Good morning, and welcome to the Saia, Inc. Second quarter 2019 conference call. My name is Diana, and I'll be your conference operator today. This call is being recorded and will be available for replay beginning today through Wednesday, August 28th. Replay instructions can be found in today's press release. This conference call may contain 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. Actual results may differ materially. Please refer to today's press release on our most recent SEC filings for more information on the exact risk factors that could cause actual results to differ. At this time, I would like to turn the conference over to the company Chief Executive Officer, Mr. Rick O'Dell.
Please go ahead, sir.
Good morning, and thank you for joining us. With me on the call today are Fritz Holzgrefe, our President and Chief Operating Officer, and Rob Chambers, our Chief Financial Officer. I'm pleased to report record second quarter revenue, operating income, operating ratio, and earnings per share. These numbers were not only records for the second quarter, but for any quarter in our history. Second quarter revenue was up 8.3% to $464.2 million, and with our 89.0 operating ratio, we grew operating income 23.1% to $51.2 million. This 27.1% incremental margin is the best we've posted since our Northeast expansion began in May of 2017. Diluted earnings per share grew nearly 22% to $1.40. I'd like to take a minute to break down the revenue growth and give a little color with regard to what we're seeing in terms of volumes and pricing.
The 8.3% revenue growth was fueled by a 9.8% increase in revenue per hundredweight, offset by a 1.9% decline in tonnage. Contractual renewal activity remained positive and averaged 6.7% in the second quarter. The second quarter also marked our 36th consecutive quarter of overall year-over-year yield improvement. In terms of demand activity, overall, fell steady to us as shipments grew by 3.6%, but we did see a decline in our weight per shipment of 5.3%, the third quarterly decline in a row. Positive note on the shipment weight is that it improved sequentially each month throughout the second quarter on an absolute basis, and the year-over-year decline was less negative each month. Some comparisons from the second quarter this year compared to the second quarter of 2018 are as follows. Despite the decline in weight per shipment, our LTL revenue per shipment rose 4% to a record $234.33.
Purchased transportation miles were 10.8% of total line haul miles compared to 11.4% in 2018, with the improvement coming from better utilization on Saia capacity and increased density in some of our newer markets. Line haul cost as a percent of revenue improved by 4.5%, benefiting from an improvement in load average, reduced purchased transportation, and higher yields. Our length-of-haul expanded slightly to 841 miles from 837 miles a year ago. Our cargo claims ratio of 0.76% was improved from last year's 0.82%. Continuous training efforts are enabling us to perform consistently against our quality benchmarks. Dock and city productivity, measured by bills per hour and stops per hour respectively, were relatively flat year-over-year despite the opening of another six terminals in the past year. The newer terminals do create a bit of a headwind to these productivity measures as lower density prohibits optimal productivity and will improve over time.
With that, I'm going to go ahead and turn the call over to Rob Chambers to review our financial results in a little more detail.
Thanks, Rick. Good morning, everyone. As Rick mentioned, we generated total revenue of $464.2 million in the second quarter, compared to $428.7 million in the second quarter of 2018, an 8.3% increase. Revenue benefited from a 9.8% increase in LTL yield and 3.6% shipment growth, offset by a 5.3% decline in weight per shipment. Fuel surcharge revenue was a modest benefit to the revenue comparison, up 3.9% from the prior year. A few key expense items which impacted second quarter results on a year-over-year basis are salaries, wages, and benefits, which rose 7.8% to $237.7 million in the second quarter, reflecting the impact of an average wage increase of 3% last July, higher healthcare benefit costs, and an approximate 3.6% increase in our average employee count throughout the quarter. Salaries, wages, and benefits were 51.2% of revenue in the quarter, compared to 51.4% last year.
Purchased transportation expense was essentially flat at $34.2 million in the quarter and was 7.4% of revenue, compared to 8% of revenue a year ago. The reduction as a percent of revenue is due to lower purchased miles as a percent of total line haul miles, as Rick mentioned, as well as a more stable truckload rate environment we experienced this year versus last year. Fuel expense declined by 3.1% in the quarter, as the national average diesel prices were down 2%-3% throughout the quarter versus a year ago. We also continue to benefit from a newer, more efficient fleet, and our miles per gallon improved by 1.1%. Claims and insurance expense in the quarter increased by 32.8% to $13.2 million, with most of the jump being related to accident severity versus the prior year.
