Patriot Transportation Holding, Inc. (PATI) Q1 2023 Earnings Call Transcript

Patriot Transportation Holding, Inc. (NASDAQ:PATI) Q1 2023 Earnings Conference Call February 3, 2023 3:00 PM ET

Company Representatives

Rob Sandlin - President, Chief Executive Officer

Matt McNulty - Chief Financial Officer, Chief Operating Officer

John Klopfenstein - Chief Accounting Officer

Conference Call Participants

Christian Olesen - Olesen Value Fund

John Koller - Oppenheimer & Close

John Deysher - Pinnacle

Operator

Good afternoon, and welcome to the Patriot Transportation Holdings Incorporated Earnings Call for the First Quarter of 2023. At this time all participants are placed on a listen-only mode and the floor will be open for questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Rob Sandlin, President and CEO of Patriot Transportation. Sir, the floor is yours.

Rob Sandlin

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 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 first quarter results. Today, the company reported a net income of $485,000 or $0.14 per share for the quarter ended December 31, 2022, compared to net income of $6,439,000 or $1.74 per share in the same quarter last year, which included $6,281,000 or a or $1.70 per share from after tax gains on real estate.

Operating revenues for the quarter were $22,850,000 up $2,279,000 from the same quarter last year, due to rate increases, higher fuel surcharges and improved business mix. Miles this quarter were down $299,000, partially due to the closing of our Nashville location and the lower driver count. Operating revenue per mile was up $0.66 or 17.5%.

Compensation and benefits increased $1,121,000, mainly due to the increased driver compensation package, mostly offset by lower driver count and a reduction in support staff. Depreciation expense was down $203,000 in the quarter and gains on sales of assets was $66,000 compared to $360,000 gain in last year’s quarter. The operating profit for this quarter was $620,000 compared to $8,541,000 in last year’s first quarter.

For the Summary and Outlook, looking back at our 2022 year, we focused on adding business with new and existing customers that meets our stated goal of adding quality business that provides for an acceptable return on investment. As we began our 2023 year, we added business with new and existing customers throughout the quarter and have new business opportunities booked going forward into the second quarter. We had $7,800,000 of cash at the end of the first quarter with no outstanding debt.

Interest rates continue to rise in the calendar for 2022, which will put more pressure on those in the industry with large outstanding debt. We will add 73 tractors during our year and received nine during the quarter. 44 of the tractors will replace our existing company fleet and 29 will replace lease tractors with company owned tractors. We believe replacing the 29 leased tractors with company units will provide a better financial result and is a good use of our cash.

We will only add a small number of trailers during 2023 and hopes that inflation declines going forward, and replacement prices, price surcharges also decline, allowing us to replace more trailers down the road at a lower price.

We will continue to focus on our driver hiring and retention. During the quarter, we raised pay on our drivers in most of the markets where pay was not adjusted late in our 2022 year. The results among our drivers with a year or more of seniority has been very positive, resulting in low turnover among this group of dedicated professionals. New driver acquisitions while slightly improved, continues to result in high turnover, but with slightly better results than this time last year.

As general freight spot rates have declined, we have experienced the ability to put on more owner operators in several markets and will continue to monitor and balance this with company drivers.

In closing, we are on target with our safety goals for the first quarter of the year and we'll continue to focus to keep preventable incidents and costs in check. Generally, the petroleum and construction industry business increases during our second quarter, and we believe we are positioned well to take additional advantage of seasonal volume increases, along with committed new business.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Thank you. Our first question is coming from Christian Olesen with Olesen Value Fund. Please go ahead.

Christian Olesen

Thank you. I just wanted to see if you guys could talk a little bit more about your other goals, plans and expectations for rate increases in the first calendar quarter of 2023 and maybe the following quarter as well?

Rob Sandlin

Yeah Christian, thanks for being on the call and for your question. I think the best way to answer that is we have budgeted the majority of our price increases in the first and second quarter of this year, and they are going along as planned and we feel like the market is still allowing for additional rate. Certainly, some of that is continuing to help us cover this added driver cost, but also some of the inflation that we're seeing, but I would say so far so good.

