Transcript General pitch

Freight Demand & Supply in a Crazy World!
January 2009
Thom S. Albrecht, CFA
Managing Director
(804) 727-6235
[email protected]
The analyst primarily responsible for the preparation of the content of this presentation certifies that (i) all views expressed in this presentation
accurately reflect the analyst’s personal views about the subject companies and securities, and (ii) no part of the analyst’s compensation was, is, or
will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this presentation. Required disclosures
may be found on page 43 of this presentation.
1
Give Yourself Some Credit!!
• A recent study
found the average
American walks
900 miles/year
• Another found that
Americans drink an
average of 22
gallons of alcohol a
year
• Conclusion:
Americans get
about 41 miles to
the gallon!!
Source: www.funnyhub.com/jokes
2
A Maze of Factors to Assess
 Why Domestic Demand Will Remain Lousy for Much of 2009
(don’t count on any demand help!)
 Housing is still a drag, with negative implications for freight
 Other consumer issues
 Commercial construction/real estate market
 International Demand Is Sick, Too
 Key international data points
 The importance of global exports
 A Few Facts on U.S. Trucking
 The structure of the industry
 Changing distribution patterns
 Supply and demand trends
 2009-2010 crystal ball
Sources: Kimball Hill Homes.com for cartoon;
Stephens Inc. for analysis.
3
Housing’s Impact to Economic Growth
6%
5%
4%
4.8%
U.S. GDP Growth
1% of
GDP=$140
Billion
4.8% 4.8%
Housing's Drag on U.S. GDP
2.7%
2.8%
3%
2%
1%
0%
1.5%
0.8%
0.1%
0.9%
-0.5%
-0.2%
-0.52% -0.66%
-1% 0.30%-0.70%
-0.60%
-1.12%
-0.91%
-1.01%
-1.06%
-1.20%
-1.33%
-2%
Q1'06
Q3'06
Q1'07
Q3'07
Q1'08
Q3'08
Sources: U.S. Bureau of Economic Analysis and Haver Analytics. The “1% of GDP”
figure is annualized.
4
Supplies of New and Existing Homes Are Double What
They Should Be…
Source: Calculated Risk Blog Financial Analytics. Blue areas are recessions. For new homes Oct’08
was 11.1 months (peak this cycle was 11.4 in Aug ’08); all-time high was 11.6 in April 1980. For
existing homes 10.2 months of supply exists. The all-time high is 11.5 months during 1982. This
represents supply of 4.23 million existing homes (not new).
5
…Meaning New Home Starts Will Remain Weak (Now at
the Lowest Level Since 1959)
Source: Calculated Risk Blog Financial Analytics. Blue vertical areas are recessions; red and blue
lines are the seasonally adjusted annual housing build starts.
6
The “Home Equity ATM” Is Broke
Source: Calculated Risk Blog Financial Analytics. Based upon underlying study by Alan Greenspan
and Dr. James Kennedy of the Federal Reserve Board. MEW is mortgage equity withdrawal and NSA is
not seasonally adjusted.
7
Case-Shiller Index Shows Residential Real
Estate Still Declining
Top 10: off 19.1% yoy and
25.0% from peak
Top 20: off 18.0% yoy and
23.4% from peak
Sources: Case-Shiller and Calculated Risk Blog Financial Analytics.
8
90-Day Home Mortgage Delinquency Rate & Overall
Foreclosures Remain on the Rise
Delinquency Rate
Foreclosure Rate
7.0%
6.0%
4.95%4.84%
5.0% 4.41%4.39%4.67%
6.99%
6.35%6.41%
5.82%
5.59%
5.12%
4.0%
3.0%
2.0%
1.0%
0.0%
1.19%
0.98% 0.99%1.05%
Q1'06
Q3'06
1.28% 1.40%
Q1'07
2.04%
1.69%
Q3'07
2.47%
Q1'08
2.75%2.97%
Q3'08
Source: Mortgage Bankers Association (MBA). Both are percentages of all mortgage loans outstanding
(inc. prime, Alt-A & subprime loans) on one to four-unit residential property. Data is seasonally adjusted.
Foreclosure rate measures “in progress” foreclosures; closed foreclosures in Q3’08 was 1.3%.
