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Saia, Inc. (NASDAQ:SAIA)

Q4 2012 Earnings Call

January 30, 2013 11:00 a.m. ET

Executives

Renée McKenzie – Treasurer

Rick O’Dell – President & CEO

Jim Darby – VP, Finance & CFO

Analysts

David Ross – Stifel Nicolaus

William Greene – Morgan Stanley

Jack Waldo – Stephens Inc.

Chaz Jones – Wunderlich Securities

Arthur Hatfield – Raymond James

Thom Albrecht – BB&T Capital Markets

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Jason Seidl – Dahlman Rose

Operator

Please stand by, we’re about to begin. Good day and welcome to the Saia Inc. Fourth Quarter 2012 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Renée McKenzie. Please go ahead.

Renée McKenzie

Thank you, Kevin. Good morning. Welcome to Saia’s Fourth Quarter 2012 Conference Call. Hosting today’s call are Rick O’Dell, Saia’s President and Chief Executive Officer and Jim Darby, our Vice President, Finance and Chief Financial Officer.

As 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’d like to turn the call over to Rick O’Dell.

Rick O’Dell

Thank you for joining us this morning. I’m pleased to report that Saia again delivered a significant increase in earnings this quarter. After two years of intense efforts centered around quality, yield management and operational excellence, it’s gratified to see that the positive results that these initiatives are generating. And let me say upfront that these initiatives were created, designed and implemented by Saia employees who are at the very heart of every success that we have.

Some highlights from the quarter compared to the fourth quarter of last year, revenue increased 4.5% to $264 million, earnings per share were $0.33 versus $0.15, an increase of 120%, our operating ratio was 96.2 versus 97.6, LTL revenue per work day increased 2.8%, LTL tonnage per work day decreased 3.2% and LTL yield increased 6% primarily due to effective yield management.

The 140 basis point improvement in Saia’s operating ratio for the quarter demonstrates continued effects of effective execution across the number of key initiatives. Our focus on best-in-class service quality, strong yield results and operational excellence were the primary drivers to our margin improvement. We continued to advance our value proposition through investments that are proving the quality of service, strengthening company infrastructure, leveraging technology and investing in our employees.

A few specifics that contributed to our positive results this quarter were industrial engineering initiatives and corresponding operational efficiencies that reduced purchase transportation miles per day by an impressive 24% compared to the fourth quarter of last year. Fuel efficiency, supported by electronic on-board devices and a scale of our professional drivers improved by 2% quarter-over-quarter and is up 7% since we started this project.

A more detailed target approach to pricing and profit management has materially improved our yields. Mix improvements are steady as our marketing efforts aimed at specific products and lanes along with increasing our insight sales resources are playing a role in the revenue growth we’re experiencing in field business.

We also continue our implementation of dimension earth in strategic terminals. This new technology allows us to provide quick, reliable and accurate density measurement for shipments. We’ve also updated our freight handling technology throughout our system. These technology investments support both operational excellence and our yield management success.

Saia’s quality matters initiative continues to drive improvement in every major quality metric that we measure. Saia’s dedicated associates again delivered 98% on-time service also achieved a 33% reduction in cargo claims and improved in each of the six customer service indicators.

At Saia, we realize that superior customer service is only achieved through engaged employees who are dedicated to doing a great job. We continued to invest in our employees with market-based compensation, doctor driver training programs, courses and enhanced quality material handling, doc mentoring programs, our continued commitment to training and technology for improved safe driving techniques as well as robust employee recognition programs.

In 2012, we furthered our continuous improvement strategy by investing in technology and equipment to decrease the average age of our fleet to provide our personnel with the tools they need to perform most effectively and to inspire customers with a real-time data and reporting that they increasingly require. And we’re not stopping there. In 2013, we’ve raised the bar to ensure that we’re always driving to be the best while improving our operational and cost efficiencies across our network.

In July, we acquired Robart Transportation Inc. and its subsidiary as we discussed at the time, the acquisition supports Saia’s strategic goal of diversifying our service portfolio which will provide further growth opportunities over time. The companies are now rebranded as Saia LTL, I’m sorry, Saia TL Plus and Saia Logistic Services.

In January, we began offering this additional suite of services to Saia’s customer base and expect to see increased cross-selling as we move through 2013.

I believe these expanded offerings combine with our impressive execution on quality, yield management and operational optimization at Saia LTL freight built on Saia’s strong foundation and provides a clear course for long-term profitable growth going forward.

Now I’d like to turn it over to Jim Darby.

Jim Darby

Thanks Rick and good morning everyone. As Rick mentioned, the fourth quarter 2012 earnings per share were $0.33 compared to $0.15 in the fourth quarter of 2011. For the quarter, revenues were $264 million with operating income of $10.1 million. This compares to 2011 fourth quarter revenue of $253 million and a reported operating income of $6.2 million.

The LTL yield for fourth quarter 2012 increased by 6%, which primarily reflects the cumulative favorable impact of continued pricing actions. Continuing our trend from the past several quarters, we’ve been successful in our yield improvement as we achieve price increases even in an economic environment that is slowing. We continued to advance our industrial engineering initiatives and operational effectiveness projects which reduced our reliance on purchase transportation, significantly enhanced our fuel utilization and reduced our self-insurance cost.

