Patriot Transportation Holding Inc (PATI) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Patriot Transportation Holdings, Inc. Fourth Quarter Earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, CEO, Rob Sandlin. Thank you. You may begin.

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. And with me today are Matt McNulty, our Chief Financial 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 to talk for a minute about our fourth quarter results. Today, the company reported fourth quarter net income of $549,000, or $0.16 per share. Transportation revenues were $20,312,000, a decrease of $3,543,000 on 1.5 million fewer miles due to COVID-19 pandemic, the downsizing of certain customer accounts due to inadequate freight rates and the closing of our Wilmington, North Carolina terminal in late April 2020. Our transportation revenue per mile increased $0.13, or 4.6%, versus last year's same quarter due to rate increases and eliminating the lower-rated business. Fuel surcharge revenue was down $1,219,000.

Compensation and benefits decreased $2,202,000, mainly due to lower company miles, lower driver training expense and less minimum pay expense. Depreciation expense decreased by $169,000 on lower miles as we continue to rightsize the fleet. Insurance and losses decreased $398,000 for the quarter, primarily due to favorable closure of prior year workers' comp claims and lower health care claims. Repair and tire expense decreased due to lower miles. The gain on assets was $116,000 lower than the same quarter last year. And SG&A was $369,000 lower, primarily due to a $190,000 gain on the Danfair transaction and other cost reductions.

As a result, operating profit for the quarter was $761,000 compared to an operating profit of $156,000 in last year's fourth quarter with an operating ratio of 96.4% compared to 99.4% during last year's quarter.

Now to talk about the year results. Net income for the year was $257,000, or $0.08 per share, compared to net income of $1,763,000 last year, which included $634,000 from gains on real estate sales. Transportation revenues were down -- I'm sorry, transportation revenues were $82,503,000, down $15,776,000 on 7,236,000 fewer miles due to COVID-19-related business decline, the downsizing of certain customer business early in the year and closing of our Charlotte terminal in May of 2019 and Wilmington terminal in late April of 2020. The corresponding revenue per mile was up $0.14, or 5.5% (sic) [5.1%], due to increased freight rates and the positive impact of lower-rated freight we eliminated. Fuel surcharge revenue was down $4,227,000 from the same period last year.

Compensation and benefits were $8,123,000 lower due to lower miles, lower driver training pay and less minimum pay. Gross fuel expense decreased significantly along with repair and tires due to reduced miles and lower diesel prices. Our insurance and losses decreased $786,000, but increased $0.04 per mile, primarily due to higher premiums on risk insurance and several high-dollar -- high-cost health claims in the early part of the year. Gains on the disposition of assets was $774,000 versus $1,657,000 last year, which included an $866,000 gain on the sale of real estate and $231,000 on the hurricane-related insurance settlement.

As a result, operating profit was $243,000 compared to an operating profit of $1,979,000 in the same period last year.

Now to talk summary and outlook. Shortly after the 2020 fiscal year began, we decided to eliminate $6 million worth of revenue with certain customers due to low rates and subsequently decreased our fleet and other costs to offset the reduction in revenue. The changes we've made to our business by eliminating lower-rated freight, exiting underperforming markets and reducing overhead, along with our efforts to increase business in markets where we could add driver capacity, were beginning to have a positive impact in early March. Our intention was to continue to push rates higher to offset the rising cost of driver hiring and retention and auto liability insurance premiums.

In mid-March, the impacts of the COVID-19 pandemic took hold and management immediately went into a crisis mode to control cost and significantly reduced miles -- with significantly reduced miles and revenue. April volumes were off approximately 35% to 40% from pre-COVID anticipated levels. Volumes rose incrementally throughout the remainder of the quarter and the year and have now settled at approximately 5% to 15% below our normal pre-COVID expectations.

