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Saia, Inc. (NASDAQ:SAIA)

Q2 2014 Results Earnings Conference Call

July 30, 2014 11:00 a.m. ET

Executives

Doug Col – Treasurer

Rick O’Dell – President and Chief Executive Officer

Jim Darby – Vice President, Finance and Chief Financial Officer

Analysts

Brad Delco - Stephens

Scott Group – Wolfe Research

Art Hatfield - Raymond James

Jason Seidl - Cowen and Company

Bill Greene – Morgan Stanley

David Ross – Stifel

Nicholas Bender – Wunderlich Securities

Willard Milby – BB&T Capital Markets

Operator

Good day and welcome to the Saia Incorporated Second 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. Good morning everyone. Welcome to Saia’s second quarter 2014 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.

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 to discuss Saia's results. Saia ended the second quarter with very positive tonnage trends and increasing momentum with respect to yield. Despite these and many other positive results, our second quarter clearly did not meet expectation. We were negatively impacted by high claims and insurance expense associated with increased accident severity in the quarter. Despite those challenges, I am proud of the Saia team for delivering a quality service and value proposition to our customer in an increasingly capacity constrained transportation market.

Some details from the quarter compared with the second quarter of last year include the following. Total revenue increased 12.9% to $330 million. LTL tonnage increased 6.9% on 5.5% more shipments. Our LTL revenue rose 12%, our operating ratio of 93.1 deteriorated 110 basis points compared to an OR of 92 in last year's second quarter.

Earnings per share of $0.53 compares to $0.54 per share a year ago and claims and insurance expense was $8.3 million higher than the second quarter of last year due primarily to accident severity. Saia's 12.9% increase in revenue over 2013 second quarter represents the highest growth for the company in seven year. Our customers continue to respond to our value proposition which is what support the strong rise in our LTL yield of 4.9% in the second quarter compared to the last year.

Looking at the quarter. Clearly disappointed that our accident severity did not allow us to bring the top line trends that we achieved to the bottom line. We have invested significant in technology and training in recent years to further enhance the robust commitment to Saia's safety program. Despite the unwavering safety foundation, we are at risk of having volatility due to accident severity given the many millions of miles that we drive each month.

Having said that, I would like to give you a little color on some of the second quarter successes that we believe will be foundation of many opportunities moving forward. Pricing on contract renewals ran well above the 3% target that we established early in the year. In fact, it was over 5% on contract renewals during the quarter. Our success in marketing higher weighted shipments which performed well in our system continued in the second quarter and led to a 28% increase in truckload tonnage.

This month we begin taking delivery of a portion of the 800 linehaul trailers that we plan to put into service before the end of the year which will further enhance our network optimization opportunities. Our operating a newer fleet and utilizing in-cab technology as well as our skilled professional drivers, helped us achieve a 3.1% increase in miles per gallon versus the second quarter of last year. Our load average continues to rise and we reduced empty miles by 3.3% compared to last year's second quarter.

We have installed two new dimensioners in 2014 for a total of 27 now operating across our terminal network and our early adoption of this technology really puts us in a good position to continue to realize benefits with respect to accurate costing as well yield enhancement. Our cargo claims ratio remains less than 1% of revenue. In May we launched a mobile Web site enabling our customer to manage their supply chain from wherever they may be, furthering our value proposition.

And the investment that we made in our sales force is paying off as we are able to reach more customers and prospects. And finally I am pleased to announce that LTL tonnage growth continues in July at a pace that’s above the 6.9% rate that we saw in the second quarter. Going forward, we expect that Saia will continue to benefit from building density in our network. Besides modern fleet, our market based compensation program, our dock to driver training options and a centralized recruiting function, Saia is well positioned to handle the challenges of a tight driver market. And while we clearly did not have a good safety quarter, we strongly believe our commitment to safety, training and technology will minimize over time these types of unfortunate events.

Now, I would like to have Jim Darby review our second quarter results.

Jim Darby

Thanks, Rick, and good morning everyone. As Rick mentioned, the second quarter 2014 earnings per share were $0.53 compared to $0.54 in the second quarter of 2013. For the quarter, revenues were $330 million with operating income of $22.7 million. This compares to 2013 second quarter revenue of $293 million and operating income of $23.3 million. Both periods included 64 work days.

As noted, LTL yield for the second quarter 2014 increased by 4.9%, primarily reflecting the favorable impact of continued pricing actions consistent with the trend of the past several quarters. During the quarter we experienced higher cost in some key areas as follows. Claims and insurance expense was $14.2 million in the quarter compared to $5.9 million last year in the same quarter. This increase of expense was primarily due to increased accident severity in the second quarter of 2014 along with some negative development of prior claims.

