Economics, Transportation and Market Overview & Outlook
Jim MeilACT RESEARCH Co., LLC
November 07, 2014
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Who Are We?
• Recognized leading publisher of CV industry data and analysis
• Founded in 1986• Columbus, Indiana
Our mission: To improve and expand N.A. commercial vehicle data to promote a better understanding of the transportation industry.
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Outline
• Key indicators & macro view• Transportation – current situation and our
take on 2015• Commercial vehicles – latest statistics
– Orders, Sales, Build
• Forecasts, risks & alternatives • Summary & Q&A
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Overview
• Slow, gradual expansion has had a positive side– Upside for manufacturing & retail in mid-cycle
• Freight situation looks solid . . . .even with warning signals from financial markets
• Fleet profitability is good• Commercial vehicle production & sales –
– High but not a record; stable by historical standards• Fuel costs in control• Driver shortage #1 operational challenge
– But it’s a backhanded sign of prosperity• 2015 critical in determining stability or overheating
2015 & beyond = good years ahead
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Evidence – lead indicators
• Yield curve (spread between long/short rates)• Purchasing Managers Indices• Commodity prices• Stock market trends• Sentiment surveys
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U.S. 10-Year Treasury Rates and90-Day T-bills
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Per
cen
t
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0• Yield curve spread wide =
low recession risk
• Rates will stay low well into 2015
• Credit relatively easy to get
10-Year Treasury Rate
90-Day T-Bill Rate
Source: U.S. Federal Reserve BoardData through September 2014
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Manufacturers’ Purchasing Managers Indexes
Jul-13 May-14 Jun-14 Jul-14 Aug-14 Sep-14Oct-14prelim
Global 51.6 52.1 52.6 52.4 52.5 52.2
United States 55.5 56.1 57.3 55.8 57.9 57.5 56.2
Canada 52.6 52.2 53.5 54.3 54.8 53.5
Mexico 49.7 51.7 51.8 51.5 52.1 52.6
Eurozone 50.3 52.2 51.8 51.8 50.7 50.3 50.7
Germany 50.7 52.3 52.0 52.4 51.4 49.9 51.8
France 49.7 45.7 48.2 47.8 46.9 48.8 47.6
Italy 50.4 53.2 52.6 51.9 49.8 50.7
Spain 49.8 52.9 54.6 53.9 52.8 52.6
UK 58.4 60.4 61.7 54.8 52.5 51.6
Russia 49.2 48.9 49.1 51.0 51.0 50.4
Japan 53.0 49.9 51.5 50.5 52.2 51.7 52.8
China 46.6 49.4 50.7 51.7 50.2 50.2 50.4
India 49.5 51.3 52.4 53.0 52.4 51.0
Brazil 47.3 50.7 48.7 49.1 50.2 49.3
>54 51-54 45-51 <45
Above Trend
Trend Flat Recession
Source: Markit Economics
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Global Oil and U.S. Diesel Prices
0.75
1.25
1.75
2.25
2.75
3.25
3.75
4.25
4.75
5.25
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Wee
kly
On
-Hig
hw
ay R
etai
l D
iese
l P
rice
s ($
/gal
lon
)
10
25
40
55
70
85
100
115
130
145
Bren
t Cru
de S
po
t Price ($/p
er barrel)
Retail Diesel Prices (left)
Source: U.S. DOE, Energy Information AgencyWeekly data through October 27, 2014
WTI Crude Spot (right)
• If WTI stays near $80, diesel could drop to $3.30 this winter
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U.S. Stock Market – S & P 500
400
600
800
1,000
1,200
1,400
1,600
1,800
2,0009
6
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Ind
ex,
1941
-43
= 1
00,
Lin
ear
Sca
le
400
600
800
1000
1200
1400
1600
1800
2000
Bren
t Cru
de S
po
t Price ($/p
er barrel)
Source: U.S. Federal ReserveData through October 30, 2014
• Rebound from mid-October shakes
• Bounced back near all-time high
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NFIB Small Business Optimism Index
80
85
90
95
100
105
110
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Ind
ex (
1986
= 1
00)
80
85
90
95
100
105
110
Source: NFIBMonthly data through September, 2014
• Still recovering from 2008-09 trauma
• Gap to good times of 1990s and 2003-2007
Average readingsince July 2009trough = 90.7
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Lead Indicator Summary SheetIndicator U.S., Canada & Mexico Rest of World
Yield Curve & Central Banks
Purchasing Mgrs Index
Stock Market
Commodity Prices
Sentiment Indicators
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Manufacturing Industrial Production IndicesNon-durables and Durables Sectors
Durables
Source: U.S. Federal Reserve Bank through September 2014
Durables Nondurables12 Mos (Sep14/Sep13) 6.2 2.5
6 Mos (Sep14/Mar14) 6.3 1.0
Growth Trends (Annualized %)
• Mid-single-digit sustained growth in durables output
• Non-durables growth rate less than half durables growth
Nondurables