During March, to some degree, through the fourth quarter -- and to some degree through the fourth quarter, we reduced the hours of our hourly staff, including mechanics. We also reduced the day's work by our drivers and furloughed 48 of our senior drivers, all of which returned to work when the business volumes increased. We made a number of permanent layoffs of hourly and salaried staff and eliminated all of our driver pay minimums. The challenge going forward is the return of higher driver turnover as the other segments of the trucking industry are recovering and more jobs become available. This puts a strain on our ability to grow in certain markets and increases the cost of hiring and training. It appears we have returned to the pre-COVID driver shortage and the resulting impacts.

We are an essential business and continued to operate throughout the crisis as we are today, but have too many employees in order to qualify for the CARES Act. Fortunately, we have 0 debt on our balance sheet on all of our tractors and trailers, except for the 30 leased tractors, and have over $16 million of cash. We did not purchase any equipment in the third and fourth quarters and do not plan to start purchasing replacement equipment until the middle of fiscal 2021.

As expected, the insurance renewal process for 2021 was difficult. We met with a number of insurance companies prior to receiving quotes and focused mostly on the excess auto premiums where the market is the tightest. Our company is held in high regard for our safety culture, loss history, and we are a desirable account, which is a credit to our management and to our entire staff. However, we still experienced material increases in the auto liability premiums, mostly driven by losses incurred by the insurance industry, resulting from significant jury awards against trucking companies. Tort reform is needed and is something that we continue to focus on and are involved in at the state and the national level.

Looking ahead, we are anxious to see what our business volumes do as the virus numbers spike and some states potentially close businesses again and people reduce travel. So we will monitor the situation closely. I still believe that companies with a strong balance sheet and positive cash flows like Patriot should weather the storm, but we believe there will be others that struggle due to a lack of cash and pending dramatic increases in risk insurance costs. We are fortunate to be in a strong position to continue to operate our business and we'll focus revenue growth on accounts willing to pay a price that allows for a reasonable return on investment and longer-term partnership.

We did purchase 7 food-grade trailers and entered into an agreement to haul potable water for a national brand beginning late this fall. We are also focusing on growth of our dry bulk business by leveraging our relationships in markets where we can add capacity to current petroleum terminals.

I have been pleased with the response of our management team and our employees. Our management has taken the necessary steps to meet the safety guidelines established by the CDC for our employees. Our drivers, while essential to the U.S. economy, took an earnings hit during this crisis, yet have reacted positively. I appreciate their dedication to providing the transportation needs for all of us and for their loyalty to Patriot. I am fortunate to be part of such a great group of people.

Thank you, again, for your interest in our company, and we will be happy to entertain any questions.

(Operator Instructions) Our first questions come from the line of [Devin Zhou] with North First Capital.

I just was curious if you could highlight the current driver shortage situation, and any updates on the future of the Tampa location?

So I'll let Matt take the Tampa location first, and then I'll come back to the driver question.

So there's not a whole lot to update right now on Tampa. As you know from prior calls, that property went out of contract a couple of months after COVID hit. It just weren't going to be able to make the deal happen. So I don't think a whole lot has changed really on the retail front yet. There is some activity and some interest in the property from industrial developers. But I think for the time being, the safest play is to kind of let some of this stuff pass and wait -- and get back into the retail market probably maybe next spring or early summer.

And then I would say on the driver turnover side of things, certainly, the truckload side of the world has -- business has increased, and so there's more demand on the available drivers out there. And so I would say we're almost back at pre-COVID levels driver turnover and acquisition. There are drivers available, but it's that continuation of that first year turn of the drivers that we hire and train, and then just that stickiness of being able to keep them on. And obviously, there's a high level of cost associated with doing all that. And so we continue to work on things internally that we think will help with the turnover because we just -- we don't believe that it's all about money.

Our next question comes from the line of John Deysher with Pinnacle.

I was just curious what the surge in COVID cases has done to the business post quarter end? In other words, did you feel that impact? And when did it start to impact you, late in your fourth quarter, in the start of first quarter? How are we looking in the first quarter so far?

