Economic Update & Transportation Market Outlook What Lies Ahead For The U.S. Economy & The Domestic Transportation Industry

Transcription

1 September 19, 2016 Economic Update & Transportation Market Outlook What Lies Ahead For The U.S. Economy & The Domestic Transportation Industry Presentation to Ohio Trucking Association John G. Larkin, CFA Managing Director John Engstrom Associate Analyst Roxanna Islam Associate Analyst 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.

2 Is Donald Fit to Be President? 2

3 Is Hillary Fit To.Stand? 3

4 What s Certain is They Both Have Plenty of Mud to Throw at Each Other 4

5 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 5

6 Transportation & The Economy Signals & Drivers Consumers drive freight, and population growth drives the consumer; global population still rising, but growth is slowing 10,000 Population (millions) Y/Y Population Growth 2.5% 9,000 Absolute Population Level (millions) 8,000 7,000 6,000 5,000 4,000 3,000 2, % 1.5% 1.0% 0.5% 1, % E 2020E 2023E 2026E 2029E 2032E 2035E 2038E 2041E 2044E 2047E 2050E Y/Y Change In Population Growth Source: U.S. Census Bureau 6

7 Transportation & The Economy Signals & Drivers Productivity has been low and downward sloping since the beginning of the century 4.5 Productivity Index Y/Y Productivity Growth 20% 4 15% Indexed Productivity (1947 = 1) Q16 Productivity = -0.5% 10% 5% 0% -5% -10% Y/Y Change In Productivity % Chart displays seasonally adjusted annual data Source: Bureau of Economic Analysis 7

8 Economics: Gross Domestic Product The advance estimate of GDP for the second quarter of 2016 showed a 1.5% growth rate; slow but positive growth 20 6% U.S. GDP (2009 chained $U.S., Tn; SAAR) % 2% 0% (2%) (4%) Y/Y % Change 8 (6%) 2Q96 2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16¹ Chart displays seasonally adjusted annual data; pink shaded regions denote recession Source: Bureau of Economic Analysis 8

9 Average Real GDP Growth Rate Per Quarter in Office Last 11 Presidents ( ) Source: Bureau of Economic Analysis 9

10 Transportation & The Economy Signals & Drivers Both U6 and U3 unemployment¹ have come down, and U6 is now catching up to the rate of improvement seen in U3 U6 (seasonally adjusted) U3 (seasonally adjusted) 18% Oct. '09 7.1% June 16 U3 (seasonally adj): 4.9% June 16 U6 (seasonally adj): 9.6% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Seasonally Adjusted Unemployment Rate Jun-16 Dec. '07 3.8% June. '16 4.7% ¹ U6 Unemployment includes unemployed, discouraged workers, marginally attached, plus total employed part time for economic recessions Source: U.S. Bureau of Labor Statistics; recessions shown in light blue 10

11 Transportation & The Economy Signals & Drivers The decline in unemployment is largely due to a falling labor force participation rate 68% 66% Peak Apr. 2000: 67.3% Labor Force Participation Rate 64% 62% 60% 58% Most Recent June 2016: 62.7% 56% M Jobs Required to Keep Rate Constant The Decline In Labor Force Participation Rate Is Partly Due To Retiring Baby Boomers, And Partly Due To Expanded Entitlement Programs Source: U.S. Bureau of Labor Statistics 11

12 Transportation & The Economy Signals & Drivers Retail Sales Ex. Gas and Adj. for Population Growth and Inflation Has Increased 2.6% Y/Y 195 Adj Retail Sales Y/Y% Change Change from 2006 Peak: (0.7%) 8% Monthly Retail Sales (W. Exclusions & Adjustments; $U.S., Billions) % (2%) (7%) 155 (12%) Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Y/Y % Change 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 12

13 Transportation & The Economy Signals & Drivers The ISM Has Weakened in July But Still Sits Slightly Above the 30-Year Average ISM Index Values: May 51.3, Jun 53.2, July year Average: Jul-86 Jul-88 Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 ISM Index Value Source: U.S. Census Bureau ISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction. 13

14 Economic Transportation Indicators& The Economy Signals & Drivers Are Elevated Retail Inventory/Sales the New Norm In Supply Chain Management? 600 Retail Inventories Inventory/Sales Ratio Retail Inventories ($bn) May 96 May 97 May 98 May 99 May 00 May 01 May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15 May 16 May-16 I/S Ratio: 1.50 I/S Ratio Source: U.S. Census Bureau

