Patriot Transportation Holding (PATI) is a tank truck company operating in the southeast United States and, based on 2017 revenues, the 10th largest bulk carrier in North America. Perhaps unsurprisingly, among publicly traded competitors in the trucking industry, you will find the widest array of market valuations. You will find companies trading near all-time highs (ODFL, JBHT), as well as a recent large bankruptcy (CGIP).
Generalizing across all companies in this industry space is likely akin to making a Procrustean bed, but there are some difficult challenges that seem to be facing a number of competitors–namely, driver shortages, driver turnover, and rising insurance costs.
Patriot addresses some of these concerns directly in their recent shareholder letter from the CEO and President Robert Sandlin. In appreciation for his candor and willingness to say the hard things, I quote the letter in its entirety:
“Fiscal year 2019 proved to be very challenging as the driver market continued to tighten. Revenue came in at $109 million, well below the $114 million we generated in fiscal 2018. The lower revenue was mainly driven by a decreasing driver count and the closure of our Charlotte terminal in May of 2019. We ended the year with an average count of 538 drivers versus 580 in fiscal year 2018. Just prior to the beginning of fiscal 2019, in an effort to reverse the trend of a declining driver force, we implemented a new productivity/minimum guarantee pay program. While the program provided a significant boost to driver hiring, it did nothing to reduce turnover and ultimately resulted in us spending significantly more on training and driver pay in fiscal 2019. In early October 2019, after gaining input from our drivers, we announced an overhaul to the driver pay program that eliminated the weekly productivity/minimum guarantee pay program and added seniority pay raises, weekly productivity bonuses, and a Paid Time Off Buyback Program, among other enhancements. We are hopeful these enhancements will continue to attract new drivers but, more importantly, will incentivize all our drivers to remain employed with the Company for years to come.
A great deal of our success is dependent upon our ability to increase revenue at good freight rates. Our strategy is to concentrate revenue growth efforts in the markets where we have been successful with driver retention and to diversify our product mix where we can achieve revenue growth and improve profit margin. Recently, we closed on the acquisition of the assets of Danfair Transport out of Americus, GA which had total revenues of approximately $2.3 million in 2018. We are excited about this acquisition as it fits nicely into one of the most stable market areas in our network and provides an opportunity to grow with some new customers in other markets we serve.
Controlling our fixed expense is critical in a declining revenue environment. During fiscal 2019, we reduced our average tractor fleet from 383 to 330 to remain aligned with our target of at least 1.5 drivers per tractor. On an annualized basis, this reduction will save the Company approximately $750,000 in depreciation expense alone.
Unfortunately, we were also forced to make headcount reductions during 2019 as we focused on keeping our support wages and SG&A expense at or below our targeted percentage of revenue. The reductions are projected to save the Company in excess of $750,000 in fiscal 2020.
We continued to search for ways to reduce costs associated with our employee benefit plans. During fiscal 2019, we implemented changes to our health, wellness and pharmacy plans that project to provide an annualized savings in excess of $1 million in fiscal 2020. These savings allowed us to keep our employee premium costs flat for the second year in a row while adding better benefits to the plans. We are hopeful that achievements like these will continue to set us apart from our competition and build a stronger workforce for our Company.
The auto liability insurance market continued to tighten in 2019 and resulted in a meaningful increase in our annual premium cost for fiscal 2020. While we were fully able to absorb the cost increase and maintain liability insurance well in excess of our customers’ minimum requirements, some of our competitors may struggle to do the same. Whether this leads to less competition, higher freight rates, consolidation or all of the above is yet to be seen, but it stands to be a big part of the industry story for the remainder of 2019 and into the future.
Finally, technology investments have played a large part in the past couple of years. During 2019, we completed several technology projects that included a new billing automation platform and a complete migration of our critical operating systems to a 3rd party cloud service provider. These implementations have helped us reduce costs and improve efficiencies across our network. Looking into 2020, we plan to begin piloting an on-board tractor camera system to assist us in managing our auto insurance claims and to improve driving behavior. Furthermore, we plan to implement a new automated dispatch module that should bring significant efficiencies to our operations and customers. We believe these projects are critical to our future success as they provide significant benefits to our drivers, employees and customers.
We want to thank our employees for their dedication to our Company and to providing the highest level of safety, professionalism and customer service. Our non-driver employee workforce consists of some of the finest people in the industry and we are consistently recognizing employees for 10, 20 and even 30 years of dedicated service each year at our annual meeting. We truly value their loyalty and leadership within our organization.
We are very proud to say that in fiscal 2019 the company beat our preventable accident frequency target. We set a very high standard for ourselves each year and achieving this goal speaks volumes about our drivers as well as our dedicated managers. Achieving this target allowed us to give away a brand-new Chevy Silverado to one of the Company’s many eligible, accident free drivers in 2019. Congratulations to Marco Rollins on winning this year’s award. The joy in Marco’s voice when he answered the phone call during our annual awards dinner was priceless and makes what we do every day well worth the effort. I also want to recognize Ron Stanley as the recipient of the Company’s John R. Mabbett Award for 2019 Driver of the Year. Ron is a veteran who served in the United States Army and we’ve been fortunate to have him on our team for the past six years. He has been a strong and consistent leader and exemplifies our determination to exceed customer expectations in safety, quality and service. Ron, we thank you for dedication and commitment to our Company.
While fiscal 2019 fell well below our expectations on profitability, our balance sheet remained strong, we continued to replace older tractors with new equipment using cash from operations and grew our shareholder equity by $2.4 million. We currently hold $21 million in cash and investments and have no outstanding debt. The Company is poised to invest in business opportunities like the Danfair acquisition should those opportunities continue to arise. During fiscal 2020, we will be exploring opportunities to expand our chemical business and are currently consulting with a chemical industry veteran to gain a better perspective on opportunities to grow chemical revenues in several new lanes. We believe we are taking the necessary steps to be successful in the future. Our management team is committed to satisfying our customers’ needs and achieving a solid return on investment for our shareholders. As always, we do not take your continuing investment in our Company lightly and we want to thank you for your continued interest and support.
Robert E. Sandlin, President & Chief Executive Officer
Thompson S. Baker II, Chairman” [10-k]
From my armchair, it looks like Patriot is playing a difficult hand as well as one can. With 3.35 million shares out and a share price of $17.30, you have a market cap of $58 million. Their book value of $54.8 million at 9/30/19 includes more than $21 million of cash and investments that exceed the liquidity requirements for this type of business. With the reduction in fleet size and sale of excess equipment in 2019, free cash flow was in excess of $4 million for the last fiscal year.
Disclosure: No position