I would say from where we operate in the fourth quarter, we've seen a small impact. We don't yet have the -- all the Thanksgiving numbers in so we don't know what that is year-over-year. But the feel of it is that business has just gotten a little bit softer, especially in your big markets, right? So you get the tourist areas of Orlando, South Florida, Atlanta where you've got a lot of commuter traffic that's not happening. And those sort of things, I think, we just continue to feel that. You're more -- you're smaller, more, what I call, mid-level markets, rural markets, we see less and less impact in those areas.

Okay. Also in terms of your competition, I would -- as you indicated, some of them are probably struggling now. They're running out of PPP backing. Are you -- do you have potential interest in acquiring any of those competitors? I don't recall if you've done acquisitions in the past or not, but might that be a fruitful area for you?

We've certainly done some acquisitions in the past, and I think it totally depends upon the acquisition candidate. One of the things that happens in our business is some of the smaller guys just hang on way too long. And so when they finally decide they want to come to you and talk, they don't have a whole lot to sell you. So I think it's just a matter of finding the right candidate at the right time. And certainly, in that situation, we would have some interest.

So there are players that you would like to acquire at the right price and at the right time, you're suggesting?

I wouldn't say that we've identified particular players that we want. It's more about if somebody were to come to us with a good business, making money and have some depreciation, own some assets, we might have an interest. But to be honest with you, we're still managing kind of as most companies are to this COVID. We don't know which -- we're hopeful on the vaccines. But as you said, there was a recent spike in cases. So we're kind of doing a cash management program still through these -- at least through the end of this year and probably into the spring until we really see that COVID kind of has gone away.

Okay. That makes sense. And finally, on the equipment side, you mentioned no new equipment until sometime next year. Do you have a budget in mind at this point that you can share with us, preliminary budget maybe?

Yes, preliminary budget was about $3 million, $3.5 million, but I'm not sure at this point if we'll spend all of that. But that was a budget for 30.

Yes. I think we had budgeted 30 tractors, and we may -- we won't do any of that in this quarter. And I think we had CapEx of about $5 million, and I know we won't spend that.

So maybe $3 million to $3.5 million next year.

Yes. I'd say -- yes, somewhere around $3 million would probably be a good estimate.

Okay. All right. Great. Raw capital.

Yes, all capital, not just papers.

(Operator Instructions) There are no further questions at this time. I'd like to hand the call back over to management for any closing remarks. Sorry, we had one more come through. Our next questions come from the line of Dorsey Farr with Kdhb V Capital Management.

Sorry, I thought I was in the queue, and I guess I was not. I wanted to follow up on the last question quickly with regard to CapEx and cash. The 7 trailers you referenced for hauling water, has any payment been made for those yet?

We received the trailers right at the end of the year and paid for them this year.

Right. Yes. We just paid for those recently.

So there's nothing coming out of the $16 million of cash for those? The $16 million on the balance sheet is net of those trailers?

No, we paid for them after year-end.

We would have paid for those after year-end, right.

Okay. And with regard to the cash, and there was a question about M&A, you're getting into new products is sort of a test, it sounds like. What's your thinking about the right amount of cash to maintain on the balance sheet? You paid a special dividend a year ago, it was higher than it is today, but it's kind of been creeping back up. How are you thinking about that right now?

The way we're thinking about that right now is we have no idea what's going to happen with COVID. And so we're just -- our directions are pretty clear from our Board, manage this business conservatively. If that means we continue to build cash for now, then do so. And then we'll talk about that more next quarter once we see when the vaccines gets out, and we'll just -- we're going to take that quarter-by-quarter for now.

Okay. And with regard to COVID, you referenced the decline in business being attributed to really 3 factors: COVID being one of them and then closure of Wilmington and then some downsizing where you let go some business that wasn't priced appropriately. Can you break that down to give us an understanding of how much of it is attributable to things that -- decisions that you made and things that aren't coming back until you can replace that business? And how much is just the impact of coronavirus?

