Patriot Transportation Holding Inc (PATI) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Patriot Transportation Holding's First Quarter 2020 Earnings Conference Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host for today, Mr. Rob Sandlin. Sir, the floor is yours.

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. 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 statement 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.

For our first quarter results, total revenue for the quarter decreased $3,245,000 to $24,809,000, while our transportation revenue decreased $2,381,000 on 1,317,000 less miles due to our decision to close our Charlotte, North Carolina terminal in late May 2019 and some downsizing of customer accounts due to low freight rates. Our revenue per mile increased by $0.15 per mile versus last year's same quarter due to rate increases and eliminating lower-rated business.

Insurance and losses decreased $173,000 this quarter. We had a gain on our risk insurance due to good prior year case development that had the largest number of high dollar health claims in any quarter in the past several years, including last year's first quarter that it had high several -- that had several high dollar claims.

Compensation and benefits decreased $1,040,000 mainly due to lower company miles, fewer nondriver employees and lower driver training pay. While training pay was lower than the prior year quarter, we continue to be challenged with driver hiring, driver travel and retention-related costs. As a result, the operating loss for the quarter was $724,000 compared to an operating profit of $1,107,000 in last year's first quarter. The net loss for the company was $460,000 -- $464,000 compared to $884,000 last year, which included $634,000 of gain related to real estate sale.

Now for the summary and outlook. While our business has not produced acceptable returns in the last couple of years, we are not accustomed to reporting a quarterly loss, and management is making changes to be sure we improve our results going forward. Our balance sheet remains strong with $19 million of cash and no outstanding debt.

In December, the company declared a special dividend of $3 per share and a $0.15 per share quarterly dividend both payable on January 30, 2020. The shortage of qualified driver applicants and the related driver turnover continued to be a challenge for us and our industry. In October 2019, we implemented a new driver pay package that included seniority raises, weekly productivity bonuses, a PTO buyback program and several other features that encourage -- that should encourage retention as well as attract new drivers. We will continue to monitor the results on the new hires and driver retention, and we'll continue to adjust our plan as needed.

The first quarter was negatively impacted by health cost due to one large health claim and a number of other high-dollar claims. However, the changes management made last year to our wellness plan and specialty drug plan will continue to produce savings on those items, helping our overall health costs.

During the third quarter of last year, we hired a new health insurance broker and benefit -- health and benefits broker who's implemented changes to our prescription drug and health plan that will produce additional savings.

We had a gain on risk insurance during the quarter based on our ability to close prior year claims, which is a testament to our team's focus on safety and claims management. We have begun pilot testing with 2 vendors of onboard camera systems to provide improved driver safety habits and the potential for exoneration in accidents where third parties are at fault. We will likely make a vendor selection during the second quarter or early third quarter. We will continue to focus on improving our safety results as the industry continues to see significantly increased costs of auto liability insurance premiums due mainly to nuclear -- or jury awards.

Demand for our services during the quarter was lower than normal, but we anticipate demand to be high in most of our markets going into the busy season. And we continue to evaluate new and current business based on price and efficiency of the daily operation.

During the quarter, we decided to renegotiate our contract with one of our largest accounts, which resulted in our decision to turn back business during the quarter totaling $3.8 million of annual revenue in markets where we did not feel the pricing was acceptable. We increased pricing on the remaining business with this customer on December 1, and we'll receive an additional increase on the price during our second quarter based on the contract. We have taken the necessary actions to downsize those terminals impacted. And while there will be some lag in expense reduction, we have a solid plan.

During the quarter, we hired an industry sales veteran that began working with us on January 1 to strengthen our sales team, and we are working on our plan to grow revenue going forward. And we'll focus on those customers that understand our quality of service and the need for us to make an acceptable profit. We are continuing our study with another industry veteran about growing our specialty chemical hauling business, and we'll complete the study during the second quarter.

We continue to keep an eye to the future as it relates to the concern over risk insurance in the trucking industry. It is well documented, including a recent article in The Wall Street Journal, that many insurance companies are taking less risk in the auto liability side of the trucking industry, and some have left the industry altogether. The premium increases are a result of the increase in jury trial awards and nuclear verdicts. Our insurance negotiations and renewal this past October was difficult, and the increased premium was larger than in the past. We anticipate that these large increases will have a negative impact on some carriers' ability to operate going forward and will certainly add costs and should have an impact on the price provided to our customers.

We will continue to monitor the impact as this situation develops, and we'll be proactive in our safety practices and discussions about our insurance renewal, which will occur in October of this year. The company's bottom line operating results are not acceptable to us, and I can assure you that management is taking the necessary steps to drive improvement.

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

(Operator Instructions) We'll go first to John Lewis at Willis Investment.

It was interesting in this quarter to see you guys mention excess capacity, and I was a little more curious if you could dive into that. And is that in geographies where pricing has been a little bit more loose and driver capacity issue hasn't been as severe? And two, can you talk a little bit more about the competitive environment that you're experiencing? Is this just larger players that are able to deal with the insurance costs so they're able to underprice business? Or just similar general detail on there would be helpful.

