PAMT Corp (PAMT) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the P.A.M. Transportation Services fourth Quarter Earnings Conference Call. As a reminder, today’s call is being recorded.

Statements in this release which are not historical facts are forward-looking and involve risks and uncertainties including, but not limited to, the impact of competitive products and pricing, increased investment to support product introductions, market acceptance of products, product transitions by the company and its competitors, currency fluctuations, changes in product sales mix, and other risks described in the Company’s registration statements and other Securities and Exchange Commission filings.

At this time for opening remarks, I’d like to turn the conference over to Mr. Mr. Bob Weaver. Please go ahead, sir.

Good afternoon. And as most of you know by now, on our conference calls, I don’t make a lot of remarks. And as such, most of the major factors that had a significant impact on our net results for the fourth quarter were noted in the press release.

And as we stated, although the results were not as we had hoped for, we are not displeased with the changes seen in the operation in the fourth quarter relative to the third, especially in the areas of rates and driver increases.

Fuel costs and the price fluctuations are the most difficult to predict and recover cost increases. Timing differences related to our fuel surcharge formula has in the past hindered the total recovery of the cost of increase of fuel. The only way to address this issue is to evaluate cost recovery lane by lane, and eliminate the lanes that we don’t recover our fuel costs, or add rate to cover the increased cost. We’ve used this method for some time, and continue to do so to close the gap between fuel cost increase and our recovery. We’ve been successful in closing that gap over time and we’ll continue to do that.

And those are pretty much the remarks I’ve got going in. I know you’ll have various questions so, Amber, I’ll throw the floor open now to you for the question period.

(OPERATOR INSTRUCTIONS) Tom Albrecht, Stevens, Inc.

I’m in a remote location. Hopefully, you can hear me okay.

Okay. We can.

Good.

I’m not accustomed to you being with Stevens, however.

You know, I didn’t call you. I knew you were about ready to release earnings, so we’ll get caught up off line here.

Congratulations, by the way.

Yes, thank you. I’m very excited about it. It’s obviously a very good firm.

I wanted to--I guess the question that I’ve been getting today, Bob, is people look at your results and they see a couple things they can be encouraged by. You reduced the number of unseated drivers. Your rate per mile on a loaded basis was up almost 10%, and yet your OR still deteriorated. You still didn’t have very good earnings. How do you explain the shortfall, apart from fuel and driver pay increases? There’s got to be some other factors that you guys are working on.

Well, part of it, Tom, the recruiting program that we put together for students, the training costs in the fourth quarter increased about $800,000. Now, those were costs that, although incurred in the fourth quarter, we’ll see benefits from those going forward. Because, once the student comes in and goes through the training, well, then he earns that bonus. So, you can see the numbers of students that we’ve increased this year increasing the cost of the training. Part of that increase is the bonus that we pay. But, those students, they actually may not hit a truck to be a first seat driver until, well, there’s probably some of them hitting right now. But, we’ll continue to see those numbers increase as we go along. But, that’s one of the cost increases that we saw.

The other, of course, you mentioned the fuel. But, we did get a slight increase in our premium on our liability renewal insurance. And that, coupled with we had a larger number of fender-bender type accidents, partly due to the weather. And those two combined together for--I forget the exactly number, Larry, for the increase in the quarter. I’ve got it somewhere here, Tom. About another $800,000.

And once again, the driver pay, you’ve got to understand that, although the pay was out there, we didn’t get the full impact of the full utilization of the number of trucks that we seated by the end of the year. That’s another benefit that we’ll continue to see as we go forward as utilization continues to increase.

I understand that those are all specific line item costs and I’m not trying to trivialize them. But, in the course of a year, every year you’re going to have a stretch where you’re focusing heavily on driver recruitment and training. There may be a couple of quarters where that’s less of a direct factor.

But I’m still wondering, I guess really, about the mix issues in pricing, because it seems like every carrier’s got some of these obstacles. And you guys are not doing as good of a job at overcoming those obstacles, whether it be pay, training costs, safety. There’s always, you know, you’re never going to have four perfect quarters in a year.

And so, I guess the question is, where do you stand with auto now? And it seemed like in the third quarter your development of non-auto business had kind of stalled. Was that the case in the fourth quarter?

Are you looking for percentages on the auto?

Yes. Just roughly percentage of revenues coming from the automotive industry.

Tom, it has not increased from the third quarter.

All right. And refresh my memory, because some of my notes might still be at a former place.