15 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 15

16 Trucking Dominates The Landscape The trucking sector dwarfs other modes in scale, and truckload (TL) accounts for the bulk of trucking in the U.S. Tonnage Market Size: 14.6 bn Tons U.S. Freight Transportation Market, 2014 Dollar Market Size: $877 bn U.S. Freight Transportation Market, 2014 Rail Intermodal % Water % Air Express % Pipeline 1, % Ground Parcel % Truckload 4, % Pipeline % Water % Rail Intermodal % Air Express % Ground Parcel % Truckload % Rail Carload 1, % Rail Carload % Private Truck 5, % LTL % Private Truck % LTL % Source: American Trucking Associations, Stifel estimates Estimates are based on 2014 market data. 16

17 Transportation & The Economy Rail intermodal loadings have outperformed since the Great Recession Truck Loadings Heavy-Duty Truck Tonnage Rail Intermodal Loadings U.S. Rail Carloads FORECAST Source: FTR Associates, On Index 2000 =

18 Transportation & The Economy Freight rates have continued on an upward trajectory since the Great Recession 270 Truckload (w/o FSC) LTL (w/o FSC) Intermodal / Rail + Dray (w/o FSC) Railroad RTM FORECAST Excludes FSC Impact 210 Includes FSC Impact Source: FTR Associates, On Index January 2003 = 100; Stifel RTM forecast 18

19 Market Demand Index The ITS Market Demand Index was weak throughout 2015 and but a capacity crunch is reversing that trend now during ITS Market Demand Index Dec-09 Mar-10 Jul-10 Oct-10 Jan-11 May-11 Aug-11 Nov-11 Feb-12 Jun-12 Sep-12 Dec-12 Apr-13 Jul-13 Oct-13 Jan-14 May-14 Aug-14 Nov-14 Mar-15 Jun-15 Sep-15 Dec-15 Apr-16 Jul-16 Source: ITS Trans4Cast; MDI index values below 7 indicate that the market favors brokers/shippers from a rate negotiation standpoint. MDI index values above 7 indicate that the market favors the trucker 19

20 Truckload Volumes TL volumes exhibited weak growth throughout 2015 and have continued to struggle throughout Total Loads (Adj) Y/Y % Change 25% Truckload Loads Index (Seasonally Adjusted) % 15% 10% 5% 0% (5%) (10%) (15%) (20%) (25%) Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 June -4.1% from May; -3.2% Y/Y Relative to Recession +56.7% Y/Y % Change Source: American Trucking Associations 20

21 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 21

22 Driver Shortage Forward looking projections show a gap in the growth of driver supply and demand Driver Labor Shortage & Surplus Number of Drivers 2,000,000 1,950,000 1,900,000 1,850,000 1,800,000 1,750,000 1,700,000 1,650,000 1,600,000 Driver Demand Driver Supply -240,000 Shortage Projected Compliance, Safety, Accountability (CSA) Hours Of Service (HOS) Drug & Alcohol Database Speed Limiters 1,550,000 1,500, Electronic Log Devices (ELDs) Efforts to counterbalance a driver shortage need to look at increasing the driver pool to keep up with growing demand, not simply preventing it from shrinking Source: FTR Transportation Intelligence, Stifel Analysis 22

23 Chronic Labor Shortage in the U.S. The cavalcade of capacity stripping federal regulations marches on to make things worse Source: FTR Intelligence; to are estimates 23

24 Focus On Safety By Insurance Companies & Shippers Insurance premiums have doubled and even tripled in some cases Many insurance companies have decided not to underwrite policies for truckers who don t have ELD s implemented Some insurance companies have even outright left the market: AIG, Zurich Truckers have indicated that insurance rates are up dramatically, some from $5,000/truck to $15,000 Some brokers have indicated that only truckers with a proven safety record and all of the regulatory required technology must already be fully implemented prior to considering writing a policy Source: Stifel 24

25 Spot Market Insanity Flushing Out Small Carriers 120 Trucking companies with an average fleet size of 17 halted operations in 2Q16; the number was only 70 in 2Q15 50,000 45,000 Total Number of Trucks Removed 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Q98 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 1Q14 3Q14 1Q15 3Q15 1Q16 Source: Avondale Partners 25

26 Capacity Utilization Expected to Spike: With increasing regulations, defaults, and a constrained driver pool growing demand a tightening capacity is expected to increase utilization Source: FTR Intelligence; to are estimates 26

27 Some Big Carriers Pruning Capacity Year-Over-Year Change in Tractor Fleet from 2Q15 to 2Q16 WERN Flat USAK -6.7% SWFT -5.2% PTSI MRTN KNX +5.4% +6.9% -2.5% #REF! 2Q15 2Q16 JBHT +5.9% CVTI -4.0% CGI 2Q16 Not Yet Reported 0 5,000 10,000 15,000 20,000 25,000 Source: Company data Total tractors including owner operators unless otherwise noted; WERN, JBHT Total tractors at quarter end 27