Yes. So corona is a little challenging because it varies by market, obviously. South Florida is probably our worst market still. But I'd say, on average, you can probably attribute current revenues, about 5% to 10% off of historical volumes that we would have expected from the same stores. Then the downsizing of the customers was an equivalent of about $6 million early in the year. And I think that's the number we've used. There will be fluctuations throughout the year with customers coming in and out, but the $6 million was the initial downsizing. And then Wilmington, would be about $2 million, right? Let me just pull that up.

We can look that up for you real quick. But -- we don't want to guess at it.

Okay. But I think drilling down, it sounds like the answer to the question is if we're trying to put a number on how much business is down due to the effects of the pandemic, it sounds like that's in the neighborhood of 5% to 10% from year ago levels. Is that right?

Yes. Right. And Wilmington would have been a little north of $2 million on an annualized basis.

5% to 10% for the fourth quarter.

Yes.

Yes.

And are you able to see how much offset is coming from maybe increased travel? Obviously, with work at home, there's less demand for fuel, but can you give us some insight as to how much that's been offset by drive to vacations and things like that in the markets that you serve?

We don't see it. Look, I don't know if you've got any -- you guys do any hotel investing, but I got friends that own hotels, and there's not anybody staying in those things. So we're not seeing it. I mean the roads are busy. But when you get around Orlando, which is a tourist area, Fort Lauderdale, you think about the commuter traffic in Atlanta, even downtown Jacksonville. I mean the parking lots down here during the day are basically empty. So none of the banks are back at work. A lot of folks, -- and some of that may not change, right? So if we're off 10%, maybe a certain percentage of that never comes back because people are going to work from home or closed their offices on a permanent basis. So we don't know what that new normal is going to be, and we're just trying to monitor that as we go.

What we're worried about really is what's happening with the spikes of the COVID pandemic now. And what is that going to do for us as we're, from today forward, looking at what normally is a pretty busy period of time for us starting about the end of December, early January for South Florida, and then it works its way up into Central Florida through about the end of March to mid-April. And that's usually our busiest time of year in the state of -- in the peninsula of Florida. And so we're being very cautious about what we think that volume is going to do this year because a lot of those folks travel in from the Northeast and from Europe at that time of year. And I'm not -- I just don't see that happening anywhere near like it normally does. And we're not anticipating that.

(Operator Instructions) Next questions come from the line of Ted Goins with Salem.

I'm wondering, as you all have retreated from certain markets, are you hearing from your larger competitors that have also retreated from markets that they found to be a little too more -- a little too competitive?

Yes, we've had various competitors eliminate themselves from a market. And yes, I just think you have to pick and choose what's -- where you're strong and where you've got a good, strong customer base. And I think we've seen both large and small carriers enter and exit markets very similarly to what we've done. We just don't want to continue to bang our heads up against the brick wall in a market where we don't have the right kind of customer base and the only way to go out and add to those customers is to do it through cheaper rates. And so we'd rather focus other places. And so yes, I think we've seen other folks do the same thing.

So is it -- do you have a sense that the competitive landscape is becoming a little bit more rational?

No, I don't have that sense yet. This is a cash business. And if not but for PPP money, we'd be having probably a different conversation today about what's going on in the marketplace. And so how long can those carriers that have debt, have cheap freight rates, have escalating insurance premiums, how long can they hang on? And it seems like at times, they can hang on forever. So that, to me, is the real question. And then in a -- when you have a customer base that may be struggling for some of the same reasons, they're going to be opportunistic if they can, if they're not the type of folks that we're trying to partner with that are looking for a longer term relationship. And so we're just trying to work our way through that -- the dynamics of that new situation and keep a real strong eye out to what's going on out there.

