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Surface Capacity-Is 2012 Finally the Tipping Point? [No]

Surface Capacity-Is 2012 Finally the Tipping Point? [No]. Thom Albrecht, CFA Managing Director (804) 787-8210 talbrecht@bbandtcm.com. FOR REQUIRED DISCLOSURES, INCLUDING ANALYST CERTIFICATION, PLEASE REFER TO THE

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Surface Capacity-Is 2012 Finally the Tipping Point? [No]

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  1. Surface Capacity-Is 2012 Finally the Tipping Point? [No] Thom Albrecht, CFA Managing Director (804) 787-8210 talbrecht@bbandtcm.com FOR REQUIRED DISCLOSURES, INCLUDING ANALYST CERTIFICATION, PLEASE REFER TO THE IMPORTANT DISCLOSURES SECTION AT THE END OF THIS PRESENTATION; Cover Photos: BBTCM; clip art on cartoon

  2. Let’s Start with the Right BBT! NOT!

  3. A Snapshot of Supply, Demand & Inventories Classic early June Freight Picture Retail inventories in good shape Note: red sections are loads, yellow are trucks. Source: U.S. Census Bureau

  4. 4 Non-Conventional Signals: Mixed but Okay Blast Furnace (Steel) Utilization TOFC Loads (Piggyback/overflow) are Disconcerting Sources: AMM, AAR and ACT.

  5. 4 More Signs are Relatively Okay Construction is up 6.0% yoy; non-residential is up 18% yoy BIFMA (Business Institutional Furniture) Chemical carloads,Wk22 +5.2%;(6-week rolling average up 7.1%) Truck Tonnage-Up 30 Straight Months Sources: Calculated Risk, ATA and AAR.

  6. 4 More Indicators-On Balance Okay Sources: American Institute of Architects, National Association of Realtors, Wright-DBC, Federal Reserve Board. EHS supply is 6.6 months, 3rd lowest since April 2006.

  7. Restaurant Trends Positive for Economy Source: NY Times, March 17, 2012

  8. Lending: Bottoming & Starting to Grow Source: Federal Reserve Board. C&I is commercial and industrial and RE is real estate

  9. The Gap Between Spending on Equipment & People is the Widest of Any Recovery Source: Wall Street Journal, January 17, 2012

  10. Truckload Supply & Demand-At Equilibrium Blue=TL Tractor Count Excess Supply Red=Loads Sources: ATA TRAC and BBTCM analysis.

  11. Spot Market at High Levels Despite Mediocre Economy 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. Picture source: K.W. Thompson.

  12. Except for 2003 & 2005, the Truck Peak is Essentially Done by June & is No Longer in the Fall Source: TCNAFI

  13. Why is Data So Much Better than Anecdotes? Mark Twain: “Reports of my death have been greatly exaggerated.” Freight corollary? “Reports of the capacity shortage have been greatly exaggerated.” Carriers are smarter about what they accept from spot market--don’t have to take any load Shippers’ inventory velocity is slow so ‘deep in route’ guide isn’t a panic • Load board velocity is slower; “crap” loads sitting longer • ‘Non-bid’ “bids” keep a lid on rates • Coming capacity shortage has been foretold since 2007 freight recession • Shippers unlikely to be caught off-guard as in 2H’03-2004 • Carriers still have slack in their systems so utilization still being soaked up (see chart) • Shippers 5 tools: a) Dedicated; b) Intermodal; c) More core carriers; d) more brokers; e) grow in-house fleet

  14. What You All are Wondering… A Synopsis of Freight Since the Great Recession Will another 2004 (Nirvana) ever happen again? Unlikely, but… May ‘03: Bush marginal rate tax cuts June ’03: HOS announced (effective 1-4-04) ’00-’02: 3 years of high carrier failure rates ’01-’03: 3 years of corporate cost cutting Auto sales 16M units and housing 1.8M units 2014: might be interesting… • 2010: spot shortage and big surge from March-June • 2011: spot shortage in March; Q2 good, not crazy • 2012: amazingly calm, slow and steady • 2013: depends on the election and Europe (partly) • 2014: the next Nirvana? [think 1994, 2004-depends on HOS ruling]

  15. Key Equipment & Productivity Trends-Death by a Thousand Cuts! (Not the 2 ‘other’ theories) Pictures: BBTCM, JBT Photos; Facebook for “Death by a Thousand Cuts”

  16. Lots of late model used trucks in last 2 downturns; few now Tractors: $40,000 More Expensive Since ‘01 But Nothing Added to Residuals; Shortage of Late Model Equipment Will Hurt Many Carriers $87,000 Value After 1 Year Sources: Tractor values from Navistar from 2000-2010, 1990, 1995 and 2012E figures are BBTCM estimates; Class 8 tractor sales from A.C.T. Research. 1st year D&A is approximately $38,000, meaning value is $85K after one year.

  17. 13% Shrinkage in Tractors 8-Years Old or Newer • TL Fleet (8 years old or newer) has shrunk 14.4% or 231,380 units; 1.5% growth in 2011; 0.5% growth expected in 2012 • Fleet that is 15 years old or newer has shrunk 13% or 290,011 units; 0.9% shrinkage in 2011; 1.5% growth expected in 2012 • Tractor growth has been below GDP 8 of the last 10 years • It has also been below Industrial Production most years • Trucking is more cyclical than the broader economy • Deregulation’s 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. Photos: Express archives.