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Retail Sales (excl Auto & Gasoline)
Source: U.S. Census BureauData through September 2014
Retail Sales (x Auto-Gas)
12 Mos (Aug14/Aug13) 2.9
6 Mos (Aug14/Feb14) 3.0
Growth Trends (Annualized %)
• Low single digit growth for total in 2014
• Hot sectors: Food & dining (up 7%) Health & personal care (up 6%)
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Retailers Upbeat on Holiday Sales
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U.S. Light Vehicle Retail Sales
910111213141516171819
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Millio
ns of
units
(SAA
R)
910111213141516171819
Sources: Ward’s Automotive and Motor IntelligenceSales data through September 2014
Auto Sales SAAR in last 4 months:
Jun 16.8 / Jul 16.4 / Aug 17.4 / Sep 16.4
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Economic summary
• Recovery is unique – slow, now 5 years old• But also sustainable – for 3 to 5 more years• Hybrid - signs of adolescence and maturity• Rising tide won’t lift all boats
– Sector performance will diverge
• Strong: Auto, Technology, Chemicals, Food Service, On-line retail
• Weak: Defense, Energy, Farm, Home Furnishings
Updated: October 28, 2014
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Macro Environment: Outlook
Freight growth satisfactory in 2014 in spite of jump in savings rate, winter weather, slow housing; 2015 should be better
Real Gross Domestic ProductYear Over Year
2010 - 2019
Source: ACT Research Co., LLC: Copyright 2014
2.5
1.8
2.8
1.92.2
3.4
2.6
2.1
2.62.9
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0.0
1.0
2.0
3.0
4.0
-1.0
Y/Y % Chg.
If recent rise in global stress goes on, may need to trim some
ACT Freight CompositeYear Over Year
2010 - 2019
Source: ACT Research Co., LLC: Copyright 2014
3.8
2.8
4.8
4.1
3.3
5.3
3.74.0 4.0 4.2
2010
2012
2014
2016
2018
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
-1.0
Y/Y % Chg.
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Freight Market Conditions
• 3 nearly simultaneous events in 2H’13 have shifted the balance of power between truckers and shippers– The economy moving to a stronger footing– Factors hurting vehicle price-performance starting to ebb– New HoS regulations impact driver productivity
• Driver situation became far & away #1 operating issue
• Proving the thesis:– By the end of Q3’13, spot market freight rates were rising,
with contract rates rising by year’s end
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Rates Began Firming in Q3’13
DAT Trendlines: Dry Van Revenue per Mile (w/FSC)
Year over Year % ChangeJanuary '10 - September '14 (2000=100)
Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2014
2010 2011 2012 2013
0
5
10
15
20
25
-5
-10
Freight Rate YY % Chg.
YY%Chg (Contract rate)
YY%Chg (Spot rate)
Cass Truckload Linehaul Pricing IndexJanuary '09 - August '14 (01'2005=100)
Source: Cass Information Systems, ACT Research Co., LLC: Copyright 2014
2009 2010 2011 2012 2013 201485
90
95
100
105
110
115
120
125SA Index
0
4
8
12
16
20
24
-4
-8
% Change
Y/Y % Change(Right Axis)
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No Topside Yet for Carrier ProfitsTL Carrier Database:
Net Profit Margin
Q1'09 - Q2'14
ACT Research Co., LLC: Copyright 2014
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 409 10 11 12 13 14
1.0
2.0
3.0
4.0
5.0
6.0
7.0%
SA
Actual But we at a period of strong and sustainable profitability for carriers
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Transportation Stocks outperform in 2014
• Wall Street sees and values the prospects in the transportation space
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Challenges on the Road Ahead1985 to 2000
Golden Age
2000 to 2010
Turbulent Age
Decade of
High Costs
Energy CostsOil prices fell in 1986; then stayed low for 15 years
Generally higher trend, much higher volatility
High, but stable for 4 years
Equipment Costs Stable Higher High
Drivers
While always a “shortage,” favorable demographics and a certain allure
Tougher until recession
Regulations and demographics shrink the pool and cut productivity
Government Profile inTrucking
Early 80s de-reg lowered gov’t interference
EPA, aging infrastructure, highway & urban congestion, more . . .
EPA, CSA, HOS, ELDs, speed governors, user fees, taxes
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For Hire Trucking ExecutivesSurvey of Top Concerns
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Driver [Pay] Shortage• The freight will get delivered
– Freight determines driver demand, not the reverse– Driver shortage is a problem of prosperity– What’s worse – not enough freight (2008-09) or not enough drivers
(2014)?
