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Before We Get Started…A Few Thoughts

Before We Get Started…A Few Thoughts. How far is the fall when jumping from the basement window? You can’t fall 20 feet from a 4-foot stepladder. Cartoon from ATA. Short Duration Cyclicality, Similar to 1970s, Has Returned: Impacts Psyche & Planning & Vendor & Customer Relationships.

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Before We Get Started…A Few Thoughts

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  1. Before We Get Started…A Few Thoughts • How far is the fall when jumping from the basement window? • You can’t fall 20 feet from a 4-foot stepladder Cartoon from ATA

  2. Short Duration Cyclicality, Similar to 1970s, Has Returned: Impacts Psyche & Planning & Vendor & Customer Relationships • Current environment is similar to highly cyclical 1970s environment • Short-duration cycles predominate with fewer “strong” quarters • Short duration also means fewer growth quarters between negative GDP periods • Recovery periods are shorter and not as strong • Strong quarters are defined as GDP growth ≥ 3% • Weak quarters are defined as GDP growth between 0% and 1.9% • 1970s:12 out of 52 quarters with negative GDP (23%); 20 with strong (38%); 8 with weak (15%); 10 quarters on average between negative GDP quarters • 1983-2001: 48 out of 76 quarters with strong GDP (63%); only 4 negative quarters; average of 32 quarters between negative GDP quarters Source: BB&TCM; GDP figures from Bureau of Economic Analysis (BEA)

  3. Four Indicators: I’m Okay, You’re Okay  Private residential spending: 55% below ’06 peak, up 36% from low. Non-residential is 28% below ’08 peak, up 33% from low. Public construction is 20% below March ’09 peak. Truck Tonnage: Up 39 of 42 months (NSA), but down 3 of 8 months Source: Calculated Risk; ATA

  4. 4 More Indicators: On Balance Okay, but Nothing Special Source: Calculated Risk, Federal Reserve Board. EHS supply in April 5.2 months, up from ~4.5 months in late winter, but still good versus 2011. Note: ABI was below 50 in April after 8 months above 50.0.

  5. Lending: Bottoming with Strength in C&I Source: Federal Reserve Board. C&I is commercial and industrial and RE is real estate

  6. Housing (in red): Adding to GDP After 18 Quarters of Negative GDP Contributions; Positive the Last 8 Quarters • 300,000 homes razed each year • 1.2M new households formed each year • 7M households formed the last 6 years and 83% went into apartments; normal is 65% to 70% • Housing starts will be up 7-10 years in a row from 2009 trough and will impact driver supply more than trucking volumes Housing’s contribution to GDP was negative 18 out of 21 quarters from 2006-Q1’11. Q4’12 GDP grew 0.4% and housing added 0.41%; Q1’13 GDP grew 2.4% and housing added 0.30%. Source: US Bureau of Economic Analysis; BB&TCM photo

  7. Good Auto Production but Yr/Yr Changes Moderate • Yearly changes in auto production moderate in 2013 • Three straight years with annual production increases above 1.5M units • Now good absolute numbers, but slower unit growth Source: BB&TCM; Bloomberg

  8. Attn Flatbed Carriers!: New Home Sizes are Growing Again Source: U.S. Census Bureau; measures average square foot of new construction homes; median sizes are approximately 200 square feet smaller over the years.

  9. But Why Does it Not Feel Better? Why is Freight so Inconsistent?Wasn’t Housing’s Recovery Supposed to Create More Freight & Make us Feel Better? Source: BBTCM analysis

  10. Freight has been Mediocre since June 2012—Why? • Housing starts rose 28% in 2012, or by 171,000 units to 781K units • N.A. auto production rose 17% or 2.3M units to 15.8M units • These were greater unit and percentage increases than in 2011 • BUT… • 2012 truck tonnage grew just 2.3% after growing 5.8% each in 2011 and 2010 • Van loads (–0.7%) shrunk for the second straight year • But N.A. intermodal (COFC) loads grew 6.1% after 6.0% growth in 2011 • Housing starts in H2’12 (839K units) were 15.2% above H1’12 (728K); YTD’13 starts up 11.4% vs. 2H’12 So, what is the problem?? Source: ATA for truck data; US Census Bureau for housing starts; Bloomberg for intermodal and auto; Housing starts are annual, seasonally adjusted figures

  11. Is it an Inventory Problem? Not Really… • Inventories are up in absolute dollars, but… • Inventory-to-sales ratios are reasonable • Inventory-to-sales ratios are up a hair, but not bloated compared to prior yr/yr months • Source: U.S. Census Bureau and BBTCM analysis.

