Patriot Transportation - Q4 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, welcome to the Patriot Transportation Holdings, Inc. earnings call for fourth quarter 2022. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Sandlin, Chief Executive Officer of Patriot Transportation Holdings. Sir, the floor is yours.

Rob Sandlin (President and CEO)

Thank you. Good afternoon, and thank you all for being on the call today and for your interest in Patriot Transportation. I am Rob Sandlin, CEO of Patriot Transportation. With me today are Matt McNulty, our Chief Financial Officer and Chief Operating Officer, and John Klopfenstein, our Chief Accounting Officer. Before we get into our results, let me caution you that any statements made during this call that relate to the future are by their nature subject to risks and uncertainties that could cause actual results and events to differ materially from those indicated by such forward-looking statements. Additional information regarding these and other risk factors and uncertainties may be found in the company's filings with the Securities and Exchange Commission. Now for our fourth quarter results.

Today, the company reported a net income of $470,000 or $0.13 per share for the quarter ended September 30, 2022, compared to net income of $40,000 or $0.01 per share in the same quarter last year. Operating revenues for the quarter were $22,882,000, up $2,425,000 from the same quarter last year due to rate increases, higher fuel surcharges, and an improved business mix. This quarter's revenue miles were negatively impacted by the approximately 10 driver reduction versus last year's fourth quarter due to the driver shortage and the closing of our Nashville terminal. Operating revenue per mile was up $0.70 or 18.9%.

Compensation and benefits increased $826,000, mainly due to the increased driver compensation package, mostly offset by the lower driver count and a reduction in support staff. Unfortunately, insurance and losses increased $444,000 due to a single vehicle rollover fatality accident, which was $270,000, along with higher health and other claims. Depreciation expense was down $285,000 in the quarter, and gains on sale of assets was $97,000 compared to the loss of $26,000 in last year's quarter. Equipment gains on sales were negatively impacted by $199,000 due to a separate vehicle rollover caused by an underinsured third party, resulting in a $178,000 loss and the fatality rollover mentioned above.

The operating profit this quarter was $484,000 compared to $58,000 in last year's fourth quarter. For the year-to-date results. The company's net income was $7,190,000 or $1.98 per share, compared to $625,000 or $0.18 per share last year. The net income included $6,281,000 or $1.73 per share from gains on real estate net of income taxes. The prior year's results included net income of $1,170,000 or $0.34 per share from gains on real estate net of income taxes.

The operating revenues were up $6,614,000 at $87,882,000 due to improved rates, higher fuel surcharges, and an improved business mix, despite being down 2.5 million miles because of the lower driver count and the closing of our Nashville operation. Operating revenue per mile improved $0.72 or 21.1%. Compensation and benefits increased mainly due to driver pay increases offset by lower driver count and non-driver personnel reductions.

Our fuel expenses increased by $3,658,000 over last year, while insurance and losses increased by $906,000, due mainly to the maximum limit COVID claim of $372,500 and a negative workers' compensation adjustment on a prior year claim of $380,000, and the fourth quarter accidents detailed earlier resulting in a loss of $270,000. We decreased depreciation expense by $1,117,000 with the downsizing of equipment that was mostly completed in the second half of fiscal 2021. SG&A expense was higher by $542,000, mostly due to a one-time transaction bonus following the sale of the Tampa terminal property of $394,000.

The gain on the Tampa land sale was $8.33 million compared to a $1.614 million gain on land sales last year. The gain on sale of assets was $739,000 versus a loss of $179,000 last year. The operating profit for the year was $9.299 million compared to $880,000 last year.

Excluding the Tampa land sale and the one-time transaction bonus for management, adjusted operating profit for the year was $1,363,000 compared to an adjusted operating loss of $734,000 last year. The COVID health claim, the prior year workers' comp claim, and the two Q4 rollover claims resulted in a negative charge of $1,268,000 for the year, which is highly unusual and something not previously seen at these levels. For the summary and outlook. During the year, our total driver count remained steady due to the large driver pay increase in April 2021 and subsequent driver pay increases during fiscal 2022. During the first quarter of fiscal 2022, we announced additional driver pay increases in all markets, most of which took effect in early February 2022.

We announced additional pay increases in about half of our markets effective in early August 2022. We are in the process of announcing driver pay increases in the remaining markets, which means that these increases will have added 25%-35% to driver pay depending on the market. We continue to be involved in the Task Force Movement, which is designed to bring transitioning service members, veterans, military families, and industry stakeholders together to improve economic and national security outcomes. We are hopeful that our DoD SkillBridge involvement will allow us to increase our driver force with transitioning military veterans soon, and we have seen some applicants from military members transitioning from the military. We have the same challenge as everyone battling inflation pressures and supply chain delays in many areas, including repair parts, tires, and labor.

