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Saia Inc. (NASDAQ:SAIA)

Q1 2014 Earnings Conference Call

April 25, 2014 11:00 AM ET

Executives

Doug Col – Treasurer

Rick O’Dell – President and CEO

Jim Darby – VP, Finance and CFO

Analysts

Jason Seidl – Cowen and Company

Scott Group – Wolfe Research

Willard Milby – BB&T Capital Markets

Nicholas Bender – Wunderlich Securities

Dave Ross – Stifel

Bill Greene – Morgan Stanley

Art Hatfield – Raymond James

Operator

Good day. And welcome to the Saia Inc. First Quarter 2014 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Doug Col. Please go ahead.

Doug Col

Thank you, operator. And good morning everyone. Welcome to Saia’s first quarter 2014 conference call. Hosting today’s call are Rick O’Dell, Saia’s President and Chief Executive Officer; and Jim Darby, Vice President, 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’d like to turn the call over to Rick O’Dell.

Rick O’Dell

Well, good morning and thank you for joining us. I am pleased to report the Saia is announcing positive first quarter results. In the quarter, we saw favorable pricing trends and strong tonnage growth continued despite the severe winter weather that challenged our entire industry. I’m proud that the Saia team what we accomplished overcoming the challenging operating conditions to allow us to deliver a very solid first quarter results.

Some highlights from the quarter compared to the first quarter of 2013 include, our total revenue increased 9.5% to $300 million, LTL tonnage increased 5.7% on 4.4% more shipments. Our LTL revenue rose 8.3%, our operating ratio of 94.9 deteriorated 20 basis points compared to a record first quarter of 94.7 last year.

Our earnings per share of $0.34 compares through reported $0.37 per share a year ago in the first quarter of 2013 EPS benefited by $0.04 due to tax credits that related to 2012. In spite of a difficult operating environment that persisted for much of the quarter, I’m pleased to report that we improved load average by 2.7% compared to the first quarter of last year. Our customers continue to respond to our value proposition and are willing to compensate at a rate that’s commensurate with the service that we provide. Our LTL yield rose 2.3% in the first quarter compared to last year, with the challenges of the first quarter behind us; we’re very encouraged about the prospectus for the remainder of 2014. And we believe that underlying trends are positive as we move forward and to the rest of the year and include the following items.

Our LTL tonnage growth was 5.7% and it improved as the quarter progressed. Our high weighted shipments increased by 28% due to targeted market efforts and tightness in the truckload market. Our sales force which was expanded by 10% late last year showing good early results.

The skill of our professional drivers confined with the investments in technology and new equipment continue to drive improvements in our fuel efficiency which was 3% better than the same period last year. Our load average continues to rise and our cargo claims ratio to a consistent improvement is now down to 0.83% of revenue.

Now, I would like to have Darby review the first quarter results.

Jim Darby

Thanks, Rick, and good morning everyone. As Rick mentioned, the first quarter 2014 earnings per share were $0.34, compared to $0.37in the first quarter of 2013. Last year’s first quarter had the benefit of the tax credit in acting in 2013 which was retroactive to 2012 the benefit was $0.04 per share.

For the quarter, revenues were $300 million with operating income of $15.2 million. This compares to 2013 first quarter revenue of $274 million and operating income of $14.5 million. Both periods included 63 work days.

As Rick mentioned LTL yield for the first quarter of 2014 increased by 2.3% which primarily reflects the favorable impact of continued pricing actions consistent with the trend of the past several quarters.

So difficult winter weather undoubtedly added cost to the quarter, we will not try to quantify the cost associated with weather. During the quarter we experienced higher cost in some areas as follows; salaries, wages and benefits rose to a $150 million in the first quarter, reflecting a mid-2013 wage increase of approximately 3% and additional wages associated with the higher tonnage trend.

Additionally, the harsh weather hampered productivity. We also incurred $1.8 million in higher healthcare cost in the first quarter of 2014. Purchase transportation expense for the quarter rose $5.2 million compared to last year. This increase relates to the tonnage growth we experienced and the use of higher cost purchase transportation to meet service needs and markets repeatedly disrupted by weather.