Salaries, wages and benefits rose 11% to $160 million in the second quarter, reflecting additional wages associated with the higher tonnage trends and the impact of the mid-2013 wage increase of approximately 3%. In keeping with our market-based compensation philosophy, we have implemented a wage increase averaging approximately 3% across the company in July 2014.

Additionally, we needed to pay hiring bonuses to attract drivers in certain markets. Healthcare cost increased $1.6 million in the second quarter of 2014 compared to the prior quarter. Purchased transportation expense for the quarter rose $8.6 million compared to last year. This increase relates to the tonnage growth we experienced which at times requires the use of less efficient purchased transportation to meet service demands.

Depreciation and amortization of $15.1 million was $2.7 million higher than last year, reflecting our significant investment in tractors and trailers over the last 12-months to reduce average age of our fleet. Our cargo claims ratio was 0.99%, a slight uptick from our 0.90% a year ago. Our effective tax rate was 37.2% for the second quarter of 2014. For modeling purposes we expect our 2014 effective tax rate to be approximately 38%.

At June 30, 2014, total debt was $95.7 million. Net debt total capital was 22.1%. This compares to total debt of $99 million and net debt to total capital of 25.5% at the end of last year's second quarter. Net capital expenditures in the first half of 2014 were $66.7 million compared to $70.8 million spent in the first six months of 2013. We continue to project net capital expenditures in 2014 of approximately $110 million. This level of investment allows for the expansion of the linehaul trailer fleet as Rick mentioned, and the continued investment in the replacement of 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

Thank you, Jim. As most of you have probably already heard, earlier this month Saia announced the planned retirement of our CFO, Jim Darby. And I would like to publicly thank Jim for his years of diligent service to Saia. Jim led our finance group through a period of dramatic growth for Saia and also guided us through the trying times of the financial markets in 2008 and 2009. And I am sure you guys are all aware that was a very long couple of years for a CFO of an LTL carrier. So we clearly wish Jim well in his retirement. I am very appreciative of the strong team that he leaves in place.

Before we open up for questions, I would like reiterate that while our absolute results were clearly disappointing, we are very encouraged by the gains we have made with increases to our revenue and the opportunity that we see going forward. And I feel strongly that Saia is really well positioned to capitalize on the unique supply-demand environment that we are currently experiencing in the market place. With that said, we are now ready to take questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Brad Delco with Stephens.

Brad Delco - Stephens

Jim, congratulations. Jim, one of your, I guess favorite numbers to give out is the monthly tonnage throughout the quarter. I may have jumped on late, if you hadn't already given that, do you mind repeating it?

Jim Darby

I haven't repeated it Brad and I will be glad to walk you through it. So as reported, the LTL tonnage for the quarter is up 6.9% and unadjusted April was up 5.7%. Adjusting it for Good Friday on a run rate basis, it would really be up about 7.5% as we have discussed before. May is up 7.7% and June is up 7.5%. And as we have gone part of the way through July at this point, July is running up 9.4% but I would tell you that there is a similar effect to what we have with Good Friday, in that last year's July 5 day was on a Friday after the holiday and it was very weak. So adjusting for that weak day that was in last year, our trend we think is running up about 7.8%. Pretty consistent with the last couple of months.

Brad Delco - Stephens

Great. That's good color. And then just focusing on the insurance and claim line. Clearly some unfortunate events, obviously, in the quarter with the severity. What sort of lasting impact would you expect on that going forward, if any?

Jim Darby

Well, Brad, with those types of accidents we try to capture all the expense in the quarter in which the accident occurred. So we don’t expect this to necessarily have any effect going forward. We are always subject to volatility on that line but we don’t expect it to go forward. And that line is up $8.3 million compared to second quarter of last year and second quarter of last year accident severity was fairly light. So what we would say is on that line, that we are probably about $7 million over what would be a normal or expected amount for that line.

Brad Delco - Stephens

Okay. And then last one for me and I'll get back in queue. The purchased transportation increase, I kind of understand that, given the strong growth you saw in the quarter. How should we expect that line to trend, taking into account the 800 tractors coming online? Should we see a pretty immediate reduction or given the growth in July plus maybe, I heard driver bonuses, is it partially offset in other areas of business, I guess? Overall, how do you expect the fluidity of the network to trend going forward and the impact on expenses?

Jim Darby

Well, it's 800 logistics post trailers that we will be adding starting in July and that will add capacity for us. Rick, you want to comment on PT?

Rick O’Dell

Yes. I guess I would say this, our purchased transportation of our linehaul expense, right, is running about 15% of our miles whereas, you know, at kind of what we would consider an optimal level, we were down around 9% to 10%. This is a capacity challenge in market. I would tell you, we are also growing in some long haul lanes which as effectively we can use the rail and some of that, so some of that maybe in our run rates going forward. But the rates on our purchased transportation absent the impact of fuel, which is kind of the way we look at it, is actually up about 9.5%. And so we are incurring some higher cost to take care of our customers in the near term, particularly on the purchased transportation side and the staffing side.

