Low rates, weather hurt P.A.M. 2Q earnings, falling 59%

Low freight rates continue to plague P.A.M. Transportation Services, and on Thursday (July 27), the Tontitown-based carrier reported second-quarter earnings declined 59%.

In the second quarter that ended June 30, net income fell to $1.6 million, or 25 cents per share, from $3.99 million or 61 cents per share in the same period in 2016. Revenue declined 2% to $108.64 million. In the company’s logistics operations, revenue fell 5% to $11.44 million, from the same period in 2016. In its truckload operations, revenue per total mile declined 4 cents to $1.39. Total miles decreased 3% to 58.72 million, and total loads was nearly flat at 84,726.

President Daniel Cushman said 50% of the company’s revenue comes from the automotive sector, and some carriers operating in the sector have accepted long-term contracts with lower rates “which we believe are unsustainable.” As a result, the company continued to increase its capacity in other sectors “which we had gained entry during our 2016 strategic expansion plan.” The expansion into the other sectors led to an 8% increase in revenue in 2016.

“This growth did not come without a price as the overcapacity within the marketplace at that time required us to make certain rate concessions in order to gain access to this freight,” Cushman said. The concessions are impacting earnings in 2017 and will likely continue to do so until “we have the opportunity to re-bid that freight.”

The freight demand has fallen in the automotive sector “as a result of falling vehicle sales, and the resulting automotive plant downtime which can occur without sufficient warning,” he said. “These volume swings are often difficult to predict and can result in asset underutilization if replacement freight isn’t readily available.”

Weather also impacted earnings.

“These two events were the late winter storm Ursa, which occurred in late April, and the southern border tornado which occurred in late May,” Cushman said. The first storm caused blizzard-like conditions, and the tornado caused the closure of the primary international crossing into Mexico at the Laredo gateway. Nearly 40% of the company’s business involves border crossing.

Late in the second quarter, “we started to see some relief as certain customers began to agree to requested rate increases,” Cushman said.

Freight rates are expected to continue to improve throughout the year and capacity should tighten “as carriers who are not compliant with the pending implementation of the electronic logging device mandate either exit the industry voluntarily or become forced out of the industry due to difficulty in obtaining insurance coverage as a result of their non-compliant status.”

The company has also worked to reduce costs, including areas such as “driver acquisition, group medical insurance, equipment rental and employee wages,” he said. “While we have successfully reduced expenses in most categories, we have not met our cost reduction goals as they relate to ongoing equipment maintenance costs.”

Another impact on earnings was on the difference in the reported gains on the sale of company-owned equipment. Through the first half of 2017, the company saw $100,000 in pre-tax losses from the sale of used equipment, compared to $3 million in gains in the same period in 2016.

“While there seems to be increased interest and activity in the used equipment market, sale prices remain at levels that do not provide an adequate return,” Cushman said. “While the used equipment market has remained soft, the stock market has continued its upward trend and certain of our investments in marketable equity securities reached price points which prompted us to sell.”

In the first half of 2017, the company had $2.1 million in non-operating pre-tax gains related to the sale of the investments, compared to a $600,000 loss in the same period in 2016.

Shares of P.A.M. (NASDAQ: PTSI) closed at $18.41, down 49 cents or 2.59%, on Thursday. In the past 52 weeks, the stock has traded between $28.43 and $14.50.

INDUSTRY TRENDS
Freight volumes and prices declined as expected for the week of July 16-22, according to DAT Solutions.

“Still we’re coming off some of the highest prices we’ve seen in years.”

Dry-van spot rates fell 2 cents to $1.81 per mile in the week, from the previous week. Spot market loads fell 2.5% and capacity rose 1.8%, from the previous week.

“It’s normal for spot market rates and volumes to slip this time of year, but load posts declined only 3% on DAT load boards last week. Rates also drifted down, but the national average rates for vans and flatbeds were still higher than the averages for the month of June.”

Class 8 same-dealer used truck sales fell 3% in June, from May, according to ACT Research.

“Channel analysis shows that both the auction and retail market segments saw declines, while the wholesale market improved,” said Steve Tam, vice president of ACT Research. “The decline was not totally unexpected, given the stronger than anticipated sales in May.”

Some dealers said used truck sales have improved, but they all say they could be better.

“The industry continues to struggle with more used late model aerodynamic sleeper trucks available than buyers,” Tam said. “As a result of the excess inventory pressure, prices are still falling for these vehicles.”

Trailer production rose 6% to more than 27,000 in June, from May. It was up 5% from June 2016. “Eight of 10 trailer categories had higher production month over month,” said Frank Maly, director of commercial vehicle transportation analysis and research at ACT.

A rise in build rates resulted in a more than four month build-to-backlog ratio for the industry in June.

“Dry vans have the longest commitment at just over five months, pushing their orderboard horizon to early December,” Maly said.