Depreciation and amortization of $13.8 million was $2.2 million higher than last year, reflecting our significant investment in tractors and trailers over the last 12 months to reduce the average age of our fleet.

Claims and insurance expense was $9.5 million in the quarter, compared to $5.6 million last year in the same quarter. This increase in expense was entirely due to increased accident severity in the first quarter of 2014.

Our cargo claims ratio improved by 5%, 2.83% from 1.87% in the first quarter of last year. Our effective tax rate was 38.5% for the first quarter of 2014. For modeling purposes, we expect our 2014 effective tax rate to be approximately 38.5%.

At March 31, 2014 total debt was $79.7 million, net debts total capital was 20%. This compares to total debt of $58.8 million and net debt to total capital of 18.1% at the end of last year’s first quarter.

Net capital expenditures in the first quarter were $8.2 million compared to $6 million spent in the first quarter last year. We are currently projecting net capital expenditures in 2014 of approximately $110 million. This increase level of investment primarily allows for the expansion of the linehaul trailer fleet, in addition to the already planned expenditures to replace revenue equipment as well as investments in technology and real estate projects.

Now, I would like to turn the call back to Rick.

Rick O’Dell

Thanks Jim. The first quarter finished with improving tonnage trends and with our network return to an expected reliability and efficiency. We remain committed to our core strategy of delivering high quality service and will continue to price our service at a level, which delivered the fair return on the investments that we make in this business.

We believe this strategy provide the strong foundation for long-term profitable growth and increased shareholder value as well as good value to our customers. With these comments, we are now ready to answer your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Jason Seidl with Cowen and Company. Please go ahead.

Jason Seidl – Cowen and Company

Good morning Rick, good morning Jim, how are you guys?

Rick O’Dell

Good morning, Jason.

Jim Darby

Good morning, Jason.

Jason Seidl – Cowen and Company

Couple of quick things here, and I know you said you are not going to quantify weather, but if I just took a look at the amount, well your claims, a massive increase, could you tell us what the accident expense was in the quarter in terms of just the accidents not just claims?

Jim Darby

Sure, Jason that entire increase was due to accident severity. So included in our claim would be our cargo claims expense and that actually improved, but the year-over-year impact of that change with all the disparity of accidents.

Jason Seidl – Cowen and Company

So that just normalized, your normal run rate, your earnings probably somewhere north of $0.40 is that a good way of looking at it?

Jim Darby

Last year’s first quarter was unusually favorable with severity. So while we were over by about 3.9 versus last year, I would say we were over by about 2.6 or 2.7 versus the expected.

Jason Seidl – Cowen and Company

Okay and that…

Jim Darby

That’s all.

Jason Seidl – Cowen and Company

That’s very good, very, very helpful. Thank you. And I guess, Rick in your comments you mentioned that the increased sales force headcount from last year is really starting to yield some results for you guys, could you give us a little more color around that and should we start to see that really take hold sort of in the back-half of the year, as the, anniversary there sort of one year mark with you guys?

Rick O’Dell

I mean all of our sales were – resources have been added, the early results are favorable, we did some benchmarking and particularly the upper Midwest geography was, we were below the market from a representation standpoint there and that’s where we kind of concentrated some of our additions. That is our strongest geography growing so far, but as I’m – obviously I’m sure you are aware, there was a merger of two carriers in that market and allow that business, I think moved elsewhere.

So, our timing proved for that, but we’re pleased with the early results and, we would expect to continue to see favorable tonnage trends going forward.

Jason Seidl – Cowen and Company

Okay, speaking your tonnage trends going forward, can you give us an update on how it was looking, particularly on a breakout between LTL and PL if you’re having?

Rick O’Dell

Sure, I can walk through the LTL tonnage trends Jason and its useful to talk about the first quarter first and then how it rolls into April, because there is an impact, because last year March had Good Friday in it, it was actually the last day of March, last work day of March last year. And this year Good Friday is in April. So there is an impact from that.

Jason Seidl – Cowen and Company

Correct, yes I know.