We’re at 44% with GM, and we’re right at 55 in total automotive.

And then how about the development? I mean, even though that hasn’t come down, there’s always some mix opportunities for you to do better with. And I guess I’m, you know, your rate per mile was up 3% sequentially from the September quarter and 9.8% year-over-year. Is all of that coming primarily from the non-automotive business, or are you getting some of that in the automotive?

Tom, we’re getting the increase in revenue from mile, and that’s an ongoing process that we see an incremental change constantly on the upside. It’s from the automotive industry. We’ve looked at all that business. As the micro-contracts expire, we’ve got a new proxy model we’re putting into place. And that’s what you see in the increase in revenue per mile.

On the non-automotive, we took several large increases on that business. We’ve got new opportunities with some Fortune 100 companies to expand that business, because our service level has been good. We’ve got some dedicated fleet opportunities with three of them that we’re going to bid on in this first quarter. We’re looking at some anecdotal business, seeing a big increase in that. We’ve got some lanes carved out to the West Coast and back and we’re seeing some very good results from that. So, we’ve got a lot of irons in the fire.

We like what we have as a plan going forward with the customer base. And we feel confident that these--once all these--the driver utilization issue and the revenue per mile, all that plays out this year, that the numbers are going to be where we need them to be, like they were in the past.

Tom, I might add to that, that the rate issue is non-ending. You know, where we ended the year at is not where we’re going to stop. You know, that’s a never ending push for us, to be able to get the rate level up high enough where we can recover all the costs that we’ve seen on the increase side. So, it’s not like we’re looking at the end of the year at the $1.18 and saying, well, that’s where we’re going to be through ’05. That’s clearly not the case.

Tom, we’re going to add the utilization numbers good from the drivers. And we saw some other--some numbers that were crunched that talked in terms of maybe an 8%, 9% total gain for the carriers, most carriers in ’04, or in a portion of ’04.

But, a large amount of that was gained by also dropping their length of haul. You know, we’ve kept our length of haul the same. And we’re up over the percentage that we talked before in the rate per mile quarter-over-quarter. So, I’d much rather do it that way and continue to work that program going forward. We’re not going to lock ourselves into any automotive business that doesn’t contribute to the bottom line. And we had the opportunities to fix that and we have been working on them for quite some time now.

Okay. I guess--and I’ll turn it over here in a moment. I think the thing that people are struggling with is [inaudible] thinks that you guys have forgotten how to do good utilization and all that. But, we’ve had two years that have been a fantastic environment and the earnings have been disappointing almost every one of those eight quarters. A couple of them were so-so quarters, but outright disappointment probably in six of them.

I mean, your costs per mile are probably going to go up 8% to 10% in 2005. You’ve got to raise your rates that much just to sort of run in place. And I guess what people are looking for is a commitment or an acknowledgement by you guys that you can go after more than that and start improving those margins and earnings again. Otherwise, it feels like the cycle’s going to miss you guys.

Well, Tom, I have to disagree. I don’t think our cost is going to go up 8% to 10%. I couldn’t imagine where an 8% to 10% cost increase would come from over and above where we’re at right now.

Well, even if it’s 5--. I mean, your costs in the fourth quarter, excluding brokerage, and I netted surcharge against fuel expense, it was $1.124 a mile versus $1.02 a year ago in the fourth quarter. So, that’s about a 10% increase year-over-year.

And $0.035 of that is driver wage. And fuel was 5.

Well--right. And fuel looks like it’s starting, between the surcharge and how you net it, becoming less of a factor, less negative.

But still, there’s this whole issue of it’s been two years and your earnings are slightly better now. But, everybody’s posting way better. And there’s a concern that you guys are going to miss the cycle. And I guess what people are looking for is more of a sense of urgency. And I’ll let you comment and turn it over then.

Well, let me say this about that. You know, you talk about the other people. I’m going to go back, and I probably shouldn’t say this, but I’m going to anyway. Back when those other people weren’t doing so well, we were doing very well. And those other people that are doing well now, they didn’t take a $0.05 or a $0.06 decrease in their rate due to circumstances that we got hit with. If we have that nickel a mile back that we had to back up before we started getting the rate increases, why, we’d be where we need to be.

And you talk about our costs going up, and you say 8 or 10 and you back it off to 5, I don’t see that big of a cost increase coming forward unless there is a significant increase in driver pay again. You know, obviously that could happen. I don’t see it being a nickel if it does happen. But, I think we’re about a nickel away from being where we need to be rate wise. We’re going to gain some more utilization. And certainly, we think it’s doable.