9
Retail Sales and Credit Card Payments Will Continue to
Weigh on 2009 Economic Activity
90-Day Credit Card Delinquencies
1.40%
1.27%
1.20%
1.37%
1.23%
1.09%
1.00%
0.89%
0.80%
0.60%
0.40%
0.20%
0.00%
Q4'08E
Q2'09E
Q4'09E
Sources: Caclulated Risk Blog Financial Analytics & U.S. Census Bureau for left chart; TransUnion
LLC for right chart.
10
Historically, Housing Bottoms a Few Months Before
Recessions End and Then Becomes an Engine of Growth
Source: Calculated Risk Blog Financial Analytics.
11
4 Keys That Will Signal Housing Is Bottoming
Source: Calculated Risk Blog Financial Analytics and Case-Shiller. OFHEO stands
for Office of Federal Housing Enterprise Oversight. HPI is House Price Index.
12
Commercial Construction and Real
Estate Will Be Headliners During 2009
“Developers Ask U.S. for Bailout as
Massive Debt Looms” (Wall Street Journal*)
Source: Headline and chart from page A1 of the December 22, 2008 Wall Street Journal.
13
The ABI Signaled Weakness in Early 2008 That Is Now
Becoming a Reality
Sources: Calculated Risk Blog Financial Analytics and the American Institute of Architecture
(AIA). ABI is a leading index of commercial construction. Quarterly data.
14
And You Thought Most of the Issues Were Subprime
Related?
Source: Calculated Risk Blog Financial Analytics, U.S. Treasury and T2 Partners LLC.
15
2 Examples of Weakness in the Commercial
Properties Market
Occupancy rates are
rising due, in part, to
over-investment
Source:
Calculated Risk Blog Financial Analytics.
16
Note the Steep Drop in the Blue Line
(Nonresidential Construction) Since August
Source: Calculated Risk Blog Financial Analytics. Left chart contains August ’08 data, while the
right chart contains November ’08 data.
17
The International Outlook
Just as Ugly as the U.S.
18
The International Economy Is Sick
Global PMI
New Orders
60
50
40
30
20
Nov
Mar
Global Airfreight
July Nov
Asia/Pacific
10%
0%
Nov
Aug
May
Feb
-20%
Nov
-10%
Aug
• China PMI was 40.2 in Dec
(38.8 in Nov); new orders
were 37.3 (32.3 in Nov);
and export new orders was
30.7 (was 29.0)
• Global PMI was 33.2 in
December and new orders
were 25.3; in August they
were 48.6 and 46.8
• Global airfreight dropped
(-13.5%) and Asia/Pacific
fell (16.9%), the 6th
straight month of declines
• Asia is 44.6% of global
airfreight
Sources: ISM (Institute for Supply Management) and IATA (International Air Transport Association). Airfreight is
measured in freight tons per kilometer. PMI stands for Purchasing Manager’s Index.
19
Exports Drive a Lot of Economies, Meaning International
Weakness Has Seriously Negative Consequences
Exports As a Percent of GDP
U.S GDP Growth
40.6%
30.2%
Since Q4’07 U.S.
growth has been
non-existent.
4%
3.1%
3%
23.8%
2%
21.3%
Spain
17.8%
1%
U.K.
16.0%
0%
Japan
14.1%
0.1%
-0.1%
-1%
0%
10%
20%
30%
40%
Q3'08
8.4%
-1.6%
Q4'07
-2%
-0.7%
Q3'07
U.S.
1.3%
Q2'07
France
2.8%
Q1'07
Italy
Q2'08
Canada
5%
Q1'08
Germany
U.S GDP (ex. Exports)
50%
Sources: Organization for Economic Cooperation & Development (OECD) and Bureau of Economic Analysis (BEA).
Chart on the left is for 2007.