Rick O’Dell

And we’ve talked about where tonnage was, so if we look at, we’re on record saying that we were up 6.1% in February and then I look at March as reported would show up 8.2% over last March. But the impact of Good Friday would take about 2% off of that. So that would mean that we’d be trending about 6.2% up just like February was year-over-year.

And as we go to April, April with Good Friday in this year is as 5.3% versus last year, but you have the reverse effect you would add 2% to that add to allow for the Good Friday effect. So at April reported would be 5.3% up actually would be running a little over 7 up.

Jason Seidl – Cowen and Company

So you are sort of your organic growth rate excluding the holiday, it looks like it is picked up a little bit in April is that accurate/

Rick O’Dell

Yes that’s fair.

Jason Seidl – Cowen and Company

Okay, fantastic. Also could you guys touch a little bit on the pricing side, excluding sort of your weight per shipment and your length to haul, other carriers that we spoken to and that have reported already kind of, it has alluded to a pretty favorable environment right now especially given all the general rate increases that were announced?

Rick O’Dell

Our analytical discipline pricing continues to pay good dividends and certainly provides a good value for our customers based on the quality of service that we’re providing. Our theoretical yield model that adjusted for length to haul weight per shipment and fuel surcharge improved about 3% year-over-year. And our contract renewals during the first quarter were again in line with kind of our expectations at the 3% range. So yeah, we feel like it contains to be a pretty favorable yield market.

Jason Seidl – Cowen and Company

Okay that’s great color. I got one more question I’ll turn it over to somebody else here. It looks like another strong year for CapEx for you guys almost like the fourth year in a row that it’s fairly strong at least over – definitely in the last three years. What should we expect for 2015 all things being equal should the CapEx sort of trend down a little bit?

Rick O’Dell

I think that really depends on the growth, and what kind of returns that we are seeing, the fuel efficiency as a new unit as warranted improving our average age from the tractor standpoint and, the our increase this year was really driven by, our desire to upsize our linehaul fleet with the increase in tonnage that we’re seeing as well as, an opportunity moving forward for us to re-optimize set optimal purchase transportation run around on own fleet. So, I don’t know the exact answer to that, I guess depending on what growth rate you forecast maybe the $100 million numbers probably right.

Jason Seidl – Cowen and Company

Okay, fair enough, I’ll turn it over to somebody else. Gentlemen, I really appreciate the time as always.

Jim Darby

Thanks.

Rick O’Dell

Great thanks, Jason.

Operator

Our next question is from Scott Group with Wolfe Research. Please go ahead.

Scott Group – Wolfe Research

Hey thanks, good morning guys.

Jim Darby

Good morning Scott.

Scott Group – Wolfe Research

So just because of the weather issues in the first quarter, but also that the shift of Easter, I’m not sure the best way to think about margins in the second quarter relative to kind of normal seasonality 1Q to 2Q, may be Rick if you’ve got some color or ideas there?

Rick O’Dell

We’re not sure when the last time I saw normal seasonality was either and certainly it wasn’t a normal first quarter. But, I guess when we kind of look at the second quarter outlook, just kind of, we always kind of look back and see where we’ve been right and in the recent years the second quarter has been about three OR points better than the first quarter. But what I would say is with our tonnage growth and absent, unusual self-insurance volatility, we feel like we should be able to do than that this year.

I would say though kind of like we commented, I think the expectations need to be a little bit tempered, because Good Friday moved from March to April and that has a negative impact on sequential margins. And while the yields environment is certainly steady and in line with our expectations, if you look back at the things we’ve been during the last couple of years we have some pretty significant, what I would call corrective action pricing going on as high, and in early 2012 our yields were up 7% sequentially and in 2013 they were up 5%. Those things have a positive impact on sequential margins, but obviously, we feel, certainly feel favorable with the benefits we should be able to get from a tonnage trends and but, I would call really steady yield environment currently as well.

Scott Group – Wolfe Research

And you don’t actually – usually don’t have the GRI in the second quarter like you do this year?

Rick O’Dell

That’s correct. That’s a little more favorable, contract renewals per se running at the rates that they were the last few years as well either. So those things may offset each other right.

Scott Group – Wolfe Research

That makes sense.