Cargo claims expense was essentially flat year-over-year, despite the increase in shipments handled versus the prior year. Depreciation and amortization expense grew by 15.5% to $29.1 million, and reflects our continued investment in real estate, equipment, and technology. As a percentage of revenue, depreciation and amortization was 6.3% of revenue, compared to 5.9% last year. Operating income rose 23.1% to a record $51.2 million, compared to $41.6 million earned in the second quarter of 2018. The operating ratio improved by 130 basis points year-over-year to 89.0%. At June 30, 2019, total debt was $179.9 million. Net debt to total capital was 19.1%. This compares to total debt of $155 million and net debt to total capital of 19.4% at June 30, 2018. Net capital expenditures in the first half of 2019 were $171.1 million, including equipment acquired with capital leases.
This compares to $140.6 million in net CapEx in the first half of 2018. In 2019, net CapEx are forecasted to be between $275 million-$300 million, including investments in real estate, terminal infrastructure improvement projects, our fleet, and continued investments in technology. I'd like to turn the call over to Fritz for some closing comments.
Thanks, Rob. We're very pleased with the record results of the second quarter. In this business, we find that you can't really spend a lot of time celebrating past results. We handle more than 30,000 shipments a day for our customers, and those shipments never stop moving. In the first half of the year, we've opened three new terminals in the Northeast. We also replaced a lease facility opened in May of 2017 in the Harrisburg, Pennsylvania market with a larger owned facility, which gives us plenty of capacity for growth as we continue to build our direct coverage of the remaining Northeast U.S. We will continue our aggressive terminal opening schedule in the second half with six terminal openings planned. Five of these will be in the new markets in the Northeast. We're also planning to relocate an additional three terminals in the second half.
These are in markets where we have simply outgrown our current capacity. While this aggressive opening schedule will pull some opening costs forward into the third quarter, we are very pleased that the opportunities have presented themselves, and this pace allows us to actually get ahead of our planned opening schedule. As of today, we've opened 13 new terminals in the Northeast since our openings began in May of 2017 and plan to finish the year with a total of 18 new terminals opened in less than three years. Before I open it up for questions, I'd like to comment on the 27.1% incremental margin we posted in the second quarter. This is the best incremental margin enjoyed by Saia since we kicked off our organic expansion efforts.
While we do not view the 27.1% as the finish line, I do think it's important that it gives a glimpse of the operating leverage inherent in a network business such as ours. We're seeing evidence of the fixed cost leverage that we expected as we sought to build our expanded geographic coverage and essentially pull more states of revenue over certain fixed network costs. With those comments, I'd like to go ahead and open the call up for questions. Operator?
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Mr. Scott Group from Wolfe Research. Go ahead.
Hey, good morning, guys. It's Rob on for Scott. Could you walk us through your sequential tonnage and shipment trends by month in the second quarter?
Sure. No problem. If we start with shipments in April, they were up 1.3% year-over-year. Tonnage was down 4.7% in April. In May, shipments per day were up 3.1%, and the tonnage per day was down 2.5%. In June, the shipments per day were up 6.5%, and the tons per day turned positive, up 1.8%. For the total quarter, again, that put the shipments per day up 3.6% and the tonnage down 1.9%.
Do you have a preliminary number for July, how both shipments and tonnage are trending?
Yep. We're seeing positive trends in shipments with July up 4.4% and the tonnage up about 0.9%.
Rick or Fritz, historically you guys have talked about the sequential margin trends 2Q to 3Q. You called out additional terminal openings. I was just curious how we should be thinking about the sequential trend coming off of the 89% in the second quarter.
Well, as you know, our wage increases affected the first week in July, so that's had some impact sequential. The same thing obviously occurred this year. Historically, we've been in the 80 basis point decline, and I think with some of our We actually are opening three terminals at the very end of September, so we're more looking at a deterioration of about 100 basis points.
I guess, as we think out to 2020, how should we be thinking about the possibility of getting to a sub 90 OR, given the incrementals that you achieved in the second quarter? Is that something which is a possibility as we look out, or could this be a 2021 event? Would love to get your perspective on that.
Obviously, that's certainly our goal, and we think it's positive. We're seeing some positive trends, some benefits from our fixed cost leverage. As we've stated, with some of the New England Motor Freight facilities becoming available, and the way things are going at the company, we're looking at accelerating our Northeast expansion probably above our initial plan. Assuming the external environment stays positive and we continue to execute well, which we fully expect, I think it's certainly a possibility.