Christian Olson

Okay, great. And in terms of driver pay, could you comment a bit more on that, just the pressures in the industry overall, is it abating much? And is there any difference comparing tank truck drivers to truck drivers more generally?

Rob Sandlin

Yes, I think you can always draw. The first thing I would say is you can always draw a comparison between the over the road driver that is out there for, let's say weeks at a time and our drivers in the tank truck industry, particularly ours that are more regional in nature and they are mostly home at night.

I think from a compensation standpoint, our drivers typically do better than a new driver that's over the road, plus their home with their family. So I think we got a little bit of an advantage there. That is the way that most people break into the industry though, is getting in that long haul side of the business. So they've got to want to change jobs, and in fact I was talking to one of our drivers last year that was out on the road for 16 years, and he's really happy to be home. He was gone six weeks at a time, and he's working for us, and he said he's making more money. So that's kind of a real life example there.

The driver pay increases that we did so far this year and we had planned, where four – five or six of our terminals that had not had driver pay increases in the latter half of the year. And so while we've seen some, I would say we've raised the pay a lot over the last, since April of '21. I think we save between 25% and 35%. And so we think the biggest part of that work is done. Certainly, with inflation where it is, there's going to be some expectation on a routine basis to do something, but I think real large chunks of that are behind us.

Christian Olson

Okay, thank you very much.

Rob Sandlin

Sure. Thank you.

Operator

Thank you. Our next question is coming from John Koller with Oppenheimer & Close. Please go ahead.

John Koller

Good afternoon gentlemen.

Rob Sandlin

Hello John.

John Koller

A couple of questions if I could. Usually on these calls you give us some idea of the number of drivers and any that you’ve added. I was wondering if you can provide that information and I’m also curious about how those efforts that you had to recruit and get new drivers into training, how those are progressing or have they largely petered out because it was not delivered as you might have expected.

Matt McNulty

So yes, so we are currently at roughly 360 revenue producing drivers, from somewhere in the 350’s to start the year, so a slight improvement there.

And as far as really kind of started seeing it mostly in the second half of January, which is fairly typical for the trucking industry and everybody stays put through the holidays, and then in January is when people start making changes.

And so we've actually seen our drivers in training in the last couple of weeks up in the mid-30s whereas prior weeks before that, we were in the mid to upper 20s, so that's it. So a leading indicator, we'll see what happens, because they have to get through training and stick, but it certainly would be a positive trend if it continues.

John Koller

Okay, yes, some of the things I've been reading have been saying that the worker pool has been increasing, and I'm wondering if you're seeing that too, but it sounds like seasonality might mask some of that.

Rob Sandlin

It does a little bit. We don't see much movement in December, but the other thing that we've seen is that with spot freight prices coming down, we've seen some owner operators come back to the tank segment. And we've got more owner operators running today than we did when we began the fiscal year.

And so we're monitoring that and trying to make sure we keep that balance where we like it. So that's a positive thing, because we've got freight for those folks to haul, so we'll continue to monitor that and see what happens.

John Koller

Okay, great. And then just a quick question if I may on insurance. A lot of the stuff I read saying that the commercial vehicle, at least on the reinsurance segment is getting somewhat difficult or has been difficult to place, and I know you guys do self-insurance. But I'm just wondering where you come out on balancing the risks and the rewards with that? Wondering if there was a price at which you might think about producing your deductibles or anything like that?

Matt McNulty

I would say that right now we run those numbers, maybe not every year. We run them enough to know that there is a sizable seven figure gap between what we would spend if we were to lower our retention significantly versus what we are spending today in the premium plus our cost.

So we’ve looked at it and so I don’t see us. We kind of feel like we are in the sweet spot on the risk and the work comp is something I guess. The work comp we decided to get a $0.5 million deductible a few years back and although we did have one claim that really surprised us last year, that still if you look at the math over history appears to be the right place to be for expenses on top of premium.