Rick O’Dell

All right.

Scott Group – Wolfe Research

What the just tremendous growth on the truckload side, I guess, just a lot of spill over, is that business that are you keeping that business do you want to keep that business, how should we kind of model the truckload side on the tonnage side going forward?

Rick O’Dell

I think the run rate of that tonnage has been up for us the last, you know now couple of quarters in a row. And that’s partially due to kind of a targeted marketing effort that we have to get then larger shipments in backhaul lanes kind of almost a spot, something that we’ve targeted to kind of some of the spot market a little bit. And like you said if not really truckload it’s just over 10,000 pound shipments, could be three tilts right.

But, we targeted that business with some pricing that makes that work for customers as well as working for us in certain lanes and we have the ability to kind of tweak that based on capacity and if our backhaul were to change, I would tell you about 80% of that business moves in backhaul lanes, so that kind of works for us from a – from a cost standpoint, incremental margin. So I think you’ll see the comps will, once you get the fourth quarter the comps will level out more, but I would say that run rate is probably, is kind of carrying forward clearly kind of in the April.

Scott Group – Wolfe Research

Okay that’s great. And just the last question from me, it seems like the – the plans to start growing tonnage are showing some success. When you think about expanding geographically and do you think that’s more likely organic or through acquisition and maybe your views on when that would be?

Rick O’Dell

I think we would selectively expand either through optimistic acquisition or organically, pretty pleased with our focus today on being able to grow tonnage and improve margins in our existing geographies. So, I think it’s required for us to drive our OR down in the 80s, which is clearly a focus of ours over a period of time. So that, selectively making an acquisition could obviously come kind of at anytime, we tend to look at the deals that come into market there is not a lot of LTL carriers out there that kind of make sense in non-overlap geography. And then I would tell you, organic expansion I would say wouldn’t happen this year, but next year probably.

Scott Group – Wolfe Research

All right great. Thanks for the time guys.

Rick O’Dell

Great.

Jim Darby

Thanks Scott.

Operator

Our next question is from Brad Delco with Stephens. Please go ahead.

Unidentified Analyst

Hey guys it’s actually Ben on for Brad.

Rick O’Dell

Hi Ben.

Jim Darby

Good morning Ben.

Unidentified Analyst

Good morning. So can you kind of help us understand the tonnage growth a bit more, was this kind of pent up volume from the bad weather or did this come little bit more from the sales add, or is it really some macro improvements that you guys are saying?

Rick O’Dell

I would say it’s – it looks a little bit like all of the above. So here is what I would tell you and if I look at the growth that we have the upper Midwest is the strongest and that’s where we had the most sales resource and that’s also where you know you got the merger of the former Vitran company and another carrier, got put together and I think some of that business went elsewhere provided a good opportunity there, feels like the markets picked up a little bit, I would say that’s true as well.

But, we saw a growth kind of across our network and then I also feel like, we’re pretty early in this incremental sales resource opportunity and normally it takes 4 to 6 months that have – to have someone to have much impact and so, we certainly feel good about the early results to think that could continue to provide some opportunities going forward as well.

Unidentified Analyst

And we refer that some carriers were kind of giving up freight or shutting down regions because of the weather, did you guys pick up any freight from that and do you expect the key bidder, how you are thinking about that?

Rick O’Dell

I’m sure we picked some, we made, we spend a lot of money keeping our network fluid and, if it’s safe to be on the roads, when we go out make picks and keep our network running. So, I think that was probably favorable, I would tell you if you look at the business that we got, the largest growth came from 3PL the segment, the second largest growth came from field business and the third was national account. So that field business tends to be pretty sticky when it moves, same with the national account business, I think that Vitran was a big player in the 3PLs and when that transition happened I think a fair amount of that business kind of went to other.

So you can’t really take sales force credit for that necessary or I think its value proposition in the service that we have in the marketplace prove to be favorable and over time we’ll continue to price that 3PL business that operates well for us and that – those volumes also tend to switch around quite a bit based on what you’re doing with your pricing from a 3PL perspective as well.

