economic update & transportation market outlook

Transportation & Logistics Equity Research


Economic Update & Transportation Market OutlookWhat Lies Ahead For The U.S. Economy & The Domestic Transportation Industry

Presentation to Ohio Trucking AssociationJohn G. Larkin, CFA | Managing Director | 214.706.9455 | [email protected]

John Engstrom | Associate Analyst | 214.706.9456 | [email protected]

Roxanna Islam | Associate Analyst | 214.706.9485 | [email protected]

Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications can be found on pages 43 – 48 of this report.

September 19, 2016


Is Donald Fit to Be President?

2


Is Hillary Fit To….Stand?

3


What’s Certain is They Both Have Plenty of Mud to Throw at Each Other

4


• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate

• Freight Market is Choppy at Best; Abysmal at Worst

• The Supply Side of the Market is Beginning to Contract and Right Size

• Some Trucking Segments Are Performing Better Than Others

• Who are the Players in Town?

• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking

Discussion Agenda

5


Source: U.S. Census Bureau 6

Transportation & The Economy—Signals & DriversConsumers drive freight, and population growth drives the consumer; global population still rising, but growth is slowing

0.0%

0.5%

1.0%

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0

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2041

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44E

2047

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50E

Y/Y

Chan

ge In

Pop

ulat

ion

Grow

th

Abso

lute

Pop

ulat

ion

Leve

l (m

illio

ns)

Population (millions) Y/Y Population Growth


-15%

-10%

-5%

0%

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0

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1

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Y/Y

Cha

nge

In P

rodu

ctiv

ity

Inde

xed

Prod

uctiv

ity (1

947

= 1)

Productivity Index Y/Y Productivity Growth

Chart displays seasonally adjusted annual dataSource: Bureau of Economic Analysis 7

Transportation & The Economy—Signals & DriversProductivity has been low and downward sloping since the beginning of the century

2Q16Productivity=-0.5%


(6%)

(4%)

(2%)

0%

2%

4%

6%

8

10

12

14

16

18

20

2Q96

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¹

Y/Y

% C

hang

e

U.S.

GDP

(200

9 ch

aine

d $U

.S.,

Tn; S

AAR

)

8Chartdisplaysseasonallyadjustedannualdata;pinkshadedregionsdenoterecessionSource:BureauofEconomicAnalysis

Economics: Gross Domestic ProductThe “advance“ estimate of GDP for the second quarter of 2016 showed a 1.5% growth rate; slow but positive growth


Average Real GDP Growth Rate Per Quarter in OfficeLast 11 Presidents (1953 – 2016)

Source:BureauofEconomicAnalysis 9


¹ U6 Unemployment includes unemployed, discouraged workers, marginally attached, plus total employed part time for economic recessionsSource: U.S. Bureau of Labor Statistics; recessions shown in light blue 10

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Seas

onall

y Adj

uste

d Un

empl

oym

ent R

ate

U6 (seasonally adjusted) U3 (seasonally adjusted)

June. '164.7%Dec. '07

3.8%

Oct. '097.1%

June‘16U3(seasonallyadj):4.9%June‘16U6(seasonallyadj):9.6%

Transportation & The Economy—Signals & DriversBoth U6 and U3 unemployment¹ have come down, and U6 is now catching up to the rate of improvement seen in U3


56%

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66%

68%19

49

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Labo

r Fo

rce

Part

icip

atio

n Ra

te

PeakApr. 2000: 67.3%

Most RecentJune 2016: 62.7%

11.6 M Jobs Required to Keep Rate Constant

Source: U.S. Bureau of Labor Statistics 11

The Decline In Labor Force Participation Rate Is Partly Due To Retiring Baby Boomers, And Partly Due To Expanded Entitlement Programs

Transportation & The Economy—Signals & DriversThe decline in unemployment is largely due to a falling labor force participation rate


12Chart displays seasonally adjusted retail sales, less gas, adjusted for inflation and population growth (1992 = 100) Source: U.S. Census Bureau; U.S. Department Of Labor - Bureau of Labor Statistics; Stifel indexing

Transportation & The Economy—Signals & DriversRetail Sales Ex. Gas and Adj. for Population Growth and Inflation Has Increased 2.6% Y/Y

(12%)

(7%)

(2%)

3%

8%

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hang

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thly

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ail S

ales

(W

. Exc

lusi

ons

& A

djus

tmen

ts; $

U.S

., Billions)

Adj Retail Sales Y/Y% Change

Change from 2006 Peak: (0.7%)


13Source: U.S. Census BureauISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction.

