What Freight Flows tell us about the Economy?

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1 What Freight Flows tell us about the Economy? Donald Broughton Chief Market Strategist, Managing Director, Senior Equity Analyst September 11, 2012

2 I have often looked at that chair behind the President

3 So how do we know?

4 We have follow the trend to peek over the horizon

5 No Representation without Transportation

What is Broughton Going to Talk About? The Changing Landscape of the Economy & Capital Markets What is a Fiscal Cliff? Demand is not Going Up. Why? Where we are Going?

6 What is Broughton Going to Talk About? The Changing Landscape of the Economy & Capital Markets What is a Fiscal Cliff? Demand is not Going Up. Why? Where we are Going? Trucking Capacity Shifts to other Modes Supply will Remain Constrained No Longer Failures but Other Capacity Constraints Pricing Power is Declining for Capacity Providers Uncertainty has a Price

7 What is a Fiscal Cliff? A combination of $8 trillion in tax hikes and spending cuts scheduled to take effect on Jan1, 2013 Bush tax cuts expire (back to 2001) Obama 2% payroll cut expires The first round of $100 billion in automatic cuts to Defense and Medicare

8 What is a Fiscal Cliff? A 4% reduction in the rate of projected economic growth Alone would represent a 1.3% contraction in the GDP

9 What is a Fiscal Cliff? There has to be a day of reckoning Annual deficit exceeding $1 trillion Current course debt goes from 70% of GDP to 200% over next 25 years

10 In Tonnage We Trust 20% Quarterly Year Over Year % Change in Truck Tonnage vs. Quarterly GDP 15% 10% 5% 0% -5% -10% -15% -20% GDP Non-Seasonally Unadjusted Truck Tonnage -25% Source: American Trucking Association and Avondale Partners LLC

11 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Truck Tonnage vs. GDP GDP (right axis) Truck Tonnage (left axis) Avondale estimates 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: American Trucking Associations, BEA, and Avondale Partners

12 In Tonnage We Trust Domestic Truck Tonnage growing at less than 1% YOY, poised to begin contracting Airfreight is already in contraction Domestic -1.5% TransAtlantic -0.8% TransPacific -0.4% Rail Carloadings are flat International container volume is contracting

13 Copper Pricing (monthly; USD per metric ton) $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Copper (daily; USD per metric ton) $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000

14 Aluminum Pricing (monthly; USD per metric ton) $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Aluminum (daily; USD per metric ton) $3,600 $3,100 $2,600 $2,100 $1,600 $1,100

15 What inflation? Metric Tons of Copper per Ounce of Gold Source: FactSet, NBER and Avondale Partners 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-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

16 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 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 What inflation? Barrels of Crude (WTI) per Ounce of Gold Source: FactSet, NBER and Avondale Partners 5 -

17 This trend should not surprise, but means more volatility in freight demand. Restocking is a myth. Manufacturing Retail Wholesalers Inventory-to-Sales Ratios Source: U.S. Department of Commerce and Bureau of Economic Statistics

18 (1) In early '01, a peak in inventory lagged the sales peak by 4 months y = x R² = y = x R² = Sales Inventory Manufacturing Inventory vs. Sales: Firms had improved responsiveness to trend shifts Source: U.S. Department of Commerce and Bureau of Economic Statistics (2) In late '01/early '02, the inventory trough followed the sales trough by 6 months (3) In '08, the inventory peak lagged the sales peak by only 1 month. (4) Inventory bottomed in Sept '09, lagging the sales trough in May by 4 months. 625, , , , , , , , , , , , , , , , ,000

19 y = 37.62x - 1,087, R² = 0.95 Wholesale Inventory vs. Sales: Firms had improved responsiveness to trend shifts Source: U.S. Department of Commerce and Bureau of Economic Statistics (1) In early '01, a peak in inventory lagged the sales peak by 5 months (2) In late '01/early '02, the inventory trough followed the sales trough by 4 months Inventory Sales y = 34.25x - 1,021, R² = 0.94 (3) In '08, the inventory peak lagged the sales peak by only 2 months. (4) Inventory bottomed in Sept '09, lagging the sales trough in March by 6 months. 500, , , , , , , , , , , , , , , ,000

20 Retail Inventory vs. Sales: Retail firms have no real successful history of navigating trend shifts Source: U.S. Department of Commerce and Bureau of Economic Statistics (1) We have no comparable frame of reference from the time frame 525, , ,000 Inventory y = 32.19x - 805, R² = 0.87 (2) In '08, the inventory peak lagged the sales peak by 3 months. 375, , ,000 Sales y = x R² = (3) Inventory bottomed in Aug '09, lagging the sales trough in Mar '09 by 5 months. 225, , ,000

