Current Economic Landscape & Transportation Industry Outlook Presentation to NASSTRAC Shippers Conference & Transportation Expo

Transcription

1 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 of this report. Current Economic Landscape & Transportation Industry Outlook Presentation to NASSTRAC Shippers Conference & Transportation Expo John G. Larkin, CFA Managing Director jglarkin@stifel.com

2 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 2

3 U.S. Logistics Cost ($U.S., billions) Logistics Cost as a % of U.S. GDP Longer-Term Transportation Trends Significant Productivity Improvements in the U.S. Logistics System Were Made Post-deregulation (Until 2003), But Incremental Efficiency Has Been Difficult 1,500 US Logistics Cost ($ bns) Cost as a % of GDP 17% 1,300 16% 15% 1,100 14% 13% % % 10% 500 9% 8% 300 7% Source: State of Logistics Reports, U.S. Bureau of Economic Analysis 3

4 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 Miles/Tractor/Week Longer-Term Transportation Trends...Partly Because Tractor Productivity Peaked Early Last Decade; HOS Revisions, Regionalization of Truckload Industry, and Intermodal Conversion Have Driven Miles/Tractor/Week Down Not Many More Levers To Pull 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 Data is average of large publicly traded truckload fleets when available: Celadon, Con-Way Truckload, Covenant, J.B. Hunt, Knight, Marten, PAM, Swift, USA Truck, and Werner Source: Company data, Stifel estimates 4

5 Longer-Term Transportation Trends Modal Optimization Rolls On, But Supply Chain Refinement Continues Smaller, lighter, more powerful, more concentrated products continue to evolve Automated manufacturing increasingly takes labor cost out of the location equation Labor costs are slowly gravitating towards the mean across the globe Nearshoring/Reshoring accelerating; Driven by economics and requirement to respond quickly to changing markets DC analysis continuously questioning number, size, location, degree of automation, insource/outsource, etc. Mode optimization rolls on; as slower modes become more time definite, the trade down from air ocean, air ground, truck rail, etc. continues IS 3D printing for real? 5

6 Longer-Term Transportation Trends Naysayers Abound During Formative Stages of New Technological Leaps 1830 Martin Van Buren Governor of New York Railroad carriages are pulled at the enormous speed of 15 miles per hour by engines which, in addition to endangering life and limb of passengers, roar and snort their way through the countryside, setting fire to crops, scaring the livestock and frightening women and children. The Almighty certainly never intended that people should travel at such breakneck speed Internal Memo Western Union This telephone has too many shortcomings to be seriously considered as a means of communication Thomas Watson Chairman of IBM I think there is a world market for maybe five computers Clifford Stoll Newsweek On Cyberbusiness : Even if there were a trustworthy way to send money over the Internet which there isn't the network is missing a most essential ingredient of capitalism: salespeople. Stoll, C. (1995, February 26). Why the web won't be nirvana. Newsweek, Retrieved from 6

7 Longer-Term Transportation Trends Looming Capacity Shortages in Truckload Due to Supply Constraints Compliance, Safety, & Accountability (CSA) December 11, 2010 Hours-of-Service (HOS) rule changes July 1, 2013 Electronic logging devices (ELDs) should have real teeth in late 2016/early 2017 More to come: speed limiters; more stringent drug testing procedures, sleep apnea testing, drug and alcohol database, medical fitness standards, etc. Driver shortage (demographics)/blue collar vs. college education disconnect Rising cost of equipment, tight credit 7

8 Longer-Term Transportation Trends Changing Landscape In Energy and Distribution Energy World Is Changing Domestic oil production boom driven by new techniques/technologies Proliferation of natural gas equipment? Short-haul yes; Long-haul not yet. Secondary benefit: energy intensive industries gain global competitive advantage Growth of E-commerce Is Changing Retail Distribution Landscape ~ 9% of total retail sales and growing 15% y/y Omni-channel distribution presents challenges Automated order picking? Same day delivery? 8

9 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 9

10 4Q93 4Q94 4Q95 4Q96 4Q97 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 U.S. GDP (2009 chained $U.S., billions; SAAR) Y/Y % Change Economic Drivers U.S. GDP Is Recovering Below the Normal Rate; The Recent Recession and Slow Recovery Has Taken More Than $2 Trillion (~12%) Out of the U.S. Economy 20,000 18,000 Pink Shade Indicates Recession 2.2% Annual GDP Growth Coming Out of Recession 6% 4% 16,000 14, % Annual GDP Growth Coming Out of Recession 2% 0% 12,000 (2%) 10,000 (4%) 8,000 (6%) Chart displays seasonally adjusted annual data Source: Bureau of Economic Analysis 10

