A Different Set of Problems: Trucking & Heavy Equipment Demand Shift Into High Gear Kenny Vieth ACT RESEARCH Co., LLC Federal Reserve Bank of Chicago Automotive Outlook Symposium June 3, 211
It s NOT Different This Time Thesis: We have experienced a deep correction, rather than a fundamental shift in the relationship between freight and the trucks needed to haul it. As freight and business fundamentals normalize, so too will commercial vehicle demand There is nothing to replace heavy trucks in the U.S. or global economies 2
3 18 17 16 15 14 13 12 11 9 8 7 6 5 4 3 2 1 198 1981 U.S. Logistics Spend as a Percentage of GDP 198-29 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 Council for Supply Chain Management Professionals, ACT Research Co., LLC: Copyright 2 Transportation Spending Inventory Carying Costs Total Logistics Bill 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29
Marginal Demand Considerations: Evolution not Revolution Detracting from Demand Accretive to Demand Trend Period Packaging evolution Population Growth 2 year Retail Consolidation Internet Shopping 2+ years Electronics Miniaturization Intermodal Ubiquitousness of electronics 2+ years 2 year JIT Operations JIT Operations 2 year Mfg. On-shoring (Mex.) Now/Coming 4
Changing Freight Patterns I U.S Tractor Market: Sleepers as a Percentage of Total Tractor Sales 7 Share of Tractor Market 68 66 64 62 5 Year MA Retail Sales 12MMA Net Orders 6 58 56 54 52 5 24 25 26 27 28 29 2 211 ACT Research Co., LLC: Copyright 211 5
Changing Freight Patterns II 14 Percent E-Commerce as a Percentage of Retail Sales (excluding food service) Q1'21 - Q4'2 12 8 6 4 2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 5 6 7 8 9 Source: Federal Reserve Board, ACT Research: Copyright 211 6
Economic Summary Recovery appears to be self sustaining. Strong tailwinds Consumers are well positioned QE2, December Stimulus Manufacturing continues at robust levels Business investment strong Inventories low relative to sales Rising headwinds External: Arab Spring Japan (short term), Eurozone debt Internal: State & local tax receipts, fixing budgets w/o breaking recovery
Consumer Fundamentals Have Firmed 11 9 8 7 6 5 $ Billions Real Disposable Personal Income Actual and Y/Y % Change Q1'1 - Q4' %Chg 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 5 6 7 8 9 11 9 8 7 6 5 4 3 2 1-1 8 7 6 5 4 3 2 1 Percent Personal Savings Rate January 2 - March 211 Percent-SAAR 12mma 1 2 3 4 5 6 7 8 9 '11 Source: BEA, ACT Research Co., LLC: Copyright 211 19 Percent Household Financial Obligations as % of Disposable Income Q1'9 - Q4' Source: BEA, ACT Research: Copyright 211 1ppt = ~$b 18 17 16.64% 16 15 8 81 82 83 84 85 86 87 88 89 9 91 92 93 94 95 96 97 98 99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 ' Source: Federal Reserve Board, ACT Research: Copyright 211
Supply-chain constraints Tires Wiring harness connectors Small engines Axles (maybe bearings) Coming Castings Ramp-Up Issues Commodity inflation: Between demand and input inflation, truck & trailer manufacturers are getting pricing/instituting surcharges 9
This Cycle Looks Familiar Supply-demand between freight and trucks has tilted in truckers favor Trucker profits have rebounded Used equipment prices are rising Credit availability/worthiness improving Two years of deferred capex has created pent-up demand and a really old fleet Rising trucker confidence Regulatory/driver shortage issues should negatively effect productivity, positively influencing new vehicle demand
Rhymes with History Class 8 Orders Period August Following March % Chg. 93-94 17.1k 32.6k +91% 96-97 11.1k 23.3k +1% 1-2* 9.k 29.1k +233% * Prebuy ahead of EPA 4 3-4 15.1k 33.5k +122% - 11 12.4k 29.2k +135%
