Good morning, and welcome to the Saia Incorporated 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 28. 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 and 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's Chief Executive Officer, Mr. Rick O'Dell. Please go ahead, sir.
Well, 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 2nd quarter but for any quarter in our history. 2nd quarter revenue was up 8.3 percent to $464,200,000 And with our 89.0 percent operating ratio, we grew operating income 23.1 percent to $51,200,000 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 dollars 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 1.9% decline in tonnage. Contractual renewal activity remained positive and averaged 6.7% in the 2nd quarter. The 2nd 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 percent, though we did see a decline in our weight per shipment of 5.3%, the 3rd quarterly decline in a row.
Positive note on the shipment rate is that it improved sequentially each month throughout the Q2 on an absolute basis, and the year over year decline was less negative each month. So comparisons from the Q2 this year compared to the Q2 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 percent of total Whitehall miles compared to 11.4% in 2018, with the improvement coming from better utilization on site capacity and increased density in some of our newer markets. Linehaul cost as a percent of revenue improved by 4.5%, benefiting from an improved improvement in load average, reduced purchase transportation at higher yields. Our length of haul expanded slightly to 8 41 miles from 8 37 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 6 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, and good morning, everyone. As Rick mentioned, we generated total revenue of 464,200,000 in the 2nd quarter, compared to 428,700,000 in the Q2 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 2nd quarter results on a year over year basis.
Our salaries, wages and benefits rose 7.8 percent to 237,700,000 in the 2nd 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 percent of revenue in the quarter compared to 51.4% last year. Purchased transportation expense was essentially flat at $34,200,000 in the quarter and was 7.4 percent of revenue compared to 8% of revenue a year ago. The reduction as a percent of revenue is due to lower purchase miles as a percent of total line haul miles, as Rick mentioned, as well as a more stable truckload rate 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% to 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 percent to 13,200,000 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 percent to $29,100,000 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 $51,200,000 compared to $41,600,000 earned in the Q2 of 2018. The operating ratio improved by 130 basis points year over year to 89.0. At June 30, 2019, total debt was 179,900,000 dollars Net debt to total capital was 19.1%. This compares to total debt of 155,000,000 and net debt to total capital of 19.4 percent at June 30, 2018. Net capital expenditures in the first half of twenty nineteen were $171,100,000 including equipment acquired with capital leases.
This compares to 140,600,000 in net capital expenditures in the first half of twenty eighteen. In 2019, net capital expenditures are forecasted to be between 275,000,000 300,000,000, including investments in real estate, terminal infrastructure improvement projects, our fleet and continued investments in technology. Now,
I'd like to
turn the call over to Fritz for some closing comments.
Thanks, Rob. We were very pleased with the record results of the 2nd quarter, but 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 3 new terminals in the Northeast. We also replaced the 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 6 terminal openings planned, 5 of these will be in the new markets in the Northeast. We're also planning to relocate an additional 3 terminals in the second half. These are terminal 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 Q3, we're very pleased with the opportunities that 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 3 years. Before I open it up for questions, I'd like to comment on the 27.1% incremental margin we posted in the 2nd 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 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 in essentially 4 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.
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 look 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%. And in June, the shipments per day were up 6.5% and the tons per deck turned positive, up 1.8%. And so for the total quarter, again, that put the shipments per day up 3.6% and the tonnage down 1.9%.
And do you have a preliminary number for July, how both shipments and tonnage are trending?
Yes, we're seeing positive trends in shipments with July up 4.4% and the tonnage up about 0.9%.
Then Rick or Fritz, historically you guys have talked about the sequential margin trends 2Q to 3Q. You called out kind of additional terminal openings. I was just curious how we should be thinking about the sequential trend coming off of the 89 percent in the Q2?
As you know, our wage increase is effective the 1st week in July. So that's had some impact sequential. And the same thing obviously occurred this year. I mean historically, we've been in the 80 basis point decline. And I think with some of our we actually are opening 3 terminals at the very end of September.
So we're more looking at a deterioration of about 100 basis points.
And then I guess as we think out to 2020, how should we be thinking about the possibility of getting to a sub-ninety percent OR given the incrementals that you achieved in the Q2. 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.
Yes. I mean, obviously, that's certainly our goal and we think it's positive. We are 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, we're actually and the way things are going at the company, we're looking at expand and accelerating our Northeast expansion probably above our initial plan. So assuming the external environment stays positive and we continue to execute well, which we fully expect, I think it's certainly a possibility.