11 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Monthly Retail Sales, Excl. Gas; Adjusted for Population Growth and Inflation ($ bn) May 1999 Y/Y % Change Economic Drivers The U.S. Consumer is Still Recovering as Adjusted Retail Sales Imply Current Spending is Equal to September 1999 Levels; We Believe a Rise In Non- Discretionary Food and Fuel Costs, Higher Taxes, Higher Health Care Costs, Weak Job Creation, and High Levels of Uncertainty are Key Reasons Monthly Retail Sales Excl. Gas Adjusted for Population Growth and Inflation Y/Y% Change 195 Fall from 2006 Peak: -6.7% 8% 6% 185 4% 2% 0% % -4% -6% -8% -10% % Chart 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 11

12 Mar-84 Mar-86 Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 ISM Index Value Economic Drivers The ISM Manufacturing Index Recovered Some in February and March After Dropping Below Its 30-Year Average In January; Are Elevated Levels Sustainable Without Underlying Consumption? ISM Index Values: Jan 51.3; Feb. 53.2; Mar year Average: 52.2 ISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction. Source: Institute for Supply Management 12

13 Feb-74 Feb-76 Feb-78 Feb-80 Feb-82 Feb-84 Feb-86 Feb-88 Feb-90 Feb-92 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Privately Owned New Housing Starts (SAAR in Thousands) 6 Mo. Moving Avg. Y/Y % Change Economic Drivers Having Bounced Off the Bottom, Housing Markets Are Finally Showing Some Life But Remain Near 40-Year Lows on an Absolute Basis; Are Rising Interest Rates Putting A Damper On This Critical Market? Housing Starts 6mo. Mvg Avg. Y/Y% Δ 2,550 2,300 2,050 1,800 Peak (Jan. 06): 2,273 Current (Feb. 14): % 80% 60% 40% 1,550 1,300 1, Trough (Apr. 09): % 0% (20%) (40%) 300 (60%) By February 14, privately owned new housing starts had increased 90% since its bottom in April 09, but was still 60% below peak in January 06 Source: U.S. Census Bureau 13

14 YTD 2013 YTD YTD 2013 YTD 2014 U.S. Auto and Light Truck Sales (millions) Y/Y % Change North American Auto and Light Truck Production (in Millioins) Y/Y % Change Economic Drivers The Auto Sector Rebound Is Plateauing; Fleet Age (~11.5 Years vs. 8-9 Year Historical Average) Suggests Replacement Demand Still High; iphones Preferred Over Autos By Many Millenials 20 Auto and Light Truck Sales Y/Y % Change 50% 20 North American Auto/Truck Production Y/Y % Change 50% 18 40% 18 40% 16 30% 16 30% 14 20% 14 20% 12 10% 12 10% 10 0% 10 0% 8-10% 8-10% 6-20% 6-20% 4 Peak to Trough: -40.5% -30% 4 Peak to Trough: -50.4% -30% 2 Rise from Trough: 45.3% -40% 2 Rise from Trough: 88.0% -40% 0-50% 0-50% Rise from Trough represents the rise from the trough to 2012 sales and production levels YTD Sales figures are through February 2014; YTD Production figures are through February 2014 Source: Ward s Automotive Group 14

15 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Retail Inventories ($bn) I/S Ratio Economic Drivers Increase in the Inventory/Sales Ratio May Foretell Mediocre Traffic Volumes Retail Inventories Inventory/Sales Rati o Jan '13 I/S Ratio: Source: U.S. Census Bureau 15

16 Feb-48 Feb-50 Feb-52 Feb-54 Feb-56 Feb-58 Feb-60 Feb-62 Feb-64 Feb-66 Feb-68 Feb-70 Feb-72 Feb-74 Feb-76 Feb-78 Feb-80 Feb-82 Feb-84 Feb-86 Feb-88 Feb-90 Feb-92 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Economic Drivers U3 (i.e., Mainstream Media Favorite) Unemployment Rate At Historically High Levels Recently And Coming Off Of Recessionary Peak, But Does This Tell the Real Story? 12% U3 (seasonally adjusted) 10% 8% 6% 4% 2% 0% Source: U.S. Bureau of Labor Statistics 16