28 Efficiency Plateau: After post-deregulation improvements, incremental efficiency in logistics has been difficult to attain. Very little support from changes in size and weight restrictions. United States Logistics Cost as a Function of GDP 1,500 US Logistics Cost ($ bns) Cost as a % of GDP 17% 16% U.S. Logistics Cost ($U.S., billions) 1,300 1, % 14% 13% 12% 11% 10% 9% 8% 300 7% Logistics Cost as a % of U.S. GDP Source: State of Logistics Reports, U.S. Bureau of Economic Analysis 28

29 Infrastructure Investment Relative to historical spend, current U.S. infrastructure investment is down one full percentage point United States Comparative Infrastructure Spending Gap between historical spend and estimated future spending need, % of GDP $177 Billion Shortfall Source: McKinsey Global Institute Analysis 29

30 Intermodal Works Only In Long Haul Density Markets Trucking competes with rail mainly in the 500 1,000 mile range, but current trucking pricing may be changing that Modal Shift Projection Source: Federal Railroad Administration National Rail Plan, September 2010 Progress Report; ATA Trucking Trends 2013, Oliver Wyman 30

31 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 31

32 Sector Overview: Dry Van Truckload (TL) Dry Van Truckload market rates have been pummeled Spot market pricing not sustainable Contract pricing pressure surprisingly intense Fleets downsizing Capacity sapping regulations are rapidly approaching Insurance companies and shippers may do more to enforce safety compliance than law enforcement Rates TL Load/Fleet Size Index (February 2005=100) Dry Van Truckload Volume and Pricing 90 JAN JAN 2004 JAN 2005 TL Dry Van (w/o FSC) Large Fleets Have Decreased Y/Y Large TL Fleet Size Index Total TL Loads Index 25,000 20,000 15,000 10,000 5, 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 Jun '14 Dec '14 Jun '15 Dec '15 Jun '16 JAN 2006 JAN 2007 JAN 2008 JAN 2009 JAN 2010 JAN 2011 Dry Van Trailer Loadings (000s, SA) JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 FTR est. JAN Loadings Source: FTR, American Trucking Associations (ATA) 32

33 Sector Overview: Less-than-Truckload (LTL) Volumes tepid but pricing stable; flat is the new up The last year and half has been tough for LTL volumes, thanks to 1) weak domestic energy/industrial sectors, 2) strong dollardriven softness in manufacturing exports, 3) average shipment size declines While soft volumes tend to weigh on pricing, due to greater industry concentration than TL, rising costs, and some hard lessons in the last downturn, the pricing environment remains rational E-commerce and shortening supply chains could be positive for LTLs, but real margin growth necessitates more volume to drive density whether through economic growth or competitor failures If TL sector tightens significantly, LTL will be happy to handle the overflow LTL Trucking Pricing and Truck Tonnage s a te 110 R N JA N JA LTL (w/o FSC) N JA N JA N JA N JA N JA N JA FTR Heavy-Duty Truck Tonnage (000s, SA) 1,400, N JA N JA N JA N JA N JA N JA N JA 1,200,000 1,000, , , , ,000 Y/Y ISM Generally Negative for Last ~18mos. Y/Y % Change 75% 50% 25% 0% (25%) (50%) Aug-99 Aug-00 Aug-01 ISM Index Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 FTR est. ATA LTL-SA Tonnage Index Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 0 Aug-15 Aug-16 g s L o a d in Source: Institute for Supply Management, National Bureau of Economic Research, American Trucking Associations; grey-shaded regions in top chart signify recessionary periods 33

34 Sector Overview: Reefer Truckload (TL) Reefer Truckload market rates have been pummeled Broadly speaking the refrigerated market is expected to continue to grow with the need for fresh(er) food In 2015 some carriers struggled with end markets dealing with the bird flu filtering through end markets Locus of production moving east Intermodal experiment still alive Rate pressure has been acute Rates Reefer Truckload Volume and Pricing 90 JAN JAN 2004 JAN 2005 TL Reefer (w/o FSC) JAN 2006 JAN 2007 JAN 2008 JAN 2009 Large Fleets Have Decreased Y/Y Large TL Fleet Size Index Total TL Loads Index 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Dec '06 Jun '07 Dec '07 JAN 2010 Jun '08 JAN 2011 Dec '08 Jun '09 Dec '09 Jun '10 Dec '10 Jun '11 Dec '11 Jun '12 Dec '12 Jun '13 Dec '13 Jun '14 Dec '14 Jun '15 Dec '15 Jun '16 Reefer Trailer Loadings (000s, SA) JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 FTR est. JAN 2017 Loadings TL Load/Fleet Size Index (February 2005=100) Source: FTR, American Trucking Associations (ATA) 34