Unidentified Analyst

Great, thanks for color. And then on the incremental margins, if we to think, I guess at weather and exclude some cost associated with it and then through the higher insurance and claims expense incremental margins look like they would have been running closely to 30% range. How do – how should we think about incremental margins going forward and then maybe over the longer term kind of how are you think about incremental margins as well?

Rick O’Dell

In kind of a normal yield environment let’s call it a 3% range, it should be able to offset our inflationary cost increases with yield improvements then we should also be gaining some density benefits as we move forward. So, we’re very focused on the opportunities to combine growth with the normal yield environment and our execution in the marketplace to make some headway. So, given the challenges we had with self-insurance and some weather related cost there in the first quarter and as I commented, our average improvement year-over-year is about 300 basis points and we are expected to do better than that.

Unidentified Analyst

Okay great, thanks guys.

Jim Darby

Thanks Ben.

Operator

Our next question is from Willard Milby with BB&T Capital Markets. Please go ahead.

Willard Milby – BB&T Capital Markets

Good morning guys.

Rick O’Dell

Good morning.

Jim Darby

Good morning.

Willard Milby – BB&T Capital Markets

Just want to ask another tonnage question here, with the new sale force, I think you said the magic numbers for six months on boarding; do you have a targeted tonnage growth with the new sales force going forward here?

Rick O’Dell

Our current run rate as we commented, as Jim commented adjusted for the Good Fridays in the 7% range. The way we kind of managed the company is to manage for efficiency kind of take a look at where your margins are and then look at opportunities to re-optimize both your business mix and your linehaul network for imbalances. So I think there is kind of that trade-off between tonnage and yield and margins.

So our current, my current thinking is to kind of manage the business for what tonnage flowed up and kind of look and see how well we’re executing and how the business is operating with some revised mix and some top-line tonnage growth and then look to kind of, if our – the opportunity is there and is working off from an efficiency standpoint and we’ll continue to see growth out, if near-term margins aren’t quite well we would like to see them and we will re-optimize our business mix through yield enhancements to make sure we will be properly compensated for that.

So, I think there is a balance between the tonnage and the yield and, you prior heard me say this before, but I mean I like tonnage growth it’s good to grow but, it’s also we like to see our margins continue to improve as well and I think that yield, the best thing about positive tonnage is it continues to encourage you to take yield risk. So, you may see us return to a combination of tonnage growth and yield improvement. We kind of like that yield thing that impacted can have on the operating ratio.

Willard Milby – BB&T Capital Markets

Okay, thanks great color there. And as I look at the purchase transportation line and as well as the fuel and operating expenses deploys, assuming there is a lot of fuel savings just to kind of shifted in the purchase transportation here in Q1. Can we expect kind of version back to the normal, I call it of kind of mid 6% as percent of revenue on PT line and kind of little 26 is high 25% of revenue on the fuel operating expenses here going forward?

Rick O’Dell

I think that’s right, in other words with the growth that we saw as well as the weather disruptions we definitely use sub optimal purchase transportation it’s kind of being our run rate right now. Obviously we ordered some incremental trailers, we’ve got over a 100 line driver positions open right now that we’re seeking to fill and after we do that, we would – you would expect to see some optimization of sub optimal purchase transportation. That being said, I like the hauls increasing a little bit, there is some lanes were efficient use of rail makes a lot of sense as well.

So, as that grows we just, we’ll do what’s best for service and for our margins there. Return on invested capital given some long – some certain long haul lanes that can run on the rail over the week and certainly our service requirements are pretty has pretty good return on invested capital.

Willard Milby – BB&T Capital Markets

Okay, so we could possibly see some spill over with a higher PT in the Q2?

Rick O’Dell

I mean we used to run 60% of that is to be rail and we were kind of doing the best that we were dealing from that perspective and with the – some of the rail disruptions as well as the weather disruptions that we saw, we’re clearly running some sub optimal PT, but it may run a little bit higher rate as we – as we take share in some of these longer haul markets as well.

Willard Milby – BB&T Capital Markets

Okay, all right. Thanks for the time guys.

Jim Darby

Sure, thanks.

Operator

Our next question is from Nicholas Bender with Wunderlich Securities. Please go ahead.