17 Seasonally Adjusted Unemployment Rate Economic Drivers U6 Unemployment (i.e., Unemployed, Plus Discouraged Workers, Plus Marginally Attached, Plus Total Employed Part Time for Economic Reasons) Has Not Seen the Same Decrease 18% 16% 14% U6 (seasonally adjusted) U3 (seasonally adjusted) Grey Shade Indicates Recession Oct. '09 7.1% Feb. '14 6.2% 12% 10% 8% Dec. '07 3.8% 6% 4% 2% 0% Source: U.S. Bureau of Labor Statistics 17

18 Feb-48 Feb-50 Feb-52 Feb-54 Feb-56 Feb-58 Feb-60 Feb-62 Feb-64 Feb-66 Feb-68 Feb-70 Feb-72 Feb-74 Feb-76 Feb-78 Feb-80 Feb-82 Feb-84 Feb-86 Feb-88 Feb-90 Feb-92 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Economic Drivers The U3 Decline Is Largely A Result of the Decline in the Labor Force Participation Rate; Partly Due to Retirement of Baby Boomers, Partly Due to Expansion of Entitlement Programs 68.0% Civilian Labor Force Participation Rate 66.0% 64.0% 62.0% 60.0% Peak Apr. 2000: 67.3% Most Recent Feb. 2014: 63.0% 58.0% 56.0% 54.0% 52.0% Source: U.S. Bureau of Labor Statistics 18

19 Total S.N.A.P. Participants (thousands) Average Monthly Benefit (Chained 2009 Dollars) Economic Drivers Has Growth of Federal Entitlement Encouraged Some/Many to Drop Out of the Workforce? Participants are 17x Greater Than They Were in 1969, And the Average Benefit Is Nearly 3x As Large On An Inflation-Adjusted Basis Total Participation Average Monthly Benefit 60,000 50, Participation: 47.6 million Cost: $80 billion $1,800 $1,600 $1,400 40,000 $1,200 $1,000 30,000 $800 20,000 $600 $400 10,000 $200 0 $0 Source: USDA Food and Nutrition Service, U.S. Bureau of Labor Statistics, Stifel Estimates 19

20 Disabled Beneficiaries Average Monthly Benefit (Chained 2009 Dollars) Economic Drivers The Average Monthly Benefit for Disabled Beneficiaries Has Increased Modestly On An Inflation-Adjusted Basis, But Participation Has Increased Significantly Beneficiaries Average Monthly Benefit 12,000,000 $3,000 10,000,000 $2,500 8,000,000 $2,000 6,000,000 $1,500 4,000,000 $1,000 2,000,000 $500 0 $- Source: Social Security Administration, Supplemental Security Record, 100 percent data, U.S. Bureau of Labor Statistics, Stifel Estimates 20

21 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Economic Drivers Currently There Are Over 1.5 Million Job Openings in Blue Collar Industries And That Number Has Only Increased In The Last Four Years; Unemployed Are Typically Over-qualified, Under-qualified, Permanently Dependent, and/or Engaged in the Underground Economy 3, % 3, % Mining and Logging 2,500 2, % Leisure and Hospitality Construction 1,500 1, % 1.0% Manufacturing Trade, Transportation, and Utilities 0 0.0% Job Openings Rate Source: U.S. Bureau of Labor Statistics, Stifel estimates 21

22 Percent Job Loss Since Start of Recession Economic Drivers Jobs Are Coming Back Slowly After the Most Recent Recession 0% -1% -2% -3% -4% -5% -6% -7% Months Since Start of Recession Sep 1948 Jul 1953 Apr 1957 Apr 1960 Mar 1970 Jul 1974 Jul 1981 Jun 1990 Feb 2001 Jan 2008 Source: U.S. Bureau of Labor Statistics 22

23 Economic Drivers The Average American Family Is Still Hurting; Median Household Income Is Still Nearly 10% Below Pre-Recessionary Levels U.S. Real Median Household Income (Chained 2012 Dollars) $58,000 $56,000 $54,000 $52,000 $50,000 $48,000 $46,000 $44,000 $42,000 $40,000 Source: U.S. Census Bureau 23