Sure. I think what I would say about the capacity is that really since last fall when the hurricane came through, we've seen business volumes lower than normal. So we had somewhat, I would say, of a slower season, winter season than what we'd seen in the past. And we recognize that by looking at some of our customers' volumes year-over-year. And then I think the driver capacity for us has been -- we had a couple of things. We've eliminated some business and held on with some of the drivers associated with that. And then we've also seen just a little bit less turnover. And as we had said a number of times going into last year, was that we have been able to keep our driver training numbers higher.

I will tell you though, we continue to see a pretty high turnover rate on that first-year driver. The churn on that first-year driver is -- continues to be a problem. We are hopeful that that's going to get better. We put driver pay increases in, in October and taken a number of other steps. So that should speak a little bit to the capacity issue that you're talking about.

And then I think, on price, it's really all over the board. And I want to be careful not to say more than I should on price, but we don't really see the large players in the market being the problem. There's -- and it's not across all boards. It's just in some specific markets where you see some really odd behavior by a carrier or 2. And then we're just trying to focus on business that is more efficient and comes in a little bit better price and that just isn't quite as volatile as some of the book of business that we may have had in the past. I don't know if that answers the question but...

Yes. Well, and so thinking about the competition a little bit longer term, do you believe there are factors out there in the market that -- just general factors that could lead to a change that may really help you guys in just the pricing environment in general?

Yes. I think there's a couple of things going on. I'm puzzled that anybody would be lowering price today knowing what we know about the insurance markets. I mean you've got -- these excess layer insurance markets, let's say, from $5 million to $10 million, are taking dramatic increases. And when you're in the hazmat business, most of our competitors got to carry at least $5 million of insurance, and a lot of larger accounts require you to have $10 million. So there's going to be some significantly increased premiums, and there may be some requirements on these smaller carriers to put up some of their own money, which is going to require the insurance company to look at their financial statements and see if they can even handle a higher deductible.

So we -- while we've been saying that for a while, I really think that, that insurance market beginning with us last October, renewals that will go through this year and maybe even in the next are going to be significant changes to the marketplace. And I think it's going to put a lot of pressure on a lot of people.

We'll go next to [Tim Cheddar] at [Merus Investment].

I'm just going to be following up on the insurance question. What kind of hike did you experience?

Yes. I don't know that I can say exactly. I would tell you this, on our primary layer, we had done a 2-year deal. So we had a contracted amount on our primary layer, but I'll -- let me leave it at this: we saw significant increases in the layers above the $5 million layer, and then there were insurance companies that typically wrote the $10 million to $20 million layer or $20 million to whatever-and-up layers that just wouldn't -- weren't willing to write those whole layers and they would cut that layer in half. So they'd be willing to cover half that layer, but they'd do it at the same cost. And I think that's probably a pretty good indication.

We went down from...

And then we actually -- while we haven't broadcast this, we've actually lowered our tier some. And we -- and I think -- Matt says we did put it out there. We lowered our tower some. So we're not carrying quite as much in insurance as we were.

I see. Back in your...

Did that help at all?

Yes. Back in your discussion about the dropped business from the large customer that annualized at $3.8 million. Maybe you can help me understand. Since like you dropped some business from that customer, you kept some other business from that customer and you raised prices on the remaining business, any sense for how your overall yearly revenue is likely to look in fiscal '20 versus fiscal '19? Do you anticipate having similar revenues, higher revenues, lower revenues?

Well, I think simply looking at it this way, we're dropping that revenue in our first quarter, and so it's going to take us a little time to battle back on some of that -- build some of that revenue back. So if you were just starting from the same base, I think you could assume that we would be down some based on the fact that it's going to take us a little while to build that revenue back. And -- but we're out there beating the bushes every day and are having some success even in the first month of trying to do that. So I think you can take that number and just say we're going to be down by that amount. And hopefully, we're going to build some of it back. That's [changing] anyway.

Yes. And also, I wanted to kind of understand a little bit on the Danfair Transport. I didn't catch much detail related to that transaction when that occurred in December, but maybe you can give me a feel for kind of back into that same question as to what the revenues are likely to be for the year. I think there was some disclosure about the amount of revenues that Danfair had in 2018, but I don't know how that relates to 2019, and I don't know how that relates to 2020. But is there any expectation that Danfair can fill the gap from the lost business from the customer you just talked about? And maybe some color as to what you paid for Danfair. Was it a stock deal? Was it a cash deal?

This is Matt, and I can get most of that. So what we're -- yes, we still feel good about the reported $2.3 million from '18 carrying forward with some slight deviations. It's actually -- we're actually trying to add some business for those customers. So that will be a benefit, and certainly, there'll probably be a little loss here or there. So I feel good about that $2.3 million right now, and then I certainly won't talk about the price of the deal. Oh...