These initiatives are ongoing as we enter into 2013 which we believe will allow us to maintain our high-quality of service to customers and gain further operational efficiencies. The quarter did include increased health care and workers’ compensation expense as well as higher costs from wage and benefit increases necessary to compensate our workforce and meet customer requirements.

We had implemented a 3% wage and salary increase companywide effective on July 1st. As I mentioned, last quarter, this increase will add approximately $13 million in expense on an annualized basis. The impact of this wage increase is partially offset by further productivity and efficiency gains.

When compared to fourth quarter 2011, claims and insurance expense is $3.9 million less this year reflecting more normal accident severity. As we mentioned on last year’s call, accident severity in fourth quarter 2011 was unusually high, accounting for approximately $3 million of this difference. Our focus on safety training along with the decline in cargo claims resulted in the continued reduction in claims and insurance expenses again in the fourth quarter. Our investments and our commitment to our quality matters program are paying off and benefiting our customers.

Depreciation and amortization ran $12.3 million during the quarter versus $10.2 million in the prior year quarter due to our capital expenditures for tractors and trailers which are now in service.

Year-to-date revenues were $1.1 billion, a 7% increase from last year. For the full-year 2012, operating income was $58.7 million with net income of $32 million. This is compared to operating income of $28.1 million with net income of $11.4 million in the prior year. Earnings per share were $1.94 compared to $0.70 in 2011.

Our effective tax rate was 37.3% for 2012. For modeling purposes, we expect our normalized effective tax rate to be approximately 37.5% for the full year 2013. You should note that the timing of the enactment of the recent legislation with which retroactively reinstate certain tax credits for 2012 will result in those credits being recognized in the first quarter of 2013. This should be approximately $0.06 favorable impact in the first quarter and this retroactive 2012 effect is excluded from the expected 2013 tax rate noted.

At December 31, 2012, total debt was $60.7 million. Net of the company’s $0.3 million cash balance, net debt-to-total capital was 19.2%. This compares to total debt of $72.9 million at the end of 2011. Net capital expenditures for 2012 were $83 million. This compares to $68 million in the prior year.

Strong cash flow from operations funded the capital expenditures, the Robart acquisition and a reduction in fixed debt during the year. The company currently plans net capital expenditures in 2013 of approximately $90 million. This level reflects the purchase of replacement tractors and trailers and our continued investment in technology.

Now I’d like to turn the call back to Rick.

Rick O’Dell

Thanks Jim. This quarter, Saia delivered solid margin and profit improvement. I believe our investments in our employees, quality techniques and innovative technology solutions provide a foundation for us to continue to build on in 2013. We remain committed to our core strategy of improving yield, building density, enhancing customer satisfaction while reducing costs through engineered process improvements and continuous employee training.

This strategy provides further opportunities for long-term profitable growth and increased shareholder and customer value in the future.

With these comments, we’re now ready to answer any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from David Ross with Stifel Nicolaus.

David Ross – Stifel Nicolaus

Yes, good morning everyone.

Rick O’Dell

Good morning David.

Jim Darby

Good morning.

David Ross – Stifel Nicolaus

On the last call, when you’re talking about CapEx, the initial estimate was that 2013 was going to be similar to 2012 in kind of the $80 million range, but it came in a little higher at $90 million. I was wondering if that’s still offer replacement and then maybe the tech investments had a little bit more on top of that on the equipment side also. Is that more for tractors or trailers?

Rick O’Dell

Yeah, we’re kind of back to a more normal cycle on tractors because we’ve got our average age down in our target range, but our trailers are still beyond our target range. So we’ve got a significant trailer purchased in 2013, which kind of drove the number up. One thing I would tell you that I think there is some significant benefits from that because we’re looking at our linehaul leave about 20% of our trailers today. Do not have logistics post capabilities so we call them smooth-sided trailers and so making that investment in the new trailers should further enhance some of our linehaul optimization and kind of support some of the targets that we have for some additional efficiencies next year.

And then we also kind of bumped the number a little bit as we began to target some of our fuel efficiency management project which is part of our engineering targets again for this next year is we’re retrofitting all of our linehaul trailers with the trailer skirts and the new ones that we’re buying are going to have skirts on them as well. And I think the retrofit alone was in about $3 million and the addition for the new site accounts for about $4 million of the increase. And one thing on that is engineering studies will tell you those skirts stay between 3% and 5% in fuel efficiency and 3% we spend about $200 million on fuel at today’s price. So 3% gives you $6 million return. So we decided that might be something we should do.

David Ross – Stifel Nicolaus

Yeah, it sounds like a good return to me. Could you comment a little bit about the Robart acquisition, how that performed since has been with you guys for about half a year now. You said that it contributed about a penny to the third quarter earnings. Was it about the same in the fourth quarter, is it still growing nicely?

Rick O’Dell

Yeah, I guess first I think I didn’t answer the other part of your first question on the fleet side. We’re seeing negative tonnage strengths right now. We’ve also as we’ve increased the average or improved the average age of our fleet. Our fleet utilization has improved and so those are essentially for replacements we’re not, we don’t plan on having any growth. We expect to just get some efficiencies out of our existing fleet at this point in time.

