Patriot Transportation Holding, Inc. (NASDAQ:PATI) Q4 2022 Earnings Conference Call December 6, 2022 3:00 AM ET
Company Participants
Rob Sandlin – Chief Executive Officer and President
Matt McNulty – Chief Financial Office and Chief Operating Officer
Conference Call Participants
Christian Olson – Olson Value Fund
Steve Rudd – Blackwell Millennium
Operator
Good afternoon, ladies and gentlemen, and welcome to the Patriot Transportation Holdings, Inc. Earnings Call for Fourth Quarter 2022. At this time, all participants have been 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, Chief Executive Officer of Patriot Transportation Holding. 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 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 fourth quarter results. Today, the company reported a net income of $470,000 or $0.13 per share for the quarter ended September 30, 2022, compared to net income of $40,000 or $0.01 per share in the same quarter last year. Operating revenues for the quarter were $22,882,000, up $2,425,000 from the same quarter last year, due to rate increases, higher fuel surcharges and an improved business mix.
This quarter’s revenue per — revenue miles were negatively impacted by the approximately 10 driver reduction versus last year’s fourth quarter, due to the driver shortage and the closing of our Nashville terminal. Operating revenue per mile was up $0.70 or 18.9%. Compensation and benefits increased $826,000, mainly due to the increased driver compensation package, mostly offset by the lower driver count and a reduction in support staff. Unfortunately, insurance and losses increased $444,000, due to a single rollout vehicle rollover fatality accident, which was $270,000, along with higher health and other claims.
Depreciation expense was down $285,000 in the quarter and gains on sale of assets was $97,000, compared to the loss of $26,000 in last year’s quarter. Equipment gains on sales were negatively impacted by $199,000, due to a separate vehicle rollover caused by an underinsured third-party resulting in $178,000 loss and the fatality rollover mentioned above. The operating profit this quarter was $484,000, compared to $58,000 in last year’s fourth quarter.
Now for the year-to-date results. The company’s net income was $7,190,000 or $1.98 per share, compared to $625,000 or $0.18 per share last year. The net income included $6,281,000 or $1.73 per share from gains on real estate net of income taxes. The prior year’s results included net income of $1,170,000 or $0.34 per share from gains on real estate net of income taxes.
The operating revenues were up $6,614,000 at $87,882,000, due to improved rates, higher fuel surcharges and an improved business mix, despite being down 2.5 miles, because of the lower driver count and the closing of our Nashville operation. Operating revenue per mile improved $0.72 or 21.1%.
Compensation and benefits increased mainly due to driver pay increases offset by lower driver count and non-driver personnel reductions. Our fuel expenses increased by $3,658,000 over last year, while insurance and losses increased by $906,000, due mainly to the maximum limit COVID claim of $372,500 and a negative workers compensation adjustment on a prior year claim of $380,000 and the fourth quarter accidents detailed earlier, resulting in a loss of $270,000. We decreased depreciation expense by $1,117,000 with the downsizing of equipment that was mostly completed in the second half of fiscal 2021.
SG&A expense was higher by $542,000 mostly due to a one-time transaction bonus following the sale of the Tampa terminal property of $394,000. The gain on the Tampa land sale was $8,330,000, compared to a $1,614,000 gain on land sales last year. The gain on sale of assets was $739,000 versus a loss of $179,000 last year.
The operating profit for the year was $9,299,000, compared to $880,000 last year. Excluding the Tampa land sale and the one-time transaction bonus for management, adjusted operating profit for the year was $1,363,000, compared to an adjusted operating loss of $734,000 last year. The COVID health claim the prior year workers comp claim and the two Q4 rollover claims resulted in a negative charge of $1,268,000 for the year, which is highly unusual and something not previously seen at these levels.
Now for the summary and outlook. During the year, our total driver count remained steady due to the large driver pay increase in April 2021 and subsequent driver pay increases during fiscal 2022. During the first quarter of fiscal 2022, we announced additional driver pay increases in all markets most of which took effect in early February 2022. We announced additional pay increases in about half of our markets effective in early August 2022.
We are in the process of announcing driver pay increases in the remaining markets, which means that these increases will have added 25% to 35% to driver pay depending on the market. We continue to be involved in task force movement, which is designed to bring transitioning service members, veterans, military families and industry stakeholders together to improve economic and national security outcomes. We are hopeful that our DoD Skill Bridge involvement will allow us to increase our driver force with transitioning military venture soon and we have seen some applicants from military members transitioning from the military.
