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Edited Transcript of PATI earnings conference call or presentation 31-Jul-19 7:00pm GMT

Q3 2019 Patriot Transportation Holding Inc Earnings Call

JACKSONVILLE Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Patriot Transportation Holding Inc earnings conference call or presentation Wednesday, July 31, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew C. McNulty

Patriot Transportation Holding, Inc. - CFO, Secretary & VP

* Robert E. Sandlin

Patriot Transportation Holding, Inc. - President & CEO

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Conference Call Participants

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* Dorsey Farr

* Jason Ursaner

* Timothy D. Chatard

Quantum Capital Management, Inc. - Director of Research & Portfolio Manager

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you all for joining us for this Patriot Transportation Holding's Third Quarter 2019 Earnings Call. (Operator Instructions) And now to get us started with opening remarks and introductions, I am pleased to turn the floor to CEO and President, Mr. Rob Sandlin. Please go ahead, sir.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [2]

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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 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.

For our third quarter results, total revenue for the quarter decreased $1.086 million to $27.526 million, while our transportation revenue decreased by $1.538 million on 865,000 less miles. The decreased miles was primarily due to one of our customers moving their private fleet into a couple of our markets during the first quarter, the closure of our Spartanburg, South Carolina satellite terminal location in June of last year and the closing of our Charlotte, North Carolina Terminal in May of this quarter.

Due to the change in our mix of business over the past year, our average haul length has increased. However, our revenue per mile has also increased by $0.08 per mile versus the last year's quarter due to rate increases. Fuel surcharge revenue for the quarter was $341,000 lower versus the same quarter last year due to the decline in miles and the lower price of fuel.

Compensation and benefits decreased by $147,000, mainly due to the lower company miles and increased number of owner operators. Depreciation expense decreased by $161,000 on lower tractor count. While we have effectively rightsized the fleet, we will continue to monitor the driver-to-truck ratio and continue to improve our utilization and increase our revenue per tractor. Year-to-date, our average revenue per tractor is $285,000 versus $265,000 in the same period last year.

Insurance and losses decreased $403,000 quarter-over-quarter, mainly due to lower health costs as we continue to see benefits from our wellness and Specialty Drug programs implemented in January of 2019. We continue to be challenged during the quarter with driver hiring, training and retention-related costs.

I mentioned earlier that we closed our Charlotte, North Carolina terminal in May of this year. Charlotte has been a difficult driver market, which did not allow adequate freight pricing to compensate us for the elevated cost to operate and make a profit. Management decided that we would be better served to focus our time and resources in other markets. As a result, net income for the quarter was $396,000 compared to $1.086 million during last year's quarter, while operating profit was $423,000 compared to $1.353 million in last year's third quarter.

Now on to the year-to-date results. To date, total revenues for the first 3 quarters of fiscal 2019 were down $2.696 million from the same period last year, and transportation revenues were down $2.967 million on 1.219 million less miles.

Net fuel expense decreased by $1.052 million due to fewer miles and higher fuel surcharges in the early part of the period. Our revenue per -- our repair and tire expense increased due to high -- more high dollar repairs and expensing of prepaid tires related to increased tractor and trailer purchases. We continue to right size our fleet. Thus, depreciation expense decreased $768,000. SG&A costs increased due to our continued upgrade in our information technology systems.

Gains on disposition of assets increased primarily due to the sale of our Ocoee, Florida property and the hurricane insurance gains. As a result, income before tax for the period was $2.128 million, including $866,000 from gains on real estate sales compared to $1.873 million in the same period last year.

Now for the summary and outlook. The shortage of driver -- of qualified driver applicants and the related driver turnover continues to be a huge challenge for our industry. During the first 3 quarters of the year, we were able to increase the number of drivers in training over last year's period, in large part due to the implementation of our productivity-based driver pay in all of our terminals during the fourth quarter of fiscal 2018. However, we have not seen an improvement in our retention rate as the first year churn of our new drivers continued. We will continue to monitor the results on new hires and driver retention, and we'll continue to adjust our plans.