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ISM

Ind

ex V

alue

ISM Index Values:May 51.3, Jun 53.2, July 52.6

30-year Average: 52.1

Transportation & The Economy—Signals & DriversThe ISM Has Weakened in July But Still Sits Slightly Above the 30-Year Average


Economic IndicatorsTransportation & The Economy—Signals & DriversAre Elevated Retail Inventory/Sales the New Norm In Supply Chain Management?

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I/S R

atio

Reta

il In

vent

orie

s ($

bn)

Retail Inventories Inventory/Sales Ratio

May-16 I/S Ratio: 1.50

Source: U.S. Census Bureau








Discussion Agenda

15


Trucking Dominates The LandscapeThe trucking sector dwarfs other modes in scale, and truckload (TL) accounts for the bulk of trucking in the U.S.

16

DollarMarketSize:$877bnU.S.FreightTransportationMarket,2014

TonnageMarketSize:14.6bn TonsU.S.FreightTransportationMarket,2014

Source:AmericanTruckingAssociations,StifelestimatesEstimatesarebasedon2014marketdata.

Truckload4,765.8

33%

LTL72.8 1%

Private Truck5,044.3

35%

Rail Carload1,943.7

13%

Rail Intermodal

191.2 1%

Water849.5 6% Pipeline

1,528.5 10%

Air Express12.9 0%

Ground Parcel152.3 1%

Truckload319.1 35%

LTL19.2 2%Private

Truck324.6 36%

Rail Carload63.4 7%

Rail Intermodal

18.3 2%

Water11.8 1%

Pipeline48.4 6%

Air Express29.8 3% Ground

Parcel75.0 8%


Source:FTRAssociates,OnIndex2000=100 17

Transportation & The Economy Rail intermodal loadings have outperformed since the Great Recession

70

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100

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160

170TruckLoadings Heavy-DutyTruckTonnage RailIntermodalLoadings U.S.RailCarloads

FORECAST


Source:FTRAssociates,OnIndexJanuary2003=100;StifelRTMforecast 18

Transportation & The Economy Freight rates have continued on an upward trajectory since the Great Recession

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270Truckload(w/oFSC) LTL(w/oFSC) Intermodal/Rail+Dray(w/oFSC) RailroadRTM

FORECAST

ExcludesFSCImpact

IncludesFSCImpact


19Source:ITSTrans4Cast;MDIindexvaluesbelow7indicatethatthemarketfavorsbrokers/shippersfromaratenegotiationstandpoint.MDIindexvaluesabove7indicatethatthemarketfavorsthetrucker

Market Demand IndexThe ITS Market Demand Index was weak throughout 2015 and but a capacity crunch is reversing that trend now during 2016

1

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25

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33

37

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Jul-16

ITS

Mar

ket D

eman

d In

dex


20Source:AmericanTruckingAssociations

Truckload VolumesTL volumes exhibited weak growth throughout 2015 and have continued to struggle throughout 2016

(25%)

(20%)

(15%)

(10%)

(5%)

0%

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Y/Y

% C

hang

e

Truc

kloa

d Lo

ads

Inde

x (S

easo

nally

Adj

uste

d)

Total Loads (Adj) Y/Y % Change

June -4.1% from May; -3.2% Y/Y

Relative to Recession +56.7%








Discussion Agenda

21


Source:FTRTransportationIntelligence,StifelAnalysis 22

1,500,000

1,550,000

1,600,000

1,650,000

1,700,000

1,750,000

1,800,000

1,850,000

1,900,000

1,950,000

2,000,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Num

ber o

f Driv

ers

Driver Labor Shortage & Surplus

-240,000 Shortage Projected

Driver Demand

Driver Supply

Efforts to counterbalance a driver shortage need to look at increasing the driver pool to keep up with growing demand, not simply preventing it from shrinking

Compliance, Safety, Accountability (CSA)

Hours Of Service (HOS)

Drug & Alcohol Database

Speed Limiters

Electronic Log Devices (ELDs)

Driver ShortageForward looking projections show a gap in the growth of driver supply and demand


Source:FTRIntelligence;2016.3to2019.4areestimates 23

Chronic Labor Shortage in the U.S.The cavalcade of capacity stripping federal regulations marches on to make things worse


Focus On Safety By Insurance Companies & ShippersInsurance premiums have doubled and even tripled in some cases

• Many insurance companies have decided not to underwrite policies fortruckers who don’t have ELD’s implemented

• Some insurance companies have even outright left the market: AIG, Zurich

• Truckers have indicated that insurance rates are up dramatically, some from$5,000/truck to $15,000