So you’re going to continue to be comfortable then with a little over 50% of the business in automotive, because you like the dedicated opportunities, the mileage utilization, even if it whipsaws around the profit.

Well, as Cliff said, we’re not taking anything on that’s automotive that is not at the profit level that we want with our profit model. And that’s part of the evaluation process that I talked about initially, was that we--as fuel price goes up, we continue to evaluate those lanes. And one of two things has to happen. That’s going to be more rate or eliminate the lane.

(OPERATOR INSTRUCTIONS) Donald Broughton, A.G. Edwards.

Hello. This is actually [Christine Kabachi] in for Donald Broughton. Just a couple of questions, gentlemen. You mentioned that the driver pay increase that you implemented in October had a significant impact on retention and recruiting. Can you give us a sense on the impact of driver turnover and where the unseated tractor count sits now?

I’ll tell you that the driver turnover changed from, prior to the increase to after the increase, was reduced by about 20%. The recruiting efforts, i.e., the bonus that we pay for the students coming in, we have netted in the fourth quarter 130 additional drivers for the quarter. And as we said in our press release, our trainers continue to be full of students in training. And right now, we’ve got about--tractors that are available to be manned, we’re sitting right at 40 tractors.

Okay, 40. Great. Do you see then adding tractors this year as a possibility?

Not currently.

We’ve been hearing from folks in the industry that they expect at least another round of driver pay increases, perhaps 10% to 15% on top of 2004 levels. Where do you see driver pay going, and do you think you’ll have to raise it in order to be competitive for drivers?

We’ll continue to monitor it and see. We still are able to offer some things to drivers that they don’t see at some of the other companies, i.e., the dedicated business. So, our pay level has historically not been as high as some of the other carriers. But again, if driver pay increases and we become non-competitive in the level we’re at, then we’ll have to implement a driver pay increase.

Okay, fair enough. Just one last question. I noticed that operating supplies on a per mile basis had a fairly big delta year-over-year and from the third quarter. Can you give us some color on what might be happening there?

Year-over-year? Is that what you’re looking at?

Right. I’m showing about $0.39 per mile versus $0.28 a mile last year.

Fuel prices, about $0.05 per mile of that. And then another significant number entered into our driver recruiting costs. It’s up about $0.02 a mile over last year. Those are some of the bigger numbers.

[Neil Gagnon], [Gagnon Securities].

Bob, you mentioned two sort of one-off numbers in your fourth quarter, the training cost number of $800,000 and then these additional liabilities in insurance. Now, you typically get the latter in the fourth quarter with weather. But, how much of this $1.6 million do you think is one-off and shouldn’t be a recurring number?

As far as the rate increase on the insurance, that was about--well, let me look so I don’t--. There was about $500,000 of the increase that was premium related, and about a little over $200,000 increase in the frequency of the fender-bender type accidents.

But, you get some of that in the fourth quarter all the time anyway.

Right.

So, maybe $500,000 is a non-recurring kind of number?

That may be a little high, Neil. But, I can tell you that the premium increase will be a recurring number.

The training going forward, what level of effort will you have versus fourth quarter?

Clarify that for me. I’m not sure I understand.

Well, you spent so much money in the fourth quarter on training and recruitment.

Right.

What will you be spending in the quarters in ’05?

It should be, Neil, between $500,000 and $600,000 a quarter less.

Larry, I’m having a little trouble hearing you because of where I am. I apologize.

Neil, it should be $500,000 to $600,000 less per quarter going forward.

5 to 600 a quarter less?

Yes.

Okay. Bob, back to the nickel a mile that you think you need to get your numbers correct. Can you give us a rough breakdown of how you’re going to get that?

The same way we’ve gotten all we’ve gotten before, Neil. You know, it’ll be in the individual lane analysis, and either getting the increase or turning the lanes back in and replacing that business with higher paying business, and forcing rate increases on our existing customers.

A question for Larry. If you’re not adding anything to your fleet to speak of, you should be building up cash. What’s the balance sheet going to be looking like?

Neil, at the end of 2004, we were about $2 million cash positive. If you take our cash on hand and our equities net of the debt, and we’ll continue to, at least in the short term, be positive cash flow wise.

So, in this current mode, you’re going to be accumulating cash.

Yes.