Rob Sandlin

It's been a pretty hard market and so any movement in that with a lower deductible over the past three or four years would have been really expensive. And then to take on more risk, looking at it the other way, there really wasn't the payback on the premium, again because of the hard market. You weren't getting rewarded as much. So we've kind of stayed where we've been for a while in those groups, but it is something we continue to look at.

Rob Sandlin

Yeah, and our renewal this year was not – it was not terrible. It wasn't like it had been in the last few years with everything being. You know our renewal on the primary was under 10% and kind of in that mid-teen range on the upper layers.

John Koller

Great! That's good to know. Last question and then I'll let it go. I know you said that in general, freight rates have been coming down and you've been adding new business, and I'm just curious, you know are you finding it more difficult given that maybe you're finding the competition a little sharper? And I'm just wondering how you're balancing that out or how you're able to get additional business, I guess?

Rob Sandlin

Yeah, let me clarify, just to be sure for you and others on the call. When I say spot freight rates coming down, that's for the general freight industry and not for us, and that's where a lot of those owner operators have been working. So when you read the different trade magazines and the trade journal stuff about spot freight prices, that's not really going to be indicative of what's going on in the tank truck industry. Hours are going up, and if you look at our revenue per mile and our quarterly announcements that we've been making. Our freight rates are up dramatically over the last two years and we don't see any reason for that to decline.

It's certainly not going to decline for us, because we're going to partner with people and customers that are looking for quality service and they want to guarantee that they've got that supply, compared to selling diesel fuel or gasoline at a margin, the freight portion of this thing is while it adds up to a lot of dollars on a per gallon basis, it's pretty small, comparatively. So we're really not seeing any rate pressure downward.

John Koller

Great, thanks so much.

Rob Sandlin

Thank you.

Operator

Thank you. Our next question is coming from John Deysher with Pinnacle. Please go ahead.

John Deysher

Good afternoon everyone. Thanks for take our questions.

Rob Sandlin

Thank you.

John Deysher

You indicate the revenue was up because of rate increases, higher fuel charges and improved business mix. Could you elaborate on the improved business mix? What are you talking about there specifically?

Rob Sandlin

Sure. Yes, I'll give you a couple of examples. So one of the things that we talked about as we were downsizing our business and trying to then right size everything and improve margin, was to go out into the marketplace. Let's say that we can't add a driver capacity, and in a given market, we've got x number of drivers. And we have to decide how are we going to make that business more profitable.

Then we go to our partners and say, ‘look, we've had driver pay go up, we've got inflation, we got this, and we need a rate increase of x and if they said, well, that's just more than we can stand, then what we would do is work with them to exit or downsize and if they can get somebody to haul it for them at a low price, and we can add business with somebody else at a higher price, then that's what we've done in a number of different markets.

So it's a combinate – that's kind of what we're talking about with business mix. More so than changing products.

Matt McNulty

Yes. It's really just a mix of the customers. It's swapping one customer for a higher rated piece of business.

Rob Sandlin

Does that make sense?

John Deysher

Yeah, that makes total sense.

Rob Sandlin

Okay good.

John Deysher

But, do you see that continuing in terms of swapping out low margin customers for higher margins customers or are you kind of reaching the end of the road there?

Rob Sandlin

I hope we are reaching the end of the road. There may be a pocket or two with that. But we really are and have aligned ourselves with some good partners and good customers and folks that we've done business with for a long time, and I think the whole world has had to wake up a little bit to the supply chain and driver shortage and that it's real, and it's frankly not going anywhere anytime soon.

And so I think our customer base and the tank truck industry realizes that it's really important to get their products to the end user. And so there are always cycles in business, but I think we're in a cycle where they understand that and they are going to be willing to pay a reasonable amount of money for us to make a reasonable return on our investment.

John Deysher

Okay, okay, that makes sense. Good. In terms – you mentioned the driver count 360 or so. What was the turnover for the most recent quarter?

Matt McNulty

Rough turnover at this first quarter was 73%.

Rob Sandlin

73% and John, what's interesting is we're turning over very few of our drivers that have more than a year's service. Most all of that churn is in that first year driver.

John Deysher

Right, but that's pretty close to what you were a year ago, right? Weren't you around 72% in Q1 a year ago?