We have the same challenge as everyone battling inflation pressures and supply chain delays in many areas, including repair parts, tires and labor. Insurance rates continue to climb at single-digit increases at the lower levels and up to 15% to 20% on the excess layers. The insurance markets are still very tight, particularly in the excess layers of coverage.
To cover this cost along with driver pay increases, we have been successful raising freight rates and we are partnering with customers and understand the challenges we face along with our need to cover the added cost and to make an acceptable return on our investment. I won’t belabor the point, but this was a particularly difficult year for insurance claims and equipment write-offs with four incidents costing us over $1.2 million. We have high deductibles on our health, auto and work comp insurance claims and we waive these each year during renewal periods, compared to our claims history and premium cost.
Our balance sheet remained stable with $8.3 million of cash as of September 30, 2022 with no outstanding debt. We replaced 26 tractors and five trailers during this year. We also added five drybulk trailers as we continue to expand this business offering. For fiscal year 2023, we are planning to purchase 73 replacement tractors, including 29 that will replace full service lease units. We also plan to purchase approximately nine trailers with a total capital expenditure of $12 million during fiscal 2023.
We were recently named Carrier of the Year for Spring Water by our water customer and we look forward to growing this business in the future. I also want to express my gratitude to all of our team members for their dedication to safety as we met all three of our safety frequency targets for the year. We have done heavy lifting over the last couple of years to right size our business, streamline cost, retool management and price our business for improved results. I’m encouraged by the improved operating profit for 2022 and we will continue to work with our team to drive improved results moving forward.
Thank you again for your interest in our company and we will be happy to entertain any questions.
Question-and-Answer Session
Operator
Certainly, ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Christian Olson from Olson Value Fund. Your line is live.
Christian Olson
Thank you. So it’s my understanding that many of your customer contracts come up for renewal about once a year. And so if you look out over the next four quarters, is it approximately the same amount every quarter? Or are there certain quarters where there are more contracts that are up for renegotiation?
Matt McNulty
Really thinking the way our business works and how this goes, I mean we have contracts that basically can just are on rolling one-year basis. There’s not a whole lot of negotiation when it comes to renewing the contract. It’s really more about the pricing and getting rate increases. And a lot of those, they really do kind of happen throughout the year depending on the customer, to be honest with you. So there is no real — there’s no pack of contracts that ever are coming due for renewal, if that’s what you’re asking.
Rob Sandlin
Christian, that was Matt. And this is Rob. The only thing I would add about that is we do have a handful of contracts that are multi-year and one-year deals that are tied to CPI, less food and energy and so especially on those two-year deals. And so we obviously, you know, what that means in terms of price increases in recent times, because of the inflation.
Christian Olson
Yes. And I guess what I was getting at was — well, so is it — can you go to pretty much any of your customers at any time and ask for a price increase? Or does it not typically happen say once a year?
Rob Sandlin
It’s a mixed bag. It’s historically been once a year, but as we’ve gone through these driver pay increases, we’ve gone to our customers and asked for additional rate increase to cover that plus inflationary cost intermittently. And so I would say over the last 18-months, it’s been more frequent than once a year. We do have some contracts that are annual rate negotiations or escalators based on CPI. But in a lot of those cases, our customers have been forthcoming during the driver pay increase times and gave us the additional pricing to cover that cost.
Christian Olson
Okay. And how do you see rate increases going forward over the next year or so you’ve clearly been able to push through some, but your compensation expense especially is going up quite a lot. Have you so far gotten rate increases from pretty much all your customers? And do you anticipate being especially aggressive over the next few months?
Rob Sandlin
I think, Christian what we’ve said since really April of 2021 when we put in the first big rate increase is that the vast majority of our customers have gone along with those price adjustments, because they understood what was going on in supply chain. They understood the driver shortage and they understood the need for us to pass along those costs. So I would say there’s been very little resistance. The other thing that we have told you all in these calls is that where there was resistance and we needed to go partner with somebody else than we’ve been willing to do that and we have made some of those changes.
Christian Olson
Got you. And then if I can also just ask about drybulk pay, you mentioned some upcoming raises. And were they plans and if there’s still real upward pressure on drybulk paying in the industry?
