Exploring Freight

1
Exploring Freight Equipment Trends April
2011 2010-Absorbing the Excesses 2011-2012
Exiting the Rear View Mirror Economy More
Steady Growth Ahead
Thom Albrecht, CFA Managing Director (804)
787-8210 talbrecht_at_bbandtcm.com
FOR REQUIRED DISCLOSURES, INCLUDING ANALYST
CERTIFICATION, PLEASE REFER TO THE IMPORTANT
DISCLOSURES SECTION AT THE END OF THIS
PRESENTATION
2
Inventory Ratios are Reasonable

• Recent moves reflect better than normal seasonal
  trends
• Retail ratio includes automotive retail total
  inc. manuf. retail
• 1.45 ratio means that for every 30 days of sales
  approx. 44 days of inventories exist
• From 03-09 the lowest retail ratio in Dec was
  1.15 and the average was 1.26 (Dec 10 was 1.12)
• 1.45 up from 1.12 and 1.35 improved from 1.18

Source U.S. Census Bureau NSA is not seasonally
adjusted
3
The Consumer is Cleaning up His Balance Sheet
Left chart shows debt reduction of 1.1 trillion
(-9) since peak and 155B (-1.3) since Q310.
Note The FOR adds automobile lease payments,
rental payments on tenant-occupied property,
homeowners' insurance, and property tax payments
to mortgage payments. DSR is a ratio of debt
payments to disposable personal income. Debt
payments consist of the estimated required
payments on outstanding mortgage and consumer
debt. Source Federal Reserve Board.
4
2011 Should be a Strong Freight Year

• ISM Survey Capex to be up 14.5 in 2011 vs. 5.4
  in 2010
• ABI index crossed 50 for the first time since
  late 2007
• IP growing at 1.5x-2x GDP IP creates freight!
• Accelerated depreciation incrementally positive
• Housing starts flattish, but auto to be 13.5M to
  14.0M units since 1970 only 7 one-year increases
  exceed 1.5M units
• Biggest Risks? Geo-political, Japan, fuel

Sources ISM, AIA, FRB Reserve, U.S. Census
Bureau and Wards.com
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Truck Tonnage Loads Versus Auto
Housing-Incremental Changes will Adversely Impact
Drivers More than Past Cycles
Truck Tonnage (Seasonally Adjusted Index) Total TL Loads (Not Seasonally Adjusted Index) Wards N.A. Car Truck Production (In Millions) Housing Starts (In Thousands)
1999 105.5 102.8 17.6 1,640.9
2000 100.0 (-5.2) 100.0 (-2.7) 17.7 1,568.7
2001 99.5 (-0.5) 106.0 (6) 15.8 1,602.7
2002 103.6 (4.1) 111.1 (4.8) 16.7 1,704.9
2003 106.7 (3.0) 111.6 (0.5) 16.2 1,847.7
2004 112.9 (5.8) 109.7 (-1.7) 16.2 1,955.8
2005 115.7 (2.5) 109.2 (-0.5) 16.3 2,068.3
2006 113.6 (-1.8) 109.3 (0) 15.9 1,800.9
2007 112.1 (-1.3) 110.0 (0.6) 15.4 1,355.0
2008 113.3 (1.1) 110.9 (0.8) 12.9 905.5
2009 103.4 (-8.7) 94.4 (-14.9) 8.76 (-32.1) 554.0
2010 109.4 (5.8) 99.0 (4.9) 12.15 (38.7) 587.6
Sources American Trucking Associations for
tonnage and loads www.wardsauto.com for autos
U.S. Census Bureau for housing.
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Key Equipment Operating Trends
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Tractors 37,000 More Expensive Since 01 But
Nothing Added to Residuals Late Model Used
Equipment (07-09) Will be in Great Demand
During 11-12
Lots of late model used trucks in 2001-2002
downturn
85,000
Value After 1 Year
Sources Tractor values from Navistar from
2000-2010, 1990, 1995 and 2011E figures are BBTCM
estimates Class 8 tractor sales from A.C.T.
Research. 1st year DA is approximately 33,000,
meaning value is 85K after one year.
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Maintenance Costs Are a Pressure Point for Many
Carriers

• With thousands of carriers having a 97 to 102 OR
  maintenance costs are ominous
• By the time the OR is back to 94-ish
  (satisfactory level to reinvest) it could be too
  late
• Banks cautious but thawing
• CSA, EOBRs, HOS all loom on top of aging
  equipment