Just for clarification, through two years, do you think it's a possibility that we could get sub 90 in 2020?
Yes.
All right. Appreciate the time.
That's what I think.
I'll hop back in the queue.
All right. Thanks.
We'll take our next question from Mr. Todd Fowler from KeyBanc Capital Markets.
Great. Good morning, everyone. Fritz, just to follow up on your comments at the end of the prepared remarks about the incremental margins. I guess a couple of things, thinking about the second quarter, do you think that that's a function of where you're at with the Northeast expansion that got you to the 27%? Is that more on the pricing environment, or was there something else going on? How do you think about the incremental margins, kind of the run rate that we should expect, and obviously there'd be variability quarter to quarter, but when we think longer term, what's the right incremental margin for the business?
Todd, if I look to start with Q2, I think the elements that you pointed out, pricing was favorable. Our production, our efficiencies were favorable. All those things kind of combined into that. We think about where our future is with this Northeast expansion, and quite frankly, as we further invest and penetrate in sort of our legacy geography, I think that those sort of incrementals would be kind of where we would be and likely grow from there. Right? I think in the short term, as Rick described, that Q2 to Q3 sort of step for us is that we'll continue to push the incrementals, but it's going to a bit of the face of the time we're investing in some new terminals. That's going to be a little bit of a drag for us, so it'll challenge that a bit.
We also have the wage step up that starts July 1. Now that's happened historically. That's nothing new for us, kind of business process. I think part of what ends up happening is that you'll see the incrementals continue to improve over time. Q2 certainly was a good quarter. I don't think that's the end of where we can take that. I think that over time, I would expect to see that to continue to improve.
Okay. That helps. Rick, in response to the last question, you made a comment about accelerating the plans in the Northeast expansion. I understand that you're going to pull some terminals forward. When you say accelerating the plan, are you just talking about doing more terminals sooner than what you anticipated? Is there more opportunity in the Northeast relative to what you initially had mapped out?
Well, both. Obviously we're executing well in our strategy, so you want to continue that process. Secondarily, I think we've said historically we targeted opening four to six terminals. We've already opened three, and now we're going to open six more in the second half. I'm just commenting compared to our prior comments with terminal availability and execution well, we're going to open more terminals.
Is the Northeast profitable at this point on a fully allocated basis?
Yes. Modestly.
Okay.
Todd, as we pointed out, though, in the past, keep in mind it's a network business, so elements of that profitability surface throughout the network. It makes other operations more efficient.
Right. I think, Fritz, what you're commenting on there is kind of the surrounding geographies might be getting some benefit from the flow in and out to the Northeast, right?
Exactly.
Okay, good. Just the last one for me. Rick, if you want to put some comments, we've heard some commentary around the LTL pricing environment. I apologize if you gave a contract renewal number here in the quarter. If you didn't, if you could share that, but then just your general thoughts on kind of the yield environment, and what you'd expect for the rest of the year. Thanks.
Yeah. The contract renewals were 6.7, and we continue to see a very stable environment to be operating in. Yeah, the tonnage environment's been a little bit weaker than we'd anticipated, but the pricing environment remains stable. We see still a fair amount of cost inflation, driver availability. The pricing environment's been good.
Okay, thanks for the time. Nice results today.
Thank you.
We'll take our next question from Mr. Amit Mehrotra from Deutsche Bank.
Thanks, operator. Hi, guys. Congrats again on the results. It's great to see, I guess, the footprint expansion gaining some traction on the OR. I wanted to ask, for my first question, just on that very issue. Fritz, you talked about kind of the benefits of the expansion, having this network efficiency effect, and that kind of helps the whole system. I just wonder in that context, the record kind of an 89 OR in the quarter. Was that more attributable to even better OR performance at the legacy terminals, or are the Northeast terminals going from more loss-making to slightly profitable? I just want to kind of decipher those two elements. It would just help us think about the runway you have relative to the 89 OR.
Amit, thank you. Good question. It's kind of across the board, to be honest with you, that OR improvement. If you think about the efficiencies that if you make a pickup in a place like Dallas and you've got an extra shipment that is extra part of that pickup is now going to be carried on in the Northeast, that's incremental to Dallas, too, right? Leveraging that infrastructure. We saw the benefits of this performance across all regions.