And just for clarification, I threw 2 years. Do you think it's a possibility that we could get sub-ninety percent in 2020?
Yes.
All right. Appreciate the time. 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 a 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 Q2, 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?
And then 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?
So, Todd, if I look start with Q2, I mean, 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. I mean, that when we think about where our future is with this Northeast expansion and quite frankly is our 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? But 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 fit in 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. And we also you have the wage step up that starts July 1.
Now that's happened historically. That's nothing new for us kind of business process. But 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.
But I think that over time, I would expect to see that to continue to improve.
Okay. That helps. And then Rick, in response to the last question, you made a comment about accelerating the plans in the Northeast expansion and understand that you're going to pull some terminals forward. When you say accelerating the plans, are you just talking about doing more terminals sooner than what you anticipated? Or is there more opportunity in the Northeast relative to what you initially had mapped out?
Well, both, I mean, obviously, we're target opening 4 to 6 terminals. We've already opened 3 and now we're going to open 6 more in the second half. So I'm just commenting compared to our prior comments with terminal availability and execution well, we're going to open more terminals.
And is the Northeast profitable at this point on a fully allocated basis?
Yes, modestly.
Okay.
Okay. As we pointed out though in the past, keep in mind, it's a network business. So elements of that profitability surface throughout our throughout the network. So it makes other operations more efficient.
Right. And 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.
Yes, the contract renewals were 6.7 and we continue to see a very stable environment to be operating in. So the tonnage environment has been a little bit weaker than we'd yes, it yes, it's been the pricing environment has been good.
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 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. And I just wonder in that context, did the record kind of 89 OR in the quarter, did that come from 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 kind of the runway you have relative to the 89 OR.
Yes. So Amit, thank you for that. Good question. It's kind of across the board, to be honest with that OR improvement. So, 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 and across all regions.
Okay. That's helpful. And then 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. And that's pretty that corresponds to just more e commerce related volumes.
So one, can you just talk about that dynamic? What's driving that shipments up, wafer shipments down? And then 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. And so 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. I would just admit that, that clearly for us, I mean, that's a bit of a headwind, right? I mean, you are 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. So it was 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. But I guess more specifically, can you just talk about, I mean, when shipments are up, does it basically do you have to keep resources because of the shipment growth, even though maybe the headwind on the wafer shipment? So going forward, how should I mean, I'm not asking the question the right way, but is 25% to 30% incremental margins kind of the way to think about it even despite that headwind, if weight per shipment continues to go down? Or when do you think that would turn from a comps perspective?
So I think the way to think about going forward, we're very focused on driving those incrementals. So obviously, we have to drive our efficiencies to achieve those incrementals as shipment patterns change over time, right? So if you have our wafer shipment continues to trend where it has been, we have to adjust our sort of productivity model to be able to deal with that. So I think that going forward, we continue in a reasonable sort of economic environment. We'll continue to drive this sort of incremental kind of in the ranges that 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 kind of our operating efficiencies. But wafer, shipment trend where it is, that's certainly a headwind and a bit of a challenge.
And you think the sequential you said 80 basis points historically deterioration. Is that the right number to think about just given the I mean the 2Q performance was way better because the Q1 was extraordinarily weak because of weather. So 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?
Yes. We talked about that there would be a bit of an erosion Q2 to Q3 because of some of the pulling forward of 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. We have to invest ahead of that in the sense of getting your drivers on staff. You've got to get them trained, doc workers. The leadership is in place, but that takes some time to develop some efficiencies out of that.
So even if you did get a little bit of revenue in the quarter, that's not going to be a very efficient sort of incrementals on that new business, those new terminals. So that's the drag. So we talked about sort of 80 basis points 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. So just going back to the OR cadence for a moment, if we could. I mean, what you're saying about the Q3 makes a lot of And if I'm hearing you correctly, it looks like we've got 3 more terminals that the plan is to bring online in the Q4. So as you sort of think about the cadence 2Q to 3Q, 3Q to 4Q, I mean do you think that you'll be able to get some leverage 3Q into 4Q given you're bringing those on those terminals on in the 3Q late in the quarter?
Or should we think about normal seasonality as we move through the year getting past the Q3, if that question makes sense?
Yes. I think you probably should be considered 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 our 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 Q4.
So we'll we typically, as you know, give us kind of shipments of 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. And 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. I mean 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 and 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. And I think that there are certainly potential opportunities, if not for maybe that tuck in sorts of things, but then also, frankly, available real estate, as people will have adjusted the business to exit the business such, that creates some opportunity. And 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. So I think that those things all help.
