Presentation Transcript

1. Is the Capacity Tipping Point Finally Here?“A pessimist sees the difficulty in every opportunity; an optimist sees opportunity in every difficulty.”-Winston Churchill Agenda: Why Did It Not Feel Better in 2012-2013? What Happened Since November? Freight Data-Just the Facts, Ma’am Economy: Points to Ponder Capacity: Hither and Thither? Photos from BB&TCM
2. The Numbers Say it was Better, but in Trucking it Didn’t Feel that Way What’s Going On? Source: BB&TCM analysis; cartoon from ATA. 2011 Auto prod. at 13.4M units Housing starts at 609K Unemployment of ~8.5% Truck tonnage rose 5.8%; total TL shipments rose 3.5%; van loads fell 3.0% 2013 Auto prod. @ 16.6+M units (+4% yoy) Housing starts at ~923.4K units Unemployment Finished @ 6.7%; 70+% of new jobs are part-time Truck tonnage is up ~8.6% since ’11; total TL shipments up 2.4%; van loads flat
3. Why? IP Slumped, Lots of Other Issues… When IP grows below 3%, freight gets sloppy E-Commerce Supply chain & packaging changes Product size changes Optimization of everything from the network to the trailer reduced shipment counts Intermodal… Much rooted in the “great recession” and high fuel prices of 2008 and resulted in… Source: Bureau of Economic Analysis for GDP; Federal Reserve Board for IP.
4. Example: Van Shrank (Decay); Reefer (Growth)… Dry van loads are in decay despite successes in dedicated, cross-border, DSD, etc. The 4 best years ever for van TL pricing and profits, 2003-2006, saw loads shrink each year Van load changes: 2003 (-1.2%), 2004 (-3.3%), 2005 (-1.3%) and 2006 (-0.3%) 2003-2006 were special only because supply was tight and HOS complicated things In the last 10 years reefer loads have declined one year (2011 @ -4.4%), while van loads have grown three times (2007 @ 1.0%,2010 at 1.4% 2013 @ 1.1%) Reefer’s annual acceleration reflects an active FDA, aging population demographics, focus on fresh foods, etc. CAGR: 1993-2002: 6.5% 2007-2013: -3.1% CAGR: 1993-2005: 1.29% 2007-2013: 2.1% Sources: BB&TCM analysis of ATA data. Commentary is BB&TCM.
5. Don’t Underestimate Intermodal’s Momentum vis-à-vis Trucking Domestic intermodal has posted load growth 12 straight years, including 2009 Van TL loads have contracted 8 of the past 12 years, including 3 of last 5 years Van loads are ~18% below 2007 levels Domestic container growth has averaged 9.2% annual growth since 2007 (versus GDP growth of ~1.8%) Source: BB&TCM; ATA and IANA data in chart
6. Other Influences—Friendly to Supply Chains, but Not to Truckers TMS Systems Packaging Revolution The growth of intermodal highway conversion in the East (see JBI chart on right) On-line shopping growth, creating more parcel, LTL and less TL (proportionate to LTL & parcel) Aggressive effort to lower deadhead by private in-house fleets (down 8 points in 6 years); this has created 2 points of truck capacity Broader supply chain changes JBI LOH Has Shrunk ~ 15% Source: BB&TCM; backhaul figures from ACT Research ; JBI LOH data from J.B. Hunt
7. Costs and Mileage Trends–Not Like the 1990s Carrier costs per mile (excluding fuel expenses) have risen 12.9% since 2008 Numerous fleets have bought used tractors and trailers to offset the higher costs of new equipment Annual cost inflation has averaged 3.1% However, driver wages fell in 2009 and were flat in 2010 Driver pay and benefits could be entering a highly inflationary period Source: BB&TCM estimates; ATA Atri division
8. What Happened the Last Few Months? Weather IP Accelerated Networks out of kilter Killed older capacity Easy Comps Rail Service meltdown: ~150,000 loads left rails first 11 weeks of 2014 May/June: port strike fears HOS: 3% Hit Will July-September be their usual “mediocre”? Source: BB&TCM