While the first quarter was negatively impacted by health cost, mainly due to one large claim, we implemented changes to our wellness plan and Specialty Drug plan, which produced lower cost in the second and third quarters. During the third quarter, we hired a new health insurance and benefits broker, which we believe will have positive results as we negotiate our prescription drug and health plan renewals for next year. We anticipate these health-related initiatives to continue producing a savings for us in the future.

While safety results for the year are varied, we did see an improvement in our preventable accident frequency rate and experienced lower risk cost as we closed out prior year claims. Our management is reviewing the use of onboard cameras to provide improved driver safety habits and potential for exoneration and accidents where third parties are at fault. We will likely make a vendor selection in the fourth quarter and begin testing. We will continue to focus on improving our safety results as the industry continues to see increased cost of auto liability insurance, which is being made worse by a significant tightening of the excess layers of insurance.

Demand for our service is still high, and we continue to evaluate new and current business based on price, efficiency of -- and efficiency of the daily operation. We continue to see improvement in our ability to gain price increases more in line with our expectation.

Management made the decision to close the Charlotte, North Carolina terminal in May of this year. We had not been successful growing this business due to the very difficult driver market, which elevated the cost to operate and the pricing in this market did not allow for a return on our investment.

Management is also evaluating the cost of maintenance on the oldest trucks in our fleet, and we'll determine if it's prudent to invest a portion of our cash to expedite the replacement of tractors to take advantage of lower maintenance cost and improve fuel economy by lowering the average age of the fleet.

The bottom line operating results are not up to our expectation. But we do see some positive momentum in several areas. The number of drivers in training improved, pricing of our business is improving. Our depreciation expense and equipment utilization has improved. The recent changes to our Specialty Drug and wellness plan have had a positive financial impact, and we will continue to make changes to other parts of our health plan during the second half of our year.

We completed the majority of IT systems move to the third-party cloud service provider during the third quarter and expect to be fully integrated during this fiscal year.

And finally, management has taken steps to lower cost by eliminating some jobs and consolidating others, most of which took place late in the third quarter. We are confident that the strategic plan we have in place will lead to improved operating profit more in line with our expectations.

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

Operator, you there?

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Questions and Answers

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Operator [1]

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And gentlemen, I do apologize for the audio delay. (Operator Instructions) We'll take our first question from Jason Ursaner.

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Jason Ursaner, [2]

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The $0.08 per mile rate increase, is that kind of more reflective of a change in sentiment of customers? Is it something sustainable? Is it more of an appreciation and understanding of the challenges you guys have faced on the driver side? Or is that, I guess, kind of more of a transitory onetime kind of thing?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [3]

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Jason, this is Rob. I'll think all of the above.

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [4]

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Other than the last piece.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [5]

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Other than the last piece. I think it's a -- I think some of it is timing and when our contracts rolled, particularly as it relates to the quarter. And then I think some of it's just a reflection of what's going on in the marketplace with tightening capacity and understanding that there's a shortage of drivers and making sure that folks can get their freight at a reasonable rate. It's past due by the way.

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Jason Ursaner, [6]

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Okay. And I heard the commentary on the driver turnover that the retention hasn't improved, I guess, on the new hires. But it feels like you've been in transition for a while, and at least even given that, it looks like you kind of returned to sort of a solid level of operational profit. I mean you have to absorb the Charlotte terminal closure. So excluding that, you guys are back to kind of reasonably profitable, maybe not where you want to be, but does it feel like you've kind of righted the ship and you're on kind of a sustainable profit path at least?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [7]

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So a couple of comments on that. I think the -- while we continue to see the churn of that first year driver, we stabilized our driver force for really this whole 9 months as to -- from where we began back in October. And so we feel like we've made some headway there. Certainly, there's still a lot of cost associated with that first year churn and the need to train those new drivers. But I think the answer is yes. I think the things that we -- all the things that I mentioned in the call that we've been working on, whether it be health insurance, lowering depreciation and then the upward trend in some of the pricing, should have the positive impact that you're seeing there.