20
Key Facts and Figures on the Trucking Industry
21
Key Trucking Trends: OR and Driver Composition
Minority Drivers
Average Trucking ORs
Women Drivers
35%
98%
32.7%
5.3%
97%
96.9%
96.7%
96.3%
96.7%
5.3%
29.4%
30%
5%
26.9%
96.1%
95.8%
96%
95.5%
95% 95.0%
97.0%
5%
25%
5%
20%
5%
15%
5%
95.2%
95.1%
94.5%
94.5%
94.0%
94%
93%
92.9%
92%
4.5%
10%
4%
5%
4%
0%
4%
91.7%
91%
90%
1993
1996
1999
2002
2005
'08e
1998
2000
2002
2004
2006
Source: Both from American Trucking Trends 2008-2009 book. Chart on right measures percentage of total
drivers.
22
3 Things Never Change: Death, Taxes & Driver Turnover
Large TL Driver Turnover
140%
LTL Turnover
20%
120%
18%
99%
16%
100%
84%
14%
14%
80%
1999
2001
2003
2005
12%
2007
10%
Small TL Driver Turnover
10%
8%
125%
6%
100%
4%
84%
71%
75%
2%
0%
2000
50%
1999
2001
2003
2005
2002
2004
2006
2008E
2007
Source: All from the American Trucking Association (ATA) STATS newsletter.
Large carriers have revenue above $30 million and small are below that.
23
Demographics Remain Unfavorable for
Significant Driver Additions
0.2%
0.4%
0.3%
0.4%
0.3%
0.5%
0.2%
0.3%
0.3%
0.3%
0.1%
0.2%
0.1%
0.0%
-0.1%
0.1%
-0.1%
-0.2%
-0.4%
-0.5%
0.0%
-0.1%
0.3%
0.1%
0.0%
0.0%
0.4%
0.2%
0.5%
0.5%
1.0%
-1.1%
-1.0%
-1.5%
2001
2003
2005
Male Population Growth (Ages 20-44)
Source: U.S. Census Bureau.
2007
2009E
2011E
2013E
Female Population Growth (Ages 20-44)
24
Breakdown of Fleets by Tractor Size and Trailer Types
9%
95.9% of U.S. Fleets Have 20 or Fewer Tractors
4.1%
3%
5%
4%
8.6%
12%
10%
58%
87.3%
More than 20 tractors
7 to 20
6 or less
HHG
Dump
Tank
Refrigerated
Twin Pups
Van
Flatbed
Sources: FMCSA and U.S. DOT, Stephens Inc. analysis and 2008-2009 American Trucking
Trends book. Left chart includes private fleets and for-hire fleets.
25
Dry Van Rate Index Since 1992
136
130.8
132
128
127.0
124
128.2
126.5
123.3
120.5
120
116
112.4
112
107.6
108
105.3
103.8
104.0
104
100.0
100
1992
•
•
•
109.0
106.5
103.5
103.8
103.7
101.0
1994
1996
1998
2000
2002
2004
2006
2008E
TL van rates could drop 2% to 4% during 2009
Spot rates could be off 15% to 25% during 1H’09
Lots of bid packages between November 2008 and March 2009 with winning bids put in place
between April and June
Sources: Data from 11 selected public carriers & private carriers; Bureau of Labor Statistics (U.S.
Dept. of Labor) and selected ATA data. Stephens Inc. estimates for 2008-2009 figures. Data is an
index that begins in 1992 at 100.0.
26
Average Fleet Size of Failures Is Higher
2000-2001 Quarterly Bankruptcies
(Avg. Fleet Size 22 Trucks)
780
745
$1.20
$1.26
Bankruptcies
3Q01
1Q01
3Q00
$1.00
1Q00
400
•
•
$1.40
Avg. Fuel Cost
600
400
200
Bankruptcies
3Q08
600
620
800
1Q08
1,000
800
1,065
990
985
1,000
3Q07
1,200
$1.60
$4.75
$4.50
935970
$4.25
$4.00
785
$3.75
$3.55
$3.50
625
$3.25
518
$2.87
$3.00
445
385
375
$2.75
365
310325 305
$2.50
$2.25
$2.00
1Q07
1,320 $1.60
1,155
1,400
1,200
3Q06
$1.80
1Q06
1,600
2006-Q3'08 Quarterly Bankruptcies
(Avg. 2008 Fleet Size 45 Trucks)
Avg. Fuel Cost
2008 bankruptcies of 3,065 up 55% yoy; Q4’08 of 375 down 52% vs. Q3’08.