Insurance rates continue to climb at single digit increases at the lower levels and up to 15%-20% on the excess layers. The insurance markets are still very tight, particularly in the excess layers of coverage. To cover this cost along with driver pay increases, we have been successful raising freight rates. We are partnering with customers that understand the challenges we face, along with our need to cover the added cost and to make an acceptable return on our investment. I won't belabor the point. This was particularly difficult year for insurance claims and equipment write-offs, with four incidents costing us over $1.2 million. We have high deductibles on our health, auto, and work comp insurance claims. We weigh these each year during renewal periods compared to our claims history and premium cost.

Our balance sheet remains stable, with $8.3 million of cash as of September 30, 2022, with no outstanding debt. We replaced 26 tractors and 5 trailers during this year. We also added 5 dry bulk trailers as we continue to expand this business offering. For fiscal year 2023, we are planning to purchase 73 replacement tractors, including 29 that will replace full-service lease units. We also plan to purchase approximately 9 trailers with a total capital expenditure of $12 million during fiscal 2023. We were recently named Carrier of the Year for spring water by our water customer, and we look forward to growing this business in the future. I also want to express my gratitude to all of our team members for their dedication to safety as we met all three of our safety frequency targets for the year.

We have done the heavy lifting over the last couple of years to rightsize our business, streamline cost, retool management, and price our business for improved results. I'm encouraged by the improved operating profit for 2022, and we will continue to work with our team to drive improved results moving forward. Thank you again for your interest in our company, and we will be happy to entertain any questions.

Operator (participant)

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Christian Olesen from Olesen Value Fund. Your line is live.

Christian Olesen (Fund Manager)

Thank you. It's my understanding that many of your customer contracts come up for renewal about once a year. If you look out over the next 4 quarters, is it approximately the same amount every quarter? Are there certain quarters where there are more contracts that are up for renegotiation?

Matt McNulty (CFO and COO)

really, thinking the way our business works and how this goes, I mean, we have contracts that basically are on rolling one-year basis. There's not a whole lot of negotiation when it comes to renewing the contract. It's really more about the pricing and getting rate increases. A lot of those, they really do kinda happen throughout the year, depending on the customer, to be honest with you. There is no there's no pack of contracts that ever are coming due for renewal, if that's what you're asking?

Rob Sandlin (President and CEO)

Christian, that was Matt. This is Rob. The only thing I would add about that is we do have a handful of contracts that are multiyear and one-year deals that are tied to CPI, less food and energy. Especially on those two-year deals. Obviously, you know what that means in terms of price increases in recent times because of the inflation.

Christian Olesen (Fund Manager)

Yeah. I guess what I was getting at was, well, you know, can you go to pretty much any of your customer that any time and ask for a price increase, or does it not typically happen, say, once a year?

Rob Sandlin (President and CEO)

It's a mixed bag. It's historically been once a year, but as we've gone through these driver pay increases, we've gone to our customers and asked for additional rate increase to cover that plus inflationary cost intermittently. I would say over the last 18 months, it's been more frequent than once a year. We do have some contracts that are annual rate negotiations or escalators based on CPI. In a lot of those cases, our customers have been forthcoming during the driver pay increase times and gave us the additional pricing to cover that cost.

Christian Olesen (Fund Manager)

Okay. How do you see rate increases going forward over the next year or so? You've clearly been able to push through some, you know, your compensation expense especially is going up quite a lot. Have you so far gotten rate increases from pretty much all your customers?

Rob Sandlin (President and CEO)

Yeah.

Christian Olesen (Fund Manager)

Do you anticipate being especially aggressive, over the next few months?

Rob Sandlin (President and CEO)

I think, Christian, what we've said since really April of 2021 when we put in the first big rate increase is that the vast majority of our customers have gone along with those price adjustments because they understood what was going on in supply chain, they understood the driver shortage, and they understood the need for us to pass along those costs. I would say there's been very little resistance. The other thing that we have told you all in these calls is that where there was resistance and we needed to go partner with somebody else, we've been willing to do that, and we have made some of those changes.

Christian Olesen (Fund Manager)

Gotcha. If I can also just ask about driver pay. You mentioned some upcoming raises, and were they planned, and is there still real upward pressure on driver pay in the industry?