Rob Sandlin
There are definitely planned and budgeted for and the price increases to go along with those, our rate increases are planned as well. And I don’t think there is as much upward pressure as there was obviously we’re up 25% to 35% once those raises are in from where we were in April — before April of 2021. And so I think the double-digit type of increases are probably behind us at least for now.
Christian Olson
Got you. All right. Thank you.
Rob Sandlin
Yes, sir. Thank you.
Operator
Thank you. [Operator Instructions] Your next question is coming from Steve Rudd from Blackwell. Your line is live.
Steve Rudd
Hi, guys. Glad to hear everyone sounds well. A question on the $12 million of CapEx expected for next year, that’s quite a large amount relative to what we’ve been spending. And it sounds like we’re buying a bunch of new equipment. Just give me an idea of what we’re setting out to do in terms of both market demand, replacement? Basically, if we take our initial — let me phrase this better. If we take our initial capital stock of trailers and rigs, from a baseline, how much are we adding to it based on this projected $12 million? And what’s the underlying rationale for the need for that add if it’s significant?
Rob Sandlin
Steve, probably the easiest way for me to answer that question is we’ve got a pretty normal trade cycle on 40 units that we will purchase throughout the fiscal year, that’s 10 trucks a quarter. And then the oddity that we have this particular year is that we have 29 tractors that we are leasing on a full service lease. And when you run the financial model, it makes more sense for us to purchase those trucks outright. So we’re kind of looking at those 29 trucks a little differently than what we would our normal. And that’s in excess of $4 million of the spend right there. I don’t have the exact number in front of me, but it’s over $4 million of that spend. So if you back that out, it’s a lot closer to normal.
Steve Rudd
I see. And the 29 trucks that are coming off lease when we compare and I know that Matt does this stuff very well, but just — so when we compare the depreciation expense of the purchase of those trucks relative to the lease expense of leasing them which is — do we save on expense through — is the depreciation lower or going to be higher than what we were expensing on the lease on those? And I understand we’ve got really significantly increased interest rates, which probably justify the purchase, but I’m curious how it shakes out on lease expense versus depreciation for those particular trucks?
Matt McNulty
I mean, the truck costs have gone up, so the inherent depreciation component will be higher for the newer trucks. However, as these were full service leases, we were paying for maintenance that you might not have as the first year on new truck. Yes. So the depreciation line and the rents line, they charge for owned truck and a leased truck is relatively flat. So we’ll just be shifting that expense from rents and equipment leases up to depreciation. But from a bottom line perspective, you won’t see much change going forward.
Steve Rudd
Okay. All right. All right, so just our hopes in the upcoming year and we’re getting normal replacement cycle. Basically, it’s our normal replacement cycle, taking off the trucks that are taking them off lease, purchasing them, increased rates relative to our cost structure and demand any new increases in demand or business that’s dropping off, you know, we’re looking at the drybulk business and getting some better or some additional customers there? But what do we see there on it? Our pricing turns on obviously on demand management grade and I’m curious what we’re still seeing?
Rob Sandlin
I think demand is still good, I mean, our business is not as — doesn’t have the peaks and valleys that some of the dry van businesses have or the flatbed businesses where their rates move up and down and their demand moves up and down quite a bit. We see seasonal demand as an example. We’re going to see South Florida and Central Florida start to pick up late this month and run pretty heavy through March. We don’t expect that to be any different. In fact, it may be a better year because we’re further away I hope and I guess from COVID. And so we’ve started — I think our growth and our ability to add miles and revenue are still tied to the same thing I’ve mentioned before and that’s our ability to add drivers in those markets.
And in a few of the markets where we’ve been able to add capacity recently, we’ve been able to go out and get new business at what I would consider good freight rates. If that answers that part of it?
Steve Rudd
I think it does. All right. Well, I guess, we’ll sit tight to have a year shapes out and enjoy the holidays coming up.
Rob Sandlin
All right, great. Thank you, Steve. Thanks for your call.
Matt McNulty
Thank you.
Operator
Thank you. [Operator Instructions] Thank you. There are no further questions in the queue.
Rob Sandlin
Thank you all for your interest in Patriot Transportation and we hope we have a safe and happy holiday.
Operator
Thank you, ladies and gentlemen. This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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