Patriot Transportation Holding Inc (PATI) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Patriot Transportation Holdings, Inc. earnings call for the third quarter. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rob Sandlin, President and CEO for Patriot Transportation. 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 or 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 third quarter results. Today, the company reported net income of $573,000 or $0.17 per share. Transportation revenues were $18,032,000 a decrease of $6,875,000 on 2,775,000 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 revenue per mile increased $0.14 or 5% versus last year's same quarter due to rate increases and eliminating lower-rated business. Fuel surcharge revenue was down $1,640,000. Compensation and benefits decreased $3,410,000, mainly due to lower company miles and lower driver training expense. The COVID-19 impact reduced training pay as our turnover declined and we only hired in certain markets where it was essential to add drivers.

Depreciation expense decreased by $161,000 on lower miles as we continue to rightsize the fleet. Insurance and losses decreased $768,000 for the quarter, primarily due to closure of prior year workers' compensation claims, lower health claims and favorable results on auto claims along with lower wreck repair costs. As a result, operating profit for the quarter was $794,000 compared to an operating profit of $423,000 in last year's third quarter.

Now for the year-to-date results. Net income for the first 9 months of the year was a loss of $292,000 or a negative $0.09 per share. Transportation revenues were $62,191,000, down $12,233,000 on 5,657,000 fewer miles due to the COVID-19 related business declines in the third quarter, the downsizing of certain customers' business earlier this year and closing of our Charlotte terminal in May of 2019 and our Wilmington terminal in late April 2020.

The corresponding revenue per mile was up $0.15 or 5.5% due to increased freight rates and the positive impact of the lower-rated freight we eliminated. Fuel surcharge revenue was down $3,008,000 for the same period last year. Compensation and benefits were $5,921,000 lower due to lower miles and lower driver training pay.

Gross fuel expense decreased significantly along with repair and tires due to reduced miles and lower diesel prices. Our insurance and losses decreased $388,000, but increased $0.05 per mile due to higher health claims in the first half of the year. Gains on disposition of assets was $674,000 versus $1,441,000 last year. As a result, operating loss for the 9 months was $518,000 compared to an operating profit of $1,823,000 in the same period last year.

Summary and outlook. While our business has not produced the returns we'd prefer in the last couple of years, we believe the recent changes we made to our business by eliminating lower-rated freight, existing underperforming markets -- exiting underperforming markets and reducing overhead 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 COVID-19 pandemic took hold and management immediately went into crisis management mode to control cost with significantly reduced miles and revenue. April volumes were off approximately 35% to 40% from pre COVID-19 anticipated levels. Volumes rose incrementally throughout the remainder of the quarter and have now settled at approximately 10% to 20% below our normal expectations.

During March and through the third quarter, we reduced the hours of our hourly staff, including mechanics, reduced the days worked by our drivers and furloughed 48 of our senior drivers, all of which returned to work when business volumes increased.

We also made a number of permanent layoffs of hourly and salaried staff and eliminated all of our driver pay minimums. We have seen fewer drivers resign since the pandemic began and driver applicants are available, but we will have to monitor the driver situation closely as our volume of business continues to fluctuate due to the impact of COVID-19. We did not permanently lay off drivers during this time and feel that we are positioned to handle our normal volume when it returns.

We are an essential business and continue to operate throughout the crisis, but have too many employees who have qualified 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 $13 million of cash. We did not purchase any equipment in the third quarter and do not plan to start purchasing replacement equipment until fiscal 2021.

I have been pleased with the response from 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, have taken an earnings hit during this crisis, yet they have reacted positively. I appreciate their dedication to providing the transportation needs for all of us and for their loyalty to Patriot.

During late April, we closed our Wilmington, North Carolina, chemical and dry bulk terminal and transitioned the business to another operator that has a larger presence and more scale in North Carolina. This operation had been impacted by the closure of a large customer and lower pricing causing a loss of volume in the last year and thus was underperforming. I am pleased we were able to find a good home for our employees and someone to take care of the loyal customers we had in the Wilmington market. We were also able to lease 21 of our trailers to the transitioning company and sold many of the tractors.