And then on Robart, and I think we said at the time of the acquisition that it would be about $0.04 accretive on an annual basis and that’s about the run rate that we’re going at. The volumes and profit margins are improving. We are making some investments in infrastructure to allow us to grow that as we rollout the cross-selling that we talked about that just started in January. We’re on target with that and just again it’s a small segment, its very well managed, its providing great service to the customer base and we look forward to expanding that. I would expect that $0.04 to be somewhere in the $0.06 range at this point in time for 2013 and beyond that. We’ll give some further guidance on how that product offerings going as we move forward.

David Ross – Stifel Nicolaus

And are you all looking at other acquisitions to complement the growth into logistics, or are you just happy growing that organically right now and see where that goes?

Rick O’Dell

Yeah, I think at this point in time, we’d like to get a little bit more at time with that, but I mean obviously it’s a very profitable model that has very good cash flow. If you could find small acquisitions and that you’re not paying a bit multiple for it and bring some synergies to it in growth and that something we would look at clearly over time.

David Ross – Stifel Nicolaus

Excellent. Also like the new website.

Rick O’Dell

Great.

Renée McKenzie

Okay, good. Thank you.

Operator

We’ll take our next question from William Greene with Morgan Stanley.

William Greene – Morgan Stanley

Hi there, good morning. One clarification did you, I think Rick, you might have mentioned this in your comments just now that tonnage was down in January. Is that what you said or did I misunderstand that?

Rick O’Dell

It is down and we were down a little bit for the quarter. I think Jim can kind of take you through the sequential trends on kind of where we were through the quarter.

William Greene – Morgan Stanley

Yeah, that would be great.

Jim Darby

Sure, I’ll walk you through that. LTL tonnage and these are year-over-year per work day comparisons. October was down 1.6%, November was down 3.7% and December was down 5.0%, now December can be a little harsh based on how the holidays fall and that type of thing. But for the quarter, we were down 3.2% and so far month-to-date in January we’re running down 3.1%.

William Greene – Morgan Stanley

Okay. And then the rate trends, you’ve sort, I think in consistent in all your comments which is just, we’ll probably go to 3% to 4% number in ‘13, is that still the case? Is that where you feel things are still coming out?

Rick O’Dell

They have been I tell you that this more granular sophisticated pricing continues to pay dividends. We continued to improve our quality and our specialized services to make sure we’re compensated for those things. We’re seeing contract renewals at this point have been in the 3% to 4% range. There are some other things that can clearly impact that including targeting smaller and more profitable accounts. So the average yield can be better than that. And what I would tell you is, again while our volumes are down about 3% as we’re into January, our yields are trending more, we’re into January at a higher yield level than we exited the fourth quarter. So we continue to make some solid progress there.

William Greene – Morgan Stanley

And so the sequential change you typically see in or first quarter for things usually flattish, but perhaps last year was because of weather. Can you just sort of talk about anything we need to keep in mind as we think about modeling 1Q?

Rick O’Dell

Yeah I guess if you look back our historical 4Q to first quarter it’s kind of been all over the board. Some usually have had wage increases in the quarter, some we haven’t fueled back a few years. I think we had a GRI in January one year, so I think at this point in time maybe we have to throw history out a little bit. But there is some things we probably need to consider obviously Saia reported a very strong first quarter last year with 95.9 OR on our yield progress, strong tonnage and we benefited from a very mild winter.

As we look at this year, we’ve had a mild winter thus far, got positive yields and we’ve got some really good traction on some of our 2013 engineering cost initiatives. So I would tell you kind of given our current trends and absent any significant weather impacts or some expense volatility that can occur in self-insurance, we would expect flat to modest improvement over last year’s OR for the same quarter.

William Greene – Morgan Stanley

Wow! In spite of downtown it’s just, that’s quite good. Okay, good. Thank you for the time.

Rick O’Dell

Thank you.

Renée McKenzie

Okay, thank you.

Operator

We’ll take our next question from Jack Waldo with Stephens Inc.

Jack Waldo – Stephens Inc

Good morning and congrats on the year and the end quarter.

Rick O’Dell

Good morning Jack. We can’t hear…

Renée McKenzie

Jack, can you speak up a bit?

Jack Waldo – Stephens Inc

Sure.

Rick O’Dell

We can’t hear you very well.

Renée McKenzie

No.

Jack Waldo – Stephens Inc

Is this better?

Renée McKenzie

There you go.

Jack Waldo – Stephens Inc

So my question is, sticking on the OR trend, 260 basis points was a wonderful performance last year. You had incremental margins of 44% where it seems like historically it’s been in that 15% to 20% range. With tonnage growth that’s flat to negative, would you anticipate going back to a more historical kind of 20% range? Are there any initiatives I guess positive or negative that might impact that as we head into 2013?

Rick O’Dell

Sure, I mean we have a number of initiatives to target growth. Obviously our current trends are a little bit negative. We’ve been very discipline from a pricing perspective, but I would tell you we have a number of targeted marketing initiatives focused on prospecting, on growing our insight sales resources, on using our CRM to do effective pipeline management to take share over a period of time.

