Earnings Transcript for PATI - Q4 Fiscal Year 2021

Operator: Good afternoon, ladies and gentlemen, and welcome to the Patriot Transportation Holdings Inc. Earnings Call for the Fourth Quarter of Fiscal Year 2021. At this time, all participants are placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Sandlin, CEO and President of Patriot Transportation Holdings Inc. Sir, the floor is yours.

Rob Sandlin: 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 filing with the Securities and Exchange Commission. Now for our fourth quarter results. Today the company reported fourth quarter net income of $40,000 or $0.01 per share for the quarter ended September 30, 2021 compared to $549,000 or $0.16 per share in the same quarter last year. Total revenues for the quarter were $20,457,000 down $909,000 from the same quarter last year. This year's quarter was negatively impacted by the reduction of one customer account starting late first quarter of fiscal 2021 and the continued reduction in driver count due to turnover and driver shortage, partially offset by improved transportation freight rates and higher fuel surcharges. Transportation revenues excluding fuel surcharges were $18,244,000 down $2,068,000 or 10%. Transportation revenue per mile was up $0.36 or 12.2% due to an improved business mix and rate increases. Fuel surcharge revenue was $2,213,000, up $1,159,000 from the same quarter last year Compensation and benefits decreased $212,000 mainly due to lower driver count and a reduction in support wages, partially offset by our increased driver compensation package of approximately 15% effective April 29, 2021. Insurance and losses decreased $452,000 primarily from lower health care claims and lower risk insurance claims. Depreciation expense was down $203,000 in the quarter as we continue to reduce fleet size. Operating profit this quarter was $588,000, -- I'm sorry, $58,000 compared to $761,000 in the same quarter last year. Operating ratio was 99.7 this quarter versus 96.4 at the same quarter last year. Now for our year-end results. The company reported full year net income of $625,000 or $0.18 per share compared to $257,000 or $0.08 per share last year. Net income this year included $1,170,000 or $0.34 per share from gains on real estate sales net of income tax. Total revenues for the period were $81,268,000 down $7,445,000 from last year, of which $5,444,000 resulted from the downsizing of one customer account beginning late first quarter and the remainder of the revenue variance was primarily attributable to the declining driver count. Transportation revenues excluding fuel surcharges were $74,431,000 down $8,72,000 or 10%. Transportation revenue per mile was up $0.22 or 7.6% due to an improved business mix and rate increases. Fuel surcharge revenue was $6,837,000, up $627,000 from last year. Compensation and benefits decreased to $3,228,000 mainly due to lower company miles and reductions in non-driver support positions. Gross fuel expense decreased $667,000 due to lower company miles. Insurance and losses decreased $1,379,000 primarily from lower health care claims. Depreciation expense was down $729,000 as we continue to reduce our fleet size to meet our business levels. While our overall preventable accident frequency was improved, we experienced two significant single tractor rollover incidents this year, which combined to cost us $879,500. Operating profit was $880,000 compared to $243,000 last year. The operating ratio was 98.9 versus 99.7 last year. Excluding the gain on sale of terminal sites and negative impacts of the two rollover accidents, operating profit for the fiscal year was $145,500. Now for the summary and outlook. Fiscal year 2021 was very similar to fiscal year 2020 and that we continue to see our driver count decrease in the face of the ongoing driver shortage in the U.S. The year began with the company making the decision to downsize, an additional approximately $6 million of annualized revenue with one customer due to low pricing. From October through March, our driver count dropped by approximately 50 drivers and we spent the early part of the year making cost reductions and head count and equipment due to the continued decrease in driver count. In late February and early March, most of our markets experienced an unexpected surge in gasoline demand presumably from pent-up, travel following COVID and the release of the vaccines. Shortly thereafter, we experienced the colonial pipeline and cyber-attack, which had a short-lived but severe impact on the fuel supply in the Eastern United States. These two events quickly highlighted the severity of the lack of driver capacity in our industry and changed the conversation amongst carriers, customers and the federal government. In April, we were able to announce a 15% increase in driver pay and all but one small customer agreed to absorb the cost of that increase into their freight rates, plus an additional 3% to 5% on average. The result of that pay increase was that we saw our voluntary turnover rate improve and our drivers in training modestly increase. And the six months following the announcement of the driver pay increase, our driver count did decline by approximately 20 drivers. But that compared to approximately 50% in the prior six months. That improvement trend is continuing and we have recently seen more of a flat line in driver count week-to-week. The biggest concern is the decline in viable applicants, which we're running a third of pre-COVID levels in the first six months of the fiscal year and is still less than half of pre-COVID levels today. We continue to focus on our driver compensation program to remain competitive and attractive in the marketplace. During our first quarter of 2022, we announced two additional significant pay increases in two of our most challenging urban markets and are partnering with small - with a small group of customers on longer term agreements to run more of a dedicated fleet model. These customers have agreed to cover the cost of that additional driver pay as well. This is a strategy, we will be exploring market-by-market during fiscal 2022 and beyond. As it allows us to be more nimble on driver pay and rate increases and provides a higher level of service to fewer customer, partners and challenging markets. We will focus on customers and understand the supply chain challenges or need for reasonable return as we move forward. We continue to see growth in our product diversification efforts as well. We expanded successfully into the water hauling business in late 2020 and foresee additional growth opportunities as these customers in the midst of expanding their operation in Florida in 2022. We also recently added a new piece of dry bulk business with an annualized revenue opportunity of approximately $1.5 million. We also added business with two new petroleum customers in Florida to help us backfill a portion of the revenue we turn back earlier in the year. We acquired an existing customers private fleet of four trucks, five trailers and hired their five dedicated drivers in October of 2021. In addition, we signed a three-year agreement to haul 100% of their freight of approximately $2 million. This acquisition fits nicely into our existing Georgia operations. Early in fiscal 2022, we sold the Tampa property for $9.6 million and declared a third special dividend to our shareholders of $3.75 per share. Cumulatively, we have declared and paid $9.90 dividends to our shareholders in just under two years. Immediately after paying the most recent dividend, our balance sheet remains strong with over $6 million in cash and no debt. Finally, to finish up on the supply chain issues in our driver shortage, we recently applied for in our partnering with the Department of Labor and FASTPORT in a Department of Labor registered apprenticeship program. We are working with FMCSA, DOL and FASTPORT to determine if we can attract driver applicants that are interested in learning a career in the bulk industry, whether they come from a prior military background, new driver entrants into our non-hazardous segment or other areas. We will see if this opportunity as a positive impact in the coming months and are hopeful that this partnership with DOL will provide additional driver capacity. Thank you again for your interest in our company and we will be happy to entertain any questions.