Looking ahead, we are anxious to see what our business volumes do as states open back up for business, and we'll monitor the progress closely. We believe the increase in unemployment and residual effect on many businesses will improve our driver retention and the driver pool in the coming months, but only time will tell.

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 grow revenue with accounts willing to pay a price that allows for a reasonable return on investment.

And finally, I want to be sure I reiterate how much I appreciate our employees and our management team by meeting the recent challenges head on. They really are a great group of people, and I'm fortunate and proud to be a part of the team. Thank you again for your interest in our company, and we will be happy to entertain any questions.

(Operator Instructions) Our first question comes from the line of John Willis (sic -- Lewis) with Willis Investment Counsel.

I have 2 here. One, just a little more generally on the volume side. And I was curious if you guys have a sense -- is most of this volume decline somewhat from the lack of commuters going to the office, lack of people going to school? And do you have any sort of sense of, in a typical environment, what percentage of gasoline consumption really kind of comes from that type of customer?

Well, I think I can probably answer that this way. Yes, we think that the bulk of the decline right now is the lack of commuters and people going to work. Normally, this time of year, we wouldn't have people in school. So we don't think that's really having much of an impact.

I would say, particularly in these large metro areas, it's the lack of people going back into their office. And so for us, it appears to be somewhere around that 10% to 12% range. When you get into places like Miami, it's obviously a little worse. Downtown Atlanta, inside the perimeter, a little bit worse. We see the suburbs, actually in some of the smaller markets doing better than that.

And I guess those -- the smaller markets seem to be better markets for you guys, I guess, maybe even from a driver availability, but also being able to negotiate contracts with them. So with that dynamic, is it almost kind of a positive mix shift into those smaller markets right now?

What was that, you said a positive what shift?

Kind of mix shift. So you maybe -- are you basically -- I guess, here's the question I'm asking is, are you seeing more volume coming from those smaller markets now relative to a normal environment where you'd maybe see more of a balance between those large metro areas and the smaller markets?

Maybe I'll answer it this way. Our volumes aren't off as much in those more -- smaller to more rural markets. And so right now, those terminals are going to be performing better than the ones where they're seeing a larger decline, because we need to be ready to take on that work in those larger markets. And so you've got to be careful not to downsize yourself so far that you can't take on the work when it returns.

Perfect. And I think it's a good lead-in to my last question of, so how are you all thinking about building up drivers and the driver situation as you're going through this? I guess, on one hand, you want to contain costs, but I believe on the other side, this may help the driver situation. With higher unemployment, hopefully you're having more applicants, but also trying to keep that retention all on to be prepared for the potential leg up to when those volumes start to return?

So I think the key to the drivers is the quality of the applicant. We get a lot of that. You'd be surprised how many applicants we actually get, even pre-COVID. But what we have seen is an improvement in the quality of that applicant. And so what we're hoping is that that creates more stickiness and less turnover as we go forward.

And so hopefully -- obviously we've been spending a lot of money hiring and training drivers. So coming out of the back end of this thing, and time will tell. But so far, we're seeing a little better quality of drivers. And you're right, other than some markets that are just inherently tight, we're seeing a better flow.

Yes. And quality, just to kind of give you some parameters for us is -- that we haven't seen lately, quality is a fairly longer driving history in general, a safe record and, most importantly, stability with less employers previously.

Maybe 3 previous jobs instead of 7.

12.

So that's the big difference. If we get more applicants, they go back to sort of this pre crisis, that's what we would have seen before, and those are the drivers we find to be -- that provide the most quality and stickiness for us.

Understood. So is this a sort of situation where you're able to pick up that quality driver and kind of put them on the bench, for lack of a better word, that, then when hopefully volumes return, I know it's -- there's obviously that cost trade-off in forecasting, but --.