And what our plan is, obviously, to look for the opportunities to optimize that as well as to make sure that we are properly compensated by our customers with our pricing programs over time, kind of by lane, by market. Particularly in the markets where we are having a lot of driver demand, challenges or it's difficult get truckload capacity, so you are paying high cost. You know one way, go away type things in head haul lanes. We just need to make sure that we get priced properly for that. So over time, I think there is an opportunity to optimize that line but you might see that line stay where it is then the yields will have to go up, right. (Indiscernible) and using purchased transportation, but somebody has to pay for it. All right? Whoever is generating the loads.

Brad Delco - Stephens

Got you. So you guys will keep chipping away at it. Could persist a little bit but the idea is you might be compensated or you will be compensated for it on the pricing side?

Rick O’Dell

Correct.

Operator

We will take our next question from Scott Group with Wolfe Research.

Scott Group – Wolfe Research

So, Rick, your comments on contract renewal of 5%, that sounds good but I know the second quarter had the earlier GRI. How should we think about yields and pricing in the third quarter and rest of the year?

Rick O’Dell

We are obviously in a capacity constrained environment and quite frankly I have never seen it like this in my entire career in LTL. And the truckload markets are very tight. When we move certain amount of our tonnage via truckloads, customers were having challenges from a capacity standpoint. In some ways they are giving us some of their heavier marks that we are having to move. And I would tell you that we have a very analytical, disciplined, pricing model that continues to pay dividends. We show that our theoretical yield model which shows that we are up about 4.5% when you adjust for the length of the haul and wait for shipment and take out the field surcharge. About 1% of that is kind of the GRI impact, so we are running up 3.5% on contract renewals and I guess what I would tell you is where at the beginning of the year we said, we will benefit from some tonnage improvements and kind of target more normalized yield with today's kind of cost environment that we are seeing. I mean that’s kind of out the window.

So I think the yield increases that we were going to get will be more material than the targets that we saw and as I commented, contract renewals were up over 5%. In this quarter we have made some adjustments to your pricing programs and the targets that we have and we are going to continue to do that. I mean there is no reason to pay $5,000 signing bonus and bunch of recruiting money to hire drivers and not be compensated for the freight that you are handling in that marketplace. I mean it's just doesn’t make any sense at all and we are very focused on the margins and the details of our pricing programs.

Scott Group – Wolfe Research

So even without the GRI, can yields be better than the 4.9% they were up in the second quarter?

Rick O’Dell

I think they can. I mean over time they have to be. I mean the situation that you have is, it's not a one for the yield. The yield opportunities aren't a one quarter story, right. So, basically 70% of our businesses come up through contract renewals. So we do them one contract at a time and there is kind of the average increase on the business that operates okay and then he markets that aren't paying their way, we make some, in some cases some very significant adjustments in some of those lanes. And I would assume there are going to be some -- with this environment that we are operating in and tonnage up in the 8% range, then we are going to take price risk. I mean we are going to take care of our customer's freight and incur the higher costs and then we are going to make sure that we are being compensated for.

Scott Group – Wolfe Research

Okay. That makes sense. In terms of the operating ratio, you usually give some kind of color inside on how you think the next quarter is going to play out. You have some thoughts there?

Rick O’Dell

Sure. I mean there is a lot of moving parts to this quarter, probably more than we have seen in the past. So this might be the easiest way to kind of step through it. In recent years, the third quarter has been about one point worst than the 2Q, due primarily to our annual wage increase. You know if you were to adjust accident severity to more in line with Saia's historical results which is a number that Jim had given, then the second quarter OR would be 91. But I would say, given the volume and pricing momentum that we are experiencing, we are currently targeting to do a little better than the historical 1 point OR decline. Kind of in spite of the fact we don’t have the GRI.

Scott Group – Wolfe Research

Got you. Okay. That’s given. Just last thing. Longer term PT was an issues this quarter and I think we understand why. Is the goal over time as you think about trying to get into an 80s operating ratio to materially reduce that PT spend, like Old Dominion has done.

Rick O’Dell

The goal is to optimize our line haul cost which is primarily what drives that. And again there is some optimal PT in there, primarily being rail and then places where you have a significantly over balanced lane and you can get cost effective PT. I would rather pay $1.70 a mile instead of running round trip at my cost, right. Because that other guys maybe able to find a load back and I would be running back empty. That being said, we have staffed up and hired a lot of drivers during this time period. We have used, what I would call sub-optimal purchased transportation to take care of our customers in this capacity constrained environment and I can assure you there are opportunities to re-optimize the purchase transportation.