Approximately 27,000, 42,000, 46,000, 39,000 and 10,650 tractors were
represented by the Q4’07 through Q4’08 carrier bankruptcies/failures.
Sources: Bankruptcies from D.A. Broughton of Avondale Partners and the
American Trucking Association; EIA for diesel fuel prices.
27
Fuel Expense Trends
Net Fuel Expense as a
Percentage of Freight Revenue
Net Fuel Cost per Mile
25%
$0.24
16%
14%
12%
10%
14.6%
12.8%
12.1%
12.1%
12.0%
12.0%
11.6%
12.5%
11.3%
11.9%
9.7%
$0.21
20%
15%
8.8%
8%
$0.19$0.19
$0.18
$0.17
$0.16
$0.15
$0.21
$0.20
$0.16
$0.13
10%
6%
4%
5%
2%
0%
0%
2000 2002 2004 2006 1Q08 3Q08
•
•
2000 2002 2004 2006 1Q08 3Q08
Stability in Figure 1 from 2002-2006 reflected healthy increases in base freight rates (exc. fuel
surcharges).
During the 1990s Figure 2 would have been consistently between $0.095 and $0.105 per mile.
Sources: Stephens Inc. analysis and Company reports from CLDN, CVTI, HTLD (Fig. 1 only),
KNX, MRTN, PTSI, USAK and WERN.
28
Despite Lower Fuel Prices Carriers Would Be Foolish
to Abandon Longer-term Intermodal Options
10.0
8.0
TOFC
COFC
1991
1994
6.0
4.0
2.0
0.0
1988
The FACTS (1988-2007):
1997

TOFC: 8 “Up” Years Since 1988, 11 “Down” Years;

COFC: 19 Straight “Up” Years; +7.7% CAGR
2000
2003
2006
-1.5% CAGR
6 Significant Influences:

Packaging Revolution under way (Ex: 7,000 containers and toy example)--driven by “green
motives” and high fuel costs; 100 mil. fewer cases on 60 mil. fewer miles; packaged dinners

Shippers will increasingly locate along rail heads, esp. intermodal yards

Fuel economics favor intermodal and penalize lousy backhauls

Drivers-demographics will remain horrible in the coming years

LOH: will continue to shorten due to regional JIT moves and due to intermodal growth

Shipment sizes will grow to lessen fuel exposure by reducing shipment counts
Source: Association of American Railroads (AAR). Measures millions of units. YTD 2008 through Dec.
20 is down -4.0% for TOFC and -3.7% for COFC. Combined intermodal is off -3.8%, while car-loadings
are down -1.7%.
29
Trucking: A Quiet Revolution Is Under Way
30
My, How Trucking Has Changed!
1998 TL Market
 Flat rates, but 1990s had few
cost pressures
 Dedicated in infancy, but
infinite payoffs
 High driver turnover
 Brokerage? [“Playoffs?”]
 Seasonality and “averages”
not emphasized
 1-way trucking dominated
 Regional a nice niche, but not
the “main thing”
 Asset light element through
owner-operators
2009 TL Market
 Volatile rates now under
pressure; turnover improved
but only because of poor
economy
 Constant cost pressures
 Dedicated=> either “capacity
insurance” or “customized
solutions”; payoff is limited
 Dedicated is costly with ORs
often worse than OTR freight
 Reluctance to embrace 4 TL
growth markets
 Asset light element through
brokerage and intermodal
 Keep trucks moving [in theory
]
Source: Stephens Inc. analysis.
31
The Game Has Changed But Many TL Carriers
Don’t Realize That
Only 4 Growth Markets for TL
Carriers:
 DSD (direct store deliveries)
 Customized dedicated
 Drayage
 Short-haul regional (now 250 to
450 miles, not 500-600 miles)
 Also, freight brokerage and
logistics are a part of many
carriers’ arsenals
 1-way OTR trucking is shrinking
 Being a big network carrier is
costly and too seasonal
 Peak season changes are forcing
carriers to find steadier freight
 HOS changes and fuel prices are
shrinking LOHs
 New regional sweet spot will be
250 to 450 miles
 Intermodal is having success in
the 650 to 900 mile lanes
 Product size revolution (iPODs,
big-screen TVs, etc.) diminishes
loads
 Packaging revolution is cutting
loads
 Supply chain reengineering
reduces miles and supports the 4
markets, but most TL carriers
don’t realize the magnitude of the
changes
Source: Stephens Inc. analysis of the marketplace.