When you -- historically, when you publish your materials, you've done a really wonderful job of sort of speaking to the duration of the relationships that you have with your larger customers. And over the last several years, as the business has changed a bit, I would -- I guess I would want to ask if -- is the -- has the decline in business -- again, this is over a larger time -- a longer time frame. Has the change come about due to your customers internalizing their own traffic? Or has it been your competitors being a bit more aggressive in their pricing? Sort of what's the mix in that, do you believe?

Yes. I don't -- one, I don't think, overall, our business really hasn't changed. We've had -- if you were going to narrow down our business relationships, we've really had one business relationship that has really been a roller coaster. We grew it, and now we've shrunk it. And so -- and just things don't always work out, right? So I think the other side of that is, sure, some of those guys are going to be opportunistic, but we're a strong-enough player in the marketplace where if we're doing 100% for you today, maybe you take a little bit of opportunity to benefit from some lower rates and maybe tomorrow we're doing 85% instead of 100% -- 85% instead of 100% of your business. And -- but you know you're going to keep us in the mix because we're going to be there. We've got a strong balance sheet, we're not going anywhere and we're going to provide you with really solid safety and service metrics, which is really, at the end of the day, what you're looking for.

Yes. And I think -- and we haven't published yet, but I mean there's a statement that we typically have in our annual report that is the same, maybe slightly different this year than in the past. But 9 of our top 10 customers have been with us well over 5 years, and that's 60-plus percent of our business. And so I'm using round numbers, but there really hasn't been a shift other than Rob described in a particular account that's gone up and down a few times over the last 10 or 15 years.

No, I -- that part is evident to me from reading the annual reports over the years that the duration of your relationship seems quite strong. But I'm really -- what I guess I'm doing a poor job of asking is, where there's been a net decline in the miles driven, is that coming from some of those larger relationships internalizing their own traffic? Or is that competitors pushing price in a level that you're not willing to address. But maybe I think you've just addressed some of that by saying you had a 1 customer relationship that is -- that sort of flourished and then it didn't.

Yes.

I'll say it for you. It's a price-driven relationship, and that's why we're not interested in doing that. But I think when you say internalizing internally that you're talking about private fleet, right?

Yes. Yes.

Yes. So we -- a couple of years ago, we did have that. We lost a significant amount of business to a large customer that put on a private fleet. And so if you go back -- and don't hold me to these exact dates, but go back 2 years, we did have a large customer that put on a private fleet, and we lost a significant amount of business because of that, a few million dollars. And so outside of that, that really hasn't been the driving factor. There is some of that, but it's not significant.

And also in the past, and forgive me for not getting the terminology correctly -- correct. You've talked about 18% of your business being sort of other. And so I presume that's hauling aggregates or chemicals or what have you. Could you speak to how that business is performing?

Well, that's more like 14% now because Wilmington was 100% other. They didn't do any petroleum. They were predominantly chemical. So when we eliminated them, that particular terminal, that took that off the table. So we're running right now about 14% other, and that is cement, which I talked about, I think, in my notes about trying to grow that -- or the dry bulk side, grow that side of the business. The chemical side of the business is about where it was post Wilmington. We'll grow that as it makes sense. We're kind of a small niche specialty chemical hauler. We're not doing long-haul chemicals. And so if we see opportunities in those 2 markets, then we're going to try to take advantage of those and leverage the resources we have at our petroleum terminals to just tack those on. So if I can add a half a dozen dry bulk units in a terminal that's doing 100% petroleum today, I can do that with just trucks, trailers and people.

Our next question is coming from the line of [Adam Richard].

Sorry to jump on at the last minute here, I'm sure you guys want to get back to work. But I guess I have a couple of questions. The -- how much are you paying for those 7 potable trucks you're buying?

$0.5 million.

Yes, I remember -- was that just over $0.5 million?

For the trailers.

For the trailers.

$0.5 million was the total?

Yes, it's just while we had -- all we bought was the trailers. We already had the tractors.

All we had to buy are the trailers. We already had tractors in place.

Okay. So you just have to buy the trailers and then you could get into this business?

Correct. Exactly.