9. Easy Comps or a Better Economy? Van (top) & Reefer Clues Dry van load growth picked up last 5months of 2013 Van loads grew 3.9% last 5 months of 2013 versus (3.7%) shrinkage in 2012 Was it a real pick-up? Or easy comps given the fiscal cliff worries of 2012 and European debt worries of 2011? IP did grow 4.8% in Q4’13, but it too had an easy comp Jan ’14 (-0.37%), Feb ’14 (+1.38%) and Mar (+2.24%) were nothing special Reefer: easy comps 3 of last 4 months in 2013 Sources: BB&TCM commentary; ATA for load data
10. LTL Shipments Saw the Same Year-End Bump LTL shipments (not tonnage) also benefitted from easy comps Last 5 months of 2011 saw double-digitgrowth Only “strength on “strength” comp was Oct at +6% vs. +8.5% in Oct ’12 Jan ’14 (+2.1%) and Feb’14 (+5.0%) Sources: BB&TCM commentary and ATA for data
11. On-Line Sales: The “Wild and Crazy Guy” for all Q4s? Has grown 15.6% annually since 2009 “great recession” E-Commerce accelerated in 2013 as mobile apps improved On a steady path to at least 10% to 12% of mix eventually Amazon is to logistics what Walmart was in the 1980s-2000s Omni-channel approach so important Modest shipping charges won’t change habits (Talbots example) Sources: US Census Bureau for e-Commerce figures. Note: Talbots is a private company.
12. Q4’13: Retail’s Impact on Freight-This May be the ‘New Normal’ Store foot traffic is off 54% the last 3 years!!!! The last 5 weeks of 2013 saw foot traffic fall 12.8%, but brick & mortar retail sales rose 2.7% Online sales were 6.2% of retail in 1st 9 months of 2013; then 14% last 5 weeks of 2013 Q4’13 zaniness not just a function of a late Thanksgiving and a Wednesday Christmas Sources: US Commerce Department, US Census Bureau; BB&TCM channel checks; photos from BB&TCM
13. Is Recent Tight Capacity Merely a Re-dux of 1H’2010? Source: BB&TCM analysis; cartoon from ATA. 1H’10 Awful weather in Feb/March Load acceptance fell Truck availability difficult Spot market spiked Feb-June “Next capacity crunch” declared by carriers But CSA, HOS, CARB, etc., were non-existent or different By mid-July it was ‘over’ for 3+ years Late ‘13-early ‘14 Weather stunk; spot soared HOS started slow, but took a bite by fall 2013 Actual & pending regs will continue to grow, i.e., “creeping capacity crunch” Unlikely to go back to looseness of 2012-2013 but not yet a huge crunch
14. Freight Data-Just the Facts, Ma’am
15. Shipments: LTL & Tank Remain the Stars Source: ATA TRAC report
16. Now Reefer is Really Smoking (pun intended)! Reefer Loads Up 20% Since ‘06 Since the end of 2006 reefer loads have grown 20.3% but trailers are up just 3.4% Reefer loads have grown 9 of the last 10 years Reefer loads have averaged 3.3% annual growth since the end of 2003 Sources: BB&TCM commentary; ATA for load data; ACT Research for reefer trailers
17. Flatbed Capacity: Thankfully Energy & Auto (Steel) Have Been Good Flatbed trailers are off 8.3% from their ’07 peak Flatbed loads have grown 9.7% since the ’09 trough However, flatbed loads remain 25% below the last peak as the negatives of sluggish construction outweigh the positives of energy Sources: BB&TCM commentary; ATA for load data; ACT Research for reefer trailers
18. Since 2011 Construction has Hired 543,000 Workers—Up to 130,000 were ex-Truck Drivers Construction hiring picked a bit in 2013, with further acceleration in 2014 Lots of cash payments in 2012 and absorption of late ‘11-early ‘12 hiring Drivers are targeted for hiring Source: BLS, June 2014 report for left table; ATA TRAC report for driver turnover; BLS for unemployment; US Census Bureau for housing starts
19. Domestic Intermodal: Gonna Take Another 15% Bite out of LH TL Long-haul trucking remains very vulnerable to rail intermodal Truckload market greater than 700 miles is a $40B market Intermodal is a $14B market Intermodal should be at $20B by 2019–2020 At least 15% of the long-haul (over 700 miles) TL market will vanish ACT Research estimates that every 1M intermodal loads reduces the Class 8 tractor population need by 10,000 Source: BB&TCM; JB Hunt for intermodal chart
20. The Economy: Points to Ponder