Okay, that's helpful. One as a follow-up, just more on the operating stats. Shipments are up very nicely but we're also seeing kind of a pretty sizable reduction in the weight per shipment. That corresponds to just more e-commerce related volumes. One, can you just talk about that dynamic? What's driving that shipment sub, weight per shipment's down? How does that kind of impact profitability? Because it's a little bit tough right now because the OR performance is in an environment of very strong contract rate renewals. If you just kind of put that to the side for a second, just talk about the OR impact from shipments being up and weight per shipment down. I think that would be helpful as well.
Sure. Amit, that clearly for us, I mean, that's a bit of a headwind, right? I mean, as you continue to make those deliveries e-commerce related sort of activities, lower weight per shipment, and we're spending the same amount of resources to execute much of that shipment growth. It is a headwind in the numbers and that kind of is reflected in our results, but we're still pleased with where we ended up in the quarter.
Right. I guess more specifically, can you just talk about, I mean, when shipments are up, basically do you have to keep resources because of the shipment growth even though maybe the headwind on the weight per shipment? Going forward, I'm not asking the question the right way, is 25%-30% incremental margins kind of the right way to think about it, even despite that headwind if weight per shipment continues to go down? When do you think that would turn from a comps perspective?
I think the way to think about going forward, we're very focused on driving those incrementals. Obviously we have to drive our efficiencies to achieve those incrementals as shipment patterns change over time, right? If our weight per shipment continues to trend where it has been, we have to adjust our sort of productivity model to be able to deal with that. I think that going forward, we continue in a reasonable sort of economic environment. We'll continue to drive those sort of incremental kind of in the ranges where we've been and hopefully improving. Q3 is going to be a challenge simply because as the items that we pointed out, but as we continue to grow out of Q3, I think that we can take advantage of our operating efficiencies.
Weight per shipment trend where it is, that's certainly a headwind and a bit of a challenge.
Do you think the sequential, you said 80 basis points historically deterioration? Is that the right number to think about? I mean, the Q2 performance was way better because the first quarter was extraordinarily weak because of weather. Just given how strong the second quarter was, is that 80 basis point deterioration still the right number to think about, or should it be a little bit higher than that?
Yeah. We talked about there'd be a bit of an erosion Q2 to Q3 because of some of the pulling forward those terminal openings that are happening right towards the end of the quarter, but we're not going to get the revenue benefit of that. You have to invest ahead of that in the sense of getting your drivers on staff. You've got to get them trained, dock workers. The leadership's in place, but that takes some time to develop some efficiencies out of that, too. Even if you did get a little bit of revenue in a quarter, that's not going to be a very efficient sort of incrementals on that new business, those two terminals. That's the drag. We talked about sort of 80 to 100 basis point erosion Q2 to Q3.
Okay. Excellent. Thanks everybody for answering my questions. Congrats again. Appreciate it.
We'll take our next question from Mr. Jack Atkins from Stephens.
Hey, guys. Good morning. Thanks so much for the time. Just going back to the OR cadence for a moment, if we could. What you're saying about the third quarter makes a lot of sense. If I'm hearing you correctly, it looks like we've got three more terminals that the plan is to bring online in the fourth quarter. Just sort of think about the cadence, 2Q to 3Q to 4Q. Do you think that you'll be able to get some leverage 3Q into 4Q, given you're bringing those terminals on in the 3Q late in the quarter? Should we think about normal seasonality as we move through the year, getting past the third quarter? If that question makes sense.
Yeah, I think you probably should consider normal seasonality from Q3 to Q4, simply because you're going to have the impact of that. As you know, Q4 is often a challenged period based on holidays and Thanksgiving and Christmas holiday. Those are always impactful for us. It's probably a little bit early to say what macro trends look like into the fourth quarter. We typically, as you know, give a kind of shipments to tonnage update during this quarter as it kind of advances, and that'll give some indication of where maybe some of the bigger trends might be headed.
Okay. No, that makes sense. Then I guess just following up on sort of the expansion plans, I guess not just in the Northeast, but as you look elsewhere across your network. Given the pain that I think a lot of smaller carriers are feeling out there right now, private carriers are feeling out there right now, are there maybe some opportunities to do some tuck-in M&A at certain places where you'd like to build some scale, whether it's in the Northeast or other places? Just curious if there's some inorganic opportunities out there that you guys are seeing, perhaps.