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Jason Ursaner, [8]

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Okay. And are there any other additional onetime costs with either Charlotte or Spartanburg or any other terminals that maybe have a similar dynamic that you're absorbing losses at them?

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [9]

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Jason, it's Matt. No, right now, that was the one that we're really focused on. I mean we have other terminals that have challenges every month. But that was the one that was kind of a long -- lingering terminals, why we exited. And one other thing. There was -- that we did have a onetime -- I hate to call it a onetime, but there was a -- there's a rollover. We had to write off a large rollover equipment damage this quarter. That was about $116,000. So that was also in this quarter to kind of answer your first question. There's a couple between Charlotte and that, plus the operating profit. It was not our standards for a good quarter, but it was a more sustainable quarter.

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Jason Ursaner, [10]

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Okay. And I guess assuming you're kind of at, at least a sustainable level of profitability and given that you have almost half your market cap in cash, just kind of what is the plan for growth and/or capital allocation? Is there a focus on adding drivers and terminals and kind of increasing the miles driven? Or is it really kind of focusing more on making the miles and drivers that you have just more profitable? I guess just kind of what are the thoughts on capital allocation overall?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [11]

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So I think 2 things. We've spent an inordinate amount of time in the last year rightsizing the fleet. We've talked about that quarter after quarter. And so we feel like we're kind of at the end of that cycle. And so the conversations that we're having internally are about trying to grow the business. The challenge with that on a grassroots level is obviously adding the driver capacity. So your focus becomes those markets where you can add capacity and who are -- what are the customers that you think you can attain in those markets. So that's the kind of the marketing growth piece. We love to grow. We're going to have to focus on those places where we think we can add driver capacity and revenue.

And then I think from a capital standpoint, we're going to continue to modernize our fleet right this minute along the lines that we have in the past. And then we've looked at does it make sense to make additional investments in equipment to try to take advantage of fuel economy and lower maintenance cost. And we just aren't quite there on making that decision yet. So if that didn't answer the question, tell me.

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Jason Ursaner, [12]

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No, that answered it. I guess just on the last point. I was a little surprised to what you said that. Just given the rightsizing of the -- in some of that, I thought you guys have kind of made some investments where the fleet is fairly young at this point and fairly modern. What are you kind of expecting CapEx-wise for, I guess, fiscal -- your fiscal '20? Or is this maybe more of a multiyear thing you're looking at?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [13]

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We have -- one, we haven't -- we just really began our budgeting process. But right now, we would anticipate doing something fairly normal.

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [14]

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Similar to this year.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [15]

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Similar to this year.

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Jason Ursaner, [16]

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Okay. And just remind me, what is kind of the CapEx budget for this year versus G&A?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [17]

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It was $10 million.

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Jason Ursaner, [18]

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Okay. And just last one for me. What's the latest on the Tampa terminal?

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [19]

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Tampa, as it was before, is in for permitting, being reviewed by city of Tampa. And I can't give you a deadline, but expectations are within the next, say, 60-plus days, we hope to have a final determination from them and hopefully be under contract in a similar time frame and just see how it goes from there. We just have to wait out the study periods and things like that.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [20]

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Yes. But moving in a positive direction.

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Operator [21]

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(Operator Instructions) We'll go next to Tim Chatard with Quantum.

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Timothy D. Chatard, Quantum Capital Management, Inc. - Director of Research & Portfolio Manager [22]

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Yes. I was just interested in the Tampa update and any other stuff, I think, we've already hit. So I think I'm in good shape.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [23]

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Okay. Great. Thank you.

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Operator [24]

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We'll move next to Dorsey Farr with kdhb V.