So I think over time, that will come down. To come back down as a percentage of revenue, just given the tight driver market and the strength of our tonnage that we are seeing. We are incurring the cost to take care of our customers, which is clearly our number one priority.

Operator

And we will take our next question from Art Hatfield with Raymond James

Art Hatfield - Raymond James

Congrats, Jim, on a well deserved retirement. Rick, I will say your next CFO should have a better driving record than Jim. Just a couple things, and I want to get a little bit ahead here, I appreciate your comments and how you think about Q3 OR and I know it's early to talk about Q4 of OR movements. But can you tell us what historically that has done for you, Q3 to Q4 historically has done?

Jim Darby

Well, Art. I don’t have that in front of me. I mean fourth quarter is usually pretty weak. If you give us a call afterwards, I will be glad to go through that with you off line. I just don’t have it in front of me right now.

Art Hatfield - Raymond James

Not a problem. I'll follow up. Just the other thing, and you've helped out a lot, Rick, on the PT thing. How much of your PT right now is on the rail?

Rick O’Dell

I have to get it. I think it's about 50% of the miles are on the rail and it's a lower percentage of cost as you would expect.

Art Hatfield - Raymond James

Okay. And then finally, just to follow up on your comment about PT earlier, you had mentioned you think it should stay at this level going forward. Were you referring to absolute dollars or as a percent of revenue?

Rick O’Dell

Your question is was on purchase transportation?

Art Hatfield - Raymond James

Yes, yes.

Rick O’Dell

I think it will stay at a higher level but I think there is an opportunity on a percentage of revenue to improve and it will be through a combination of yield improvements and/or re-optimizing the PT to that sub-optimal in our network today. And then there will be some combination where it's quite frankly, if I have got a customer who is not paying us away and he is generating high cost PT. Whether he pays or whether that business goes away, because it's not paying its way, right, then I still improve my margins.

Art Hatfield - Raymond James

Right, right. No, understood. But the dollar amount really shouldn't decline much from here is I guess what you are saying, in the near-term?

Rick O’Dell

No. I don’t think. It's not an immediate quarter-to-quarter thing. But I do think there will be some improvement as we head into the third quarter because of the staffing that we have done during the quarter as well as the vacation period for our own drivers is high in the summer time. And when the kids to back to school and those types of things happen, we get a lot of our availability increases and so we will be able to take out some of the sub-optimal PT in the quarter.

Operator

We will take our next question from Jason Seidl with Cowen and Company.

Jason Seidl - Cowen and Company

Congratulations, Jim. A quick question. Rick, when you are looking at sort of the demand, how much of this demand you think is coming from the fact that truckload is so tight? Is there any way to parcel that out?

Rick O’Dell

To me that’s kind of the over 10,000 pounds shipments which you know our average weight in that group I think is around 13,000 pounds. So it's not really truckload. I mean quite frankly, the only kind of even heavy truckloads that we participate in very much is kind of more in a spot quote market or with some quoted lanes that we have for certain customers that fill backhaul. So I think there is some, quite frankly, particularly you have got some large accounts that where we have a trailer pool. If their truckload carrier no-shows them or they don’t have anything, they may split up two shipments and give them to us and somebody else. You see what I am saying. Because my trailer is sitting there, it gets them off their dock.

So we are seeing some more of that. But given that our average weight per shipment was only up modestly, we are not seeing a ton of that. I mean we are just not -- we don’t price competitively in that market place. But there is some spillover at the margin, right. And the more truckload carriers have capacity challenges and have options. You know they don’t do truckload stop up, they would rather fill their truck up and get a full load from origin to destination, free their driver up again. So I think we would say right at the margin there is some impact there.

Jason Seidl - Cowen and Company

Okay. Well, that's good color. When you look at, you said in some areas you are paying bonuses to the drivers. If you listened in or read some of the notes around, most of the truckload carriers are saying, the driver environment is likely to get worse, not better. So should we expect the same for you that the environment to attract and retain drivers gets a little bit worse from here on out?

Rick O’Dell

It's clearly a capacity constrained environment and I think there will be some cost challenges associated with that. And I guess what I comment is, I think we have a strong foundation around our recruiting, our market-based compensation. We have the lowest average age of the tractor that we have ever had at Saia. You know we are very focused on being a good place to work and we think Saia's value proposition is attractive in the market place and we will make the investments to staff, to handle some incremental business and then, quite frankly, the costs are going to have to go up. Al right.