  12. What Else? Industrial Production Slowed (Fiscal Cliff Worries); Few “Animal Spirits” • Business investment slowed in H2’12 • Factory output slowed • Even though things have bounced a bit so far in 2013, every month is inconsistent • Truck tonnage has declined 2 of last 4 months; the 2 months of growth were each over 7%. Source: Bureau of Economic Analysis for GDP; Federal Reserve Board for IP; ATA for truck tonnage; BBTCM for other comments

  13. Other Influences—No Easy Road Ahead • TMS Systems • Packaging Revolution • The growth of intermodal highway conversion in the East • 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 • Truck capacity growth (up ~1.5% in 2012) after shrinking 15% from 2007–2011 JBI LOH Has Shrunk ~ 15% Source: BB&TCM; backhaul figures from ACT Research ; JBILOH data from J.B. Hunt

  14. Can Housing Turn 2% GDP Growth into 4%?Even if housing is double its historical average, GDP growth would be aided by 0.6% rather than 0.3%; housing won’t generate 4% GDP by itself • From 1983-2005 (exc. 1989-1991 “mini-bust”) housing represented about 8.3% of annual GDP growth or 1/12 of the economy • 1983, 1984, 1986 & 2004 are the only years GDP added more than 0.4% to GDP growth • 1983 was the only year housing added 1% or more to GDP at 1.3% • Housing historically added 0.3% to GDP growth or 30 bps • Q4’12 added 0.41% (GDP grew 0.4%); Q1’13 added 0.3% (GDP grew 2.4%) Source: US Census Bureau; BB&TCM

  15. What’s More Important to GDP-Housing or Energy? • Housing starts rose 28% in 2012 to 785K and are expected to rise 27% to 30% in 2013 to ~1M units • Starts broke out of a 3-year average of ~585K over a year ago, but haven’t improved freight anecdotes; Why? • Energy is much bigger and drill rig counts are down 12% the last 9 months • Other industrial trends have been sloppy, too Source: Bureau of Economic Analysis, Energy Information Administration and BBTCM analysis.

  16. A Tale of 2 Sectors: Van (Decay), Reefer (Growth) CAGR: 1993-2002: 6.5% 2006-2013 YTD: -3.96% • 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 twice (2007 @ 1.0% and 2010 at 1.4%) • Reefer’s annual acceleration reflects an active FDA, aging population demographics, focus on fresh foods, etc. CAGR: 1993-2005: 1.29% 2006-2013 YTD: 2.98% Sources: BBTCM analysis of ATA data. Commentary is BBTCM.

  17. Key Load Trends Since Peak & Trough • Flatbed loads are off 26% from the 2006 peak but are up 10% from trough through 2012; YTD 2013 they are up 1% • Refrigerated loads have grown 17% since 2006 through year-end 2012; YTD 2013 they are up 5% • Tank loads are up 28% since 2006 (think energy and chemicals); food grade, aviation fuel, etc., have had nominal growth • LTL shipments are 14% below the 2006 peak through year-end 2012, but they are up 15% from the mid-2010 trough; YTD 2013 they are down 1% • Dry van loads shrank 19.4% from end of 2006 through 2012, including shrinkage of 3% in 2011 and 1.4% in 2012. YTD’13 they are off 5.0% and are 9.3% below the 2009 “great recession” Sources: ATA TRAC report and BBTCM analysis.

  18. Van Loads Continue to Shrink; Off 19% from 2006-2012 Source: ATA TRAC report

  19. U.S. Merchandise Trade with Mexico by Truck • U.S. truck exports into Mexico have grown 7.8% annually since 2005 and at a 16.4% clip since 2009 • U.S. truck imports from Mexico have grown 7.2% since 2005 and at a 15.7% since the 2009 trough Sources: Department of Transportation BTS and BBTCM analysis. Measures value of goods moved, not number of loads.