Nicholas Bender – Wunderlich Securities

Good morning.

Operator

Nicholas your line is open.

Nicholas Bender – Wunderlich Securities

Sorry, got that guys. Good morning.

Jim Darby

Good morning.

Nicholas Bender – Wunderlich Securities

Quick questions on the capacity outlook, obviously you guys are down up some CapEx here for some new equipment and a little bit higher replacing that activity. How do you feel about door capacity and on the real stay front, any expectation you mean to add more doors for the tonnage your layering on at this point?

Rick O’Dell

We’re on pretty good shape right now, I mean as you know we really haven’t grown for a couple of years and we’d built out some capacity kind of head of the downturn, timing was there, I guess that, so we have some excess capacity probably the place, the place we are looking to add another terminal in the Chicago market, but that’s a construction project that would probably come online first of next year. And obviously we look for opportunistic real estate purchases where you can have opportunity to upgrade.

But we don’t have any significant deficiencies in our network right now. Our break capacity is good, our network is running fluid at today’s level and we’ve got some incremental capacity there. So I wouldn’t look for big real estate purchases unless it’s something where existing facility that we’re leasing may come up for sale and things like that. With today’s cost of money being pretty inexpensive we would make opportunistic purchases in markets that make sense.

Nicholas Bender – Wunderlich Securities

Sure and now that make sense Rick. Sort of circling back, when last time we heard from you guys in January we talked about sort of the $10 million to $12 million cost savings targeting a couple of different buckets. Especially with CapEx picking up here and may be doing a little more with pricing activity. Do you see any potential for upside to those cost savings metrics especially as the – like I said you pulled some older equipment out of the market and maybe get some power efficiency equipment into the fleet?

Rick O’Dell

I think, the fuel is one of our targeted opportunities that we’ve obviously seen some significant improvement in that over the last couple of years and unlike last year, where we had two big buckets of the improvement in linehaul and fuel efficiency both of which we achieved. It’s kind of spread around a variety of projects and what I would tell you is some of those projects have been delayed a little bit with the weather disruption and focus had to be a little bit more near term then we would have like. So, but I would tell you, I think that $10 million number is probably still good.

Nicholas Bender – Wunderlich Securities

Okay that’s helpful. Looking at heavier weight for shipment really in the last couple of quarters here anything to read into that, all entirely mix shift with more business that you’re growing in the upper Midwest or is there any component of potentially stronger macro conditions?

Rick O’Dell

I mean it looks a little better I would tell you two, we’ve targeted some heavier weighted shipments from 3PLs and some other different sources that’s kind of happened over a period of time as well. And then I think, I guess what we’re seeing is certainly the economic activity certainly feels a little bit better as well.

Nicholas Bender – Wunderlich Securities

Okay that’s great. And then my last one here real quick. Obviously, you guys delivered excellent tonnage growth in the quarter and, we see from your competitor yesterday’s strong tonnage growth number as well. How you feel, about the pricing environment at this point in time certainly the first quarter was pretty unique, but any indications or any concerns about, people getting more competitive or aggressive on rates in particular lanes or anything like that?

Rick O’Dell

I mean our yield improvements again were kind of in line with our target around the 3% range, the general rate increases kind of came out little early, I think that’s favorable seems to be sticking well. And I think it’s a pretty good environment, as I commented, I think with our tonnage up like it is as become the contract renewals, we’re going to take a hard look at the business and how it operates and, we’ve gotten, I said most of our corrective action pricing is behind us but there is, all this opportunities for a few that you never quite give right, so when they come up again I think there is certainly our opportunity is to re-price lanes. And, one thing we’re seeing with the growth that we have in the upper Midwest geography as kind of changed our lane imbalance up there as well. So, when you grow – out grow one region out grows others, right and then your lane imbalances change. You got to make sure that you’re being properly compensated for that. So sometimes your historical pricing may need to be re-priced based on that.