24 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 24

25 Trucking Industry Background The Trucking Sector Still Dominates Other Modes, and TL Dominates Trucking U.S. Freight Transportation Market* U.S. Freight Transportation Market* ($827.6 Billion) (13,775 Million Tons) Water $12.2 2% Pipeline $41.5 5% Rail Carload $57.1 7% Rail Intermodal $14.7 2% LTL $34.8 4% Parcel $48.7 6% Air $28.0 3% Private Fleet $ % Pipeline 1,406 10% Rail Carload 1,858 14% Water 881 6% Rail Intermodal 166 1% LTL 121 1% Parcel 75 1% Air 13 0% Private Fleet 4,670 34% Truckload $ % Truckload 4,584 33% *Figures in $ billions *Figures in millions of tons Source: American Trucking Associations, Stifel estimates Estimates are based on 2012 market data. 25

26 Trucking Industry Background Truckload Is Much Larger and More Fragmented Than Less-Than-Truckload TL LTL Market Size $299 Billion $35 Billion Operations Point-to-point Network Customer Focus Retail Industrial Market Concentration Top 5 5% Top 5 55% Driver Turnover 1 65% 8% 1. Average driver turnover since 2008 Source: American Trucking Associations, Stifel estimates 26

27 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 27

28 Truckload Overview The Truckload Market Is Highly Fragmented; The Top 10 Carriers Accounted for Just Over 5% of 2013 Truckload Revenues Swift Transportation: 1.0% Schneider National: 0.8% Werner Enterprises: 0.5% J.B. Hunt Transport Services: 0.5% Landstar System 0.5% U.S. Xpress: 0.5% Prime: 0.5% 94.6% C.R. England: 0.4% CRST International: 0.4% Crete Carrier: 0.3% Other: 94.6% Source: Company data, SJ Consulting, Stifel estimates 28

29 Truckload Overview Truckload Sector Themes Lost 20% of capacity during the downturn Now losing more capacity due to FMCSA regulations and deteriorating driver demographics Large carriers diversifying away from conventional truckload to reduce exposure to seasonality, cyclicality, driver scarcity, capital intensity, and intermodal competition Equipment life-cycle costs rising raising barriers to entry Financing scarce for smaller, struggling carriers Core Carrier Concept Part II appears to be underway Accelerating M&A in lieu of organic growth Heartland/Gordon Swift/Central FFE/KLLM LinkAmerica/Arnold 29

30 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 Avg. Public Carrier Operating Ratio Truckload Overview Carrier Margins Have Returned to Average Levels, But Are Still Below Peak 100% 98% 96% Pre-freight downturn average margins: 93.1% TTM OR: 92.8% 7.2% is slightly above the prior average margin of 6.9% 94% 92% 90% 88% 86% Source: Company data 30

31 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Heavy Duty Class 8 Retail Sales (SA) Estimated Age of U.S. Class 8 Fleet (Years) Truckload Supply On the Supply Side, Our Estimated OTR Class 8 Average Fleet Age has Come Down Over the Last Two Years As Most Purchases Are Replacements By Big Carriers to Access Fuel Efficient Vehicles Heavy Duty Class 8 Retail Sales First Use Estimated Fleet Age Indicator 35,000 30,000 25,000 20,000 15, ,000 5,000 0 Estimated OTR Average Fleet Age - Feb 2014: 2.84 years - Feb 2009: 2.98 years Data through February 2014 Source: ACT Research 31

32 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14E 4Q14E Total Number of Trucks Removed Truckload Supply The Number of Trucks Removed (Due to Bankruptcies) Has Begun to Creep Up From Near Historical Floor Levels; Additionally, Increasing Insurance Expense, Maintenance Expense, and Equipment Costs Have Given Rise to Some Carriers Choosing To Exit The Industry (By Not Replenishing Fleets Or Selling Assets); A Spike In Fuel Price Could Drive Bankruptcies Higher 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Source: Avondale Partners, LLC, FTR forecast estimates 32

33 $95,000 $125,000 Truckload Supply Fleet Management Is an Increasing Challenge, Motor Carriers Are Struggling to Replace Their Trucks $130,000 Estimated New Class 8 Truck Price $125,000 $120,000 $115,000 $110,000 CAGR: 2.3% $105,000 $100,000 $95,000 $90,000 $85,000 $80, Source: ACT Research 33