  20. Carrier Dynamics: Death by a Thousand Cuts! (Not the two “other” theories) • Not tons of carrier failures • Not tons of repossessions as used equipment values recovered • Instead, “death by a thousand cuts” Source: BB&TCM

  21. Tractors: $40,000 More Expensive Since ‘01 but Nothing Added to Residuals; Late-Model Equipment Shortage Will Hurt Many Carriers Lots of late-model used trucks in last two downturns; fewer now 5 years, not 4 $87,000 Value After 1 Year* *First-year D&A is ~ $38,000, meaning value is $87K after one year. Sources: Tractor values from Navistar from 2000-2010; from BB&TCM for 1990, 1995, and 2012; Class 8 tractor sales from A.C.T. Research.

  22. Costs and Mileage Productivity–Not Exactly a Barrel of Monkeys • Carrier costs per mile (excluding fuel expenses) have risen 12.6% since 2008 • Numerous fleets have bought used tractors and trailers to offset the higher costs of new equipment • Annual cost inflation has averaged 3.02% • 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 Atridivision

  23. Depreciation Costs Rising with Newer, More Expensive Equipment Fleet age: 2006 1.34 yrs; 2011: 2.4 yrs; 2012: 2.3 yrs Fleet age: 2006 1.75 yrs; 2011: 2.3 yrs; 2012: 2.7 yrs Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of 2012. Source: Carrier data.

  24. Maintenance Costs per Mile Rising, Even for “Young-ish” Fleets Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of 2012. Source: Carrier data.

  25. Productivity Down, Rates up Modestly, Input Costs Up Analysis of a composite of carriers. Trailer tractor ratio was 1.7; 2.0; 2.5; 2.8 and 2.5, respectively. All four data figures began at 100.0 in 1990. Source: BB&TCM analysis; Transport Topics cartoon

  26. What Some Carriers are Doing to Minimize Rate-Focused Customers • Top chart occurred even as loads grew 15% • “Carrier A” focused on mid-sized accounts that are less rate sensitive • Went from 80 to 150 customers in Chicago alone Source: BB&TCM analysis; Carrier A is top chart and Carrier B is bottom

  27. TL Dry Van Carriers: Not As Many Carriers as You Might Think • ~600,000 fleets with operating authority, but... • 406,000* can be eliminated due to oddball categories • 70% of the remaining 194,000 operate Class 3-7 trucks • This leaves 58,000 fleets • Approximately 30% of those are private or “not-for-hire” fleets • Of the 41,000 remaining fleets, 58% are dry van • More than half of those 24,000 fleets operate 5 or fewer trucks • About 8,000–10,000 fleets are in the dry van, for-hire market with more than 5 trucks • Top 250 control approximately 35%–45% of the trucks *Excludes selected categories (migrant, unspecified, US mail, exempt, government, Indian tribe, private property, private passenger bus, private non-passenger bus, road repair and “other” classifications totaling 406,000 fleets) that do not compete in the OTR truckload market Source: ATA, Federal Motor Carrier Safety Administration; Office of Motor Carriers; BB&TCM

  28. Drivers and Intermodal Source: ATA’sTransport Topics

  29. Intermodal’s Impact to LH Trucking is Greater than Truckers Realize • 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; JBHunt for intermodal chart

  30. Intermodal is Definitely Gaining Share from Van Trucking… • Domestic intermodal has posted load growth 11 straight years, including 2009 • Van TL loads have contracted 8 of the past 11 years, including last two years • Van loads are ~19% below 2006 levels • Domestic container growth has averaged 9.1% annual growth since 2007 (versus GDP growth of ~1.5%) Source: BB&TCM; ATA data in chart

  31. Why Drivers Leave Their Jobs—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 (photo, analysis and survey); comments on right from BBTCM

  32. Annual Change in Construction Jobs (000s)—Negative Implications for Truck Drivers from 2013 Onward • Construction hiring picking up in 2013 • Lots of cash payments in 2012 and absorption of late ‘11-early ‘12 hiring • Drivers will be targeted for hiring Source: BLS, May 2013 report for left table; ATA TRAC report for driver turnover; BLS for unemployment; US Census Bureau for housing starts