We keep an eye on that pretty closely. I think that there are certainly potential opportunities, if not for maybe tuck-in sorts of things, also, frankly, available real estate. As people have adjusted a business, exited business such, that creates some opportunity. Certainly as you hear our planned opening numbers, it's no small part driven partly by our execution, but also partly by the availability of some assets. I think that those things all help.
Obviously with a strong balance sheet, we're in a position to pursue other opportunities that would come available.
Absolutely right. Okay, last question, I'll hand it over. Just on the tonnage front, I think the July number that you quoted at the beginning of the Q&A is pretty encouraging considering, if my numbers are right, it's a pretty tough comp still. Comps do get a lot easier as you move through the third quarter. Is it sort of your opinion that maybe we've reached an inflection point from a tonnage per day perspective that third quarter could see some solidly positive tonnage on a per day basis if trends hold together?
I think we're dependent, as you know, on the sort of macro environment. I think the numbers are what they are right now. We're pleased with the trends we've seen so far in July. We'll see how August and September sort of develop. Obviously August can be a holiday period or vacation period for people. That could be a bit choppy. We'll look to see how that develops.
Okay. Thanks again for the time, guys.
Thank you.
We'll take our next question from Mr. Matt Brooklier from Buckingham Research.
Hey, thanks. Good morning. I was trying to get maybe a little bit more color in terms of your, let's call it a relative tonnage outperformance in June and July. We've heard from a number of your peers that June during 2Q was probably the toughest month of the quarter. I'm assuming the improvement in tonnage that you saw towards the end of the quarter was a function of the additional terminals that came online. Maybe you could give a little bit more color if there's other factors, if there were any large account wins. Did you potentially pick up some share from, I think a couple of carriers filed for bankruptcy in 2Q? Just trying to get a little bit more color there.
This is Rick. I would just comment that our Northeast expansion strategy, when you see growth to and from the Northeast, it's not just because we opened three new terminals. A large portion of our growth continues to come from business to and from the terminals that we've opened two years ago, for instance. Historically, as we've executed an expansion over a five-year period, we've seen share gains as we mature as a market participant there. Also as you open three more terminals that are adjacent to our current Northeast, then our coverage becomes more attractive to somebody that was maybe piecemealing their business amongst other carriers. We've obviously seen a fair amount of benefit from that.
Then again, as Fritz had commented on the operating income, a lot of that business is moving to and from our legacy geography and where we have good production, good load average. Then over time too, it provides us the opportunity. You may grow and use purchased transportation to handle the incremental business, and then over time you reoptimize your line haul network. There's also a fair amount of benefit from seeing maturity of the terminals that have been opened over the last couple of years.
Okay. It sounds kind of more all-encompassing, I guess, in terms of you have expansion in the Northeast, you've been growing terminals outside of that geography, and all in, you seem to be picking up a share, which is obviously the intention there. The six additional terminals in the second half, the target is, I just want to clarify something. Three of those are for swapping out a smaller terminal with a larger terminal, and then three of those are completely new locations?
Yeah. Of the six that we quoted, five of them are actually new markets in the Northeast. At the end of the day, in the second half, we've got the six terminal openings planned. Five of them are in new markets, we're also going to relocate an additional four terminals in the second half as well.
Okay. Got it. That's incremental. All right. Helpful color. Appreciate the time.
Thank you.
We'll take our next question from Ms. Stephanie Benjamin from SunTrust.
Hi, good afternoon. I wanted to follow up on some of the questions we had previously on just the volume growth and the improvement we saw kind of throughout the quarter and then into July. Were there any pockets of strength you can point to, particular industries or markets where you really saw this improve? Then I just have a quick follow-up.
Yeah. Stephanie, I would just say it's tough for us to really highlight individual industries. I would say that, as I commented earlier, the improvement is really pretty broad-based for us, that there isn't a call-out other than to say that the Northeast continued to execute and grow. I think it's pretty broad-based for us without a real call-out into either by industry or region.
I would also comment that we have some company-specific marketing programs that are execution, including in legacy markets that have been successful for us. Obviously, we've got a very good cargo claims ratio. Our service has been really solid. I think we've just positioned ourselves well in the marketplace to execute as well.