21. Private Economy GDP Growth is “Ok” IP has accelerated recently, a good thing But until job creation consistently tracks/exceeds 250,000 a month, the economy will remain “solidly mediocre” Rising interest rates will foster more loan growth, not stifle growth Bank spreads remain very narrow Source: Bureau of Economic Analysis for GDP; Private economy GDP is exclusive of all government spending (federal, state and local); commentary is BB&TCM
22. …2 Key Freight Drivers Have “Leveled Off” Housing starts are up 52% since 2011, but permits have stalled since April ’13 Permits are not impacted by weather like housing starts Auto production is up 89% since 2009 low and 24% since 2011 but is beginning to level off; 2% to 4% unit growth More robust job and income growth will be required for materially greater improvements Rising interest rates probably slowed housing some 70+% of all new jobs last 2 years are part-time versus a longer-term average of 53% How quickly will housing get back to 1.5M units? Sources: BB&TCM commentary, US Census Bureau (housing) and Bloomberg (auto production). Housing in 000s; autos in millions.
23. Chemicals: Quietly Signaling Strength Chemical carloads on the railroads are encouraging 22 weeks so far While 13 are down (vs. 16 down weeks in all of 2013), much of that was weather Chemical shipments have been up 7 of the last 10 weeks Chemical carloadings are a proxy for industrial activity In the next 3 years over 120 new chemical, fertilizer and petro-chem plants and expansions will come on line in the Gulf Coast, totaling more than $120 billion Sources: Association of American Railroads (AAR), Bloomberg and BB&TCM commentary.
24. Long-Term Positive: Household Formations are Running Way Above Housing Starts Source: US Census Bureau and BB&TCM analysis
25. Lending: Bottoming and Growing Selectively Source: Federal Reserve Board. C&I is commercial and industrial and RE is real estate
26. Factoid: Today’s Youth are Different than Us Only 40% of Millenials (born 1983-2001) believe it is important to own a vehicle compared to 60% for baby boomers (1946-1964) 87% of 19-year olds held a license in 1983; only 69% did in 2011 Why? More comfortable with shared cars, bikes and public transit Affordability also an issue Will impact future freight Sources: US Dept. of Transportation and BB&TCM analysis; photo from BB&TCM
27. Capacity: Prolonged Crunch or Rolling Headaches in 2014-2016? Source: BB&TCM/Thom Albrecht for cartoon on left; ATA for cartoon on right.
28. Capacity Crunch or Not? Bull Case Van loads grew 6.2% in Dec ‘13 Increase in carrier failures in Q3, Q4 and Q1 despite lower fuel prices and higher freight volumes Regulatory issues finally tightening the noose more than earlier supply chain changes Future regulation (ELDs, drug clearinghouse, etc.) to further constrict capacity Source: Commentary is BB&TCM analysis and opinions; photo is courtesy of BB&TCM Bear Case Dec’12 loads fell 8.4% (easy comp) 70+% of jobs last 2 years are part-time; labor participation rate very low Housing starts: faltered in Q4 and Q1, hurting GDP over 0.3% Auto at 16.6M, up from 8.8M and unlikely to exceed 17.5M Changing retail season likely to create chaos last 5-6 weeks each year, esp. e-Commerce WEATHER! Our conclusion? 2014 is like 2003, not 2004…a transitional year…setting the stage for 2015-2016, which could be highly inflationary for shippers
29. Tractor Shrinkage Was Close to Shipment Shrinkage by Late 2013 There are 1.3M CL8 trucks 8 years old or newer 2.23M CL8 trucks 15 years old or newer We estimate that 70% to 75% of inter-city freight is hauled by trucks 8 years old or newer Little is hauled by 14 & 15 year old trucks But some is hauled by 9-12 year old trucks Weighting it 70/30 implies the OTR fleet was down ~16.5%, implying slight excess capacity (1% to 2%) last fall and then… all heck broke loose… Source: Bureau of Economic Analysis for GDP; Federal Reserve Board for IP.