And so again while our current trends are negative I think particularly as we get into the second half, we would not necessarily expect to have negative tonnage trends going forward. But that fits is, it is kind of what the current is and again we’re facing some tough comps for the first two quarters as we had pretty robust tonnage and it really started dropping off in May and a lack of weather related issue. So from that perspective we had to take those kind of things into consideration as we look at how the year may come.

And then, for the company, we’ve got a number of well established engineered cost initiatives for 2013 that we focused in on starting in October. So and we’re talking about last quarter now I feel like I’ve been in 2013 for about four months now to see what we can do this year. And we’ve targeted about $20 million of annualized savings in this list of projects. Some of the larger target areas are linehaul optimization as the first one. We’re off to a good start in this project in 2013. We’re actually achieving record load average in January in spite of expected seasonally weak tonnage. And then we talked about the purchase of the pub trailers that will give us 100% logistics post-trailer, which is a 20% improvement in capacity. That’s going to benefit both linehaul as well as we have some enhanced cargo protection capability there.

And then on the fuel management efforts, again, since we started our fuel management project we saved 7%. Some of the things that we’re doing there, the electronic on-board computers, they target optimal shifting. They also provide miles per gallon by driver and it continues to have a positive impact on driver behavior and we have some additional opportunities to continue to further that. To compute, the electronic on-board fuels also provide fuel data by tractor. So maintenance kind of troubleshoot what the issues are and core performing units that data is kind of just been started again. We just had in our full fleet starting in July.

And we talked about the trailer skirts that have an impact on your linehaul miles, people are seeing 3% to 5% on that from what I understand from engineered studies. The new equipment that we buy gets better miles per gallon than outgoing units. We also have a national contract for retail and improved bulk tank utilization. So our – for our retail purchases and then we got a more targeted plan to make sure we buy internally which is about $0.30 per gallon benefit there.

And then we have other targeted kind of savings on maintenance cargo claim, safety and other areas, but again fuel and linehaul are two largest buckets. So I guess overall, kind of when we look at what we could do for the year. I think its going to be partially dependent upon of what kind of an economic environment that we see in terms of tonnage and yields the corresponding impact on that. But gain I would tell you we’re not just dependent upon the economy because of some of these efficiency efforts that we have.

The offset to that there are obviously there’ll be some wage pressure over time and we’ll have some additional depreciation with the capital expenditures that we have and the investments that we’re making in technology, but there is, I feel good about our opportunities as we move forward.

Jack Waldo – Stephens Inc

Got you. Thanks for the detail there. Your volume trends Rick, what do you attribute those two? Do you think they’re more company-specific or driven more from the economic background?

Jim Darby

Well I mean I think obviously we saw some economic softness through the fourth quarter, but I think it’s also partially due to our pricing discipline. We just – we’re being very disciplined in our pricing and very granular in saying, well in that locations it had haul line I can’t give you the pricing you want. So within customers, we’ve lost some shares, some lanes because we’re unwilling to price in places that do not work for us. But I think the economy is pretty soft and what I would tell you is I think given some of the large corrective action pricing things that we’ve done over the last two years, I mean, most of those are behind us. I have very few accounts that require material increase.

So what I would expect to see more going forward is, we participate in the economic growth through our existing customer base and then with some of the projects that we have focused on target marketing and some growth and prospecting opportunities and we would expect to get back and taken some share.

Jack Waldo – Stephens Inc

Fair enough. Rick, how much of your business is delivered in three days or more?

Jim Darby

It’s about 20%. We’re still about 80/20. It’s a larger proportion of the revenue obviously but on a shipment account basis its 80/20.

Jack Waldo – Stephens Inc

And then my last question, you have a competitor that’s union that’s negotiating the contract right now. Do you believe that you’ve seen any frank diversions so far from that or do you believe has that been much of a topic of conversation with customers at this point?

Jim Darby

Not specifically.

Jack Waldo – Stephens Inc

Okay. Thank you guys, very much for your time. Congrats.

Renée McKenzie

Thank you.

Rick O’Dell

All right, thanks.

Operator

We’ll take our next question from Chaz Jones with Wunderlich.

Chaz Jones – Wunderlich Securities

Yeah, hey good morning everyone. Nice quarter.

Renée McKenzie

Thank you.

Chaz Jones – Wunderlich Securities

First question was, I was just curious, could you actually quantify the impact on the quarter with the additional health care and work comp expense? Is there a dollar figure?

Rick O’Dell

Sure. Looking forth to forth, which is probably what you’re asking right?

Chaz Jones – Wunderlich Securities

Right.

Jim Darby

The health plan was up about $2.1 million and the work comp compared to a year ago was up about $0.5 million.

Chaz Jones – Wunderlich Securities

Do you see the health care is more one-time or is that probably something as we move forward is still going to have some cost pressure in it?

Jim Darby

Well I think ongoing there will continue to be some increases in the health care. Fourth quarter increase was the sharpest that we’ve seen this year. Actually third quarter was fairly flat year-over-year. So it came on a little bit faster. When we look at the whole year health care, our cost was about 4% and that was a little bit less than an increase in what we saw in 2011 when it went up 14.5%.

