a period of time, Saia is not going to be in a perpetual market share decline.

I'm willing to take a couple of percentage points off where somebody else says if my yield goes up 2%, 3% higher than the market and my analytics show that we're underpriced in the marketplace and we need to continue to take those opportunities to reprice accounts appropriately that need to be repriced over a period of time dependent on market conditions..

No, that's helpful.

When you talk about your poor execution on the cost side, is that an issue of recognition? Or was it an issue of just putting off the decision and thinking that maybe it would turn at any moment?.

I mean, I think when it was time and it was clear where we were, a decision like that is always difficult.

In fact, people, their families, even if some person has some documented performance issues, I mean, you'd rather coach them around and get them to improve, right?.

Right..

It's not really on a philosophical decision to go out and do that. So you never feel good about it, right? But, I mean, in fairness, like, we weren't managing our variable labor hours to the extent that things had slowed down. So, I mean, that part of it is our own execution.

I would tell you, because the driver market has been tight and our employees are highly-valued, I mean, we probably waited a little bit longer than, in hindsight, than I would have liked, but I think that's prudent, too, right? We're not the kind of company every time you turn around, volumes dip for three weeks, you're going to turn around and lay people off.

I mean, that's not appropriate. So I would have liked to seeing our execution be a little bit better, I mean, but when volume soften up, it's hard to maintain load average and productivity, you lose some route density. And you got to work through those things and make adjustments in. We didn't adjust as quickly as we would have liked.

And I'm confident over a period of time we'll execute better. I wouldn't necessarily call our execution poor, but I think it could've been better. We have higher expectations than what we achieved.

Let's put it that way, right?.

No. That's a fair explanation. Last thing for me, right now, on the insurance side, it seems like insurance costs are kind of headed higher.

Can you talk a little bit, not at just about you, but really about where you see the market heading? And is this going to be something that theoretically is problematic for some carriers in that their insurance costs start to get out of control? One.

And two, are you seeing any providers pulling back from the market at all?.

We are working toward our renewal right now, and indications are that the expenses are going to go up a fair amount. That's not the biggest portion of our – because we are so self-insured, it's not a huge portion of our overall expense, but it's looking to go up materially next year.

I don't know, Doug, are you seeing somebody pull out of the market or anything? Doug handles our risk area, so he'd probably be better answer that directly than me..

I don't think we're far along enough in the renewal process to say we're not seeing carriers willing or insurance carriers willing to come in and compete.

But just given the size and the visibility of some major transportation related claims and awards last year, I'd just say insurance carriers are – if they're still playing in this market, they're very careful about who they underwrite. So it's competitive, but it's something we'll manage through as we get closer to our renewal..

Sure.

So it sounds like it's not necessarily an issue for you, but it could be an issue for some smaller carriers if they have got poor experience?.

Yeah, potentially.

I think that combination of poor experience and some very high profile accidents that probably have some huge numbers associated with it, right?.

Yeah..

Got to make you think.

And, like you said, for us and I think carriers that have a robust safety program are investing in technology, have all the onboard devices and electronic logging and things that are going to come to market and become even more prevalent out there amongst the smaller carriers and you've got to think it's going to have some impact, right?.

Right. No, I would think so. Hey, thanks for the time this morning, guys..

We'll go next to Alex Vecchio with Morgan Stanley..

Hey there. Thanks for taking my questions. Rick, obviously, we have seen M&A pick up in the space over the last few months. And I kind of want to touch back on the pricing environment.

And maybe can you kind of talk to the extent to which there might be some relationship between the behavior of some competitors, just given what's happened in the market and from an M&A perspective?.

Are you talking about XPO specifically? Or what – I don't know, what's your question there earlier (38:14)?.

My question is, are you seeing behavior change at carriers that are now owned by different companies? So, yes..

No. I don't want to get into one sign of something I saw with a couple of people, and we don't normally name other carriers out there, but that wasn't the carrier that I was referring to..

Okay.

But there are numerous other folks out there that are engaging in a bit more aggressive pricing behavior?.

It's actually – I've only seen couple of other instances and we see it in RFQs and sometimes I don't know who won the business or if somebody tells me that if they're telling me the truth or not. So somebody, they may tell me – oh, they are trying to get me to match somebody's pricing and they may tell me it's FedEx that won the business.

I don't necessarily really know if they're benchmarking me against FedEx or it's a second-tier player and they're just looking for cost savings and they're going to that. So from that perspective, I really don't know.

I do have – there's an example of a competitor who went to a 3PL on good sources that I have and made some adjustments to their rates for volume, and it's one of the bigger players. So, to me, that's – I just don't like that. Now, I haven't seen that as being widespread and I wouldn't say it's numerous, but I don't know kind of where we are.