21 In Tonnage We Trust Monthly Truck Tonnage Index (2000 basis 100) Seasonally Adjusted Data Non-Seasonally Adjusted Data Avondale's Projection Source: American Trucking Association and Avondale Partners

22 Less of a Leading Indicator than Truck, But a more Global View 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Airfreight vs. GDP GDP (right axis) Domestic Airfreight (left axis) International Airfreight (left axis) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: Air Transport Association, BEA, and Avondale Partners

23 The Strategery of Domestic Airfreight has Failed to Rebound U.S. Domestic Total Air Cargo Ton Miles ( Present) Revenue Ton Miles (000s) 1,200,000 1,100,000 1,000, , , , , ,000

24 No Hope for Change Here? International Total Air Cargo Ton Miles ( Present) Revenue Ton Miles (000s) 1,400,000 1,200,000 1,000, , , ,000

Monthly Ton Miles (000's) 700,000 Trans Atlantic Latin/S.

25 The Trans-Atlantic slowdown was more pronounced Until recently International Total Air Cargo Segmented by Orgin/Destination Monthly Ton Miles (000's) 700,000 Trans Atlantic Latin/S. America Trans Pacific 600, , , , , ,000 0

26 European Airfreight Avondale IATA 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% Sources: Airport Authorities, IATA and Avondale Partners -30.0%

27 Asia Pacific Airfreight Avondale IATA 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Sources: Airport Authorities, IATA and Avondale Partners -40.0%

28 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Rail Carloads vs. GDP GDP (right axis) Rail Carloads Ex Coal and Ag (left axis) Rail Carloads Chemicals and Metals Only (left axis) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: American Association of Railroads, BEA, and Avondale Partners

29 Total Intermodal Units Originated by Class I U.S. Railroads Thousands Source: AAR & Avondale Partners

30 Total Carloads Originated by Class I U.S. Railroads Thousands Source: AAR & Avondale Partners

31 Total Volumes (Ex Coal and Ag) North American 220, , , , , ,000 Source: AAR and Avondale Partners

32 Coal Carload Volume North American 160, , , ,000 Export coal remains solid, while utility demand has been persistently pressured by low natural gas prices. Although we expect utility volumes to remain under pressure, we may have seen the worst in Q2. With temperatures extremely hot in the back half of June and into July we would not be surprised to see modest improvement. 120, , ,000 Source: AAR and Avondale Partners

33 Natural Gas (daily; USD per MM BTU) $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00

34 Chemical Carload Volume North American 58,000 53,000 48,000 Our favorite predictor of U.S. domestic industrial production continues its overall bullish trend, but strength in petroleum carloads is masking weakness in other chemical volumes. 43,000 38,000 Source: AAR and Avondale Partners

35 Western Rail Total Weekly (4-wk avg) Petroleum Carloads North Dakota Montly Oil Production (Bbls) 16,000 What Has the Bakken Meant for Rails? 22,000,000 15,000 20,000,000 14,000 13,000 North Dakota Oil Production BNSF, UNP, CP Petroleum Carloads 18,000,000 12,000 16,000,000 11,000 14,000,000 10,000 12,000,000 9,000 8,000 10,000,000 7,000 8,000,000 6,000 6,000,000 Source: AAR, North Dakota DMR, Avondale Partners

36 Chemicals (ex-petroleum) Carload Volume North American 50,000 45,000 40,000 35,000 30,000 Source: AAR and Avondale Partners

37 Agricultural Products Carload Volume North American 65,000 60,000 55,000 50,000 This group continues to suffer from lower export demand. 45,000 40,000 Source: AAR and Avondale Partners

38 Metal / Metal Ore Carload Volume North American 55,000 50,000 45,000 40,000 35,000 This key group has weakened of late. 30,000 25,000 20,000 15,000 Source: AAR and Avondale Partners

39 Motor Vehicles & Equipment Carload Volume North American Auto shipments continue to move higher as manufacturers ramp production to meet growing demand. 36,000 34,000 32,000 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 Source: AAR and Avondale Partners

40 Forest / Lumber Carload Volume North American Forest products and other housing-related categories have shown signs of a modest recovery in recent months. 34,000 32,000 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Source: AAR and Avondale Partners

41 What about the Ports?

42 Total Los Angeles and Long Beach Container Volume (TEUs) 64% of U.S. West Coast volume 54% of total Pacific coast volume 35% of U.S. total volume Inbound Outbound Empty 20-Foot Equivalent Units (TEUs) 700, , , , , , ,000 Source: Port of Los Angeles and Long Beach and Avondale Partners