So going forward, we would expect to see some increases in that maybe in the 8% range or so due to rising cost of services, the prescription costs continue to go up and the new health care law was that ever increasing maximum, annual maximums on individuals, those are driving our cost up. But I would say somewhere in the range of 8% or so.

Chaz Jones – Wunderlich Securities

Okay, great. Yeah that’s helpful. And then on the improved purchase transportation cost, just looking at it as far as in the quarter dropping below I think 6% of revenue, is that a number that you feel comfortable with from a run rate standpoint. Or is there still opportunity if you’re looking at on a percentage of revenue basis to continue to maybe drive that down a little bit more?

Jim Darby

I think the magnitude of the decrease from fourth quarter ‘11 to fourth quarter ‘12 is probably we’re not going to see that level again going forward. We’re had a pretty good rate now, the linehaul guys have done a very good job of bringing those miles in-house, using less purchase transportation outside. But I would say you can see some seasonality of that as you go forward, but it’s a pretty good run rate to use. You’ll see a little bit of seasonality as we get to the heavier quarters and you get to some vacations and that type of thing, but they’ve done a very good job of managing through some of our change in mix where we have to cover purchase transportation in the short run, but they’ve done a very good job of holding that down. As Rick mentioned those miles are down substantially from a year ago.

Chaz Jones – Wunderlich Securities

Got it. One last question, just in terms of the CapEx, I know that you’ve kind of been going through on equipment refresh the last couple of years here and I know its early to think about 2014, but is 2014 a year as we sit here today that perhaps CapEx starts to come back down some?

Rick O’Dell

I guess I would say it kind of depends on our outlook on what we think the returns look like. We probably have one more year to kind of refresh the city trailer fleet and then we would be finished. This year, we’re addressing a linehaul trailers and some smaller group of the city trailers. But we really have probably one more year unfortunately of that. I mean for three years we basically didn’t spend any money, so.

Chaz Jones – Wunderlich Securities

Thanks for taking my question. I’m sorry, go ahead.

Jim Darby

That’s right. As Rick mentioned on the tractors, we pretty much caught up the average age of fleet on tractors is now about 5.7. We feel comfortable with that and those purchases for 2013 really at a maintenance level. The trailers are the ones that are going to spike up because we let those age out a little bit, but so there is a little bit of catch up there. But as Rick mentioned, we’ll have to see as things develop through 2014 all the way into 2014 as you mentioned, it’s a little early to project that.

Chaz Jones – Wunderlich Securities

Got it. Thanks for taking my question.

Renée McKenzie

Thank you.

Operator

Our next question comes from Art Hatfield with Raymond James.

Arthur Hatfield – Raymond James

Hey, good morning everyone.

Rick O’Dell

Good morning Art.

Jim Darby

Good morning.

Renée McKenzie

Good morning.

Arthur Hatfield – Raymond James

Hey, Jim, just real quick back on health care. You talked about a growth rate of 8% going forward. Did you give what the total spend in ‘12 was on health care?

Jim Darby

Just under $60 million.

Arthur Hatfield – Raymond James

Okay.

Jim Darby

And that was up, that increase was a little bit less than the ‘10 to ‘11 that we saw. But I think so it was a little bit better what we’d anticipated but going forward, we’d expect to be maybe in the 8% range on increase.

Arthur Hatfield – Raymond James

Fair enough, fair enough. That’s helpful. I had ‘10 and ‘11, but I couldn’t find the ‘12. Just one other thing, as we think about, kind of, as to try and contemplate modeling for ‘13, and you guys are doing tremendous stuff on the productivity side, but as you noted, the volume environment isn’t great right now. Is everything that you’re doing on the productivity side and focusing on rates? Are you just basically mitigating the impact on the OR that’s being caused by less tonnage or at these tonnage levels can you still grow the OR, or improve the OR I shouldn’t grow, but improve the OR in 2013 or do you need tonnage levels to improve from here?

Rick O’Dell

To me the tonnage levels are compounding thing, right, I mean if I just look at the cost initiatives that we have of say $20 million and then if you get our targeted yield increases in the 3% to 4% range, it gives you a pretty good bucket of improvement opportunities and then obviously that’ll be offset by some other things we’ve talked about partially offset anyway by health care, wage and benefit increases, increased depreciation, all right.

But we think there is – we don’t think we’re dependent upon a lot of tonnage growth to improve the operating ratio, obviously it certainly enhances it, should we get in a better environment and/or have success at improving our tonnage levels at a reasonable yield and thus far the yield environment has been pretty solid. We’ve seen a few people that have started to price some 3PL accounts and things that can move business pretty quickly. So a couple of people are responding in that manner, but we have not seen any widespread major negotiation type issues or challenges at this point in time.

Arthur Hatfield – Raymond James

Okay. Fair enough, all right. Thanks for the time.

Renée McKenzie

Thank you.

Rick O’Dell

Thanks Art.

Operator

We’ll take our next question from Thom Albrecht with BB&T.

Thom Albrecht – BB&T Capital Markets

Good morning everyone.

Rick O’Dell

Good morning Thom.

Thom Albrecht – BB&T Capital Markets

Couple of follow-up questions. Hey, good morning. Couple of follow up questions. Jim, do you have some guidance for depreciation for 2013?