34 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 Annualized Line-haul Driver Turnover Rate Truckload Supply Turnover Has Returned Back to the ~100% Level For Large TLs Given the Implementation of CSA, the New Hours-of-Service Rules, Deteriorating Demographics, Work Ethic Issues, and Burgeoning Entitlement Programs 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% Large TL Carriers Small TL Carriers 20% Large truckload fleets defined as carriers with greater than $30 million in annual revenue Small truckload fleets defined as carriers with less than $30 million in annual revenue Source: American Trucking Associations 34

35 Truckload Supply New Drivers Required to Enter the Workforce to Fulfill Demand Averages 96k Per Year Over the Next 10 Years Voluntary Non- Retirement Departures 11% Backfill Reasons for New Drivers Non-Voluntary Departures 16% 37% Retirements Industry Growth 36% Source: ATA Benchmarking Guide for Driver Recruitment & Retention 35

36 04/12/10 06/03/10 07/25/10 09/15/10 11/06/10 12/28/10 02/18/11 04/11/11 06/02/11 07/24/11 09/14/11 11/05/11 12/27/11 02/17/12 04/09/12 05/31/12 07/22/12 09/12/12 11/03/12 12/25/12 02/15/13 04/08/13 05/30/13 07/21/13 09/11/13 11/02/13 12/24/13 02/14/14 04/07/14 ITS Market Demand Index Truckload Demand The ITS Trans4Cast Market Demand Index Has Indicated Recent Strength In The Trucking Market, But How Much of the Impact Is Weather? Q14 Avg % Y/Y MDI index values below 7 indicates that the market favors brokers/shippers from a rate negotiation standpoint; values above 7 indicate that the market favors the trucker. Source: ITS Trans4Cast 36

37 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Dry Van TL Loads Index (SA) Y/Y % Change Truckload Demand Dry Van Loads Have Not Shown the Same Recovery As Total Loads Since the Downturn in 2008; On a Y/Y Basis, Loads Turned Negative In January For the First Month Since April 2013; Reasons: Supply Chain Optimization, Load Optimization, Weak Consumption Dry Van Loads Y/Y % Change 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Source: American Trucking Associations 37

38 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 TL Load/Fleet Size Index (February 2005=100) Truckload Supply & Demand Truckload Supply and Demand Have Been Roughly In Balance Since March of 2010; Winter Weather Has Added to Tightness in Recent Months Large TL Fleet Size Index Total TL Loads Index Data through February 2014 Source: American Trucking Associations 38

39 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 ATA TL Rev/Mile (SA) Index Y/Y % Change Truckload Yields We Expect Yields to Increase In the Range of 2.0% to 4.0% Y/Y In 2014, Depending Upon the Timing and Impact of Weather Events, Driver Supply, and Growth in Freight Volumes % % % (5%) (10%) 125 (15%) Data through February 2014 Source: American Trucking Associations 39

40 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 40

41 LTL Overview Industry Concentration Allows For Greater Traction With Rate Increases 16.3% FedEx Freight YRC Worldwide 44.5% 14.5% Con-way Freight UPS Freight 10.3% Old Dominion 6.9% 7.4% Other Note: LTL Industry Is 12% As Large As TL Industry In Terms of Annual Freight Bill Source: Company data, SJ Consulting, Stifel estimates 41

42 LTL Overview Less-Than-Truckload (LTL) Sector Themes Modal share losses have moderated; some freight may return back in a tight TL market environment or as optimal shipment sizes decline Some acquisition driven consolidation still possible Bundling by UPS and FedEx attractive to many shippers YRC okay for now, but still may not be completely out of the woods Some carriers diversifying beyond conventional LTL International partnerships Drayage Dedicated 42

43 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 Avg. Public Carrier Operating Ratio LTL Overview Carrier Margins Remain Below Average and Well Below Historical Peaks 106% 104% 102% TTM OR: 94.8% 5.2% is still measurably below the 6.9% average historical margin 100% 98% 96% Pre-freight downturn average margins: 93.1% 94% 92% 90% 88% 86% Source: Company data 43

44 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 Annualized Line-haul Driver Turnover Rate LTL Supply Relative to Truckload, LTL Driver Turnover Is Significantly Lower Due to Better Pay and Lifestyle; However, Even LTL Carriers Are Not Immune to Deteriorating Demographic Trends As Many Are Now Reporting Difficulty Finding Drivers 30% LTL Carriers 25% 20% 15% 10% 5% 0% Large truckload fleets defined as carriers with greater than $30 million in annual revenue Small truckload fleets defined as carriers with less than $30 million in annual revenue Source: American Trucking Associations 44