  18. Active Trailer Populations Refrigerated Trailers Flatbed Trailers Source: ACT Research; pictures from Ryder and JBT Photos

  19. Trailers are Old; Also, Van Population has Shrunk 11% Dry Vans Reefer Vans (Avg. Age) Flatbed (Avg. Age) Source: A.C.T. Research.

  20. Productivity Down, Rates up Modestly, Input Costs Up Sources: BBTCM analysis of a composite of carriers. Trailer tractor ratio was 1.7; 2.0; 2.5; 2.8 and 2.5, respectively. All 4 data figures began at 100.0 in 1990. Cartoon: Transport Topics.

  21. CSA, DRIVERS, Rates & Intermodal Cartoon from Transport Topics

  22. Population Demographics are Lousy for Driver Recruiting • White males aged 35-54 have shrunk by 3M during the last decade • Van pay is typically under $0.40 a mile and annual pay averaged about $46,500 in 2010; will be about $48,000 in 2011 • Private not-for hire fleets have low turnover (<15%) 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 • CSA and lousy demographics are steep headwinds Sources: U.S. Census Bureau. Unemployment is from the Bureau of Labor Statistics (BLS). BBTCM analysis below. Picture: BBTCM and FSA, circa 2005.

  23. Driver Turnover is Rising Even With a Modest Housing Recovery—Could get Really Difficult when Housing Gets Strong • If HOS (hours of service) is trimmed (2013?) and housing keeps modestly improving, then the stage could be set for a very challenging driver and capacity market in 2013; 2014 similar to 2004 and 1994? • Each housing start generates about 8 TL loads • Once housing begins to recover it could rise for 8-10 straight years • Housing starts of 800K-850K in 2013 and 950+K in 2014 could do far more damage to driver availability than all those years when housing starts were above 1.5M 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 and 2Q12E of 94%.

  24. Annual Change in Construction Jobs (000s)-Negative Implications for Truck Drivers-But Why is Hiring Down in 2012? Source: Bureau of Labor Statistics, May 2012 report

  25. Why Drivers Leave Their Jobs

  26. JBHT is Driving Intermodal Conversion Sources: Company reports.

  27. What Can You as a Carrier Do? • Develop a smart network • New TL pricing model: charge a rate per hour for your assets • How much time does it take to service your customer and what are the assets involved? • Consider tiering driver pay, with 3 to 5 tiers • Analyze how and when customers can tender loads (48 hrs, 7 days, etc.?) • Analyze how quickly loads are accepted and why? Is your approach fresh or a tradition? • What is your average profit per load? $50, $60…$100? Do do you even know? • Let’s explore the network concept…

  28. Is Your Network the Equivalent of a Rotary Phone or “Dumb Phone”? Or… • Is it a head-haul or backhaul lane? • What is the market rate? • That’s what I’ll charge… • Incorporates revenue per mile • Length of Haul • Maybe part of the weekly computation of revenue per truck • But lacking data on efficiency of loads…

  29. Or is Your Network More Like a Smart Phone? Loading and unloading info Reefer run time; was product loaded warm? Cargo thefts-likely truck stops Lock-down fuel card network How many hours before pick-up did reefer run & after delivery? Next load options if you accept current load Next load backhaul or head-haul? Impact on driver HOS & network both today & in 48 hours Ability to rate loads ‘1’ to ’10’? • How data intensive is your information about every lane, account, location? • Dwell time at that location? • Accessorial payment history? [Impacts ability to pay layover, detention to driver, etc.] • Driver turnover @ that spot? • Probability of a better load in 4 hours? • Data on high, low and average market rates • Toll info & contracts (22/100) • Loading & unloading info • Average, surge and seasonal info

  30. Miscellaneous considerations & influences

  31. Truck Tonnage & Loads Versus Auto & Housing; Incremental Changes More Adverse to Drivers & Capacity this Cycle Sources: ATA for tonnage and loads; www.wardsauto.com for autos; U.S. Census Bureau for housing. Auto sales through December were 12.7M units up from 11.6M in 2010.

  32. Trucking Segment Shipment Trends Source: ATA May 2012 TRAC report.

  33. Canary in the Coal Mine? Which 4-Letter Word-Lull or Slow? Chemical Carloadings • Chemical rail carloadings: down 19 of the last 23 weeks (US & Canadian Rails) • Cass: May shipments up 2.2% yr/yr; up 1.8% sequentially • Loans: credit cards (+2.6%) and consumer loans (+4.5%) up noticeably last 2 months • CLOs (pools of junk bonds) remain positive yr/yr • Oh, and gas prices… Sources: AAR and Cass.

  34. Gas Prices as a Percentage of Disposable Income In May gas prices averaged 4.06% of disposable income The all-time high was 4.92% in July 2008 Historically, 4% has led to a deceleration in tonnage and consumer spending “Wiggle room” today includes some job growth, more fuel efficient vehicles (63% vs. 48%), Internet shopping and fewer miles driven Our sense? At 4.2% to 4.3% it gets worrisome Sources: U.S. government economics departments of BEA and EIA. Commentary: BBTCM analysis.

  35. Disclosures

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