Jim Darby

Well we don’t give specific guidance, but I can give you what you might expect as it’s ramped up in 2012 when it’s at the high level of CapEx and we finished the year about $48 million in total. That was up substantially from ‘11. Going forward, I would expect that with the level of capital expenditures that we’ve quoted for next year, Thom, being in a $90 million range, it would probably go up a little over $1 million a quarter, somewhere in the range of $53 million or so. And that will manifest and bring the equipment on as well.

Thom Albrecht – BB&T Capital Markets

Yeah, that makes sense. I just needed some ballpark thoughts there. Rick, rather on your purchase transportation line, now that you got Robart in there and there are some PT expenses paid out through there, it’s kind of hard to know how much of that lining item is the linehaul for LTL versus brokerage, so of the, let’s say, $15 million in the fourth quarter. What’s an approximate split?

Jim Darby

Okay. Well the PT, the way that we record the purchase transportation the way we record revenue for our new subsidiary is the revenue comes in net of PT on the top line.

Rick O’Dell

So it’s the brokerage revenue basically what’s recorded, so there is no – it’s all side LTL rate in the purchase transportation line. There is no gross up.

Thom Albrecht – BB&T Capital Markets

Okay. All right. And then, let me see what else I have here. So given the improvement there, I know you talked about a lot of your initiatives Rick and I’m sorry to kind of repeat myself, but do you think purchase transportation linehaul and all that represents as much of an opportunity in ‘13 as what you’ve seen over the last four, five quarters?

Rick O’Dell

Yes, I do actually because we actually started another linehaul optimization initiative in November and in both December and January we set new records for load average at our company on what are two of the lightest tonnage periods of the year. And when I also consider that by May probably we’ll have the new linehaul pups in which will give us some enhanced capacity in the linehaul network there from a loading capability and some increased tonnage at that time.

I think we can further our efficiencies there. So obviously the linehaul is a big bucket, the purchase transportation is just one segment of that that’s obviously sticks out on the financial statements, but the fuel and linehaul driver expense, the fuel and the operating expense line and the linehaul driver expense in the ways line our big numbers too.

Thom Albrecht – BB&T Capital Markets

Yeah. I hear you. And then just couple of other, so what was your workers’ comp total in 2012 and cargo claims? There is a percentage of revenue or however you might want to give that?

Rick O’Dell

Cargo claims was 1.1% of revenues for the year and it was below 1% of revenue for the second half and we expect to maintain that cargo claims ratio going forward if you work comp about 17%.

Jim Darby

The work comp for the year was right around 20 and that includes the adjustment that we booked into fourth quarter because we do an actuarial study every year and we were surprised by greater adverse development in prior year claims and that of course applies to the current year claims that where we expect higher development. So we booked an adjustment into fourth quarter that got us for the year about 20.

Thom Albrecht – BB&T Capital Markets

What was like a year ago, 17, 18?

Jim Darby

About 19 a year ago.

Rick O’Dell

Both years actually had some unfavorable development in them and 2010 and 2011 we had some work comp severity that was higher than it was in ‘12. And obviously I think any time you do an actuarial study and do a true-up you think you got the number right, but we’ve taken some pretty significant adjustments two years in a row. And with our current safety performance we have targeted internally so I would say some reductions and expense in that line.

Jim Darby

Yeah, Thom, and I mentioned to the earlier question that forth to forth work comp was up about $0.5 million. If we compare since both of those had adverse adjustments, if you look at the adverse is what would be a more normal quarter, it might have been about 1.5 more than a normal quarter, just for forth because that had the upward adjustment.

Thom Albrecht – BB&T Capital Markets

Right. Okay, thank you very much.

Rick O’Dell

Thanks Thom.

Renée McKenzie

Thank you.

Operator

Our next question comes from Scott Group with Wolfe Trahan. Please go ahead.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Hey, thanks. Good morning.

Rick O’Dell

Hi, Scott.

Renée McKenzie

Good morning.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Good morning. So I just want to make sure I’m understanding your comments about purchase transportation. I thought I heard in one question you said its tough to get much better than where we are in fourth quarter and then I thought I heard you say to Tom, just last question that there is more to go here. So when we think about that line item, obviously a nice year-over-year reduction in absolute PT in 2012. How are you thinking about that line on an absolute basis in ‘13?

Rick O’Dell

Okay, so it’s Rick. Here is what you have to consider. Our linehaul expense, I mean the purchase transportation portion is a very small portion of our overall linehaul expense because most of our freights moved with company drivers which have wages, equipments costs, maintenance and fuel are the biggest components of that. So what I’m saying is, while we believe that our purchase transportation is optimized on today’s trait and tonnage levels, there is still an opportunity particularly as tonnage increases to get further linehaul optimization. Now the PT portion is now a smaller portion of our expense, it will really come more in the wage benefit and fuel line. But I think that was what Jim’s point was is, we would more expect PT to kind of trend with tonnage levels as they go through the seasonality on a percentage basis etc, better than we don’t have savings that we’ll see in the fuel and wage line will be the two primary ones. As we were just miles by a proven our load average in our linehaul efficiency.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Okay that’s actually very helpful. Rick, can you give a little bit more color, you mentioned something about the competitive environment with 3PL is maybe changing a little bit. Just what are you seeing out there in the competitive environment? We had the other LTL Arkansas

Best reported today and they’re seeing their tonnage go up better and maybe their yields a little worse. Is the competitive environment getting worse as the economy has softened?