Operator: Your first question is coming from Steve Rudd from Blackwell. Your line is live.

Steve Rudd: Thanks. Thanks for the update. A few follow-up questions and thanks for the, by the way not a small thing and well done. So the first, how many drivers do we have, what's our driver count right now?

Rob Sandlin: 375.

John Klopfenstein: With owner operators.

Rob Sandlin: With owner operators, we got about 375, and I hesitate, because that number sometime changes day-to-day. So I'll give you that approximate number.

Steve Rudd: Okay. And I think less time we spoke, we were about the same 380 drivers at the beginning of June and 364 on July 28 conference call.

Rob Sandlin: Yes, we are relatively flat in the last several months.

Steve Rudd: All right. So that's a big plus to be relatively flat. And then you are doing all the right stuff. I guess the, - in your calculation each driver, what do they translate, what is the traditional driver translate to in terms of revenue and then we can work out bottom line from there.

Rob Sandlin: We use around number of 200,000. It just depends on the market and the customer. But I would use 200, annually.

Steve Rudd: 200 in terms of revenue not profit?

Rob Sandlin: Yes, revenue.

Steve Rudd: Okay. And then when we work that through with the driver, I don't know what the cost is to driver plus to follow. What does it work out?

Matt McNulty: Which number, what.

Steve Rudd: We've got revenue and then cost of the driver.

Rob Sandlin: You are taking about from a profit standpoint.

Steve Rudd: I'm trying to get out to a profit line. Yes, from a profit standpoint.

Rob Sandlin: That's really hard to do because it's totally dependent upon, - is that incremental business ad that you're doing with that driver or are you replacing a driver. I mean, if you're just replacing a driver there is no profit at all.

Steve Rudd: No, I'm sorry. I'm saying for the incremental driver. So if we have 375 drivers currently and we -- two months, or five months have 400 drivers. So that gets me 5 million.

Rob Sandlin: I will make how I would just use about 25% of incremental growth. It's probably a good round number for you. If you.

Steve Rudd: That was about 50,000 excuse me, back of the envelope, yes number.

Rob Sandlin: Yes, I think that's a fair estimation, if you're actually able to grow your business, yes.

Steve Rudd: Right. And then you're doing good to join the DOL program, how many drivers we stabilized and I say weak, you guys have stabilized and I know it's not a small thing to do this. So as I said, every conference call hats off to you. How many drivers do you hope for in the next three months, six months, because I think - you've now stopped the bleeding. So where do we hope we can wind up?

Rob Sandlin: Well, I think, - here's the best way for me to answer that. If you look at the holiday season, we will be fortunate to stay relatively flat through the holidays, because the applicant flow and also the typically the departures of drivers voluntarily slows down during the holiday. So between now and call it the first 10 days of January and then we'll see things typically pick back up on the applicant side and that's held true today. We've got fewer drivers in training, then we had call it three weeks ago, but that's fairly normal. So I would hope to stay flat during this period of time. We really, Steve, we really just don't know this driver market is unlike anything I've ever seen. And we are just getting started with this apprenticeship program. In fact, I went to DC, two weeks ago to meet with the Department of Labor and Federal Motor Carrier Safety and I'm due to go back up there and it's something that we're trying to figure it out. But we've added two drivers so far as a part of this apprenticeship program, but those were drivers that we actually recruited and they did not come through the Department of Labor. And so I'm providing them feedback on that on a weekly basis at this time. We'd love to have 75 more drivers spread out across our system. We think, particularly on the dry bulk side of our business and in some of these metropolitan - large metropolitan areas as these companies start to put back - people back to work, there is going to be additional demand. And so we believe there is an opportunity there to incrementally grow the business, but we've got to be able to put drivers in the trucks to do that.