Matt McNulty

I don’t know that I could go back to Q1 a year ago and get that.

Rob Sandlin

For the year, we were up…

Matt McNulty

For the year we were about 83% overall last year.

John Deysher

All right, okay. So it’s coming down a little bit, that’s good.

Matt McNulty

Two years ago it was 100%.

Rob Sandlin

Yeah.

John Deysher

A year ago it was 100%. Okay, good, so it is coming down.

Rob Sandlin

It’s now where we want it, but we are going through a lot of gyrations and just trying something new all the time to see what we can do to impact that new driver so that it has more staying power, because we spend a lot of money training these folks and so we're really spending a lot of time and energy there.

John Deysher

Okay, all right, good. On the CapEx side, could you explain the economics behind replacing versus - replacing lease with owned trucks, you said better financial results. Could you talk us through why the results are better by owning a truck as opposed to leasing it?

Matt McNulty

I mean, quite frankly it's come down to the fact that they are building in a significantly higher cost of the tractor, and then they are throwing interest on top of that than what we can purchase ourselves.

John Deysher

So the returns are – how much better the returns from owning the truck versus leasing the truck?

Rob Sandlin

You remember the difference when we ran those numbers. John, I can't remember the numbers. We ran all of that, and the other thing that's going to happen is initially when you lease that truck, you're paying out – over the life of that truck, you're paying x number of dollars or cents per mile for maintenance.

So when we put these trucks on, for the first two years, we're going to see a significant, at least the first two years, we're going to see a significant reduction in that maintenance cost as well, because we're just going to be doing routine PM type work.

When you're getting later in life, that thing might swing around a little bit in the other direction, but when we ran that whole model, it was quite substantial and we got on the phone with the leasing companies, finance guy, and he even agreed that in our, with what we were doing, it probably made more sense for us to own trucks.

Matt McNulty

If you're borrowing money, with interest rates higher, the leasing companies are looking to get imputed interest rate into their number, that's pretty high. And when we have money in the bank, it just makes less sense for us to do that.

John Deysher

Yeah, okay.

Matt McNulty

I did check, our turnover rate was 80% in the same quarter last year.

John Deysher

It was 80%, okay, and now it was 73%. Okay, that's good, that's fine. We haven't seen the Q yet, but what was the CapEx for Q1?

Matt McNulty

$2 million net.

John Deysher

$2 million net, and the total is going to be $12 million, so that leaves about $10 million. How does the $10 million unfold over the next three quarters, roughly?

Rob Sandlin

So the way the trackers are coming in is we’ve got ten a quarter, provided that they deliver them on time from one of our vendors and then the lease tractors are spread over about three months across the third and maybe filter a little bit into the fourth quarter. But I think most of that's going to hit in the third quarter and that's the 29 trucks.

Matt McNulty

Yes, late second, mostly third.

Rob Sandlin

Late second, mostly third.

Matt McNulty

Pretty Sure.

John Deysher

So then the remaining $10 million folds out how over the next three quarters?

Matt McNulty

I can do that for you, so.

Rob Sandlin

It's going to be heavy 29, 30 and can be 40 trucks. Three or four maybe?

Matt McNulty

No, it’ll be more. It’ll be heavy at either third. So it’s probably more like two, six and two probably.

That's right. That's right.

Rob Sandlin

No, that's right. Yeah, that one makes sense.

John Deysher

If they come on time.

Rob Sandlin

If they are here on time. The 29 have to be here on time.

Matt McNulty

For 29 we’re pretty much locked in with them. They will ride for that, that late second and third quarter.

John Deysher

Okay. So two, six and two for quarters two, three and four, is that right?

Rob Sandlin

Correct. Yes.

John Deysher

All right, good. That's all we have. Thanks very much.

Rob Sandlin

Okay, thank you.

Operator

Thank you. There are no further questions in the queue at this time. So I will hand it back to Mr. Sandlin for any closing comments you may have.

Robert Sandlin

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

Operator

Thank you, everyone, and this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day and we thank you for your participation.