So that’s something that’s certainly an opportunity going forward as well. With strong tonnage growth that encourages you to take a look at the business and how it operates and, the driver market is tighter than in spite it had been in a long time, there is certain markets where we’re having to pay signing bonuses of $5,000 to get a driver either run over the road or even in the city. So I can assure you we’re taking a hard look at customers business and those – particularly in those markets to see, we’re going to go through the process, the cost we process to grow and bring on new people we got to make sure being compensated personally for the business we’re handling. So in both there is an opportunity right, and there is good incremental margins for tonnage growth and then I think the positive thing about tonnage growth that encourages you to take some yield risk when you need to.

Nicholas Bender – Wunderlich Securities

Understood, I appreciate the color guys and congratulations again.

Rick O’Dell

Thanks I appreciate it.

Operator

(Operator Instructions). Our next question is from David Ross with Stifel. Please go ahead.

Dave Ross – Stifel

Yes good morning gentlemen.

Jim Darby

Good morning, David.

Rick O’Dell

Good morning.

Dave Ross – Stifel

Hey Rick as to follow up on your comment about drivers, in some markets you said you have to pay a little bit more, what markets for those specifically be and did you think there is going to be another just kind of broader annual wage increase this summer?

Rick O’Dell

I mean I guess it’s kind of weird some of the markets are, some of the smaller kind of oil field markets, are obviously hot right now that fracing activity driver type of options of, be in that kind of oil field sector or be in with an LTL carrier. So that’s causing some spike in some, what you would call non-traditional markets and then some of the upper Midwest market I think with, some business moving around up there from the merger that we discussed earlier is causing, some shortages in some of those markets that you wouldn’t have historically wouldn’t expect right, Columbus, Ohio paying signing bonuses it’s kind of unusual, all right, that was spent in Indiana I mean.

But it’s kind of the market, so I – and then we do our benchmarking and obviously we’re committed to a market-based compensation program and we have informally announced our wage increase but, we’ve done at the last couple of years in July and you can assume that, when you are in a market like we are today and it will be revisiting that at that point in time. And I would tell you most, we have a very rich benefit plan and with that some combining that with some probably fairly modest wage increases in most markets with a couple of market adjustments probably we’re looking at.

Dave Ross – Stifel

Okay and then, on those benefit plans I guess Jim you mentioned, healthcare costs were up $1.8 million year-over-year in the quarter. Was there anything unusual driving it higher or was that affordable care acts related, anymore comments on that, how should it trend the rest of 2014?

Jim Darby

Yes, Dave. It was – it is unusual, but it’s what we expected. I mean, because what we’re seeing this year is we’re expecting it to go up about $7 million for the year and about $2 million of that increase is specifically related to the Affordable Care Act and what’s being implemented this year. So we have normal inflation in healthcare expenses and then the Affordable Care Act adds about $2 million more.

Dave Ross – Stifel

I don’t know why it’s called the Affordable Care Act then. The insurance and clams in Q2 2014, is that trending more normally, no bad accidents in the first few weeks I take it?

Rick O’Dell

Correct. I mean, obviously, we’re subject to self-insurance volatility, but we’re very committed to our safety programs. They’re very robust, supported by technology and management training and we’ve – although some volatility, we very much plan to get back to normal accident severity.

Dave Ross – Stifel

And then, last question, Rick. If you could comment about the logistic services business, how that’s growing, is that making a big impact on the numbers yet?

Rick O’Dell

It’s really pretty minimal. So we’re actually kind of year-over-year obviously with some of the disruptions in the truckload market, it’s more flattish year-over-year compared to some growth that we experienced last year. I don’t think it’s necessarily representative of what the business can do over a period of time, but it didn’t have much impact on a comp basis.

Dave Ross – Stifel

Excellent. Thank you very much.

Rick O’Dell

Thanks Dave.

Jim Darby

Thanks Dave.

Operator

Our next question is from Bill Greene with Morgan Stanley. Please go ahead.

Bill Greene – Morgan Stanley

Yes. Hi, there. Good morning.

Jim Darby

Good morning, Bill.

Bill Greene – Morgan Stanley

Good morning. I just had one quick question here. Rick, you mentioned sort of hoping to get potentially into the 80s on an OR basis. Have you ever sort of described the timeframe for getting there or if not are you willing to kind of venture how long that could take?