Steve Rudd: So let's look at that number of 75 or even more drivers is doing everything I mean, you're partnering with your customers, which is brilliant because it makes them understand the price increase and be party to it like they get it. It's a form of transparency. So that's well done in terms of the sales. the second part, though is I think the target has to be in the 75 to 100 drivers. Can we ramp up to that over the next year and you guys similar most experienced and maybe the most experience in the industry for you have to have a sense, you have definitely in the right direction. And I think you by the end of the year you can ramp up for that, or at the end of the year comes - said in the year, December 2022 will I be on the call saying, we are still headed in a great direction and it could have 385 drivers. And I think that would be silly, but my sense is, do you think you can ramp up over the next year, to that increase.

Rob Sandlin: We haven't seen anything that indicates that we could add 75 drivers by this time next year. And then I think if you could let's take two parts. If you could, - you have an equipment constraint today in that the orders for tractors are so far out that we might would have trouble generating enough tractors. Now, we may be could lease some tractors or we can buy used tractors. But that would - that could potentially cause a constraint for us. I would tell you that if you could add 10% year driver force of the year, you'd be based on what we see today you'd be really happy. But this driver market, I don't care what the CEOs that were in DC said this week and I've read their comments and I'd be glad to challenge each one of them, maybe their supply sales are in better shape. But there is not much if any capacity in this marketplace and there's just not a lot of drivers available. I mean, you heard me say in the conference call, we are somewhere around a half of the viable applicants that we had pre-COVID, and we had a driver shortage pre-COVID. So it's just not probably right this minute realistic to think that you could do that. We would love to do it, because we think we can grow along with it.

Steve Rudd: So let's talk them through how we drive incremental revenue, right. So the incremental revenue, our existing and maybe I'm a purchase unsophisticated away, because we are saying okay drivers 200,000 profit 50,000. I don't know how much incremental revenue you get out of your existing drivers based on the increased demand for the products that we carry and just generally in the economy. So if I take a look at two profit drivers, one is the existing driver base and customer base and there we are pushing through additional price increases, pretty much.

Rob Sandlin: Yes.

Steve Rudd: So we feel we can push through additional price increases.

Rob Sandlin: We, yes, that's something we've been pretty clear about the market. The market is going to have to do more than pay for driver pay increases because we've got insurance costs that are going up and frankly nobody wants to be in this business and just breakeven or lose money. We need to get this company and frankly this industry back to a reasonable return on investment. And so when we're looking at price increase, we are not only looking at price increase to cover cost, we are looking at price increase to add margins. And so that's one way that we're going to have to do it, if you can't add incremental business then you've got to reduce cost, which we've done and we've outlined pretty heavily and there is still a little bit more of that potentially to go. And then you've got to be able to raise your prices in excess of your cost increases.

Steve Rudd: Great. That's thematic, of course. And then in terms of the incremental I know these restraints on - constraints on the amount of time driver can be on the road. But in terms of allocation and utilization of your existing driver pool, how much room do we have there?

Rob Sandlin: There is really none. We spend a lot of time and energy, getting our drivers to work their days off now, just to cover the customer base that we have. And I think that's pretty true throughout the industry, there is just no, there's really very little, I should say, ability to make get the drivers to be more productive. There are like everybody else, right. They, you only want to work six days a week. So many times, they want to be with their families, and so becomes this quality of life issue as it relates to truck drivers and if we're going to attract people in this industry, they are going to have to have a quality of life, and that's just something we've got to continue to focus on and within the whole business, the whole industry. I think they are about maxed out candidly.

Steve Rudd: Yes, I would imagine that could be the case. It's a crazy documentary comparing production of things here versus China and it was really amazing what we define as maxed out and they define it. So each incremental driver added is my math right, we get basically a bottom line of $0.02 based on a number of shares, if you are able to add drivers.

Rob Sandlin: So I don't know.

Matt McNulty: I don't have a calculator that close, but I can run it for you.

Steve Rudd: Go ahead. I'd be happy to do it. It's, - interesting to me, because literally you're doing everything you can and I think we will succeed continue to succeed at it. Modeling this out is obviously always tough. But it's not - insurmountable because the variables are that great except to driver count, which I think is now stable $0.15, I think, is that right.

Matt McNulty: $0.15.

Rob Sandlin: Right, $0.15.

Steve Rudd: Okay. So you know, it's pretty amazing how each additional driver. And then the margin we won't get into, but obviously significant given our low share count. All right, well listen, if I come back, if I have more. I'll get back into the queue and stay well guys. Your predicting is listed. I mean you're doing very good work. Really appreciate it.

Rob Sandlin: Thanks. We appreciate your interest. Thank you. Thanks for the questions.

Operator: Thank you. There are no further questions in the queue. I will now hand the conference back to CEO, Rob Sandlin for closing remarks. Please go ahead.

End of Q&A:

Rob Sandlin: Thank you for being on the call today and we appreciate your interest in Patriot Transportation. Have a good day.