Right. I think, John, we're looking at each market every week. We do recruiting calls and we have -- each terminal has a number of open -- call it, open seats. We call it requisites that we want to fill in those terminals.

And then we, as senior management, are monitoring those numbers closely, so that we're not putting drivers in in places where we don't think we're going to need them. But also trying to be sure that we're projecting out in those markets where we believe there's a little bit of growth opportunity as volumes return. So we're monitoring that by location on a weekly basis.

Yes. And the benefit we're seeing right now, and it could be short-lived, is you're -- instead of having to take the first qualified guy that's ready to accept, we're getting some better selection options so that maybe we had 3 or 4 guys and we can pick the more solid candidate versus just taking the one that's there.

Our next question comes from the line of [James Chatard] with Meros Investments.

It's Tim at Meros. Any thoughts on consolidation? You've given some ideas in the past on consolidation. I don't know with the changes in the market if you've got any new ideas there.

You mean specifically from us consolidating with others or just in our business, in general?

Yes. I mean, you've talked about using capital potentially to consolidate from your side. You paid a special dividend, obviously, and that comes up [frequently].

So I'd say we are continuing to be open. We obviously, in the environment we've seen in the last 6, 8, 9 months, there's been more things, I'll just say, out there in the market. More things to look at. But again, we're still seeing an environment that a lot of -- there's not a lot of people in our business that are making a very good margin.

And so it's just really hard for us to find something that really looks to be accretive and something we want to get into. But we are looking, and there are definitely opportunities and so we'll continue to monitor and look. But again, it's been a difficult market to find quality opportunities, if quality seems to be the operative word today.

But anything just in terms of real estate which you can talk about?

Yes. It's -- there's not a whole lot to update -- that's why we didn't put much in the press release -- from the last time. We are still in -- we're about halfway into the 120-day free look period, I call it, with the buyer. They are working hard. I talk to them pretty much every week.

It's -- COVID has definitely had a cooling effect on retail and other parts of that deal that need to all come together. But so far, no changes in the deal. I still feel, I'd say, reasonably confident that at some point that deal is going to close.

In this calendar year, you think?

That's -- it would. If it stayed on track. If I had to tell you where I think there might be some movement is it might be maybe some timing to give them a little more time to pull everything together based on the fact that we've got this odd event that's really impacting retailers and hotel developers' ability to plan like they could have before pre COVID. It's just put a little bit of a damper on everybody's ability to plan.

But on the income statement, the SG&A line item took a fairly substantial drop down. You obviously had good success with cost controls. If I were thinking about the SG&A line item specifically, any color on how that might react if revenue levels recover towards pre-COVID levels? Would it -- would you expect it to rise back at the same rate as revenues or a slower rate than revenues?

I would just say slower, if at all, unless the revenues started to really pop. I think we're at a good spot right now to manage the business even with some revenue growth.

That's at the current kind of 1.84? I mean, would there be -- you think you could hold that level steady? Or would there be seasonality in that number or any other -- I mean that would be a heck of an accomplishment if you were to keep that 1.84 flat for the quarter.

John K. is on the line with us. Is that -- did the Danfair gain go in that line, too?

It did. Yes, that was $150,000. So you'd have to take that -- add that back.

That's what I thought, closer to -- call it, closer to 2. I don't think there's anything else -- John, again, correct me if I am wrong -- I don't believe there's anything else that's in there right now that I'd call onetime. We've tried to cut costs and get in line with revenue levels.

Tim, I think the only thing that I would -- this is Rob -- I'd say is that the quarter evolved. So there's people in the quarter and there's people out of the quarter. And so I would say that outside of an adjustment that we had there in the quarter that near-term with just what I would call regular volume increases back to normal levels, I wouldn't see any reason for us to have to raise those numbers up.

Great. Thanks for the color. And you said there was a gain in there related to -- what was the gain related to? Because you do have a line item related to PP&E gain, but I guess you're referring to something else?