Time to replace some trucks 24 U.S. Class 8 Replacement & Trade-In Models Units (s) 199-216 22 2 FIRST OWNER MODEL: FIRST TRADES 18 16 14 12 ACTIVE POP. MODE L: REPLACEMENT 8 '9 92 94 96 98 ' 2 4 6 8 ' 12 14 16 ACT Research Co., LLC: Copyright 211 Date Sold Years of Service 2 211 212 213 214 USC8RS 23 146,143 8 9 11 12 24 28,82 7 8 9 11 25 257,847 6 7 8 9 26 289,656 5 6 7 8 9 27 157,565 4 5 6 7 8 12
Ceridian-UCLA Pulse of Commerce Index ATA Monthly Truck Tonnage Index (SA) January 22 - April 211 January '2 - April '11 (2=) 1 Index (22=) Y/Y % Chg. 5 13 SA Index % Change 4 45 4 35 12 3 9 3 25 1 2 8 2 7 6 15 5 9 Y/Y % Change (Right Axis) -5 5-8 - -15 4 22 23 24 25 26 27 28 29 2 211-2 7 22 23 24 25 26 27 28 29 2-2 Source: Ceridian, UCLA, ACT Research Co., LLC: Copyright 211 Source, American Trucking Association, ACT Research Co., LLC: Copyright 211 14 12 Loads Per Truck Transcore Loadboard Data January '3 - April '11 (2=) Loads Per Truck LPT "SA" 8 6 4 2 23 24 25 26 27 28 29 2 211 Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 211 13
16 12 Percent Change ACT U.S. Freight Composite Q/Q at SAAR, Y/Y Q1'97 - Q4'12(Actual through Q4') ANN. AVG. +6.8% +4.9%+6.7% 8 4-4 -8-12 -16 12341234123412341234123412341234123412341234123412341234123412341234 96 97 98 99 1 2 3 4 5 6 7 8 9 11 12 Source: ACT Research Co., LLC: Copyright 211
Tight Capacity Favors Truckers 25 Thousands U.S. Class 8 Supply & Freight Demand Overbuy:Underbuy 1997-212 2 15 5-5 - -15-2 97 98 99 ' 1 2 3 4 5 6 7 8 9 11 12 ACT Research Co., LLC: Copyright 211 15
Not A New Phenomenon The Traffic World (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 ) 16
The Root of the Problem 26 24 DRIVER SUPPLY: U.S. MALES Potential Hirees & Impending Retirees Warm Bodies (s) 21 Year-olds 65 Year-olds 2-22 SUPPLY OF INCOMING CDL-AGE U.S. MALES SHRINKS Driver The Root of the Driver Shortage Driver Wages Relative to Food Prep Workers Food Service 4. 22 $28,(e) 2 18 16 14 HARD TO FIND DRIVERS NOT SO HARD TO FIND DRIVERS U.S. MALES AT RETIREMENT AGE RISES SHARPLY 3. 2. $39,3 12 1. 1. $7,(e) $19, 8 2 21 22 23 24 25 26 27 28 29 2 211 212 213 214 215 216 217 218 219 22. 1981 28 Source: U.S. Census Bureau, ACT Research Co., LLC: Copyright 2 BLS OES, ACT Research Co., LLC: Copyright 2 When the supply-gap disappears, wages are going to rise rapidly A check at MATS indicated long-haul TLs wages are still ~$35-$4k/year At 4:1, drivers would be making ~$75k A tight driver supply will accelerate fleets moves to replace old units with newer models so as to attract new/retain existing drivers. 17
Workers to Spare? Truck Transportation Employment January 23 - April 211 (Seasonally Adjusted) Incremental 2k not trucking (for-hire fleets) 15 Employment ('s) M-M jobs Chg (s) 7 145 6 14 5 135 13 125 12 115 1 5 4 3 2 - -2 65 6 55 5 Employment ('s) Construction Employment: Production & Nonsupervisory January 23 - April 211 (Seasonally Adjusted) M-M jobs Chg (s) 4 35 3 25 '3 '4 '5 '6 '7 '8 '9-3 45 2 Source: BLS, ACT Research: Copyright 211 4 15 Incremental 1.7 million NOT working construction! 35 3 25 2 15 '3 '4 '5 '6 '7 '8 '9 5-5 - -15 Source: BLS, ACT Research: Copyright 211 18
Weather, Fuel Bite in Q1 TL Carrier Database: Net Profit Margin(excl. SWFT) Q1 '97 - Preliminary Q1 '11 7. % 6. 4 Quarter Moving Average 5. 4. 3. 2. 1.. 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 97 98 99 1 2 3 4 5 6 7 8 9 11 ACT Research Co., LLC: Copyright 211
Into the Preferred Quadrant 2
AVERAGE AGE: U.S. Class 8 Active Population 199-216 6.8 Avg. Age in Years 6.7 6.7 6.6 6.5 6.5 6.4 6.2 6. 6.1 6.3 6.3 6. 5.9 5.9 5.8 6. 6.2 6.3 6. 6. 6.1 5.8 5.6 5.4 5.6 5.4 5.4 5.5 5.5 5.3 5.3 5.6 5.8 5.7 5.2 5. 9 92 94 96 98 2 4 6 8 12 14 16 ACT Research Co., LLC: Copyright 211 21