And, I guess, the only other thing I would say about the merger and acquisition thing, I think there's some other 3PLs that control a fair amount of business or work through TMS and there's some of those players, while most people are taking a wait-and-see attitude, there are some of those players that are a little uncomfortable with the closeness of that relationship of the asset base and the 3PL provider and having access to their information and that freight information.

So we've seen some opportunities, a handful of opportunities come to us because of some concern with respect to that. So over time, that could potentially be a positive for us. That's the only other example I would have of an impact of the merger in the space..

Okay. No, that's really helpful color on that front. On the tonnage, you noted that October was down 8.5%. Assuming you kind of want to stay as disciplined as you feasibly can on pricing, and this behavior kind of persists from the market.

Should we assume that that tonnage might actually get worse and maybe end up being worse on a year-over-year basis for the full fourth quarter? How are you thinking about the full fourth quarter from a tonnage decline perspective?.

Our comps get easier kind of through the quarter. And then obviously, all year we've been down, right? So last year, you kind of had the truckload spillover and things freed up a little bit in the fourth quarter. So I think the comps get a little bit easier.

I think if we take today's kind of current run rate and move that into next year and had normal seasonality, I think we end up in the down 2% area.

So if you didn't get another step down, where you end up in a run rate in the next year is the 2% kind of level, based on kind of a three-year historical average of what we would consider normal seasonality, whatever that is anymore..

Yeah. I hear you. Okay. So that's kind of a comment for – go ahead, sorry..

But that's how – that's – I don't know how else to plan, right? I mean, you have that plus whatever wins you have in the marketplace and some business gets de-selected from a variety of reasons at points in time, whether that be our choice or the customer's choice.

Sometimes they change modes and there's things that are out of your control, somebody moves a plant, something like that. But I guess that's just from an indication of kind of a run rate thing we're looking at migrating toward for next year. That's probably the best data I would have for you at this point in time..

No, great. That's really helpful color on the outlook there on the tonnage.

So lastly then, how much pricing do you actually need to expand margins? At what point – if pricing were to fall to X percent, is it almost – or much more difficult to expand margins for you?.

Yeah. I mean, yield is obviously the biggest lever that you have, right? But you have a lot of levers. I mean, there's cost levers. I mean, we can make other adjustments if necessary. We have engineered improvement opportunities.

I guess what I would tell you is just, let's just say we look into next year, right? When we stated this, I mean, we think we should be able to kind of improve in a normal year by a 1.5 or so on the operating ratio because I think we're still underperforming and we're not getting the types of returns that we seek.

If pricing and tonnage are both negative, obviously, that gets more difficult to do. Beyond that, I don't know that – I mean we could kind of try to step through, cost increases are going to run a little bit higher into the year because we've already committed to our wage increase as we go into next year.

You know you're going to have healthcare inflation.

I would tell you I think next year's – well, I do think the driver market will stay tight, I mean, I think, compared to this year where we made some pretty meaningful market adjustments in specific markets, as well as with positions like over-the-road drivers that next year will be more of a normal increase, more in the 3% range.

So the back half, we won't have the same inflationary challenges. And then I think I've commented, I mean, as we go through our planning process, we're planning for lower tonnage and lower pricing than what we achieved this year. And we're very focused on some engineered cost initiatives targeting in excess of $20 million for next year.

So I don't know if that helps you from a modeling standpoint and a philosophical standpoint..

No. That is really helpful. Okay. I appreciate the time. I'm going to pass it along. Thank you..

All right. Thanks..

We'll go next to Scott Group with Wolfe Research..

Hey. Thanks. Good morning, guys..

Good morning, Scott..

Good morning, Scott..

The 4% workforce reduction, when did that take effect and what percent of the salaries line does that impact?.

It took effect on Friday. So we'll get about two months of benefit for the quarter. And then when you say – it's our salaries, wages and benefits line that will be impacted. And over time, you'd see some impact in the fringe rate as well..

I'm guessing though it's not – doesn't impact the entire salaries line. I'm guessing there's some part of that that's more fixed or bonus-related or something..

That's correct..

Or should we – so what's a good – like on that salaries line, what's a good percent to take that would come down 4%? Or I guess, if it's simpler for you, what's the ultimate cost savings from this 4% workforce reduction?.

Our first half, again, I don't even have a full week of productivity targets that we're achieving post that, right? So I'm giving you based on my historical experience with doing this and are working to manage better after we've gone through a process like this, it's probably around $1 million a month reduced expense run rate..

Okay. That's helpful. So on the pricing....

Scott, that wouldn't be in addition to what you described earlier..

Got you. Okay..

And obviously, there's an overlap with that for our targeted savings for next year, right..

Got you. Okay. Okay.