Yes. Yes, that's a difference. So there was a gain on a -- if you recall, last year, in November, we closed on a small acquisition in South Georgia. It had a potential earn-out in the deal. And it's based on revenue levels generated by that -- by what we acquired, the customers that came with that deal.

And based on their current projections of revenue through the 12-month period that it's judged on, we booked -- I believe we booked $450,000 of additional expense to pay out that out earn-out back in that quarter, and we took $150,000 of that back in as a gain because we don't foresee having to pay that out based on his revenue levels.

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

A couple of quick questions. One, how do you feel you're doing relative to your direct competitors? Are you holding your own with them? Are they doing better in certain markets than you are? Maybe you're doing better in certain markets than they are. But generally speaking, how would you feel you're holding versus your direct competitors?

So, John, I want to be sure I understand. You're talking financial performance?

Not necessarily. I mean, I think everyone is hurting, but who's out there winning business, defending market share? I mean, ultimately the ones who are laying in the groundwork now will profit down the road. So just generally speaking, either financial or nonfinancial?

Yes. I'd say from a safety and customer service standpoint, we're going to hold ourselves up against anybody. That's our focus, and that's what we do every day. We feel like we can make the biggest impact to our bottom line by being safe in driving the frequency down and driving the claims out of our business. And we've proven that over a long period of time.

When you get into a market like this, where people are starting to struggle, they're running out of PPP money, and they've gotten past that 3-month deferral of debt payments. And so you really kind of wonder what the health is of the industry.

In trucking, in general, 2018 was a record year. And 2019 was a record year for bankruptcies. And so one of the things that we keep saying is that as people -- as these companies continue to operate at these low margins you may see a period of time where they chase volume just to help pay the bills. But insurance cost is continuing to rise. That's just -- that isn't going to last very long.

So we are resisting the temptation to chase volume with price. And I think, frankly, there's a group of people in the customer base that understand that and that there may be folks out there that are just chasing volume just to solve a short-term cash crunch basis and it's really not the best long-term play.

So we're watching it closely. And I think there are a lot of trucking companies, both in our space and in all spaces that are really struggling financially. And so when that's happening, you really have to pay attention to what's going on and keep your ear to the ground. I don't know if I answered your whole question or not.

Yes. No, I think that's a good start. Regarding those customers who are -- competitors who are struggling financially, you don't have to acquire the whole business. I mean, have you thought about joint ventures or alliances or things along that line, where maybe a competitor needs some equity and you can give it to them and own 20%, a minority interest? There's lots of ways, I think, you can enhance your market share without going down the 100% direct acquisition route.

I mean, certainly those are opportunities, options for others. That is not our strategy, to be honest with you. We're happy to try to do a deal with somebody who -- where it makes sense, and we're going to buy the business and eventually merge it in and run it ourselves.

But doing joint ventures, especially in our own competitive space, would be almost impossible for us to fathom, just due to pricing and other factors and having partners. So we'll continue to try to monitor the overall market and see if we can't find opportunities, but that would be how I'd best answer that question.

So you want to own 100%, basically?

Yes.

Okay. All right, fair enough. Is it too premature to start talking about when a dividend might be reinstated? Kind of what has to --?

I think it is too early. It'd be premature to be -- to use your word. I think we just need to continue to let this COVID thing play out. And I'm hoping by the beginning of 2021, we have some better answers, and we'll just have to see what the Board would like to do.

Okay. And then finally, you mentioned we were about halfway through the free-look period on the real estate transaction. When does that free-look period end exactly?

The free-look ends at the, I'll call it, the first week or 2 of September. So we're almost a little bit beyond half. And then there is roughly anywhere from 30 to 90 days, depending on what the buyer would elect to do on additional deposits and things like that. My guess is, I'd just go ahead and call it about 90 days from there to the final outside closing date. That's early December.

Okay. So mid-September at the outside is when they need to say yes or no?

Yes.

(Operator Instructions) There are no further questions in the queue. I'd like to hand it back to management for closing remarks.

Thank you all, and thank you for your interest in Patriot, and we look forward to talking with you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.