• There is no substitute mode for most truck freight
• Driver shortage is actionable by management– The Law of Supply & Demand has not been repealed– Freight & fuel are “macro,” externally set – Driver shortage does not preclude profitability
• Correlated with profits and Class 8 net orders– There is no “Easy Button” in a competitive market
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100 Years Ago:The Traffic World (now part of Journal of Commerce)
Dec. 12, 1914
The Truck Driver Problem
• “Practically every truck manufacturer and nearly all employers complain of the great difficulty of securing drivers who are competent and who will work handling freight aside from those who drive horses. They are agreed that the profit or loss from truck transportation is largely dependent upon the drivers, and yet a majority of truck owners will hire the men who will work cheapest, entrusting valuable property in their keeping…)
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Not an Obstacle to Profits
2005 2006 2007 2008 2009 2010 2011 2012 201320
50
80
110
140
170Percent T urnover
2
3
4
5
6
7Net Profits
ATA Large TL Turnover Carrier Profits 4QMA
ATA: For-Hire TL Carrier Driver Turnover & Trucker Profits (ACT's Publicly Carrier Database)
2005 - 2013 Q4
American Trucking Associations, ACT Research Co., LLC: Copyright 2014
At ~97%, for-hire turnover is ~40ppts below the rates seen last cycle, suggesting carriers are doing a better job of meeting drivers’ lifestyle objectives
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Average Hourly EarningsProduction Workers
15
16
17
18
19
20
21
22
23
24
25
04 05 06 07 08 09 10 11 12 13 14
Ave
rag
e H
ou
rly
Ea
rnin
gs
($/
hr,
se
as
ad
j)
15
16
17
18
19
20
21
22
23
24
25
Manufacturing
Long Distance Truckload
Source: U.S. Bureau of Labor StatisticsData through August 2014
2004-2008 2009-2014
Construction 3.6 1.5
Manufacturing 2.5 1.2
Long Dist TL 1.3 4.3
Average Annual Growth in Hourly Earnings
Construction
Manufacturing & construction compete for same pool of blue collar workers
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Managing the Shortage
• There has always been a driver shortage– Transportation is a commodity where the business goes to
the lowest bidder, so the industry ends up paying just enough to get the bare minimum of drivers required
• Surveys most often point to quality of life issues as the reason for driver turnover– Given that driving will still be a hard job tomorrow, and
besides better scheduling, the answer is higher pay• Large TL taking a page from private fleet play book
– Instead of across-the-board rate increases, more for-hire fleets are turning to performance based pay metrics to reward best drivers
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Silver Lining
• Rising barriers to entry will constrain new capacity additions– Regulatory burden– Equipment costs– Driver recruiting & retention– Shipper liability concerns– Etc.
• Constraint on capacity will be telling as economy accelerates
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Challenges on the Road Ahead1985 to 2000
Golden Age
2000 to 2010
Turbulent Age
Decade of
High Costs
Energy CostsOil prices fell in 1986; then stayed low for 15 years
Generally higher trend, much higher volatility
High, but stable for 4 years
Equipment Costs Stable Higher, ever rising High but stabilizing
Drivers
While always a “shortage,” favorable demographics and a certain allure
Tougher until recession
Regulations and demographics shrink the pool and cut productivity
Government Profile inTrucking
Early 80s de-reg lowered gov’t interference
EPA, aging infrastructure, highway & urban congestion, more . . .
EPA, CSA, HOS, ELDs, speed governors, user fees, taxes
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Productivity: Defining the Cycle
• Rapid rise in transportation inflation last decade drove sharp focus on cost control by shippers– Equipment, driver, & diesel inflation– Overall costs of regulatory compliance
• Simultaneously, boost in tech & competition– Technology advances made for real-time
communications linking shippers to under-utilized capacity
– RRs spent $ billions on expanding IM offerings and improving service
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Illustrating the Impact
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 20201100
1400
1700
2000
2300
2600
2900
3200
3500
3800US ACtive Pop (000s)
2
4
6
8
10
12
14
16
18
20RGDP $Bs
GDP US Total Pop
Class 8 Total Population & U.S. Real GDP1974 - 2020f
ACT Research Co., LLC: Copyright 2014
Deregulation
FCST
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Productivity: Key question for ‘15-’17
• At what point do the outsized equipment productivity gains of the past 7-8 years taper?– Our work suggests that 2012 was the high-water mark
for the rate of productivity growth• Productivity still growing above trend, but at a slower rate• Little progress private fleet empty backhauls • Stagnating gap between ATA tonnage and loads
– If the economy grows as expected and productivity growth slows, the next several years will be very good for truckers and by extension new truck and trailer demand
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New Equipment Demand
• Rapid change in sentiment over last 12 months– Stronger and more consistent freight– Traction on freight rates & profitability– Improved confidence
• Short-term industry outlook– Class 8 orders booked at 350k (annualized rate) - YTD 2014
• Past 12 actual at 328,400– Backlogs solid
• From 4 weeks to 5 months– Low inventories provide cushion for build
• SA IN/RS at 2.2 N.A., 2.1 U.S.