35 Sector Overview: Flatbed Truckload (TL) Flatbed Truckload market rates have been pummeled Heavy haul freight struggling currently through soft industrial economy and low commodity prices Flatbed Truckload Volume and Pricing TL Platform (w/o FSC) Flatbed Trailer Loadings (000s, SA) 150 9,000 8, ,000 US implementation of steel tariffs on China has only shown null to modest benefit to domestic steel volumes Building materials were ok up until recently Ag and construction equipment soft Drilling rigs and pipe very weak Rates Large Fleets Have Decreased Y/Y Large TL Fleet Size Index Total TL Loads Index 6,000 5,000 4,000 3,000 2,000 1, 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 Jun '14 Dec '14 Jun '15 Dec '15 Jun '16 JAN 2003 JAN 2004 JAN 2005 JAN 2006 JAN 2007 JAN 2008 JAN 2009 JAN 2010 JAN 2011 JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 FTR est. JAN 2017 Loadings TL Load/Fleet Size Index (February 2005=100) Source: FTR, American Trucking Associations (ATA) 35

36 Sector Overview: Tank Truckload (TL) Tank Truckload market rates have been pummeled The North American Energy industry in midst of a lull and some estimates show that construction is currently backlogged for 10 years Petrochemical industry investment is booming with 2017 being the first year for new capacity coming on stream There are 243 U.S. chemical production projects expected between 2010 and 2023 Plastic pellet business is solid Frac sand is soft Grain is strong Rates TL Load/Fleet Size Index (February 2005=100) Tank Truckload Volume and Pricing JAN JAN 2004 TL Tank (w/o FSC) JAN 2005 JAN 2006 JAN 2007 JAN 2008 Large Fleets Have Decreased Y/Y Dec '06 Jun '07 Dec '07 Jun '08 Dec '08 Jun '09 Dec '09 Jun '10 JAN 2009 Large TL Fleet Size Index Bulk Trailer/Straight Truck Loadings (000s, SA) 35,000 Total TL Loads Index 30,000 25,000 20,000 15,000 10,000 Dec '10 JAN 2010 Jun '11 JAN 2011 Dec '11 Jun '12 Dec '12 Jun '13 Dec '13 Jun '14 Dec '14 Jun '15 Dec '15 Jun '16 JAN 2012 JAN 2013 JAN 2014 JAN 2015 JAN 2016 FTR est. JAN ,000 0 Loadings Source: FTR, American Trucking Associations (ATA) 36

37 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 37

38 Truckload Market Fragmentation & Competition Transportation status quo: fragmented with very few large players U.S. Motor Carriers Operating a Given Number of Power Units 6 or Fewer 7 to 20 More than % 2.8% Add LTL Fragmentation 90.5% Source: CH Robinson 38

39 Truckload Market Fragmentation & Competition Transportation status quo: fragmented Truckload/Dedicated Market Size and Share 2015 Ranking of Top 25 U.S. & Canadian Carriers (2014 Data) $3,500 Public Company Revenue Private Company Revenue Total 2014 Revenues (USD $ Millions) $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ U.S. & Canadian Carriers Ranked From Largest to Smallest Source: Transport Topics; Market Size Includes Private Truckload and Truckload CVTI revenue includes Star Transportation; USAK revenue is Trucking revenue only; PTSI revenue is total revenue 39

40 Competitive Landscape The top-5 LTL carriers comprise nearly 55% of the industry FedEx Freight YRC Worldwide Con-way Freight UPS Freight Old Dominion Other FedEx Freight $6,093 16% Other $17,285 46% YRC Worldwide $5,069 14% Old Dominion $2,788 7% Con-way Freight $3,632 10% UPS Freight $2,633 7% Note: LTL Industry Is 12% As Large As The TL Industry In Terms of Annual Freight Bill Source: Company data, measured by 2014 revenue; Stifel estimates 40

41 Discussion Agenda The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate Freight Market is Choppy at Best; Abysmal at Worst The Supply Side of the Market is Beginning to Contract and Right Size Some Trucking Segments Are Performing Better Than Others Who are the Players in Town? Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking 41

42 Conclusions The sluggish U.S. economy should continue to pull the freight market into a tightening position, especially given current regs Slow, steady growth most likely scenario (recession risk, however, while lessened of late, still remains) Longer term, a tight TL supply and demand dynamic is still probable All other logistics sectors benefit from tight TL supply and demand Shipper and carrier collaboration is largely untapped reservoir for incremental productivity 3PL s likely to continue helping shippers Ø Drive down total logistics costs Ø Source capacity Ø Reduce overhead Ø Optimize supply chain design Ø Winning 3PL's and winning/larger TL carriers will make peace Source: Stifel 42

43 Important Disclosures & Certifications I, John G. Larkin, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, John G. Larkin, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Our European Policy for Managing Research Conflicts of Interest is available at The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel s overall revenue, which includes investment banking revenue. Our investment rating system is three tiered, defined as follows: BUY We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield. HOLD We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price change plus dividend yield. SELL We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield. 43

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