Great. No, that's helpful. I wanted to turn to just the expectations you set on the last call about, call it about 100 basis points of OR improvement for the full year. I think after the kind of weaker Q1 or weather-driven disruptions that had been a little bit higher, call it maybe 150-200 basis points. Is there any kind of levers at this point where we could see it kind of higher than 100 basis points of improvement after the strong Q2 performance? Or is it more of a decision to accelerate some of those terminal expansions to kind of generate that greater efficiency and scale as we kind of move into 2020? Just some color on that would be helpful. Thanks.
I would say we're still within that range that we described on the last call. I think the interesting thing is that we've been able to identify these openings. We think that's an appropriate investment for longer-term value at this stage. I think we're still comfortable with that sort of characterization. We'll see how this third quarter develops. That'll lead to kind of where we see Q4 to be. Maybe that adjusted towards the end of the year, but at this stage, I think we're pretty comfortable with that.
Great. Thanks so much.
Thank you.
We'll take our next question from Jason Seidl from Cowen and Company.
Thanks, operator. Hey, guys. Good morning. How do you go about looking at the upcoming peak season? We've heard a lot of sort of mixed expectations, if you will, from different capacity providers throughout the supply chain. I would just love to hear your thoughts.
I think the comps get a little bit easier as we go into the future months. We feel okay about it, and our general conversations with customers have been pretty good. I guess probably beyond that, you see the same economic data that we see, and we'll just have to see how the environment develops.
Okay. Fair enough. Getting to the contract renewal rates, obviously 6.7% is fantastic. How should we think about it longer term, though? Because if you go back in the LTL history over a decade-long period, it usually has an average 6.7%. How should we think about that going forward? Is there a point in time where we should expect to step down in that rate?
Yes, I would think so, right? I would think over time it's going to step down. When we do longer-term forecasts and planning, we're not assuming that we're going to be able to achieve those types of increases forever. Within our portfolio of customers, there are some customers that are not currently being appropriately compensated for our costs, and so we'll continue to address those as that comes up. Obviously, we're doing it now. We have some customers where we're being properly compensated, and they're not seeing a 9% increase or whatever. When you average six, seven, we're not just saying and trying to mandate a 6.7% increase. It depends on the customer's portfolio, and how it's operating within our network.
That makes a lot of sense. I know it's early, but how should we conceptually think about net CapEx for 2020?
Yeah. We would expect this year to end somewhere between $275 and $300. I think for next year, it's probably $300+, maybe $310, something like that. It's all dependent upon what the investment opportunities are that are out there, what our view of the macro environment looks like closer in, because as you know, our big buckets of investment spending is really maintaining fleet age and such. If there were a change in the environment, we may change that number. Right now, I think that range is where we think.
Yeah, I would also comment.
That's good color.
Yeah, I would also comment too, just as we continue to grow our network, it's really important to have particularly your larger break bulk facilities built out ahead of your growth. In some markets, especially if you have to build a facility or you're actually even acquiring them now, it's very expensive to get a large coveted break bulk type of operation. I think historically, we look at sometimes we didn't build our network out ahead of our growth, then it would impact our margins as you have capacity constraints, and you have to run freight suboptimally or generate backlogs or can't build as many directs as you need from a door count capacity. We're very focused on strategically making those investments ahead of our growth.
No, that makes sense. Listen, gentlemen, I appreciate the time as always.
Thanks.
We'll take our next question from Mr. David Ross from Stifel.
wanted to, I guess, follow up on Jason's question on the contract renewals, asking it a different way. The 6.7 is just much higher than average. Why is that the case? Is it that you guys were that much below market, or is there something else going on there?
Well, obviously, apparently that's part of it, right? You look at our operating ratio versus some of the competitors out there that run a similar network. We've obviously made a lot of investments in our company and the quality of our service offering, and I think we're in a position to execute and expect to be properly compensated for that. If you look at our OR gap against some of the best-in-class operators out there, and part of it's yield. As you expand your network and have a broader product offering and execute on a quality product with a good cargo claims ratio, I think we expect to be properly compensated for that, and we're executing that pricing discipline in the marketplace, obviously on a customer-by-customer basis.
There's nothing in there that accounts for weight per shipment because that typically goes into yield. Even if the customer is giving you lighter weight shipments this year versus a year ago, for the same shipment on a like for like basis, it's up 6.7%. Is that correct?