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Dorsey Farr, [25]

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I had a question on Tampa, maybe you've answered to the extent you can. But in the last 10-Q, you referenced the commercial mixed-use master site plan that you had filed with the city. You don't know when that's going to be approved. You expect in the next few months, it said in the filing. Are you planning to list with the same broker that you had before? And are you getting any counsel from them on how the property might be marketed once the plan is approved? What should we expect and so forth?

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [26]

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Sure. So this is Matt. So we never -- we have not changed brokers throughout the process, and they have continued to market it throughout. From when we went on a contract on the last one through all of this planning and entitlement phase we're in right now, they continue to market it. And we feel like we've got a really good grip on the market and the folks that are valid players to purchase it.

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Dorsey Farr, [27]

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And the plans that you're waiting approval for, what does that mean in terms of who is the candidate buyer pool is? What has changed in that from the original deal that didn't go through?

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [28]

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The fact that we would have the approvals of the plans in hand.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [29]

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It's just using the same zoning and having the plans in hand that would allow somebody to move forward.

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Dorsey Farr, [30]

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Got it. So you've just gone through the steps, so they won't have to go through once they acquire it?

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Matthew C. McNulty, Patriot Transportation Holding, Inc. - CFO, Secretary & VP [31]

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Right. We're just trying to take some of the risk out of it.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [32]

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And hopefully, move things along to closing a little faster. So there's not as long a period once we get under contract.

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Dorsey Farr, [33]

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Okay. Okay. Rob, you mentioned in your prepared remarks a customer that moved part of their private fleet into a couple of markets. Did you retain any of the business in those markets? Or were you displaced completely when that happened?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [34]

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Displaced completely. And on top of that, they hired some of our drivers away, which makes it doubly bad because you're trying to replace drivers at the same time. So it's a pretty difficult situation.

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Dorsey Farr, [35]

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So from a risk standpoint, are you engaged with that customer in other markets currently where the same might occur? And then the second question, are there other markets and/or customers like that? I presume there are other customers with other markets where that's a possibility that is of concern.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [36]

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No. We're really not, to any degree, nothing like -- just a small amount of revenue here and there. So nothing to that magnitude. And I think the answer to...

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Dorsey Farr, [37]

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With the particular customer?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [38]

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Right. With the particular customer. I think to answer your question kind of broadly is that there are private fleets in the Southeastern United States, but the private fleet I'm talking about was a major oil company, and that's a different realm compared to a regional convenience store private fleet. You're dealing with something totally different there.

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Operator [39]

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And gentlemen, at this time, we have no questions from the group. (Operator Instructions) And we do have a signal, a follow-up from Jason Ursaner.

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Jason Ursaner, [40]

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Just a quick follow-up kind of on that last question. Some of the business that you have lost over the last couple of years, have you seen any of that come back where maybe you passed on business where it wasn't at a margin that you guys thought was acceptable, and lo and behold, that kind of doesn't turn out so well for whoever won that contract and people are starting to have this realization of there kind of is a level of pricing that the market just needs to be at?

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [41]

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Jason, it's a good question. Thanks for asking that. Yes, we're seeing more and more of that as the market tightens up and people have trouble getting their fuel hauled when they need it. And so we think that's going to continue. The other thing in the marketplace that I think will continue to help tighten capacity is the excess insurance markets have really tightened up, and there are potential large premium increases in auto liability rates. And so for somebody like us, we think that, that is going to have a long-term benefit in the market. Certainly, we'll pay more for excess insurance layers, but that will continue to tighten things up and move rates probably in a more favorable position. But yes, we have seen some of the business come back.

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Operator [42]

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And Mr. Sandlin and Mr. McNulty, we have no questions from the group. I'll turn it back to you for any additional or closing remarks.

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Robert E. Sandlin, Patriot Transportation Holding, Inc. - President & CEO [43]

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Thank you. Thank you again for being on the call, and we appreciate your interest in Patriot Transportation. Have a good day.