Source BBTCM analysis.
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LOH A Picture is Worth a Thousand Words
Sources Werner Enterprises 10K on left
Heartland Express documents on right.
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Key LTL Trends

• Top 25 LTL carriers are 87.6 of the market
• Top 25 haul 24.1B out of 27.47B 11B hauled by
  non-LTL firms
• 10B of LTL freight is hauled by non-LTL
• 2010 tonnage declined -0.3 and yields fell -0.7
• 2010 revenues grew 9.4 due to FSCs and some
  yield in 2H10
• 9 carriers with at least 1B in annual revenue
  their share 67.5

Source American Trucking Associations TRAC
report. Left is tonnage and right is yields.
BBTCM analysis in text.
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What Happened Last Spring and Summer? Did
Capacity Tilt Towards the Carriers that Quickly?
What About 2011?
12
Spot Market Provides Directional Clues Even if
Large Truckers Have Little Exposure
Sources TransCore for left chart Internet
Truckstop for right. On right chart, above 7.0
favors carriers below 5.0 favors shippers 5 to
7 is neutral zone, in terms of pricing and
capacity.
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16 Shrinkage in Tractors 8-Years Old or Newer

• TL Fleet (8 years old or newer) has shrunk 16 or
  252,000 units 1.6 growth expected in 2011
• Fleet that is 15 years old or newer has shrunk
  12 or 273,700 units 0.6 shrinkage expected in
  2011
• Tractor growth has been below GDP 6 of the last 8
  years (top chart)
• It has also been below Industrial Production most
  years
• Trucking is much more cyclical than the broader
  economy
• Deregulations 20-year window of growth has run
  its course
• Freight grows slower than GDP growth most years

Sources A.C.T. Research and BBTCM analysis.
Population figures in millions.
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West Coast Volumes Peaked in August 2010 12
Growth in Q111 and 5 Yr/Yr Through Sept
These are Volatile
4Q10 Volumes Dropped 11.7 from 3Q10 a More
Normal Drop is 4 to 6 However, Yr/Yr 4Q10
Growth was 12.2
Source National Retail Federation Global Port
Tracker report, February 2011. Measures quarterly
TEU volumes at 6 western ports.
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Unintended Consequences from New Regs-Influence
Started in 2010 and Should Accelerate in 2011

• Stated Goals
• HOSgt less driver fatigue improved safety
• CSAgt real-time data all fleets drivers
  covered 7 behaviors monitored
• EOBRsgt enforce HOS and driver performance under
  CSA

• Additional Consequences
• HOS Reduce asset utilization de facto capacity
  cut should drive up rates
• CSA Reduced driver base 5-10 driver free
  agents? new equipment important flatbed esp.
  hit insurance issues 3 layers
• EOBRs Under the radar fleets O-Os experience
  5 to 8 utilization drops more level playing
  field for large company equipment fleets

Source BBTCM analysis.
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Driver Turnover Is Re-Emerging as a Key Issue

• White males aged 35-54 have shrunk by 3M during
  the last decade
• Van pay is typically under 0.40 a mile (latest
  survey average was 36.8)
• Private not-for hire fleets have low turnover
  (lt15) and average 64,000 in annual driver pay
• This implies TL for-hire pay needs to rise to
  0.50 to 0.55 per mile LTL pay already in this
  range

Sources U.S. Census Bureau on left ATA TRAC
Report on right, which reflects large TL fleet
(above 30M of revenue) annualized driver
turnover. Unemployment is from the Bureau of
Labor Statistics (BLS). BBTCM analysis below.
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So, is the Market Really Short on Capacity?

• Not so fast!
• Loads off 15
• Packaging revolution, intermodal and supply chain
  changes reduced truck loads
• Kindle 115110 cell phone buying
• Chinese VAT in summer 10
• Container shortage less severe in 2011 watch
  chassis in 11
• Conclusion TL about at equilibrium to end 2010,
  not way short problem likely to worsen in 2011
  until summer 2012 loosening in 2013-2014
• LTL still has 5 to 8 excess terminal capacity,
  but maxed out on labor capacity-that is the key!