(OPERATOR INSTRUCTIONS) [Bob Dutch], Lord Abbett & Co.

In regards to the rate environment, what are you finding in terms of customer response right now?

There’s a fair amount of resistance to rate increases. That, I guess, is a little bit different than what it was three or four months ago, where they were more agreeable to it. But, we’ve been back to some of these customers more than once. But, as costs continue to increase, we’ve got to keep going back. They’re not--it’s not as easy as it was, but it is doable.

Cliff, you may have some specifics you want to add. You deal with the costumers more directly than--.

With the automotive business, as I stated before, those are contracts that come up constantly that have an expiration date. And we review those and go forward. We redid those under a revised pricing model that included baking in more costs, unexpected costs than we did before, like covering deficits and fuel surcharge, the new engines, all these things we foresee that could hit us.

So, under the new pricing model, we put that rate in. If we’re successful, that’s great. But if we’re not successful, we have a very strong customer base of non-automotive customers that we have opportunities out there that we’ve also got rate increases from that we can go back to that business, just like we’ve done this month. You know, before all the plants started back up, we were able to do what we needed to get done with our regular customer base. So, it’s kind of a good situation that we’re in now because we have the opportunity to do--take other opportunities with the non-automotive business if we need to.

Have you been any more successful, either with the automotive or non-automotive customer base?

Been successful with both.

In a similar degree?

Probably better in automotive.

Has the term of the contracts, automotive, has that changed, shortened or lengthened at all?

No, they’re usually based on about a year. There’s always situations that can arise, model changes, production changes and so forth, that could increase or benefit you. But primarily, it’s a year. And they can last longer on that if you want to, but you have the ability to renegotiate after that period of time.

And is the year period something you have a greater preference for or they?

In this environment, they like it. Otherwise, I’d be wanting to renegotiate all of them [inaudible].

And if you’re not looking to buy any tractors this year, how low might CapEx be?

We’ll be replacing about 300 tractors. We won’t be adding any additional tractors, but our net capital expenditures for 2005 will be about $25 million.

And has the cost per tractor gone up meaningfully at all in the last year?

It has.

And by about what amount on average?

It’s between, depending on the model you’re looking at in the OEM, it runs between 2% and 5%.

And you talked about lower turnover on the new hires. But, where’s your overall turnover currently amongst your driver base?

We’re running about 90%.

And when you look at the last five years, how did that compare?

It’s remained fairly stable. Our turnover picked up in the second quarter of ’04 significantly, i.e., the reason for the need for the pay increase. But, since we put it in, it’s come back--turnover always reduces a little bit around the holiday period because people don’t want to change jobs during the holiday period. But, about 90% is where we’ve seen it in the past overall. And that includes the typical over-the-road, as well as the dedicated. But again, the dedicated always runs less than the typical over-the-road does.

So, just one discussion point here. Your turnover picked up and it required you to put through a rate increase. Is there any reason why, say maybe your sensitivity to what was going on in the industry lagged out of the industry and resulted in your losing drivers to competitors?

It wasn’t a sensitivity issue. It was strictly a matter of being able to afford it.

And then I guess getting back to Tom’s question a little bit, in terms of how you’ve been faring. You know, that answer kind of suggests that others have an advantage over yourselves.

Well, I think the others didn’t start in the hole on the rate issue like we did. But, I think if there is another driver pay increase that comes, I think that the customer base, not only ours, but everybody else’s, knows it’s going to be passed through.

And if you look back, those other carriers we keep referring to have had to put in a number of different pay changes over let’s say the last five years, where we’ve been able to maintain ours because of the balance of dedicated business and long-haul freight that’s easy to pick up and deliver. It’s not labor intensive for the driver. There’s a lot of predictability of where they’re going to be and when they’re going to have time off and get time off. We were not forced to have to make all those adjustments in driver pay that they did.

So, the one we put in this year was significant. The drivers really responded to it. And just because the industry has another one, doesn’t necessarily mean that we’re going to have to move with the industry at the same time. It could be that we do, but we’re not in locked step with them, as far as results that we get from the driver pay increase.

Well, it almost seems as if some of the truckers may be using wage increases as a competitive advantage, and yet it doesn’t seem to be impacting their earnings performance, be it a Heartland or a Night or a Warner.

I don’t disagree with you.

And are there any senior management positions that need to be filled at this stage, or are contemplated?

None contemplated, unless you know something I don’t.