I am not overly pleased with where our operating ratio is. I mean there is opportunity to improve and get returns and there is a segment of our business that my analytics would show aren't really paying their way and now the cost increases are going up. So when you look at regulation, the cost of equipment, the technology and now the driver availability and purchase transportation cost per mile is up 9.5% during the quarter. I mean somebody has to pay for that or I can't get 3% rate increases and have 9% increases in PT cost per mile. So we are just going to -- we are very focused on the segments of business that people that care about service and quality and understand the market dynamics and quite frankly, I think the costs are just going to have to -- I mean the pricing is going to have to improve.

Jason Seidl - Cowen and Company

That's clearly what seems to be the case out there. And I guess the last thing, on pricing. There has obviously been a lot of talk about a potential for second round of GRI's. And I'm not going to ask you whether Saia plans to do one or not because I know you won't answer that. However, would it surprise you if another carrier were to announce a second general rate increase here in the fall?

Rick O’Dell

Probably not. I mean there is a lot of talk about it. I guess, here is my position on that, okay. We tend to follow the market with a general rate increase and those customers that are on that pricing. That way or tariffs are generally in alignment with the competitors out there. You know when we are doing pricing and competing effectively. I would tell you that, if I look at the business that doesn’t operate well and needs to pay more, it tends to more be the national accounts and the 3PLs. And I think regardless whether there is a second GRI or not, we are focused on being properly compensated for the cost and increasingly on a buy a lane, buy a shipment basis. Because the customers and the 3PLs are increasingly sophisticated and if you missed price in a lane or a location across them then they are going to re-optimize you. Right.

Jason Seidl - Cowen and Company

Well, that was going to be my next question. Like if you look at the GRI business, that tends to be better rated business for the LTL's. And I guess I was going to ask, are they putting themselves in danger of losing some of that business if they push the GRI's too hard?

Rick O’Dell

I mean, yes. Small customers have a choice to go on the 3PL and they are taking a portion of the mark-up and so we are very sensitive to that in making sure that we are pricing across our entire our customer base fairly. Right. That being said, national accounts have more pricing power than a small customer does and there is some synergies associated with a bigger book of business in some cases. And I mean, I think you will see, we kind of tended to go at the lower end of the market with our last general rate increase and I would just say we are sensitive to the options that the small customer hasn’t. We like to continue to foster those relationships with those customers.

Operator

We will take our next question from Bill Greene with Morgan Stanley.

Bill Greene – Morgan Stanley

Can I ask a question about the dimensionalizers? As you roll those out more and more, is there a big opportunity on yield there, if you will, almost a non-pricing opportunity but more of an optimization opportunity?

Rick O’Dell

Yes. I think we are running a pretty high percentage of our shipments through the dimensioners. And I guess the biggest enhancement that we have now is they have actually enhance the ones that we have so that it can take a larger shipment or footprint in there. And we think that will actually allow us to increase the -- about 6% more of our shipments will be able to be automatically run through the dimensioner. So there is an opportunity there not only from a yield management perspective but obviously to make sure that we are doing accurate costing and pricing. And I think the bigger opportunity that we have there is, today we have some competitors that are doing little or none of this and so have customers that are probably taking advantage of them where they don’t really know what the dems are. And I think the opportunity will be as others embrace this technology and find out what value it has. Then you got these customers that are taking advantage of that will no longer will be available and I think it will have an impact on yield overall across the industry.

Bill Greene – Morgan Stanley

Yes. Right. No, I agree. Rick, when you think about the industry's capacity response to what you're seeing, is there much that you think the industry can do to increase capacity? If things are as tight as they are in truckload and now they are actually getting tight in the less than truckload as you mentioned in your remarks, do you think there's something the industry can do to add to capacity? Or is this just all going to result in much higher prices?

Rick O’Dell

I mean we can adapt our capacity where it makes sense. And if the margins area adequate, we are interested in growing at a sub-90 type of operating ratio, right. So I think there will be both. But just compared to the truckload market, I mean our jobs are still better compensation package and a better lifestyle. So over time, we should be able to enhance capacity from a driver market perspective through our recruiting efforts. It's a good place to work, our compensation programs are good. Our benefit program is at or above the market place. And so I think we can expand capacity, it's just near term it cost more, right. To bring a driver on, you are paying bonuses. In the month of June we incurred record recruiting advertising expense. So it's just -- we are going to adapt to the capacity to take advantage of the fundamentals that are available in the marketplace.

Bill Greene – Morgan Stanley

Sure. And what's your latest thinking on either an organic expansion into markets you don't serve or an acquisition? Is this kind of environment making that a tougher way to go just because I assume that anyone who is a seller would say, well, I should be worth more today?

Rick O’Dell

Yes. I guess what I would tell you with that, I mean given today the opportunities that we see in today's market to generate growth and margin enhancement, I mean we are very focused on that. And while we wouldn’t -- or we would look at opportunities to expand our geography, we would have to be selective and opportunistic about that. And we are very focused on the growth and margin improvement opportunity we see internally. So I would tell you that geographic expansion, either organic or acquisition, would be very low on our priority list.