• Yes!
• Linehaul fleet down by 16
• Driver recruiters down 50-60 at many fleets
• Load growth of 2 to 4
• IP growing at 1.5x-2x GDP growth
• CSA caused many fleets to purge 5 to 10 of
  drivers

Source BBTCM analysis.
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Miscellaneous Factors
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Carriers Facing a Tug of War

• Shippers Want
• Increased Payload
• Fewer loads (packaging revolution, SC revolution)
• Supply Chain Flexibility 24/7
• More Tractors Trailers
• More Drivers
• Indemnification
• More Tractors
• Shippers Want
• Stretched Payment Terms
• Partnerships, but 3PLs prevalent dedicated as
  insurance capacity
• Intermodal
• Financially strong carriers

• Government Wants/Demands
• Emissions Friendly Eqpt.-Heavier
• Fewer loads if Congress passes 88K or 97K GVW
• HOS Fewer, less flexible hours
• More moved by rails/intermodal
• CSA shrinks driver pool
• CSA Increases liability potential
• O-Os shrinking under attack
• Reality Is
• Fuel paid 2x a week
• Carriers have started non-asset divisions, but
  woefully inadequate
• Less than 10 large asset-based IMCs
• Govt. hasnt lifted SIR of 750K since 1983

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Costs and Rate Trends
RPLM vs. Costs Rates fell 13.2 peak to trough,
while costs fell 9.7
Cost CAGR (red) 1990-1999 0.8 2001-2010 4.1,
but 2001-2008 4.6
Sources Data from 11 public companies Bureau of
Labor Statistics and selected ATA data. BBTCM
estimates for 2010-2011. Index began in 1992 at
100.0 and converts loaded rate per mile figures
into an index index excludes fuel surcharges.
BBTCM analysis for costs.
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Mexico Japan Considerations

• Mexico
• CSCMP just voted it best near-shore alternative
  vs. rest of Americas
• Celadon example on pay
• N. Mexico to Dallas ideal for 13-liter, but
  depends on freight mix
• 30 more expensive on labor vis-à-vis China but
  20 cheaper transportation
• Hundreds of companies have opened/re-opened
  facilities in Mexico since 20 currency
  devaluation in 2008-2009

• Japan
• Represents 6.4 of U.S. imports and 4.7 of U.S.
  exports
• Provides 60 of worlds silicon, used in
  semi-conductors, LCD panels
• 35 of global flash memory in phones, cameras,
  etc.
• Supply chain disruptions
• U.S. biggest exports grain and chemicals
• Pinch-points in supply chain. Ex autos high
  tech Shreveport, LA GM plant
• If nuclear risk is contained? Biggest rebuilding
  project in global history

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Container Rates May Impact Length of Peak
Shipping Season
Sources Drewry Shipping Consultants and Journal
of Commerce.
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Key Airfreight Trends-Steadier Growth Could Pop
Airfreight Bubble
Sources Drewry Consultants and JOC. Air freight
in January was 39 percent above the low point
reached by the end of 2009, and some 6 percent
above the pre-recession peak. The Drewry Air
Freight Price Index for Shanghai was launched in
November 2008, and peaked in December 2009 at
149.1 with an average 6.03 per kilogram rate.
The January 2011 index rose 3.3 percent from
December to 104.8, and the January average per
kilogram rate rose 14 cents to 4.24 per
kilogram, a 10 percent year-over-year decline.
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A Few CSA (Carrier Shipper Alliance) Tips

• Secure all freight properly, esp. hazmat
• Ensure accurate shipping weight to prevent
  overloading
• Avoid excessive detention to max drivers HOS
• Be flexible on pick-up and delivery times
• Complete bill of ladings correctly
• Provide proper placards for hazmat loads being
  tendered
• Allow drivers access to loading process for
  freight securement, esp. hazmat loads

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Possible Shipper Game Plan in 2011

• Focus on securing capacity, not reducing rates
• Increase approved brokers from 1 or 2 to 3-4
• Bring in more carriers
• Encourage 1-lane wonders
• Increase intermodal usage
• Get tight with 3PLs
• Utilize dedicated capacity
• Shorten pay periods
• Find out driver turnover on your account

Source BBTCM analysis.
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Intermodal Developments
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Significant Railroad Investments are Converting
Some Highway Freight
Source The Wall Street Journal.
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Crescent and Heartland Intermodal Corridors

• Heartland 1,200 mile route is 220 miles shorter
  and 28 tunnels were raised to accommodate
  double-stack opened Sept10
• 1.5M to 2.0M annual loads potential
• Target International freight
• Crescent 2,500 miles from NJ to Louisiana
  complete in 2012, but improved svc. in 2011
• 2.0M to 2.5M annual loads potential
• Target Domestic highway freight

Sources Progressive Railroading and BBTCM
estimates.
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Disclosures
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