We haven't -- it's found here in the Q.

The total price.

Yes.

So it'll be in this quarter's Q.

Right. $1 million in cash and $465,000 in...

Potentially payable...

Potential payouts 12 months from now.

So -- okay. So it's -- yes. So we ended up paying roughly $1.4 million for that deal. It's -- a lot of that deal was -- is contingent on an earnout -- on earnout. So we paid $1 million to date, and the rest will be earned out over time based on how it performs.

And that will be in the Q. So you'll be able to see it.

Yes. I checked the SEC website before I got on the call because there typically isn't a ton in your press release. And I was -- related to that, I was kind of curious on capital spending needs for the year with business levels being challenged. What are your thoughts towards what capital spend could be for the current year?

Yes. Normally, we're spending somewhere around our depreciation number. We've already pulled back on the number of tractors that we're going to order this year. So we'll come in less than what we budgeted. So somewhere around $6 million, $7 million will be -- does that sound about right, John?

Yes. I mean the budget was $8.4 million.

The budget was $8.4 million, and I'd say we'll come in, well, probably about somewhere between -- around $7 million.

Yes. Got it. And just...

And we kind of adjust -- we monitor that all the time, and we don't have -- we're not hard fixed on some -- on our orders for our trucks in the fourth quarter. So we can always adjust that.

Right. Any update on what's happening with your real estate in Tampa?

Basically, we're in the same pattern. We have submitted our final application for approval by the city. We feel fairly good that that's going to be approved, and it's just a matter of time for them to take it through the process. And I feel good about the buyers based on current temperature that once we get that done, that they'll take it to closing probably sometime this calendar year.

Not to flog a dead horse here, but it's kind of been in this holding pattern for a couple of years now. Is there any more color you could give as to why the approval has taken as long as it has? It seems like it's probably kind of frustrating for you to kind of -- the waiting game there.

I mean yes. Unfortunately, I've done real estate in the past life, and this is the norm. It's just -- it's going through the red tape of the government reviews. And with multiple agencies that have to review a project like this, it just always takes longer than they originally think. This one is even longer because of the nature of the project and the city that we're dealing with. It's just taken longer. And our -- to be honest with you, our team has spent additional time making sure that they've got everything buttoned up and done on this final submittal to try to avoid any further delays.

So at this point, your -- the document that would come from the City of Tampa is a what specifically, a permit to sell? Just if you could help me for -- with just that piece of it.

It's just an approval -- approved site plan for the project that we went ahead and undertook to get, which typically the developer would go through. But in order to move the project along, we undertook it, and we're waiting for the city to approve the site plan. Once that's done, it goes into the next phase of the contract with the purchaser, which really is a short study period, and then closing.

And you would expect the site plan to come in the calendar year 2020 and then...

No, I expect the site plan to come in sometime in the spring to early summer. I'm hoping spring but early summer. And then with the tail on the due diligence and the closing, I think the closing will occur sometime fall -- between early and late -- early fall and December.

(Operator Instructions) We'll go next to Jason Ursaner with Bumbershoot Holdings.

Just wondering if you could walk through, I guess, what led to the capital allocation decisions in terms of the special dividend and paying the dividend just because it's -- you've been overcapitalized for a while. But I guess my understanding was kind of waiting to maybe be a consolidator or look for some acquisitions, which the conversation on the risk insurance kind of sound like that might be headed your way now. So just trying to understand how that came about with the $10 million.

That's a tough one to answer. That's really with the board discussion and decision, that they went through lots of iterations of capital discussions, and that was the decision that was made. In short, reward long-term shareholders, made a lot of cash, build on the balance sheet. And even with what we have left in Tampa, we still have plenty of firepower to do deals if they come our way. So I think everybody felt comfortable that, that was a decision they could make today. And then we continue to monitor going forward.

Yes. Jason, I think it's important to note that we've got dry powder to go out and do deals. And if one were to come along that required more than the cash that we have, we've got the credit facility that we can get into while we're waiting on Tampa to close or something else. So from an operating standpoint, the guy running the business, if we got a deal we need to do out there, we still got plenty of resources to make that happen.

Okay. So it's not -- there's no change, I guess, in terms -- I guess, abandoning that piece of the strategy.

Kind of.

Or how do you look at capital allocation just going forward from here given the new dividend policy and, I guess, just the temperature of the market?

We don't look at it any differently. I mean we're running the business. We're growing -- we're going to try to grow the business back. We have been kind of in a down cycle. We're hopefully at the bottom of this trough, and we're going to see things moving in the right direction. I can tell you the mantra here is grow the business, go grow the business with the right kind of partners. And if we can pick up some deals, whether it's something like the Danfair deal or something larger that makes strategic sense for us, then we certainly have an appetite to do that.

And Mr. Sandlin, at this time, I have no other questions holding.

Great. Thank you. Thank you, and we appreciate all of your interest in our company. Thank you.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.