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Orders pushing build higher
10 11 12 13 145
10
15
20
25
30Units (000s)
TOTAL CLASS 8 NA: NET ORDERS (Trailing 12 Months) & BUILD
January '10 - Prelim. September '14
ACT Research Co., LLC: Copyright 2014
NET ORDERS:Trailing 12-month
av erage
BUILD:Actual
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Sales Follow BuildTOTAL CLASS 8: N.A. RETAIL SALES
January '10 - August '14
ACT Research Co., LLC: Copyright 2014
10 11 12 13 14
0
5
10
15
20
25
30
35
-5
-10
Units (000s)
0
20
40
60
80
100
120
140
-20
-40
Y/Y % Change
Y/Y % Chg.(Right Axis)
Actual & Seasonally Adjusted
On an SA basis, retail sales in August were the best since February 2007
Early data suggest that orders, sales remained strong in September
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Why Is the Class 8 market so cyclical?
• Truckers tend to reach buy and not-buy profitability levels at about the same time – Truckers buy when ROI makes sense – for their fleet
• Green light for buying went on in Q4’13• There might be 500k fleets, but ~1k fleets buy the nearly all of the new
trucks
– Just like the front side of the cycle, truckers rein in buying when profit metrics flash red
• U.S. rule of thumb: 1ppt of GDP =12k new pop– Replacement: 190k– 3% GDP Growth: 36k– Less productivity: ?– Total: >226K
• It is easy too get too many trucks into the market• It is hard to right-size after an overshoot
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Sensing a Pattern: More Like 1994 or 2004?
AVERAGE AGE: U.S. Class 8 TOTAL Population
1990 - 2020
ACT Research Co., LLC: Copyright 2014
9.4
9.6
9.7
9.7
9.5
9.2
9.2
9.1
9.0
8.7
8.6
8.7
8.9
9.1
9.0
8.9
8.7
8.9
9.1
9.5
9.8 9
.9 9.9 1
0.0
9.9
9.9
9.9
9.9
9.8
9.8
9.7
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 208.0
8.5
9.0
9.5
10.0
10.5Avg. Age in Years
Coincidence:1994-19952004-20062014-201?
Given average fleet age,5-year demand potential looks more like 1990s than 2000s
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Alternative ScenarioNA Class 8 BuildForecast
2011 - 2020
ACT Research Co., LLC: Copyright 2014
'11 '12 '13 '14 '15 '16 '17 '18 '19 '20200.0
225.0
250.0
275.0
300.0
325.0
350.0Units (000s)
Current Forecast
Reasonable Alternative
Current Forecast 255.3 277.5 245.5 296.7 311.8 292.5 258.4 254.7 285.1
Reasonable Alternative 245.5 300.0 335.0 330.0 220.0 270.0 320.0 210.0
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Medium Duty Truck, Bus & RV BuildLong Term
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Forecast Risks for 2015
• Downside:– Global weakness may have bad feedback loop to US/NA– Equipment is very expensive, but also very good– Regulations/logistics have reduced mileage/truck
• Upside:– Housing, job creation may be poised for strong 2015– One more year to climb the CSA, HOS learning curve
• Both sides:– Fuel costs are capable of anything – up, down, flat– Because equipment is very expensive, very good . . .
. . . It could be very hard to get if market overheats
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Forecasts2012 2013 2014 2015 2016 2017
Freight (Y/Y % Change)
ACT Freight Composite 4.5 4.0 3.2 5.6 4.1 3.2
ATA Truck Tonnage 2.7 5.3 3.3 4.4 3.7 3.3
Equipment (Units, 000)
NA Class 8 Build 277.5 245.8 296.5 311.8 292.5 256.7
NA Cl 5-7 Build 188.3 201.4 213.8 221.5 232.4 244.2
U.S. Trailers Factory Sales 236.8 239.6 267.0 267.4 275.4 269.3
U.S. Trlrs. Tot. Axled 244.0 246.4 278.7 277.4 283.4 277.6
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Summary
• 2015 another good year for freight, fleet profits– Better economic growth in key freight sectors– Rising freight rates, still tight capacity– Lower energy prices likely to persist– Favorable business conditions into 2016 (and beyond)
• For equipment – 2014 expansion high, 2015 likely top – An old fleet (maintenance & downtime issues)– Healthy used equipment values
• If economy keeps a slow but sustained pace . . .– 2016, 2017 should be good for carriers – steady,
stable
ACT Research Company, LLC4400 Ray Boll Boulevard
Columbus, IN 47203
Phone: (812) 379-2085Fax: (812) 378-5997
Email: [email protected]
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