  33. A Microwave, or a Crock Pot, Crunch? HOS May Determine Which Scenario Source: BB&TCM

  34. 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 Source: BB&TCM photo

  35. 12-Step Program to Become a Shipper of Choice • Payments in 30 days or less (70% of carrier expenses due inside of 8 days); fair FSC (no BTF) • Weekend freight!!!!!!! • Bids: talk to key partners on key lanes • After awarding lanes give sufficient time to implement • Honor bid commitments • Bring new opportunities to partners first • Have driver friendly facilities and people • Velocity improvement in shipper network • Avg. daily volumes from Q1 to Q4 so as to set up surge capacity; lane flow seasonality; minimize end of period gymnastics • Use EDI; also timely resolution of claims & payment issues • Use multiple service offerings • Publish competitive metrics 12A. Access to top management 1x-2x a year 12B. Windows in lieu of appointments to make driver productive in HOS world 12C. Constant communication about carrier and shipper networks; networks can change weekly and carriers are not always “hiding capacity” Source: BB&TCM

  36. Shippers: Be Wary of the Procurement Trap Procurement Mentality • Run competitive bids • Seek the lowest price • Don’t discount overall value but price is a big component • Useful for inventory, planning and operations • Allows a Co to periodically test where the market is • Can be a good thing, but… The Problem • Businesses: tend to be saddled with fixed costs and capital investments OR people challenges related to intellectual assets-rarely both • Ex: steel and software • Trucking is the worst of both worlds, i.e., large fixed costs and capital needs with very high people turnover (inc. non-driver turnover, e.g., getting chewed out for failing on 15-min delivery windows) • Q: is your organization left with procurement professionals or transportation specialists? Source: BB&TCM

  37. Shipper Tips • You are not buying transportation, you are buying capacity…make sure your bosses know the difference • Next-day lane service is shortening—what does that mean for your network? • Fleets are tiering driver pay: What tier of drivers are you getting? • Slip-seating: if HOS gets cut [again], ask what fleets are doing to promote this from 1%-2% of trucks to 20+% • Floor loading vs. pallet loading…opportunities? • Ask: what percent of your fleet do you withhold for market opportunities vs. pre-booking? • 5 levers to pull: (1) dedicated; (2) intermodal; (3) brokerage; (4) increase core carriers; (5) grow in-house fleet. • Ask: what lever(s) make sense that we have not pulled? • Fix:Only 70% of shipments are unloaded in less than two hours • Fix:~80% of van loads are drop and hook, but 85% of reefer loads are live load/unload • Fix:Penalties for early deliveries and/or no acceptance • Address: Shipper/receiver focus upon inventories and dock door management, cutting into flexibility when more flexibility is needed Source: BB&TCM

  38. Is There Another 2004 Out There? Maybe 2004 Backdrop • ’00-’02: 3 years of record carrier failures • Bush tax cuts May 2003 • HOS announced July 2003 (effective 1-4-04) • Many shippers took capacity for granted • IP growth rate doubled • Auto sales @ 16M+ units and housing @ 1.8M units 2013–2014 Environment • Modest carrier failures (’07-’11) • Tax increases in 2013-2014 • Obamacare and other regulations and costs • Shippers anticipating next capacity squeeze since 2007 mini-downturn • Shippers: 5 levers pulled regularly • Auto sales @ 16M and housing @ 1M+ units • Pending HOS change? (July)

  39. Summary Shippers • Capacity has been relatively loose since June, but be wary… • Capacity could tighten on a dime; don’t be penny-wise and pound foolish • Positive economic surprises would make it clear there are not enough trucks • HOS will hurt productivity and accelerate failures • Between housing and HOS balance could shift in H2’13 or in 2014 to carriers Carriers • Engage shippers about productivity hit on HOS • Show your costs, but also recognize that supply and demand drives rates • Focus on the “660 (soon to be 600) challenge” • Determine customers that hurt you the most when HOS changes • Know your costs per hour and remember not all hours are created equally Source: BB&TCM analysis

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