It is a bit of an odd metric, right? What you're basically saying is when you come up for renewal, you're looking across the base of business that you currently have. What we're saying is on average, based on the base of business that we have at that point in time, we got a 6.7% increase. In fairness, right, some of the business goes away, right? You have price shoppers, they may take lanes away, and you also may gain new lanes in a renewal as well, right? That's why you don't see a perfect correlation, but I think it's a metric that we look at internally to see how well are we executing against how the customer operates. Again, you don't always keep all the business, or it may change, right, which changes your mix over time.
I think it's indicative of our execution and what's going on in the marketplace more so than saying, hey, we actually retained 100% of that.
The 5% drop in weight per shipment, how much of that do you actually attribute to e-commerce?
Yeah, I would say that's across the total book of business. Tough for us to identify exactly would be the sliver of that would be e-commerce related. If you look at it year-over-year, I think it's obviously the higher-weighted shipments that were evident last year in that macro environment, be it industrial activity compared to this year. That's probably the biggest driver of that year-over-year is just if you looked at the data and said, all right, where has that gone? It's probably been more industrial related than, say, e-commerce taking it away. It's more about trends and other elements of the business.
Excellent. Thank you very much.
Thanks, David.
We'll take our next question from Mr. Ravi Shanker from Morgan Stanley.
Thank you, Evelyn. A couple of follow-ups to some of your recent commentary. On some of the e-commerce side, I think you said that it was hard to quantify the year-over-year decline, how much of that came from e-commerce. Can you help us understand what percentage of your overall volumes today are e-commerce versus the "traditional" kind of industrial-heavy freight that you guys ship usually?
I think the statistics we can give you, and this I would argue is probably not encompassing all of e-commerce, but if I just looked at residential or sort of appointment-related business, a year ago, maybe that number was sort of five-ish%. That's crept up to maybe six-ish to seven-ish%, somewhere in that range. As you know, Ravi, that e-commerce is really impacting the rest of the supply chain, too. That could be impacting other elements of our business as we move freight from a DC to a distributor or a last mile provider. That's a subset, the residential sort of focus, but I think that's kind of the trend.
Got it. I'm assuming that you don't expect that 5%-6% to be a huge portion of your business in five years' time, and it's not going to be 25%, or could it be?
No.
No.
Okay. Got it.
The residential could go to 25% now. Yeah.
Okay, understood. Also just to kind of confirm that, when you say e-commerce, is that strictly B2C or is it also kind of B2B business? I think that's what you were alluding to earlier in this response. Yeah.
That's my point around the differences in the supply chain, right? It could be B2B, it could be how the supply chain is being influenced by e-commerce activity. The residential is for us, that I described, is simply B2C, right?
Yeah. In other words, where you used to take a certain amount of business into a retailer, the average shipment weight on those would be generally higher as opposed to if you're taking them to a final mile carrier or a warehouse provider who's delivering to a final mile or breaking those down and delivering them in smaller packages, right? They tend to be more fragmented because they're trying to get closer to the customer. More people are shopping online as opposed to going to retail stores.
Understood. Just finally, in your prepared remarks, you spoke about tech spend being an incremental, I would say headwind, but a call on cost going forward. Can you just elaborate a little bit more on what exactly you're spending on the tech side and how much that could be in 2019 and 2020?
If I look just at the third quarter, that was kind of where our commentary is centered. We're going to open the terminal, that means we're going to make sure that we've got the appropriate staff in place at the terminal level. That's we've got to get them trained, we've got to get them staffed such that they can provide the start of service. We clearly aren't going to be operating at any sort of productivity level that we would long term be focused on. That's probably a 20 bps-ish kind of drag on the quarter, maybe a little bit more on the third quarter. Over time, as we've shown into the second quarter that we just completed, we could translate that and drive the incremental margins up over time.
We have some targeted terminal openings in 2020, but we're not that close to a pipeline of those. At this point in time, the remaining markets we have to open tend to be more smaller markets, and we think we'll be able to find some available facilities as opposed to having to build those for the most part. If we were going to open in 2020 and build it, we would have had probably already have closed on the land, and we don't have any of those instances in our expanded geography. We are expanding some of our own break bulk capacity. We're just not in a position to kind of give you precise timing on what headwinds those might be potentially in 2020.
Understood. Thank you.
We'll take our next question from Mr. Tyler Brown from Raymond James.
Hey, good morning, guys.