Operator

We will take our next question from David Ross with Stifel.

David Ross – Stifel

A question on the tonnage growth at Saia. Are you seeing that largely come from existing customers or new business? I mean as the new sales hires go out, are they picking up a lot of new accounts or are you able to go back to your old customers and give them a little more attention to get more business?

Rick O’Dell

I would tell you it's both and kind of if we -- so the new sales force is allowing us to get more touches with the existing customers as well as more touches from a prospecting perspective. And then if I kind of dissect our LTL tonnage growth, field business is growing the fastest. 3PL business is second and national account business is third. And that’s probably partially because we are increasingly selective on the margins we are looking for from a national account perspective. And the investment and sales resources have been in the field. And then geographically it's the kind of the same story we have been seeing where the upper Midwest is growing faster than the rest of our geography. And that is where we added the most sales resources and then you also have a merger of the Vitran sale deal that went on up there and I think some of that business obviously got dispersed across the marketplace.

David Ross – Stifel

Are there specific industry segments where you are seeing more growth, whether it be retail, industrial?

Rick O’Dell

You know since the higher growth areas are kind of more on the field side, it's such a diverse group of customers that I don’t think we are seeing anything specific but we could glean from what we are seeing.

David Ross – Stifel

Then on the dimensioner side again, you said you had two more installed bringing your total up to 27. Is there a target number you are looking to get to in the network, 30, 35, 40?

Rick O’Dell

I think it's kind of return oriented as well as -- as long as we have capacity to get enough of sample from let's say a large account and generally it's what you might expect. But we have a couple of most of our large break operations and then the smaller, kind of mid-sized terminals almost all have one. So I think we are somewhat saturated with it but we continue to analyze lanes and places where if we have a high volume lane where we don’t have any ability to go through the dimensioner then we would look to add to those selectively. But I would, at this point, it's probably a handful or so as opposed ten more something.

David Ross – Stifel

Okay. And then lastly, just on the comments you made about driver recruiting and TL capacity. Could you comment on what markets are toughest right now to find drivers and then what markets are toughest to find TL capacity?

Rick O’Dell

Well, there is a couple of things. It's kind of this oilfield fracking market is having an impact on certain locations in Colorado, Iowa and Texas. For us, for some reasons, Minnesota, Minneapolis. Denver is a growing market and it's a tough market to recruit drivers in from a city perspective there. And then it's a little odd, historically the Southeast was a pretty east purchased transportation market from truckload perspective and we have had some times where there's been shortages, like Atlanta and Nashville. Texas is tough at times.

The way we have kind of addressed that, David, which is in a loose market in truckload you can kind of get a adhoc load if you need it. And what we have kind of had to is because we need the capacities that either the truckload guys will give us because we are a good customer to them. And they will give us a capacity but we need to commit to it three days a week or five days a week or whatever the case is. So what we have done is kind of pre-committed so we can secure availability at somewhat of a reasonable price. But at least you have the availability and then we look to kind of staff over a period of time to re-optimize that and/or if that’s at a higher cost than what we are paying, then those lanes need to be repriced with the customers that are driving that.

Operator

We will take our next question from Nick Bender with Wunderlich Securities.

Nicholas Bender – Wunderlich Securities

Congratulations, Jim. Rick, I kind of wanted to go back. You touched on it a second ago, as far as the new sales hires from last year. Can you give us some sense of how up to speed and how ramped those sales force additions are? And whether or not, as you look at some markets either where capacities is tighter, where you feel like you have got some opportunity, do you think about any additional large sales force increases here in the back half of the year?

Rick O’Dell

Yes. I think we are doing the analytics on a kind of, by territory basis to see what we think the return is and how much of it was kind of due to, let's just say you know a company specific thing or a market condition there. But our analytics would show compared with some of the best in class folks out there, that we are -- we still are underrepresented in some markets. So we would analyze that as we go into our planning period for next year and assuming we are getting good returns where we are that we would make some incremental investment. And you know this field business operates well and it's probably not just coincidental that the field business is growing the way that it is. And when we talk about the yield opportunities out there, part of that yield opportunity is what I would call a re-optimized business mix. Right. Meaning if you grow higher yielding field business and maybe some of the national account business that people that are just more price players decide to go elsewhere, that’s an upgrade in the yield and a better utilization of our capacity in a capacity constrained environment.

So I think it makes sense and as we approach next year, I mean we are taking a hard look at that right now. Ramp up wise they have been in for basically the whole year. So the expense is in from a run rate basis.