43 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Ocean Imports vs. GDP GDP (right axis) New York/New Jersey (left axis) LA/Long Beach (left axis) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: Port of LA/LB, Port of NY/NJ. BEA, and Avondale Partners

44 40.0% Ocean Exports vs. GDP 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% GDP (right axis) New York/New Jersey (left axis) LA/Long Beach (left axis) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: Port of LA/LB, Port of NY/NJ. BEA, and Avondale Partners

45 YoY % Change LA/LB Exports YoY % Change US Dollar (INVERTED) Exports vs. the Dollar 40.00% US Dollar vs. LA/LB Exports -20.0% 30.00% -15.0% 20.00% -10.0% 10.00% -5.0% 0.00% 0.0% % 5.0% % % YoY % Change LA/LB Exports YoY % US Dollar (Inverted) 10.0% 15.0% % Source: Port of Los Angeles and Long Beach and Avondale Partners 20.0%

46 Exports vs. the Dollar Euro vs. NY/NJ Exports 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% YoY % Change EUR v USD YoY % Change NY/NJ Exports Source: Port Authority of New York/New Jersey, FactSet and Avondale Partners -15.0% -20.0%

47 Tonnage Poised to Continue Recovery? Monthly Truck Tonnage Index (2000 basis 100) Seasonally Adjusted Data Non-Seasonally Adjusted Data Source: American Trucking Association and Avondale Partners LLC Avondale's Projection

48 Tonnage not Pointing to Continued Recovery? Monthly Truck Tonnage Index (2000 basis 100) Seasonally Adjusted Data Non-Seasonally Adjusted Data Avondale's Projection Source: American Trucking Association and Avondale Partners

49 Are Currency Valuation and Freight Flows Related? 20% 15% Truck Tonnage 3 Mos % Change Mov. Avg. (left axis) Dollar Index % Change (inverted on right axis) U.S. Dollar -20% -15% 10% Truck Tonnage -10% 5% -5% 0% 0% -5% 5% -10% 10% -15% 15% -20% Sources: FactSet, American Trucking Association and Avondale Partners LLC 20%

50 Those Who Make Tangible Goods are Capital Intensive 25% Do Changes in Interest Rates Create Changes in Truck Tonnage? 12% 20% 15% 10% 5% 0% -5% -10% Non-Seasonally Adjusted Truck Tonnage Prime Rate 11% 10% 9% 8% 7% 6% 5% 4% -15% Source: American Trucking Association, FactSet, and Avondale Partners 3%

51 ISM Index Truck Tonnage 3 Month MA Y-o-Y% Confidence in Purchasing or Supply Chain Managers is a Reflection of Purchase Order Activity ISM Index vs. Truck Tonnage 3 mo Moving Avg YoY% ISM Index ISM 50 Truck Tonnage 3 month MA Y-o-Y% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Sources: ISM, ATA, and Avondale Partners

52 ISM Index Truck Tonnage 3 Month MA Y-o-Y% 70 Highest Degree of Predictive Value on Next 6 to 8 weeks ISM Index vs. Truck Tonnage Index 3MMA YoY% 15% % 5% 0% ISM Index ISM 50 Truck Tonnage Index -5% -10% -15% Sources: ISM, ATA, and Avondale Partners

53 What about energy costs? Historically, slowed growth but had not been responsible for contractions 130 Truck Tonnage vs. Crude Oil Prices Seasonally Adjusted Data Crude Oil $ per Barrel $130 $110 $90 $70 $50 $30 $10 Source: American Trucking Associations, FactSet, and Avondale Partners LLC

120 110 100 Consumer Confidence = Truck Tonnage? If retail is one of trucking's largest customers, shouldn't 90 80 70 60 50 40 consumer confidence affect truck tonnage?

54 Consumer Confidence = Truck Tonnage? If retail is one of trucking's largest customers, shouldn't consumer confidence affect truck tonnage? Coming out of recession consumer confidence continued to fall or lack strength until long after truck tonnage had recovered. Consumer confidence reaches levels lower than 1991 Seasonally Adjusted Truck Tonnage Consumer confidence begins to fall over 6 months after truck tonnage had collapsed Consumer Confidence Source: American Trucking Associations, Conference Board, and Avondale Partners LLC

55 Capacity Factors EOBR s Company Failures Driver availability / cost Shift to or away from / competition from other modes (i.e., intermodal) Size and age of truck fleet

56 3.0% 2.0% 1.0% Miles Per Tractor During EOBR Implementation Based on population of trucking companies which have already gone through the EOBR adoption process Q1 is quarter in which we estimate at least 2/3 of fleet was outfitted with EOBRs 0.0% -1.0% -2.0% -3.0% Source: Company filings and Avondale Partners estimates