And obviously, with the strong balance sheet, we're in a position to pursue other opportunities that would come available. Absolutely,
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 and A is pretty encouraging considering if my numbers are right, it's a pretty tough comp still. But comps do get a lot easier as you move through the Q3.
I mean is it sort of your opinion that maybe we've reached an inflection point from a tonnage per day perspective that Q3 could see some solidly positive tonnage on a per day basis if trends hold together?
Yes. I think it's we're dependent, as you know, on the sort of macro environment. So I think the numbers are what they are right now. I mean, we're pleased with the trends we've seen so far in July. We'll see how August and we'll look to see how that develops.
Okay. Thanks again for the
next question. 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. So 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 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, but 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.
Yes. 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 3 new terminals. I mean, a large portion of our growth continues to come from business to and from the terminals that we've opened 2 years ago, for instance. So historically, as we've executed an expansion over a 5 year period, we've seen share gains as the we mature as a market participant there.
And then also as you open 3 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. So we've seen some we've obviously seen a fair amount of benefit from that. And 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. And then over time, too, it provides us the opportunity. You may grow and use purchase transportation to handle the incremental business.
And then over time, you re optimize your line haul network. So 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. So 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. And then the 6 additional terminals in the second half, the target is I just want to clarify something. 3 of those are for swapping out a smaller terminal with a larger terminal and then 3 of those are completely new locations?
Yes. So of the 6 that we quoted, 5 of them are actually new markets in the Northeast. And then we're at the end of the day, in the second half, we've got the 6 terminal openings planned, 5 of them are in new markets. And then we're also going to relocate an additional 4 terminals in the second half as well.
We'll take our next question from 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? And then I just have a quick follow-up.
Yes. So Stephanie, I would just say it's tough for us to really highlight individual industries. I would say that because I commented earlier, the improvement is really pretty broad based for us. There isn't a call out other than, say, that the Northeast continue to execute and grow. And so I think it's pretty broad based for us without a call out 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. And obviously, we've got a very good card of claims ratio. Our service has been really, really solid. So I think we just positioned ourselves well in the marketplace to execute as
well. Great. That's helpful. And then 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 1Q or weather driven disruptions that had been a little bit higher, call it maybe 150 to 200 basis points. Is there an already kind of levers at this point where we could see it kind of higher than 100 bps of improvement after the strong QQ 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.
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 that we buy, And we think that's an appropriate investment for longer term value at the stage. So I think we're still comfortable with that sort of characterization. We'll see how this Q3 develops that will lead to kind of where we see Q4 of these, 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. So we feel okay about it. And our general conversations with customers have been pretty good. And 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. And 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 the decade long period, it usually has an average 6.7%.
So 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 forecast and planning, we're not assuming that we're going to be able to achieve those types of increases forever. But it is 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.
And then obviously, we're doing it now. We have some customers that are where we're being properly compensated and we're they're not seeing a 9% increase or whatever. So when you average 6%, 7%, that's not 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. And I know it's early, but how should we conceptually think about net CapEx for 2020?
Yes. So we would expect this year to sort of end sort of somewhere between $275,000300,000 I think for next year, it's probably $300,000,000 plus maybe $310,000,000 something like that. It's all dependent upon what the investment opportunities are that are out there, kind of what the 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 sort of age and such. If there were a change in the environment, we may change that number. But right now, I think that's sort of it's kind of the range where we
think. Yes. I would also comment too just as we continue to grow our network, it's really important to have particularly your larger breakable facilities built out ahead of your growth. And 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. And I think historically, we look at sometimes we didn't build our network out ahead of our growth.
And then it would impact our margins as you have capacity constraints and you have to run freight sub optimally or generate backlogs or can't build as many directs as you need from a door count capacity. So 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 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, I mean, apparently, that's part of it, right? I mean, you kind of 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. So if you look at kind of our OR gap against some of the best in class operators out there, and part of its yield and 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. So 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?
Well, it is a bit of odd metric, right? So what you're basically saying is when you come up for renewal, if you're looking across the base of business that you currently have. And 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. Now in fairness, right, some of the business goes away, right? You have price shoppers, and they may take lanes away and you also may gain new lanes in a renewal as well, right?
So I mean that's why you don't see a perfect correlation, but I think it is a so it's a metric that we look at internally to see like how well are we executing against how the customer operates. And again, you don't always keep the all the business or it may change, right, which changes your mix over time. So it's 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.
And then the 5% drop in weight per shipment, how much of that do you actually attribute to e commerce?
