Less-than-truckload (LTL) carrier Saia turned in a third quarter in which it took a modest increase in revenue and turned it into a significant improvement in both operating income and operating ratio (OR).
Saia’s OR was 88.5% compared to 90.3% a year ago. Operating revenue was $481.3 million, up from $468.9 million, an increase of just 2.7%. But its operating income was up 21.7%, an increase of $55.2 million.
The bottom-line generally accepted accounting principles (GAAP) earnings per share of $1.56 were above consensus by 25 cents per share, according to SeekingAlpha. The revenue figure beat consensus by $10.4 million, SeekingAlpha reported.
The OR of 88.5% was a company record, according to Saia President and CEO Fritz Holagrefe.
The transportation team at Deutsche Bank led by Amit Mehrotra, in a quick analysis after the earnings were released Thursday morning, said the OR record was “a very important milestone for a company with significantly higher EPS potential if the OR gap closes.”
By contrast, LTL competitor Old Dominion Freight Lines had a third-quarter OR of less than 75%.
Not surprisingly for a company that boosted earnings on a relatively small increase in revenue, the key benchmarks for an LTL company were all higher. Total tonnage was flat, and LTL shipments were up by less than 1%.
But revenue per hundredweight rose to $18.59, an increase of 47 cents for a 2.53% jump. Revenue per hundredweight is the benchmark for determining a company’s yield.
LTL revenue per shipment increased to $239.60, up from $235.87, a 1.56% increase. Pounds per shipment were down about 1%, to 1,289. Length of haul increased 893, up 5.71%.
“(Management) appears to have correctly taken advantage of a big inflection in volumes by going after price, with yields [excluding] fuel up 5.5%,” the transportation analysis team at Deutsche Bank said in a note released soon after the Saia earnings came out. “Yields were also helped by a 6% increase in length of haul (due to the company’s expanded network), but clearly pricing was a key component of the company’s record operating results.”
Noting the small increase in revenue and the larger increase in profit, Deutsche said Saia “dropped almost the entirety of y-o-y revenue increase to the bottom line.”
Deutsche noted in its comments that Saia is disproportionately affected by the cost of outside transportation, as it secures more of its driving capacity from outside the company than other LTL companies. That means that even though it isn’t a truckload carrier, truckload economics and the cost of acquiring drivers have a big impact on Saia. The company’s purchased transportation hit for the quarter was $40 million, up from $35.8 million, a jump of 11.7%.
But despite that rise, costs otherwise were kept mostly in check. The end result was total operating expenses of $426.1 million, an increase of not even 1%.
The increased margins, Deutsche said, “still implies strong cost control in the face of much higher sequential purchased transportation costs (due to truckload pricing and Saia’s disproportionate reliance on third-party line haul capacity).”
Todd Fowler of KeyBank also was encouraged by the report. “We expect a positive near-term reaction in shares given operational upside, with margin improvement despite flat tonnage in what was likely a challenging operating environment,” he wrote. “Additionally, we are encouraged with favorable yield performance potentially signaling an accelerating contract renewal environment.”
Holzgrefe said in a prepared statement announcing the earnings, “Our third-quarter results reflect a continuation of the improving volume trends we experienced in the middle of the second quarter and our continued focus on pricing and execution.”
Saia’s balance sheet is much stronger than last year. Total debt is $120.9 million, down from $165.3 million a year ago. Net debt to total capital was 9.4% as the quarter closed, down from 17.3% in September 2019.
Saia has cut back its capital spending. Through the nine months, capex was $205.3 million, down from $245.2 million in the same period last year. The company said its full-year capex will be $225 million, suggesting just $20 million in capex this quarter.