Rob Sandlin (President and CEO)

They're definitely planned and budgeted for. The price increases to go along with those are rate increases planned as well. I don't think there is as much upward pressure as there was. Obviously, we're up 25%-35% once those raises are in, from where we were in April, before April of 2021. I think the double digit type of increases are probably behind us, at least for now.

Christian Olesen (Fund Manager)

Gotcha. All right. Thank you.

Rob Sandlin (President and CEO)

Yes, sir. Thank you.

Operator (participant)

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then 1 on your phone at this time. Your next question is coming from Steve Rudd from BlackWall. Your line is live.

Steve Rudd (Analyst)

Hi, guys. Glad to hear everyone sounds well. A question on the $12 million of CapEx expected for next year. That's quite a large amount relative to what we've been spending. It sounds like we're buying a bunch of new equipment. Just give me an idea of what we're, you know, what we're setting out to do in terms of both market demand, replacements. Let me phrase this better. If we take our initial capital stock of trailers and rigs from a baseline, how much are we adding to it based on this projected $12 million? What's the underlying rationale for the need for that add, if it's significant?

Rob Sandlin (President and CEO)

Well, Steve, probably the easiest way for me to answer that question is we've got a pretty normal trade cycle on 40 units that we will purchase throughout the fiscal year. That's 10 trucks a quarter. The oddity that we have this particular year is that we have 29 tractors that we are leasing on a full service lease. When you run the financial model, it makes more sense for us to purchase those trucks outright. We're kind of looking at those 29 trucks a little differently than what we would our normal. That's in excess of $4 million of the spend right there. I don't have the exact number in front of me, but it's over $4 million of that spend.

If you back that out, it's a lot closer to normal.

Steve Rudd (Analyst)

I see. The 29 trucks that are coming off lease when we compare, and I know that Matt does this stuff very well, but just. When we compare the depreciation expense of the purchase of those trucks relative to the lease expense of leasing them, which is do we save on expense through? Is the depreciation lower or gonna be higher than what we were expensing on the lease on those? I understand we got really significantly increased interest rates, which probably justify the purchase, but I'm curious how it shakes out on lease expense versus depreciation for those particular trucks.

John D. Klopfenstein (Chief Accounting Officer)

I mean, the truck costs have gone up, so the inherent depreciation component will be higher for the newer trucks. However, as these were full service leases, we were paying for, you know, maintenance that you might not have at the first year on a new truck.

Matt McNulty (CFO and COO)

Yeah. The depreciation line and the rents line, the charge for a owned truck and a leased truck is relatively flat. We'll just be shifting that expense from rents and equipment leases up to depreciation. From a bottom-line perspective, you won't see much change.

Steve Rudd (Analyst)

Okay.

Matt McNulty (CFO and COO)

Going forward.

Steve Rudd (Analyst)

All right. All right. Just our hopes in the upcoming year and we're getting, you know, our normal replacement cycle. Basically, it's our normal replacement cycle, taking off the trucks that are taking them off lease, purchasing them, increased rates relative to our cost structure and demand, any new, both increases in demand or business that's dropping off. I know we're looking at the dry bulk business and getting some better or some additional customers there. What do we see there on a, you know, pricing turns on, obviously on demand. Demand's been great, and I'm curious what we're still seeing.

Rob Sandlin (President and CEO)

I think demand's still good. I mean, our business doesn't have the peaks and valleys that some of the dry van businesses have or the flatbed businesses where their rates move up and down, and their demand moves up and down quite a bit. We see seasonal demand as an example. We're gonna see South Florida and Central Florida start to pick up late this month and run pretty heavy through March. We don't expect that to be any different. In fact, it may be a better year because we're further away, I hope and I guess, from COVID. We've started... I think our growth and our ability to add miles and revenue are still tied to the same thing I've mentioned before, and that's our ability to add drivers in those markets.

In a few of the markets where we've been able to add capacity recently, we've been able to go out and get new business at what I would consider good freight rates. If that answers that part of it.

Steve Rudd (Analyst)

I think it does. All right. Well, I guess we'll sit tight, see how the year shapes out and enjoy the holidays coming up.

Rob Sandlin (President and CEO)

All right. Great. Thank you.

Matt McNulty (CFO and COO)

Thank you.

Rob Sandlin (President and CEO)

Thanks for your call.

Operator (participant)

Thank you. As a final reminder, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Please hold while we poll for questions. Thank you. There are no further questions in the queue.

Rob Sandlin (President and CEO)

Thank you all for your interest in Patriot Transportation, and we hope you have a safe and happy holiday.

Operator (participant)

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.