Got it. How much EBITDA potential does it have, do you think?

We think it's probably easier to project the revenue piece. We think it's hopefully going to be over $1 million of revenue, somewhere between $1 million and $1.5 million.

Okay. Got it. And I think earlier, there was a question regarding acquisitions. And you guys did try and make an acquisition. I guess -- I don't know if it was a bankruptcy situation. You're the, like, [stopping heart force] for them for a company that was called -- what?

Yes, we did. Yes.

Yes, you're right.

Could you -- how much were you going to pay? What kind of EBITDA did that business generate? Can you just maybe give a little more information about your thought process there?

Well, while Matt's thinking about -- while Matt's thinking about dollars, the thought process was a lot of that business revolves around places where we already have terminals. And so it's a little bit like what I talked about a few minutes ago, if we could have gone out and added, pick a number, 100 drivers hauling the bulk and utilized some of the people that would come along with a deal like that and then house those folks at terminals that we already operate in, that it would be some -- you could look at it somewhat incrementally from an add standpoint. We wouldn't have needed much in the way of overhead to take on something that way. So that was really our thought process. And we know the customer base already so it made a lot of sense for us to take a look at it.

So the purchase is part of the bankruptcy proceeding, and so the dollars are in there. We were slightly outbid by a little over $4 million -- I mean the total bid was a little over $4 million.

Okay. So you were trying to pay a little under that, let's say.

That's correct.

Correct.

Okay. And how do you look -- like, how much EBITDA do you think it would generate? I'm just trying to, like, get your thought process how you look at these things.

I don't know that I could -- I'd like to get the numbers in front of me to answer that question. I can't remember -- it's been a little while, a lot of water under the bridge since we did that.

Yes, we'd have to really look at that, how much value we were going to put on the equipment and what that depreciation was going to look like and the earnings with the synergies. I'd rather -- maybe we can -- you could -- we can do a little work on it and call you or you could call us at some point here shortly after this call. I don't want to give you a bad number.

Yes. I just can't remember the number. Obviously, there's a point at which we stopped and that we didn't think that it was worth going any further.

Right, right. I got it. So if I look at your -- I mean maybe I'm looking at just the wrong way or maybe it's just so simple. If I look at your market cap and back out your cash, you have an enterprise value of roughly $17 million, and that doesn't even include the $10 million potential real estate sales. I mean the stock is trading, what, 2x to 3x EBITDA. And again, you have the real estate, and you're going to generate free cash. Why wouldn't you guys -- and I know the stock is pretty thin, try and buy back some stock at these levels? It seems like a ridiculously low valuation.

Well, yes, a couple of reasons. One is through all of the post-dividend and COVID crisis, we've, like I said earlier, we've been really trying to manage to protect our cash. That's one reason. The other thing is the stock has been a little bit volatile, been a little beaten down. And in order to buy our stock, a, it trades thinly, like you said, it's very hard to pick up shares. We are in blackout as a company quite a bit. So you've got to have a standing order in place in order to do that, and we have not had an opportunity to do something like that yet. I'm not sure we will. But again, really, over the last 6 to 8 months, we've been in blackout now for -- until tomorrow, the company has been in blackout for several months because it's our year-end.

Since September.

Since September. So all of that kind of combined and -- to really kind of keep us from buying it. And again, we really -- we've seen people try to accumulate shares. It's hard to accumulate many shares. But I understand your point. We would agree with you that it's a good opportunity to buy. We just haven't the trigger as a company at the moment.

We'll certainly take that question -- we'll share that question with our Board.

Yes. I mean -- okay. So you -- I'm looking at it the right way. It's just so thin and hard to do. Yes, I hear you. Okay. I understand.

(Operator Instructions) It looks like there are no further questions at this time so I'll hand the call back over to Rob for any closing comments.

Great. Thank you. We appreciate your interest in Patriot Transportation, and thank you for the added questions today. Have a good day. Thanks.

Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.