Rick O’Dell

Like I said, I mean one that you have is the book of 3PL business are the segment of that that’s pretty transactional. So if you go cut your price with them and there is kind of an immediate impact on that. So I think you see people that aren’t getting the tonnage levels that they’d like to see at this time of year and they’re willing to go sacrifice some yield to get some tonnage. We’re very committed to our value proposition and we even see within the 3PL we can – when we raise price, we, they may tell us we’re going to lose a lot of business and a lot of times we don’t because customers still make choices not based on price, and 3PL do the same things right. They have little bit different model but it’s a same way that it works.

So to me its just a philosophy, if you got a side, what your needs for your company and it’s a way to go out and try to optimize or get tonnage some place you needed if you have excess capacity or something, I guess we feel like our yields and our value proposition is important to us and we think its important to most customer. So we’ve taken the position that we’ve gotten these 3PL operating within a tolerable range and we really don’t have a room in there to move pricing and we’re not willing to sacrifice our value proposition for that sort of some small incremental amount of tonnage. The math just doesn’t really work on that.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

What percent of the business today is 3PL?

Rick O’Dell

You have to get industry figures. I mean it’s a…

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

I’m sorry, of your business.

Rick O’Dell

Probably in the 20% range.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Okay. And then…

Rick O’Dell

And there is one thing I would tell you, I don’t count by, it depends on what you to find is a 3PL right. You have 3PL that they just negotiate for the customer and pay freight bills and its customer specific I mean, is that 3PL or is that kind of generic pricing 3PL. so it depends on what your definition is. We believe ours is about 20% in total.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Okay. And then last thing, on the CapEx side, I understand your answer about some of the maintenance stuff, when do you think about actually start growing again and raising CapEx. Is there a margin level or return on capital level that you want to hit first?

Rick O’Dell

Yeah, I mean, to me, I’d like to see our operating ratio below 93 or some good confidence that we’re going to be headed in that direction in the near future and then we could kind of look for potential acquisition or organic geographic expansion of the business. But in today’s environment when tractor costs $94,000 and you’re operating at 95 OR then it’s just not a good investment in incremental business. That’s one reason for us, I mean we’re not going to go chase incremental tonnage at 95 OR because return on capital is inadequate.

We think there are also we believe there are some good returns on some investments in technology, dimensions, upgrading our fleet that you’ll have a good return on it in terms of some load average, cargo claims, protection, opportunity as well as these trailer skirts and things. So for us, our focus is really on furthering some of our operating efficiencies and our quality initiatives within our company. So we can kind of further sustain our value proposition for some period of time to get the OR down where it really needs to be so we can pursue some other growth opportunities.

Ed Wolfe & Scott Group – Wolfe Trahan & Co.

Okay. That makes sense. Thanks a lot. I appreciate it.

Rick O’Dell

All right, thanks Scott.

Renée McKenzie

Thank you.

Operator

(Operator Instructions) We’ll take our next question from Jason Seidl with Dahlman Rose.

Jason Seidl – Dahlman Rose

Rick, Jim, Renée, how are you folks this morning?

Rick O’Dell

Good, how are you?

Renée McKenzie

Good morning.

Jason Seidl – Dahlman Rose

Hanging in guys. Couple of quick questions. One, just conceptually not put any numbers around it, if I look at 1Q, you started off tonnage down, but you think you could have some OR improvement if we exclude the impact from the one-time tax benefit in the quarter. Is it safe to say on a modeling throughout the course of the year that this is probably going to be your most difficult quarterly comp all things being equal?

Rick O’Dell

Well 2Q was a really good quarter too, but and then our tonnage kind of dropped off in the second half, which I think everyone did, right. We saw some softening, some weaknesses in the second half. So, yeah I think the first half of the year, obviously have some tougher comps and the second half of the year, to me, quite frankly, we could have done better in the third quarter and the fourth quarter. We’ve identified some opportunities to address some of those internal opportunities and to do better there. If we get a little bit of second half recovery and some of our marketing initiatives could have some benefit and as well as you get more traction through these engineered initiatives and we get the capital and technology in place, we demonstrated good results from that.

So I think your comment is fair as the first half comps are going to be a little bit more difficult given tonnage trends and mild winter weather and how well we did last year during those two quarters.

Jason Seidl – Dahlman Rose

Okay. And just another question regarding brokered freight. Are you seeing a higher percentage of your business move towards the brokers?

Rick O’Dell

You’re talking about 3PL brokers?

Jason Seidl – Dahlman Rose

Yeah.

Rick O’Dell

Yeah.