30. Why Drivers Leave Their Jobs (Pay & Respect)—It’s a Shipper Problem not Just a Carrier Problem Does the shipper value a driver’s time? Bathrooms, phones Wifi availability Helpful staff Parking availability Clear signs Paper work handled courteously & simply 3rd Parties @ Gate-Do they share your view? 3% rate hike-~1% goes to driver Source: BB&TCM (analysis and survey); comments on right from BB&TCM; cartoon from ATA.
31. Pay Rising but Woefully Inadequate Driver turnover in the 90s for 8 straight quarters Turnover managed fairly well, but the pipeline of new drivers is weak Pay needs to rise to attract new candidates to the industry 2013 median driver pay was $47,544, up 1.92% vs. 2012 but up just 3.3% since 2008 At $0.372 it has barely budged since $0.360 in 2008; inflation alone would be at $0.403 In real terms drivers have lost 2.25 cents Source: BB&TCM estimates; ATA Atri division
32. Regulations, More than Demand, Will Drive the Next Crunch-But It’s Coming Tons of New Regulations Source: FTR Associates and BB&TCM analysis.
33. And A Host of Miscellaneous Factors HOS cut “functional capacity”by ~3% And empty trucks due to no drivers is ~4% (maybe more) Carrier failures have risen significantly the last 9 months despite relatively muted fuel prices and a modest uptick in volumes Fleets are failing as the cumulative impact of costs and the driver toll run their course Older drivers leaving due to technology; younger drivers still not entering the driver force ELDs will grow like a musical crescendo… Sources: ATA for loads; ACT Research for truck counts and BB&TCM analysis; photo from BB&TCM
34. Driver Miles Equals Driver Smiles Prep time=pre-trip inspection, fueling, drug tests, DOT inspections PT=breaks, meals, communications, route planning, logging Time at S/R=inefficient appointments, paperwork, check-in, check-out DTE=holidays, surges, traffic, day of week booking, network changes UT=appointment times, parking issues, fatigue, 70 hour rule, planning uncertainty, day of week bookings DT=Most fleets believe they can add 30 to 75 minutes with shipper/receiver help Note: 600 available drive time minutes per day Sources: BB&TCM proprietary work with a large private fleet, sub-90 OR
35. Shippers, Let’s Talk Strategy and “Big Picture” You are not buying transportation, you are buying capacity…make sure your bosses know the difference Don’t let trucking’s economies of scope mask its diseconomies of scale Many of you work for companies with a kaizen, continuous improvement or lean culture. The average trucker has 4 to 5 drivers for every non-driver. Given the government’s lack of productivity help, be careful about a “CI” mindset Source: BB&TCM photo and commentary
36. Stat of the Day When President Obama took office in 2009, there was one person at DOT making over $170,000 annually Today, there are 1,800+ people at DOT making over $170,0000 No wonder you have a headache! Source: US Congress for DOT information; picture from BB&TCM.