32
Freight Brokerage, Once a Dirty Word Is Now an
Integral Part of the Market
C.H. Robinson is the "Life Line" for Small Carriers
Approximate Number of Freight Brokers
85%
Measures percentage
of CHRW shipments
from carriers with
100 or less tractors.
80%
18,000
2008E
78%
75%
75%75%
74%
76%
15,000
2007
70%
70%
10,000
2005
65%
63%
65%
64%
65%
66%
62%
2000
7,500
60%
1990
55%
50%
1980
1997
1999
2001
2003
2005
5,000
14
2007
Sources: CHRW 10-K reports for left chart; Transportation Intermediary Association (TIA) and
Stephens Inc. estimates for right chart.
33
When Will Capacity Tilt Back in Favor of
the Providers?
34
Tractor Growth Wasn’t Outrageous, So Why Is Capacity So Lousy?
Total Population of Class 8 Tractors
3.8
7%
5.6%
3.6
• Tractor growth has been
below GDP 4 of the last 6
years
• It has also been below
Industrial Production
growth 3 of the last 6
years
• Trucking is much more
cyclical than the broader
economy
• Deregulation’s 20-year
window of growth has run
its course
3.4
5.2%
5%
2.1%
3.2
3%
2.2%
1.0%
1%
3.0
2.8
2.6
2002
2003
2004
2005
2006
2007
-1%
-1.9%
-3%
2008E
Class 8 Tractors (8 Years Old or Newer)
1.7
9%
5.3%
1.6
1.5
5.4%
6%
2.4%
-2.7%
3%
-0.9%
-3.7%
-4.6%
0%
-3%
1.4
-6.0%
1.3
-6%
-9%
2002
2003
2004
2005
2006
2007 2008E 2009E
Sources: A.C.T. Research and Stephens Inc. analysis. Population figures in millions.
35
Capacity Growth Was Slowest in Dry Van, But Excess
Capacity Is the Worst-Why?
Dry Vans (000s)
1,860
Reefer Units (000s)
2003-2006 CAGR:
1.54%; cumulative
4.7%
1,840
1,820
-2.9%
1,800
350
340
330
320
310
300
290
280
270
2003-2007 CAGR:
3.4%; cumulative:
14.3%
2002
2004
2006
2008E
Flatbed Trailers (000s)
1,780
1,760
1,740
1,720
2002
2004
2006
2008E
320
300
280
260
240
2003-2007 CAGR:
3.1%; cumulative:
13.1%
2002
Source: A.C.T Research.
2004
2006
2008E
36
13.6% total growth
90,000
29,000
6.9% total growth
27,279
90,277
94,000
2004-2008 Growth: 1.7%
CAGR; 6% Shrinkage from
1999-2004 trough
82,247
27,000
79,497
82,000
82,054
28,000
86,000
29,168
30,000
2003-2008 Growth: 2.6% CAGR;
3.3% cumulative shrinkage from
1999-2003 trough
28,408
98,000
29,005
Tank Trailer Capacity Trends
26,000
78,000
74,000
25,000
1998
2000
2002
2004
2006
Liquid Tank Trailers
Source: A.C.T. Research.
2008E
1998
2000
2002
2004
2006
2008E
Bulk Tank Trailers
37
2009 Issues to Watch
LTL:
TL:
•
•
•
•
•
•
•
•
•
•
•
•
Employee Free Choice Act
(EFCA): new union threat
Roadway Yellow merger
Escalating price war
6-7 LTL carriers are vulnerable
Top 59 carriers control 90% of
tonnage
Weak flatbed, industrial prod &
int’l trade all related to LTL
Shippers turning 6 loads into 5…
Both TL & LTL: dramatic
reworking of supply chains
•
•
•
•
Lots of shipper bids now
Contract rates down 2% to 4%
Deep consolidation this winter
Banks now foreclosing on weak
carriers
Packaging revolution
Intermodal success in 650 to 900
mile lanes
Only 4 growth avenues: DSD,
customized dedicated, short-haul
regional (250-450 miles),
drayage
Potential rewriting of the
independent contractor laws
Source: Stephens Inc. analysis.