Hey.
Hey.
Hey, just a quick clarification. It sounds like you have some additional greenfield terminals planned. In addition, you've got some terminal swaps. Big picture, and I don't want the physical numbers because I know you're not going to give them to me, but any color on what your Northeast door footprint is actually growing this year?
We'll have to get you that offline. We don't have that right here.
Okay. My hunch is it's quite a bit, though.
Correct.
Yeah. Okay. Sorry if I missed it, but on the six additional terminals this year, will those be owned or leased?
There's going to be mostly leased, one owned.
Okay. Then maybe, this is a big picture question, but longer term, where would you guys like to be in terms of owned versus leased, and how do you think about that strategically longer term?
Yeah. Tyler, on that front, that hasn't changed for us. We're very focused on, we want to own strategic assets. If the lease provides us access to a market, we certainly will take advantage of that. We can do that for a couple of reasons. Sometimes it gets you into the market, kind of as we described earlier, Harrisburg. We were able to access that market through a lease, then later we found a property we could purchase. Part of the methodology around that. I don't know that I'd read into the fact that these are a greater percentage of leased assets other than to say that that got us access to the market. Those were available. Conceivably down the road, we could actually buy the facilities if we think that's long-term strategic.
I think right now we would prefer to generally own strategic assets where we can.
Okay. That's it. I appreciate it.
We'll take our next question from Scott Group from Wolfe Research.
Hey, guys. Thanks for the follow-up. Clearly the Northeast market right today, it just broke even. It's profitable, but quite a bit lower margins than the consolidated OR average for Saia overall. Longer term, as you build the density in the Northeast, how should we think about the margins relative to the corporate average? Clearly, the Northeast is a more expensive region to operate in, but I'm just curious if you think it can be as profitable to the corporate average.
I would expect over time that where we are right now is not where we're going to end up in the Northeast. You are right, it is a very expensive market to operate. That makes it even more important that we do a good job of understanding those cost drivers and then pricing accordingly and identifying that freight that is ideal for that market. I would suspect over time that although I think we can get that to be a lot better, it probably won't have the same margin structure per se than, say, the markets in the center of the country where you have more inbound and outbound freight. You're more closely balanced in terms of how you spread your costs between freight that comes into a market or exits a market or passes through a market.
It probably won't get to be the lowest OR, but I don't see a reason that would be an impediment to us getting to higher levels of where we are right now or improved levels, I should say, from where we are right now.
Yeah. I would also comment, if you just look at where we are, we're pretty immature in the marketplace there. We don't have as many terminals there as some of our competitors do, so we're running some longer peddle runs. There are clearly some opportunities as you gain more density in the marketplace to gain some operating efficiencies. Quite frankly, the longer you're there over time, we're not a price player jumping in there, but as you gain some efficiencies, we should be able to improve there. I think as you gain some maturity and your brand strengthens there too, we should have some incremental pricing leverage as well.
Yeah, that makes sense. It should be a very good incremental margin business as you guys build the footprint. Can it get to an average kind of OR for Saia overall? Obviously, you noted it can't get to the best, but should we think about this as an average or a below average market?
Rob, remember the thesis around this Northeast expansion. It's going to be an incremental add because we're leveraging an infrastructure of a public company across 48 states of revenue when this is wrapped up and we continue to penetrate other markets. I absolutely think it should get to be company average, but I don't see it as a drag longer term. In a network, it benefits those other better or bigger, more mature markets just to be able to drive more freight through those or start more freight in those markets and have them end up in the Northeast. I think it's a win-win all the way around for us.
I would comment too-
Makes sense.
even as you grow longer haul business, it flows across the rest of your network, and it gives you an opportunity to have load more directs and have some incremental opportunities to leverage flows across your line haul network and re-optimize those. Regional profitability, it's just allocating your costs across an entire network. There's a portion of that where you're gaining some efficiencies that are benefiting the rest of your freight that you're not really going to see that necessarily in your Northeast operating ratio, but you may see some of that across the rest of your network.
That's fair, and we've definitely seen that with some of your competitors as they've expanded geographic footprints. That clears it up for me. Thanks a lot for the follow-up, guys.
Great, thanks.
That concludes today's question and answer session. At this time, I will turn the conference back to you for any additional closing remarks.
Great. Thank you for your interest in Saia. We appreciate it. I'll talk to you.