No, not at all. And on a relative basis, again, how would you characterize morale and the culture within the company currently?

I think it’s good. I think people are excited about what ’05 could build up to be. We’ve got everything in motion going forward. We’ve got a good plan and we’re ready to get it done.

And in that regard, can you just touch on how incentive compensation is based in this year, and to the degree it’s any different than some prior periods?

The bonus program we have for the employees is the same this year as it has been in the past. There’s been no change in it.

Based on operating ratio.

And that’s the primary [inaudible]?

Yes.

And is that level the same or is it--?

It’s the same. There’s no payout until we get back under 90.

Under--I have to--90 or lower.

Right.

And then the bonus can be up to what percent of salary?

Ten’s as high as we’ve hit thus far.

10%?

Um-hum.

[John Mershakari], Fidelity Investments.

Let’s see. I think I might have actually forgotten. Well actually, brokers purchase trend as a percentage of broker rev. Can you give me that for the quarter please?

What’s that again, John?

Broker purchase trend as a percentage of broker rev. You’ve historically given that number out.

Okay. It was 89.6%.

And do you have it for Q3 as well?

I don’t have it with me, John. You can call and I can get it for you later.

Okay. Just on the cost side, looking at operating supplies, you mentioned that $0.05 per mile of that is fuel and $0.02 is driver recruiting.

Right.

What’s in the employee compensation line that’s been increased in this quarter?

Driver wage.

Is that it? Are there any other sort of one-time costs in there?

No, that’s the big one. Everything else is--there’s no percentage change over 20 basis points.

Because it looks like that line item’s up over a nickel on a per mile basis sequentially. Not $0.03 as it would suggest from your pay increase.

We decreased the number of owner/operators, but that’s actually--. The percentage of revenue for salaries, wages and benefits from quarter to quarter, that’s the only--that’s the only number of any significance.

I’m sorry?

That’s the only number of any significance, is the driver wage.

Do you know why the number looks like it’s up $0.055 sequentially then per model, versus $0.03 driver pay increase?

John, I don’t think we’ve got an answer for you right now. We’ll have to look at it and see, and see exactly what you’re referring to and--.

Where are you getting your miles? Did you [inaudible] the press release?

Yes. I guess I’ll worry about it offline. But, looking into ’05, you mentioned that you feel you’re doing all the right things to get your margins where they need to be. So, does that imply that you think margins can improve in ’05 from ’04?

Oh, yes.

And where--in other words, where are those cost savings going to come from? Where specifically do you think you’re going to get this margin improvement from?

Well, part of it’s going to be more rate. And I mentioned earlier, you know, the rate levels are continuing to move upward. And as we man more equipment, you know, we’re now in a position where we’re not at optimum at manning, but we’re getting close to that number. And the utilization number in itself, the pickup in that will have a significant bearing on the margin itself.

How much do you think utilization will increase in the next year?

Well, if we get those 40 trucks that are available to be manned, that would be an increase that we would see. And I can’t do the math right here in front of me but, in the fourth quarter, the additional drivers that we did add in the fourth quarter, we didn’t get the benefit of all of them during the quarter. In fact, most of them came on later in the quarter because of the pay increase. And the recruiting bonus for students didn’t go in until the beginning of the fourth quarter.

Could you possibly review the number of unseated trucks for the past four quarters? Do you have that handy?

I don’t have it in front of me.

Okay. And then the nickel of pricing that you think you need to be where the pricing will be adequate, is that sort of a goal over the next year or so? Is that about a nickel--or is that just sort of more near term?

I’d like to see it by the end of the second quarter.

And for the year, do you have any idea what you think might be achievable or reasonable?

I think if we can get that done by the end of the second quarter, I think the remainder of the year will be pretty well flat.

And there are no further questions. Mr. Weaver, I’ll turn the conference back over to you for any closing or additional remarks, sir.

You know, I just want to reiterate to you guys again that we feel good about where we wound the year up and where we started the year at. January is always a tough month in the segment of the business that we’re in. And January revenue, we were able to increase revenue a little bit over what it was in January of ’04. And that was with, I think, one or two less work days because of the way the holidays fell.

Rates, we feel good about the rates. We feel good that they’re going to continue to go up. Obviously, the proof is in the showing. But, I want you to know that we feel comfortable that we’re capable of putting together what you all want to see and what we want to see. But, I appreciate you all’s interest and we will be in touch.

(OPERATOR INSTRUCTIONS)