45 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Total LTL tonnage index (SA) Y/Y % Change LTL Demand LTL Tonnage Growth Was Positive Y/Y At 1.9% In January, But Considerably Lower Than the 5.3% Y/Y Average Increase in the Prior Six Months 140 Total LTL Tonnage (SA Index) Y/Y % Change 30% % % 110 0% 100 (10%) 90 (20%) 80 (30%) Source: American Trucking Associations 45

46 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 LTL Tonnage/Fleet Size Index (February 2005=100) LTL Supply & Demand Supply/Demand Balance (Active Capacity) Continues to Favor Higher Rates LTL Fleet Size Index LTL Tonnage Index Data through January 2014 Source: American Trucking Associations 46

47 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Total LTL Revenue/Ton (SA) Index Y/Y Change LTL Yields We Expect Yields to Increase In the Range of 0.0% to 2.0% Y/Y In 2014, Depending Upon Carrier Pricing Discipline % % 0% 120 (5%) (10%) (15%) 100 (20%) Source: American Trucking Associations, Stifel estimates 47

48 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 48

49 Parcel Overview Parcel Sector Topics of Interest Can USPS ever be a viable third option for parcel shippers? How fast can regional parcel carriers grow? What is TNT s fate? How big is the parcel opportunity in China and who is best positioned? UPS SurePost vs. FedEx SmartPost? Amazon? Same day delivery? Bundling should allow UPS and FedEx to gain significant LTL share Holiday surge strategies? 49

50 Packages per Day (thousands) Ratio of Ground vs. Air Packages Parcel Overview Ground Dominates the Parcel Network; Approximately 3x As Many Packages Move Through Ground As Through Air Domestic Air Volume Domestic Ground Volume 16, x 14, x 3.3x 12, x 10, x 3.0x 8, x 6, x 2.7x 4, x 2, x 2.4x x Combined average daily package volume of FedEx and UPS air and ground segments. FDX reports on a May 31 fiscal year basis; Domestic Air Volume includes FedEx U.S. Overnight Box, FedEx U.S. Overnight Envelope, FedEx U.S. Deferred, UPS Next Day Air, and UPS Deferred; Domestic Ground Volume includes FedEx Ground and UPS Ground, excludes FedEx SmartPost Source: Company data. 50

51 Parcel Overview FedEx Still Dominates the Domestic Air Market, While UPS Still Dominates the Domestic Ground Market; FedEx Has Been Closing the Gap In Ground U.S. Domestic Air Market: ~$28B U.S. Domestic Ground Market: ~$38B UPS 35% FedEx 40% UPS 64% FedEx 30% USPS 4% Other 1% USPS 24% Other 2% Estimates based on data. FedEx is on a May 31 fiscal year, UPS is December 31, and USPS is September 30. Source: Company data and Stifel estimates 51

52 Parcel Overview International Priority Market Share by Region* Source: DHL investor presentation, company data, Stifel estimates *Data for CY

53 Discussion Agenda Longer-Term Transportation Trends Some Old/Some New Economic Drivers Point Toward Slow, Steady Growth Trucking Industry Background Truckload Overview LTL Overview Parcel Overview Key Issues and Conclusions 53

54 Key Issues & Conclusions Major Challenges Driver recruiting/retention TMS makes all customers smart; pricing becomes critical E-commerce fulfillment is a threat to dedicated fleets Shorter supply chains threaten global enablers of commerce; could be windfall for truckers Modal optimization and supply chain redesign to continue: Air Ground LTL Parcel LTL TL Air Ocean, Ground SmartPost Next-day Deferred TL intermodal Federal government Lack of fiscal discipline Cavalcade of taxes/regulation Control of labor market (immigration, entitlement programs, labor laws, etc.) 54

55 Important Disclosures & Certifications I, John Larkin, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, John Larkin, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at Stifel research analysts receive compensation that is based upon (among other factors) Stifel s overall investment banking revenues. Our investment rating system is three tiered, defined as follows: BUY - For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non- U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non- U.S. securities as compared to the MSCI World Index. 55

56 Important Disclosures & Certifications HOLD - For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-u.s. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL - For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-u.s. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value Of the securities we rate, 48% are rated Buy, 50% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 9% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively. 56

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