Nicholas Bender – Wunderlich Securities

Right, right. You touched on it, I was thinking more of an actual tonnage generation. But the other question, I guess sort of following up on that, is we have a lot of discussion, it's the tonnage versus yield trade off. But it sounds like a lot of the way you guys are thinking about it is grow tonnage but with those accounts where some more attractive yield is baked into it just by virtue of the mix.

Rick O’Dell

That’s true. And then I would also comment to you that I have some tonnage based on my analytics on a buy lane, buy shipment basis, there is some tonnage that clearly isn't paying us way today. And those lanes are going to be repriced over a period of time. And as you might expect, it's primarily national accounts and 3PLs.

Nicholas Bender – Wunderlich Securities

Okay, that's helpful. Let me pivot over to truckload real quick. Obviously, you guys have done a lot of work seeking out freight to help you build density a little bit, fill some backhaul, things of that nature. Is that really primarily still the strategy there or is there at any point or within any lanes where you feel like you can turn the screws and focus more on rate within some denser lanes?

Rick O’Dell

I guess one thing I would tell you is, we have actually -- the portion of that that’s driven by spot quotes, you can tweak that real easily and we have actually gotten much more price sensitive on that just because of the capacity environment. So some markets even if it's build backhaul and contributed a little bit, it's at the delivery you got to take half a trailer load out and then you got to city driver openings that doesn’t really make sense. So we have been a little tighter with that. And then our analytics on the greater than 10,000 pounds shipments, I would tell you, we are more sensitive to that now because of the line haul capacity constraints and the costs that we are seeing both in the truckload and the rail markets. So we are making sure that we are repricing those lanes to make sure that we are being properly compensated.

Nicholas Bender – Wunderlich Securities

Got you. The last question I want to touch on, you've got a good chunk of trailer deliveries coming in the second half here. We've heard some commentary that capacity in the trailer market is a little bit tight, meaning new equipment deliveries. You don't expect any delays or anything like that in the back half of the year with those deliveries, everything looks to be on schedule?

Rick O’Dell

Yes. No, actually the delivery started and we are in queue in the manufacturing process. But I think your point is valid in that as we look at next year's orders in order to get first quarter delivery, we would have to order right now. So I mean that’s kind of unusual in the trailer market.

Operator

We will take our next question from Willard Milby with BB&T Capital Markets.

Willard Milby – BB&T Capital Markets

I just want to start off with operating supplies and expenses. You are down 200 bps year-over-year as a percentage of revenue there. How much of that was due to increased PT versus higher MPG's and lower maintenance on new tractors?

Rick O’Dell

That’s very perceptive. That is why it doesn’t trend up with the tonnage because we have run more miles PT so our fuel usage which is in that line is not anywhere near up with the tonnages. As well as the improvement in miles per gallon of 3%/

Willard Milby – BB&T Capital Markets

Is there a way to parse those two out from each other at all? How much is the new trucks versus how much is just reduced or increased PT from fuel?

Jim Darby

3% improvement in miles per gallon. Overall fuel usage, overall gallons purchase is only up somewhere in the range of 4% on product cost in that line, and our tonnage is up 7%.

Willard Milby – BB&T Capital Markets

All right. Kind of, to shift over to the sales force. Can I get a headcount at the end of '13 and just a refresher of how many exactly you added in Q4?

Rick O’Dell

We increased our sales force about 10% during the fourth quarter and it gets us 250 or so I think.

Jim Darby

Yes, we are at about 250 sales resources plus some inside sales.

Willard Milby – BB&T Capital Markets

Have you added any in the first half of this year and do you have a year-end headcount target in mind for sales?

Rick O’Dell

No. I think I commented earlier, we analyzing that opportunity and the returns that we got now because it takes six to nine months for a sales person generally to come in and have an impact and see what their territory is, what impact they can have. So we just now kind of have the analytics on that and then we will -- when we get through those this quarter and as we have set up our plan for next year, we will evaluate what additions we should do. But I would tell you that, if we benchmark against some of the other carriers that have a combination of good tonnage and good yield improvements, they have a larger sales force, let's call it freight bill or per amount of millions of dollars of revenue than we do. So we think it continues to be an opportunity for us going forward.

Willard Milby – BB&T Capital Markets

So it sounds like you are not exactly comfortable with where it is now but you just want to be tactical on where you add. Is that fair to say?

Rick O’Dell

That’s correct. And we do a lot of analytics on everything. We want to make sure that our analytics are right and that we are getting the type of returns for the investment that we make. And quite frankly, we have had some challenges adapting to the capacity constrained environment that we have today. We also want to make sure that we are ready for that and that the yields that we can get on incremental business will support our targeted margins.

Willard Milby – BB&T Capital Markets

All right. And just one last thing. I'm going to go back to purchase trends here. Would you say that's more a shortage of equipment or a shortage of manpower issue as you look at this particular quarter and going forward?