On the pricing, I don't know if there's enough history with the 3PLs, but is this how the pricing has started to fall in the past? Does it start with the 3PLs and then lead or is this an unusual kind of first chink in the armor?.

What I would say is I've seen that be a first chink in the armor thing and then sometimes it falls after that, but I've also seen sometimes you just have one player who says, I want to do this and maybe he didn't participate with this 3PL previously or he is not participating to the extent they choose to, and it's just a one-time action, right? So, the question is, is that a reaction or a thing where somebody else follows, somebody else follows, and next thing you know this segment of your business begins to deteriorate from a yield standpoint.

I mean, I don't know I think it's – to me, when people ask me, what's the first sign? I mean, to me, it's sometimes that is a sign that you look at. But, I also see people are using various tactics with 3PLs. I mean, some people cut their rates with 3PLs from December to March 1 because it's a slow seasonal period and they want more business.

I mean, I personally think it's a slow seasonal period for them. It's a slow seasonal period for me. I'd rather manage through it than reduce my yield. So, I've chosen not to do that.

I also feel that people that resell blanket 3PL, if they want to resell my pricing, I'll give them that, but I'm not turning my pricing into transactional business every time there's a seasonal downturn. But other carriers have different philosophies or something they're trying to do during that time period. So, I don't control what other people do.

We can only control our philosophy and our discipline..

Yeah. So, knowing what you know....

Why exacerbate a low seasonal period. I mean, to me, it just doesn't make any sense to me, just except that's a low seasonal period and manage through it..

Yes, yes, yes. I hear you.

Knowing what you know, how would you budget for LTL pricing next year, your LTL pricing?.

I mean, I think there'll be a step down from what we've been able to achieve in the prior year. So, we're trying to be conservative. We've taken our tonnage expectation. I think I talked to you guys about that where we kind of think our run rate would be if we got normal seasonality.

And I still think with where we are and what we're seeing in the marketplace, I mean, we're targeting a 4% to 5% increase in contract renewals. And I think you're looking at, based on the general rate increases and the timing that's already been announced, I mean, we would target something in that range as well. Similar to what other people have done.

Our practice is kind of to follow the market, so a lot of other people get out there in front and then we go along. We want to keep our tariffs in line with the market.

So, as you're out there pricing, you know you're not out of whack from a discount percentage, right?.

Do you still think 4% to 5% pricing is reasonable for next year?.

That's what I'm targeting..

Okay. And then just last question.

So, maybe with the tonnage commentary, the pricing commentary, do you think we can see that margin improvement and earnings growth in the first half next year or do we realistically need to wait until third quarter and kind of lapping this kind of latest let down in tonnage?.

It's probably a little early to say..

All right. Thank you for the time, guys..

I mean, I have some preliminary modeling that we've gone through and things, but I don't think I'm – I'm not sure I'm prepared to answer that right now..

Okay. That's fair..

All right..

I know..

Okay..

Yes..

All right..

All right. Thank you, guys..

We'll go next to Willard Milby with BB&T Capital Markets..

Hey. It's Tom Albrecht. I accidentally knocked my own phone off, so I'm using Will's. A couple of things. I didn't see on your website, but did you end up doing in October GRI like a few of the players did? And then I had kind of a follow-up..

No. We tend to follow the market from a general rate increase perspective, Tom. And while some people have gone early, you got some other players that went last year in January and they're doing that, we tend to kind of not come early to that party but just show up when everybody else gets there so to speak.

So, you could probably assume in January timeline and something in line with what others have done to keep our tariff well-aligned..

Okay. And I think Scott kind of partly clarified this, but when you get at these points where the market is turning for better or worse, you kind of parse every word. You were talking earlier that relative to 2016 you thought that tonnage and pricing would be lower.

I think what I heard is, on the pricing front, you meant rate increases would be smaller, not necessarily negative pricing, but that, on the tonnage front, maybe for awhile, it could still linger and be negative, at least to start 2016.

Am I hearing you right on those two fronts?.

Correct. Yeah. I think I said if we have – if we kind of got normal seasonality as we've – from here, and I'm talking about October's run rate as you kind of overlap some weaker periods we've experienced last year, around a negative 2% tonnage would kind of be a normal thing from here. And obviously, we're seeking market share.

We're opening another terminal in Chicago in the first quarter.

I mean, I'm not just accepting a reduced tonnage outlook in the perpetuity or anything, but I think from a planning perspective and what you're going to achieve from a margin standpoint, I think it's prudent to plan for maybe a softer environment, some continued yield discipline on our part and get more aggressive on cost – from a cost management perspective.

So, philosophically, that's what we're working on..

Okay. That was helpful. Thank you..

All right. Well, thank you for your interest in Saia this morning. We look forward to providing you some additional update as we visit with you, guys. Thanks..

This does conclude today's conference. We thank you for participation..