57 Total Trucks Average Diesel Fuel ($ per Gallon, Including Taxes) Total Trucks Parked Reaches New Record 50,000 45,000 40,000 35,000 Total Trucks of Companies Failing (on a quarterly basis) vs. Average Retail Diesel Fuel Price (Including Taxes) Total # Trucks Avg Diesel Fuel Price $4.40 $3.90 $ ,000 25,000 20,000 $2.90 $ ,000 10,000 5,000 ` $1.90 $ $0.90 Source: Avondale Partners estimates and EIA

Labor always Transports largest expense; suggesting unemployment will continue to fall but Driver Pay per Mile U.S. Unemployment Rate Unemployment vs. Driver Pay $0.390 $0.

58 Labor always Transports largest expense; suggesting unemployment will continue to fall but Driver Pay per Mile U.S. Unemployment Rate Unemployment vs. Driver Pay $0.390 $0.370 Once the labor market began to weaken, driver pay stopped rising before unemployment began going up. All Carriers Unemployment Rate 10.00% 8.00% $ % $0.330 $0.310 $0.290 $0.270 As long as unemployment was falling, truckers had to pay more to attract drivers. Now that Driver Pay is going up again, we expect unemployment will continue to fall. 4.00% 2.00% 0.00% Source: Signpost, BLS and Avondale Partners

59 YoY Change in Employment Alternatives Driver Turnover 5.0% 0.0% -5.0% -10.0% -15.0% Driver Turnover vs. Employment Alternatives As alternative jobs become available, more drivers leave the industry, turnover rises Construction and Manufacturing Employment Large TL Driver Turnover 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Source: ATA, BLS, Avondale Partners

60 $4.50 But, fuel inflation does influence mode National Retail Diesel Fuel Price per gallon (weekly year over year) Quarterly Averages ($/gallon) 1Q 2Q 3Q 4Q YR $4.00 $ $3.00 $2.50 $2.00 Source: Department of Energy - U.S. average

61 ATA Index Long-Haul Truckload > 1,000 miles Since the peak of the cycle in 1999 long-haul has trended down Source: American Trucking Association and Avondale Partners

62 The Realities of Intermodal Truckload Demand by Length of Haul <3,000 <2,500 <2,000 <1,500 <1,000 <500 < % 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Avondale Partners estimates

63 20% 3 Month Moving Average of Truck Tonnage versus Class 8 Truck Production Source: ACT and ATA; Avondale Partners LLC Estimates Truck Production % Change 100% 15% Tonnage Production 80% 60% 10% 40% 5% 20% 0% 0% -5% -20% -40% -10% -15% -20% Despite engine emission changes, fundamental truck tonnage correlates with heavy duty truck production. -60% -80% -100%

64 50,000 Historical Class 8 Heavy Duty Truck Cycles - Orders 45,000 40,000 35,000 '96 - '01 '02 - '06 '07 - present 3- month moving average of class 8 heavy duty net orders Pent up supply from '06 pre-buy took time to work through 30,000 25,000 20,000 The prebuy of '09. 15,000 10,000 5,000 Source: ACT Research and Avondale Partners LLC 0 Month

Predictions for 2011-2012 Most critical factor for truckers will be the ability to attract, train and retain an adequate number of drivers and owner operators.

65 Predictions for Most critical factor for truckers will be the ability to attract, train and retain an adequate number of drivers and owner operators. This will be more difficult this cycle than it has ever been. CSA constrains capacity (fewer drivers, lower asset utilization) Buy EOBR s / paperless driver logs; asset utilization going down Buy more trailers HOS constrains even further Truckload pricing will be strong but operating margins will not rebound as strongly in 2011 Bankers had worse credit experience in segments other than Transportation, they will be back YRCW is the definitive Zombie Trucker Breakeven point for intermodal is shorter and shorter, creating capacity through mode shift Domestic manufacturing and assembly, along with export commodities will continue to drive the first stage of the rebound Next big American consumer spending boom comes from those living outside our border

66 Predictions for Fiscal cliff will be pushed off even further Romney will defeat Obama A Romney win will be a bigger short term negative in the economy, but a much better long term If current freight trends continue, it is time to use the R word Next round of trucking failures will set all new records If it is any consolation, most of the rest of the world will suffer more The U.S. will once again lead the world out of the coming calamity

67 What Freight Flows tell us about the Economy? Donald Broughton Chief Market Strategist, Managing Director, Senior Equity Analyst September 11, 2012

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