Rick O’Dell

I mean I think everything you look at is, it's a very capacity constrained driver environment out there. And the regulatory challenges for the whole industry, truckload and LTL, continue to be an incremental burden. So I think it's driver driven based on the data that I have seen.

Willard Milby – BB&T Capital Markets

Okay, fair enough. Any aspects of that from maybe additional dockworkers needed? Are you okay in that particular, I guess classification?

Rick O’Dell

Yes. Most of the capacity constraint from our perspective is on the driver side so we spent a fair amount with the incremental tonnage. We have spent a fair amount of money recruiting and training, it's more on the training side for a dockworker. So there is some incremental cost involved in that as the business levels have stepped up. And we also kind of over time, are making more of the dock workers full time which has some incremental cost in our network. But at this point in time from an availability standpoint we are not having a lot of issues finding a dockworker. It's not the same as the city driver market.

Operator

And we will take our next question from Scott Group with Wolfe Research.

Scott Group – Wolfe Research

Thanks for taking the follow-up. I was hoping to be the last one to wish Jim the best. Two quick things. First, you mentioned that there's still freight that you think is moving at unacceptable margins. What percentage of the business you still think has margins that you want to cull out and where were you like a year ago on that metric?

Rick O’Dell

I think I would rather not say and there is two points for that I would like to make. Right. One is, I mean cull out isn't necessarily my term. I just want to be properly compensated for it. And it's a business relationship and if the customer decides that they have a better option from somebody else who wants to handle that lane, we understand that but we know what our costs are. And I have been in this business and kind of played it for density. And I guess what I have learned and it's clearly paid some dividends for the company as the more sophisticated we can be from a pricing standpoint. We know what our costs are and we believe that we have a very efficient network and that I don’t think there is a lot of other players out there that want to handle business that’s not operating very well in this market. And you know it's our network and we have somewhat unique lane imbalances etcetera, although there's markets that are perennially imbalanced. And some of those markets are some of the most difficult to recruit drivers in. So those lanes are going to -- they need to be repriced. So I would just tell you that -- depends where you set your target on returns and how much you -- then how much business would qualify in there. But it's not immaterial. And we think we have a good value proposition and some of our data analysis show that in some places we think we are underpriced and we were convinced we have a good value proposition and we are going to go through and reprice that and we will kind of find out what happens. I think we will get the yield increases and the tonnage will continue to come on.

Scott Group – Wolfe Research

Okay. And then can you put the driver stuff in perspective? We are used to hearing it from the truckload guys, not from the LTL's but starting to hear it more from LTL. Did you have these issues back in '04, '05, '06, when truckload drivers became a huge issue or is this kind of brand new? And if it's brand new, should we be thinking that 3% is not the right way to model LTL labor inflation and we got to start raising that like we are starting to raise that in truckload models?

Rick O’Dell

It's new for us. I mean I have never seen this before. A couple of things. I think the significant tonnage increases in this that have happened so fast. I mean you need to get staffed up for that. So, again, we are kind of dealing with a signing bonus thing to get people to come to sign and once you get it staffed, I mean our retention rates have actually -- our turnover rates have actually declined. So whether it's a permanent thing or not, I don’t really know. And then I would tell you that in terms of wage scales etcetera, the drivers are going up more than some of our other employees from a demand standpoint. And then it's also, it’s some of the locations where you are having driver issues are very isolated, meaning, let's just say, out of 147 terminals I may be paying signing bonuses in 20 terminals. And once they are staffed and I am into a normal, more normal environment then you are back to where you are doing okay.

So I think there will be some incremental pressure on the wages and I also think work environment, benefit plans, quality of your equipment, there is a lot of other things that make -- the way you treat people, there is a lot of other things besides just how much you make per hour, per mile, that impacts whether you work there or not. And I would tell you that we are very focused on those things as well.

Operator

And we will take our final question from Jason Seidl with Cowen and Company.

Jason Seidl - Cowen and Company

Just wanted to clarify some of your comments on the third quarter in terms of the OR. You were saying that you are looking at 2Q as more like a 91ish when you adjust for your claims. And you said there should be normally a one point move. You meant one point deterioration in operating ratio, not an improvement. Correct?

Rick O’Dell

That’s correct.

Jason Seidl - Cowen and Company

Okay. That's all I was asking. Thanks again, guys.

Rick O’Dell

So normally there is a one point deterioration driven by the wage and we said we would target or expect to do slightly better than that because of some of the yield and volume momentum that we are seeing.

Operator

And with no further questions, I would like to turn the call back over to Rick O'Dell for any additional or closing remarks.

Rick O’Dell

Thank you for interest in Saia and we look forward to staying in contact with you guys.

Operator

And this does concludes today's conference. Thank you for your participation.

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