Yes. I don't know. I would say that's across the total book of business. So tough for us to identify exactly would be the sliver of that that would be e commerce related. But if you look at it year over year, I mean, I think it's obviously the higher weighted shipments that were evident last year in that in macro environment, be it sort of 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, which 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.
We'll take our next question from Mr. Ravi Shanker from Morgan Stanley.
Thanks, Evelyn. Just a couple of follow ups to some of your recent commentary. Just 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. But can you help us understand kind of what percentage of your overall volumes today are e commerce versus
statistics we can give you, 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 5 ish percent. That's crept up to maybe 6 ish to 7 ish percent, somewhere in that range. But as you know, Ravi, I mean, that e commerce is really impacting the rest of the supply chain, too. So that could be impacting other elements of our business as we move freight from a DC to a distributor or a last mile provider.
So that's a subset, the residential sort of focus, but I think that's kind of the trend.
Got it. So I'm assuming that you don't expect that 5% to 6% to be like a huge portion of your business in 5 years' time. And it's not going to be 25% or could it be?
No.
Okay. We don't
see residents that come to 25%, no.
Yes. Okay. Understood.
And also just to kind of confirm that, when you say e commerce, does that is that strictly B2C or is it also kind of B2B business? I think that's what you were alluding
to in your Investor Mark. Yes. That's my point around the differences in the supply chain, right? So it could be B2B, but it could be how the supply chain is being influenced by e commerce activity. The residential is, for us, I would describe simply B2C, right?
Yes. So in other words, we're 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 is 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 and more people are shopping online as opposed to going to retail stores.
Understood. And finally, in your prepared remarks, you spoke about tech spend being an incremental, let's say, headwind, but a call on cost going forward. Can you just elaborate a little bit more kind of what exactly you're spending on the tech side and kind of how much that could be in 2019 2020?
So if I look just at the Q3, that was kind of where our commentary is centered. We're going to open the terminals. So that means we're going to make sure that we've got the appropriate staff in place at the operator at the terminal level. So 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. So that's probably a 20 bps ish kind of drag on the quarter, maybe a little bit more on the Q3. But over time, as we've shown into the Q2 that we just completed, we can translate that and drive the incremental margins
up over time. And we have some targeted terminal openings in 2020, but we're not that close to a pipeline of those. I mean, at this point in time, they tend 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. So 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 brake capacity.
So we're just not we're 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.
Hi, Tyler.
Hey, just a quick clarification, but it sounds like you have some additional greenfield terminals planned. In addition, you've got some terminal swaps. But 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. Yes. Okay.
And then sorry if I missed it, but on the 6 additional terminals this year, will those be owned or leased?
There's going to be mostly leased, one owned.
Okay. And then maybe just 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?
Yes. So Tyler, on that front, I mean, that hasn't changed for us. We're very focused on we want to own strategic assets. But if the lease provides us access to a market, we certainly will take advantage of that. And we also 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. So that's kind of the methodology around that. So I don't know that I'd read into the fact that there's 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. But I think right now, we're would prefer to generally own strategic assets where we can.
Okay. Okay. That's it. I appreciate it.
We'll take our next question from Scott Group from Wolfe Research.
Clearly, the Northeast market right today 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. And you're right, it is a very expensive market to operate. So 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 the market or passes through a market. So probably won't get to be the lowest OR, but I think I don't see a reason that would be an impediment to us getting to higher levels of where we are right now or approved levels, I should say, from where we are right now.
Yes.
I would also comment that 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 pedal runs. So there are clearly some opportunities as you gain more density in the marketplace to gain some operating efficiencies. And quite frankly, the long view there over time, we're not a good price player jumping in there. But as you gain some efficiencies, we should be able to improve there.
And I think as you gain some maturity and your brand strengthens there, too, we should have some incremental pricing leverage as well.
Yes. That makes sense. It should be a very good incremental margin business as you guys build the footprint. I mean, 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 the store and piece expansion. I mean, 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. So I absolutely think it should get to be company average, but I don't see it as a drag longer term. And it benefits in a network, it benefits those other better or bigger, more mature markets just to be able to drive more freight through those, start more freight in those markets and have them end up in the Northeast. So I think it's a win win all the
way around for us. And I would comment to you, Stephen, if 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. So I mean regional profitability, it's just allocating your costs across an entire network. So there's a portion of that, 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're going to see it 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 footprint. So 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 or closing remarks.
Great. Thank you for your interest in Saia. We appreciate it. I'll talk to you.