Rick O’Dell

I mean, we don’t provide guidance, but there’s someone that’s doing it repeatedly and I’m not very patient person. My wife could probably tell you that. So I would just tell you, we’re working hard on it and we’re – I feel like the return on invested capital is clearly improving, but when you take a hard look at kind of what’s going on and the market opportunity with the tonnage up, so we certainly expect to improve our margins going forward. We think there is a lot of opportunity there.

Bill Greene – Morgan Stanley

Yes. Clearly you have good incrementals on both the tonnage and the yield side. So if we’re in a better tonnage environment, one would think that, as you said before, that’s good for yields and the combination of which I would think would meant that’s actually not that far into the future on an annual basis, of course not in the first quarter, but that’s how it’s kind of thinking about it. So just want to hear your thoughts? Thanks. Sorry.

Rick O’Dell

I think the same way. And so, we’re clearly focused on that opportunity, and as I said before, I like the incremental tonnage, I think it’s favorable. But it also causes me to look at the margins that we’re having on our existing business and to the extent those need to be corrected in lanes, particularly imbalance lanes. We’re going to make sure we’re properly compensated for the invested capital that we’re making.

Bill Greene – Morgan Stanley

That’s great. Thanks for the time.

Rick O’Dell

Sure.

Jim Darby

Thanks, Bill.

Operator

Our next question is from Art Hatfield with Raymond James. Please go ahead.

Art Hatfield – Raymond James

Hey. Morning, guys.

Jim Darby

Hi Art.

Art Hatfield – Raymond James

I probably missed a lot of this. I’ve been busy trying to get the pine tar off my hand. I thought Jim would appreciate that. Hey, when I look at kind of like go forward – when I think about trying to model things going forward, one of the thing that kind of jumped out, I mean, Q1 was your truckload tonnage and you may have mentioned this and I apologize if I missed it, but how can we think about it in Q1 and just how really should we think about that going forward?

Rick O’Dell

Yes. I commented on it earlier, but basically what happened is in the fourth quarter of last year, we did some target marketing for in the spot market for – to fill back haul lanes...

Art Hatfield – Raymond James

Got it.

Rick O’Dell

In that that we made some enhancements put some efforts there. I call it targeted marketing and it’s produced some positive results that carried on through the first quarter. 80% of it is in backhaul lanes. It has good incremental margins. And so you kind of expect that to go forward.

What I would tell you is, since this kind of more spot transactional business, we tweaked that, have the ability to tweak that based on imbalance and capacity. So it’s kind of always going on, but we’re seeing some good success in that. We feel like that it has good incremental margins and I don’t think it’s kind of a one trick pony kind of a thing. It’s something that we will probably continue to see going forward.

Art Hatfield – Raymond James

But it’s something you – from what I just heard you said, it’s something the tool you use to manage your capacity. It’s not something that could get out of control where you may have to spend money to add capacity in lane just to handle this type of business, is that fair enough?

Rick O’Dell

We tweaked the pricing in the lanes daily. We have the capacity to watch very closely. It’s not – you see poorly priced business that’s moving in head all lanes. We tweak it – we tweak it right away it’s a spot market type of thing and can be changed every day.

Art Hatfield – Raymond James

Got it. That’s very helpful. So when we think about that, because of that I mean we’ve – I would speak to most of the market changes going forward, the pricing of that business is probably going to be somewhere where it is today?

Rick O’Dell

Yes, it will tweak up a little bit, but you asked – it’s just heavy weighted LTL shipments that were kind of stockholding right?

Jim Darby

Right, right, right. So, it’s just going to fall with market.

Art Hatfield – Raymond James

Yes, I got you. That’s all I got today. Thanks for the time Rick.

Rick O’Dell

All right, great. Thanks Art.

Jim Darby

Thanks a lot.

Operator

And it appears there are no further questions at this time. Mr. O’Dell, I’d like to turn the call back to you for any additional or closing remarks.

Rick O’Dell

Okay. Thank you for your interest in Saia and we look forward to catching up with you guys again soon.

Operator

And that does conclude today’s call. Thank you for your participation.

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