38
Possible Elements of the Eventual Freight Recovery
How Fast Will it
Come Back?
 It could be 2011-2012 before
“robust” is used again
 Depends upon supply shakeout in
2009
 Other issues (EFCA) could crimp
carrier economics and supply
 Worst business environment in
1H’09 since early 1970s
 2H’09: lousy economy, but
interesting truck supply dynamics
 2H’09: GDP turns positive, but
with growth of 2% or less
Features of the Recovery?
 Truck supply will get healthier
ahead of freight demand
 Rate increases will make 20042005 look reasonable
 A bunch of negatives could hit
all at once, e.g., higher energy
costs, general inflation and much
higher interest rates
 Infrastructure and capital projects
will lead, not the consumer
 GDP in a “growth recession” (2%
or less) until summer of 2010
 Lots of “fits and starts”…years of
uninterrupted growth are unlikely
“Are we having fun yet?”
39
Closing Crystal Ball Thoughts
 Credit issues will still dominate 1H’09 ($11 trillion in
mortgages); commercial loans, credit cards and auto loans
will come home to roost. We’re a long way from done.
 TL van excess supply will be 4% to 5% by February, but be
in the midst of a sharp correction
 LTL excess capacity could be as much as 7% to 10% at its
worst point
 Unemployment (9%?) might not peak until spring 2010
 Industrial production could drop 10% from peak to trough
(-4% so far)
 Unprecedented supply shake-out will occur as these
pressure points are too great not to cause chaos
 Get your supply chains ready now when the cost of change
is manageable
Sources: Stephens Inc. analysis and Wall Street Journal for loan figures.
40
Public companies mentioned: Celadon (CLDN-$8.53); Covenant Transport (CVTI-$2.00); C.H. Robinson (CHRW-$55.03); Heartland Express
(HTLD-$15.76); J.B. Hunt (JBHT-$26.27); Knight Transport (KNX-$16.12); Landstar System, Inc. (LSTR-$38.43); Marten Transport (MRTN$18.96); P.A.M. Transport (PTSI-$7.00); USA Truck (USAK-$13.79); Werner Enterprises (WERN-$17.34). Reflects closing prices from
December 31, 2008. Schneider/SNI, Swift and U.S. Xpress/XPRSA are private.
REQUIRED DISCLOSURES
The research analyst principally responsible for preparation of this presentation has received compensation that is based on
the firm’s overall revenue which includes investment banking revenue.
Rating Definitions:
OVERWEIGHT (O) - The stock's total return is expected to be greater than the total return of the company's industry sector, on a riskadjusted basis, over the next 12 months. EQUAL-WEIGHT (E) - The stock's total return is expected to be equivalent to the total return of the
company's industry sector, on a risk-adjusted basis, over the next 12 months. UNDERWEIGHT (U) - The stock's total return is expected to be
less than the total return of the company's industry sector, on a risk-adjusted basis, over the next 12 months. VOLATILE (V) - The stock's
price volatility is potentially higher than that of the company's industry sector. The company stock ratings may reflect the analyst's
subjective assessment of risk factors that could impact the company's business.
Distribution of Stephens Inc.'s Ratings (as of 12/31/08)
Rating
BUY
HOLD
SELL
%
48.0
51.0
1.0
% Investment Banking Clients
(Past 12 Months)
9
4
0
OTHER DISCLOSURES
This presentation has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell
any security. It does not purport to be a complete description of the securities, markets or developments referred to in the presentation.
Information included in the presentation was obtained from internal and external sources which we consider reliable, but we have not
independently verified such information and do not guarantee that it is accurate or complete. Such information is believed to be accurate on
the date of issuance of the presentation, and all expressions of opinion apply on the date of issuance of the presentation. No subsequent
publication or distribution of this presentation shall mean or imply that any such information or opinion remains current at any time after the
stated date of the presentation. We do not undertake to advise you of any changes in any such information or opinion. Additional information
available upon request.
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