• Some brokers have indicated that only truckers with a proven safety recordand all of the regulatory required technology must already be fullyimplemented prior to considering writing a policy

Source:Stifel 24


Spot Market Insanity Flushing Out Small Carriers120 Trucking companies with an average fleet size of 17 halted operations in 2Q16; the number was only 70 in 2Q15

Source:AvondalePartners 25

0

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50,0003Q98

1Q99

3Q99

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3Q15

1Q16

Tota

l Num

ber

of T

ruck

s Re

mov

ed


Source:FTRIntelligence;2016.3to2019.4areestimates 26

Capacity Utilization Expected to Spike: With increasing regulations, defaults, and a constrained driver pool growing demand a tightening capacity is expected to increase utilization


Some Big Carriers Pruning CapacityYear-Over-Year Change in Tractor Fleet from 2Q15 to 2Q16

0 5,000 10,000 15,000 20,000 25,000

CGI

CVTI

JBHT

KNX

MRTN

PTSI

SWFT

USAK

WERN

#REF!

2Q15

2Q16

Flat

-5.2%

+6.9%

-4.0%

-2.5%

+5.4%

-6.7%

2Q16NotYetReported

Source:CompanydataTotaltractorsincludingowneroperatorsunlessotherwisenoted;WERN,JBHT– Totaltractorsatquarterend 27

+5.9%


28Source: State of Logistics Reports, U.S. Bureau of Economic Analysis

United States Logistics Cost as a Function of GDP

Efficiency Plateau: After post-deregulation improvements, incremental efficiency in logistics has been difficult to attain. Very little support from changes in size and weight restrictions.

7%

8%

9%

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11%

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17%

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900

1,100

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1,500

1981

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Logi

stic

s Co

st a

s a

% o

f U.S

. GDP

U.S.

Log

istic

s Co

st ($

U.S

., bi

llion

s)

US Logistics Cost ($ bns) Cost as a % of GDP


Infrastructure Investment Relative to historical spend, current U.S. infrastructure investment is down one full percentage point

29Source:McKinseyGlobalInstituteAnalysis

United States Comparative Infrastructure SpendingGap between historical spend and estimated future spending need, % of GDP

$177BillionShortfall


Intermodal Works Only In Long Haul Density MarketsTrucking competes with rail mainly in the 500 – 1,000 mile range, but current trucking pricing may be changing that

Source:FederalRailroadAdministrationNationalRailPlan,September2010ProgressReport;ATATruckingTrends2013,OliverWyman 30

Modal Shift Projection








Discussion Agenda

31


Sector Overview: Dry Van Truckload (TL)Dry Van Truckload market rates have been pummeled

Source: FTR, American Trucking Associations (ATA) 32

Dry Van Truckload Volume and Pricing

Large Fleets Have Decreased Y/Y

• Spot market pricing not sustainable

• Contract pricing pressure surprisingly intense

• Fleets downsizing

• Capacity sapping regulations are rapidly approaching

• Insurance companies and shippers may do more to enforce safety compliance than law enforcement

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TL L

oad/

Flee

t Siz

e In

dex

(Feb

ruar

y 20

05=1

00)

Large TL Fleet Size Index Total TL Loads Index

0

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Load

ings

Rates

TL Dry Van (w/o FSC) Dry Van Trailer Loadings (000s, SA)

FTRest.


Sector Overview: Less-than-Truckload (LTL)Volumes tepid but pricing stable; flat is the new up

Source: Institute for Supply Management, National Bureau of Economic Research, American Trucking Associations; grey-shaded regions in top chart signify recessionary periods 33

• The last year and half has been tough for LTL volumes, thanks to 1) weak domestic energy/industrial sectors, 2) strong dollar-driven softness in manufacturing exports, 3) average shipment size declines

• While soft volumes tend to weigh on pricing, due to greater industry concentration than TL, rising costs, and some hard lessons in the last downturn, the pricing environment remains rational

• E-commerce and shortening supply chains could be positive for LTLs, but real margin growth necessitates more volume to drive density whether through economic growth or competitor failures

• If TL sector tightens significantly, LTL will be happy to handle the overflow

0

200,000

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JAN 2017

Loadings

Rates

LTL (w/o FSC) FTR Heavy-Duty Truck Tonnage (000s, SA)

FTRest.

LTL Trucking Pricing and Truck Tonnage

(50%)

(25%)

0%

25%

50%

75%

Aug-

99Au

g-00

Aug-

01Au

g-02

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03Au

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g-16

Y/Y

% C

hang

e

ISM Index ATA LTL-SA Tonnage Index

Y/Y ISM Generally Negative for Last ~18mos.