37. IMPORTANT DISCLOSURES To receive price charts on the companies mentioned in this report, please contact BB&T Capital Markets Research at 800-552-7757 x8785. BB&T Capital Markets rating distribution by percentage (as of June 12, 2014): All companies All companies under coverage to which it has provided under coverage: investment banking services in the previous 12 months: Buy (1) 48.25% Buy (1) 26.09% Hold (2) 51.40% Hold (2) 14.29% Underweight/Sell (3) 0.35% Underweight/Sell (3) 0.00% Not Rated (NR) 0.00% Not Rated (NR) 0.00% BB&T Capital Markets Ratings System: The BB&T Capital Markets Equity Research Department Stock Rating System consists of three separate ratings. The appropriate rating is determined by a stock’s estimated 12-month total return potential, which consists of the percentage price change to the 12-month price target and the current yield on anticipated dividends. A 12-month price target is the analyst’s best estimate of the market price of the stock in 12 months. A 12-month price target is highly subjective and the result of numerous assumptions, including company, industry, and market fundamentals, both on an absolute and relative basis, as well as investor sentiment, which can be highly volatile. The definition of each rating is as follows: Buy (1): estimated total return potential greater than or equal to 10%, Hold (2): estimated total return potential greater than or equal to 0% and less than 10%, Underweight (3): estimated total return potential less than 0% B: Buy H: Hold UW: Underweight NR: Not Rated NA: Not Applicable NM: Not Meaningful SP: Suspended Stocks rated Buy (1) are required to have a published 12-month price target, while it is not required on stocks rated Hold (2) and Underweight (3). BB&T Capital Markets Equity Research Disclosures as of June 12, 2014 BB&T Capital Markets makes a market in the securities of ArcBest Corporation, Celadon Group, Inc., C. H. Robinson Worldwide, Inc., Con-way Incorporated, Covenant Transportation Group, Inc., Echo Global Logistics, Inc., The Greenbrier Companies, Inc., Genesee & Wyoming Inc., Heartland Express, Inc., J.B. Hunt Transport Services, Inc., Knight Transportation, Inc., Landstar System, Inc., Marten Transport, Ltd., Old Dominion Freight Line, Inc., Roadrunner Transportation Systems, Inc., Saia, Inc., Swift Transportation Company, Trinity Industries, Inc., Universal Truckload Services, Inc., Wabtec Corporation, Werner Enterprises, Inc. and YRC Worldwide Inc.. BB&T Capital Markets has managed or co-managed a public offering of securities for Roadrunner Transportation Systems, Inc. and Wabtec Corporation in the last 12 months. BB&T Capital Markets has received compensation for investment banking services from Roadrunner Transportation Systems, Inc. and Wabtec Corporation in the last 12 months. BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from ArcBest Corporation, Celadon Group, Inc., C. H. Robinson Worldwide, Inc., Con-way Incorporated, Covenant Transportation Group, Inc., Echo Global Logistics, Inc., The Greenbrier Companies, Inc., Genesee & Wyoming Inc., Heartland Express, Inc., J.B. Hunt Transport Services, Inc., Knight Transportation, Inc., Landstar System, Inc., Marten Transport, Ltd., Old Dominion Freight Line, Inc., Roadrunner Transportation Systems, Inc., Saia, Inc., Swift Transportation Company, Trinity Industries, Inc., Universal Truckload Services, Inc., Wabtec Corporation, Werner Enterprises, Inc. and YRC Worldwide Inc. in the next three months. An affiliate of BB&T Capital Markets received compensation from ArcBest Corporation, Con-way Incorporated, The Greenbrier Companies, Inc., Genesee & Wyoming Inc., J.B. Hunt Transport Services, Inc., Landstar System, Inc., Old Dominion Freight Line, Inc., Roadrunner Transportation Systems, Inc., Saia, Inc., Swift Transportation Company, Trinity Industries, Inc. and Wabtec Corporation for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts. ADDITIONAL INFORMATION AVAILABLE UPON REQUEST For valuation methodology and related risk factors on Buy (1)–rated stocks, please refer to the body text of this report or to individual reports on any covered companies referenced in this report. The analyst(s) principally responsible for preparation of this report received compensation that is based upon many factors, including the firm’s overall investment banking revenue. 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