Jason Seidl – Dahlman Rose

And it sold by how much; I mean if you can give us some…

Rick O’Dell

I guess I would tell you is to me, if you look at the growth rate for the 3PLs are greater than the growth rates of the LTL carriers. So I guess that’s definitely sure, all right. And so again that’s some of the things that we really are looking at from our businesses we have to be diligent in our pricing of those – of that business segment and make sure that those customers are paying for the value proposition that we’re bringing to the marketplace as well. We also have insight sales that are working with those smaller customers and giving them a more direct contact and follow-up to kind of come back with some of the 3PLs that have call centers and people doing the same type of thing. You can’t have a sales rep out driving around calling on those customers; you do it in a different methodology. So that’s another thing that we’re working in that segment too, but I think you can tell, and I guess I’ve said this before, I mean what those transactional 3PLs do is they accumulate small customers and negotiate national account type pricing with them.

So what that means is over time as your small customers they have an option to go through a 3PL and get more aggressive pricing. And so we have to offer those smaller customers a better price than we offered them in the past and so what that means is the national account people also have to pay. You don’t have this big diversions where national accounts operate at just call it, 100 and if you feel the council operated it as 70, right and if it is 50/50 you could operate at a 85. You can’t do that anymore because the field customers have more pricing leverage because they’ve got this other alternatives they can go to. So, again, I think it also has demonstrates to us and COGS us to have to make sure our pricing is prudent not both with the small customer as well as the national accounts can’t just be carrying your overhead.

Jason Seidl – Dahlman Rose

It sounds like from your comments that you just gave, that you guys are looking to where it’s prudent take back some of those smaller customers.

Rick O’Dell

I get a customer to do business with me direct and not pay to 3PL has 18% and you can go through the same price that I’m getting it for him and I win on that, don’t I?

Jason Seidl – Dahlman Rose

Yeah, absolutely. All right, fantastic. Guys, thanks for the time as always. I appreciate it.

Rick O’Dell

All right thanks.

Renée McKenzie

Thank you.

Operator

We’ll go next to Jack Waldo with Stephens Inc.

Jack Waldo – Stephens Inc

Hey guys, I just wanted to follow-up on the tax issue. Would you mind explaining that one more time?

Jim Darby

Sure. And we gave what the effective rate was in ‘12 and what we expect it to be in 2013. And what we said was because of the fiscal-cliff legislation that was enacted, wasn’t actually enacted until January 2nd, so the retroactive benefit for 2012, you cannot book that in 2012, it’ll be handled as a subsequent event and it’ll have about $0.06 impact on first quarter. The rate that I quoted the effective rate for 2013 takes into account the extra credits that we’re allowed in 2013. So that’ll be a subsequent event that will record in first quarter. That makes sense?

Rick O’Dell

Right. So in other words, there is the propane tax credit has got alternative fuel tax which was propane tax that’s got reinstated. That’s going to have $0.12 impact in 2013, but $0.06 of it is retroactive at all we booked in the first quarter and we’ll all throw it out.

Jack Waldo – Stephens Inc

So the full year be the 37.5% you guided or it will be the 37.5% you guided?

Jim Darby

Yes, excluding the $0.06 from the last year. We did not include the retroactive piece in that because that all gets reported in the first quarter.

Jack Waldo – Stephens Inc

So it’ll be less than 37.5.

Jim Darby

So the effective tax rate for 2013 is the 37.5%, but we will have a $0.06 benefit which that relates to last year that’s not in that rate because that all gets books in the first quarter.

Jack Waldo – Stephens Inc

Okay, thank you.

Rick O’Dell

Okay.

Operator

We’ll go next to Thom Albrecht with BB&T.

Thom Albrecht – BB&T Capital Markets

Right. So just one more point on that. So then the $0.06 for 2013 is really just going to be spread amongst Q2, Q3, and Q4? Correct?

Jim Darby

That’s correct.

Rick O’Dell

Yeah actually one through…

Jim Darby

One through four.

Rick O’Dell

We’ve spread one through four and the cumulative adjustment which was really for 2012 of another $0.06 will be all booked in the first quarter. So we expect to have 30.5 a quarter is what the run rate is right.

Thom Albrecht – BB&T Capital Markets

Right, so…

Rick O’Dell

For the back on run rate and then there’ll also be another $0.06 booked in the first quarter.

Thom Albrecht – BB&T Capital Markets

So really the first quarter is about $0.075 of which $0.06 is for the 2012 retroactive.

Rick O’Dell

Right.

Jim Darby

That’s correct. And Thom, the reason we said that is because when we report first quarter, we’ll specifically identify that $0.06 impact as being retroactive for 2012 and it’s not a rate that applies to 2013. The way you said it was right.

Rick O’Dell

But we won’t retroactive our $1.94 to $2.

Jim Darby

No. We’re not allowed to do that.

Thom Albrecht – BB&T Capital Markets

All right. So we’re putting in about $1.2 million is what that works out to after-tax, so as we fill around for Q1.

Jim Darby

Yeah.

Thom Albrecht – BB&T Capital Markets

Okay. Thank you very much.

Jim Darby

Thanks Thom.

Rick O’Dell

All right, thanks.

Operator

This does conclude today’s question-and-answer session. I’d like to turn the conference back over to Rick O’Dell for any additional or closing remarks.

Rick O’Dell

Great, thank you for your interest. And we look forward doing another call next quarter.

Operator

This concludes today’s conference. We thank you for your participation.

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