Sector Overview: Reefer Truckload (TL)Reefer Truckload market rates have been pummeled


Reefer Truckload Volume and Pricing


• Broadly speaking the refrigerated market is expected to continue to grow with the need for fresh(er) food

• In 2015 some carriers struggled with end markets dealing with the bird flu filtering through end markets

• Locus of production moving east

• Intermodal experiment still alive

• Rate pressure has been acute

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TL L

oad/

Flee

t Siz

e In

dex

(Feb

ruar

y 20

05=1

00)


05001,0001,5002,0002,5003,0003,5004,0004,5005,000

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Load

ings

Rates

TL Reefer (w/o FSC) Reefer Trailer Loadings (000s, SA)

FTRest.


Sector Overview: Flatbed Truckload (TL)Flatbed Truckload market rates have been pummeled


Flatbed Truckload Volume and Pricing


• Heavy haul freight struggling currently through soft industrial economy and low commodity prices

• US implementation of steel tariffs on China has only shown null to modest benefit to domestic steel volumes

• Building materials were ok up until recently

• Ag and construction equipment soft

• Drilling rigs and pipe very weak

80

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TL L

oad/

Flee

t Siz

e In

dex

(Feb

ruar

y 20

05=1

00)


0

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90

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2003

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Load

ings

Rates

TL Platform (w/o FSC) Flatbed Trailer Loadings (000s, SA)

FTRest.


Sector Overview: Tank Truckload (TL)Tank Truckload market rates have been pummeled


Tank Truckload Volume and Pricing


• The North American Energy industry in midst of a lull and some estimates show that construction is currently backlogged for 10 years

• Petrochemical industry investment is booming with 2017 being the first year for new capacity coming on stream

• There are 243 U.S. chemical production projects expected between 2010 and 2023

• Plastic pellet business is solid

• Frac sand is soft

• Grain is strong

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TL L

oad/

Flee

t Siz

e In

dex

(Feb

ruar

y 20

05=1

00)


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

9095

100105110115120125130135140

JAN

2003

JAN

2004

JAN

2005

JAN

2006

JAN

2007

JAN

2008

JAN

2009

JAN

2010

JAN

2011

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2014

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2015

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2016

JAN

2017

Load

ings

Rates

TL Tank (w/o FSC) Bulk Trailer/Straight Truck Loadings (000s, SA)

FTRest.








Discussion Agenda

37


Source:CHRobinson 38

Truckload Market Fragmentation & CompetitionTransportation status quo: fragmented with very few large players

90.5%

6.8% 2.8%

6orFewer 7to20 Morethan20

U.S. Motor Carriers Operating a Given Number of Power Units

AddLTLFragmentation


Truckload/Dedicated Market Size and Share 2015 Ranking of Top 25 U.S. & Canadian Carriers (2014 Data)

Total201

4Re

venu

es

(USD

$M

illions)

Source:TransportTopics;MarketSizeIncludesPrivateTruckloadandTruckloadCVTIrevenueincludesStarTransportation;USAKrevenueisTruckingrevenueonly;PTSIrevenueistotalrevenue

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

U.S.&CanadianCarriersRankedFromLargesttoSmallest

Public Company Revenue Private Company Revenue

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Truckload Market Fragmentation & CompetitionTransportation status quo: fragmented


Competitive LandscapeThe top-5 LTL carriers comprise nearly 55% of the industry

Source:Companydata,measuredby2014revenue;Stifelestimates 40

Note: LTL Industry Is 12% As Large As The TL Industry In Terms of Annual Freight Bill

FedEx Freight$6,093 16%

YRC Worldwide

$5,069 14%

Con-way Freight$3,632 10%

UPS Freight$2,633

7%

Old Dominion

$2,788 7%

Other$17,285

46%

FedEx Freight YRC Worldwide Con-way FreightUPS Freight Old Dominion Other








Discussion Agenda

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ConclusionsThe sluggish U.S. economy should continue to pull the freight market into a tightening position, especially given current regs

Source: Stifel

§ Slow, steady growth most likely scenario (recession risk, however, whilelessened of late, still remains)

§ Longer term, a tight TL supply and demand dynamic is still probable

§ All other logistics sectors benefit from tight TL supply and demand§ Shipper and carrier collaboration is largely untapped reservoir for

incremental productivity§ 3PL’s likely to continue helping shippers

Ø Drive down total logistics costsØ Source capacityØ Reduce overheadØ Optimize supply chain designØ Winning 3PL's and winning/larger TL carriers will make peace


Important Disclosures & Certifications

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economic update & transportation market outlook

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