55 $(s)/unit 5 45 4 35 3 25 2 15 5 Used Class 8: Average Retail Selling Price Monthly & 3MMA January '3 - March '11 3 4 5 6 7 8 9 11 ACT Research Co., LLC: Copyright 211 Y/Y % Chg. 17 16 15 14 13 12 1 9 8 7 6 5 4 3 2 - -2-3 Jumped to $68.8k in April 7 6 5 4 3 2 Slipped to $42.3k in April CLASS 8: U.S. USED TRUCK AVERAGE SALE PRICE 4 to 5 years old, 4-5, miles January '9 - Preliminary March '11 Total Reported Price ($) Monthly & 6 Mo. Avg. Same Dealer Sales Y/Y% Chg. (right axis) 9 11 Y/Y % Change 24 22 2 18 16 14 12 8 6 4 2-2 -4 ACT Research Co., LLC: Copyright 211 22
Current Demand Environment: Class 8 & Trailers Indicators generally pointing in the right direction Orders: Rise sharply in Q4-Q1» Rise to 5-plus year highs in March-April» Orders continue to be placed close-in» Breadth of demand expanding Backlogs: Rising since September Build: Build rates are following Orders higher» Rising BL/BU ratios will support higher build rates Retail Sales: Trending higher» Have been close to two-year highs for several months Inventory: Not an impediment to build» Likely accretive into 213 23
On Fire TOTAL CLASS 8: N.A. NET ORDERS January '4 - April '11 (Not SA) 6 Units (s) Mexico/Export % Share 5 9 4 8 3 7 2 - -2-3 Mexico & Export Share (Right Axis) Exports Mexico 6 5 4 3 2 25 2 TOTAL CLASS 8: N.A. BACKLOG & BL/BU RATIO January '4 - April '11 (Not Seasonally Adjusted) Units (s) BACKLOG BL/BU Ratio (Months) 24 22 2 18-4 4 5 6 7 8 9 11 ACT Research Co., LLC: Copyright 211 15 16 14 12 5 8 6 4-5 BL/BU RATIO (Right Axis) 4 5 6 7 8 9 11 2 ACT Research Co., LLC: Copyright 211 24
Also On Fire 4 35 3 Units (s) TOTAL TRAILERS: NET ORDERS January '4 - March '11 NET ORDERS: Actual & Seasonally Adjusted 25 2 TOTAL TRAILERS BACKLOG & BACKLOG/BUILD RATIO January '4 - March '11 15 5 4 5 6 7 8 9 11 ACT Research Co., LLC: Copyright 211 175 15 125 75 5 25-25 -5-75 Units (s) BACKLOG: Acutal & SA BL/BU RATIO (Right Axis) BL/BU Ratio (Months) 4 5 6 7 8 9 11 21 2 19 18 17 16 15 14 13 12 11 9 8 7 6 5 4 3 2 1 ACT Research Co., LLC: Copyright 211 25
Warming Trend TOTAL CLASSES 5-7: N.A. NET ORDERS January '4 - April '11 (Not Seasonally Adjusted) 45 Units (s) 4 35 3 25 2 TOTAL CL. 5-7: N.A. BACKLOG & BL/BU RATIO January '4 - April '11 (Not Seasonally Adjusted) 15 12 Units (s) BL/BU Ratio (Months) 15 BACKLOG 14 13 5 12 4 5 6 7 8 9 11 ACT Research Co., LLC: Copyright 211 8 6 11 9 8 4 7 6 2 5 4 3-2 BL/BU RATIO (Right Axis) 4 5 6 7 8 9 11 2 1 ACT Research Co., LLC: Copyright 211 26
BROAD-BASED (Data through April 211, annualized) Class 8 Orders U.S. (s) Canada (s) Mexico (s) Exports (s) Tot NA (s) NA SAAR Past 12 188.3 21.8 17.6 25.7 259.3 Past 6 251.8 36.4 21. 34.4 343.7 328.3 Past 3 264.6 38.4 22.4 39.8 365.2 345.2 April 348.2 47.3 19.9 42.1 457.5 444.3 27
N.A. Class 8 Production 26-216 4 Units (Thousands) 376 35 33 334 3 25 212 26 256 255 22 259 2 15 118 154 5 '6 '7 '8 '9 ' '11 '12 '13 '14 '15 '16 Truck: Daycab 12 81 74 35 43 64 91 4 79 69 81 Truck: Sleeper 3 2 1 1 1 2 2 2 1 2 Tractor: Daycab 1 6 56 34 42 68 94 93 71 61 71 Tractor: Sleeper 152 7 74 49 68 122 144 135 4 9 5 ACT Research Co., LLC: Copyright 211 35 3 U.S. TRAILER FACTORY SHIPMENTS 26-216 Orders (s) Dry Vans Reefer Vans Flatbeds Other Trailers 25 2 15 5 6 7 8 9 11 12 13 14 15 16 Total Trailers 276 214 143 79 124 28 259 265 236 218 248 Other Trailers 48 4 32 21 3 43 5 51 45 41 44 Flatbeds 34 22 13 6 7 12 19 23 23 22 23 Reefer Vans 38 32 27 22 27 36 4 31 34 35 36 Dry Vans 156 119 72 3 6 117 15 16 135 12 145 ACT Research Co., LLC: Copyright 211 28 ACT Research Co., LLC, Copyright 2
N.A. Classes 5-7 Order Distribution (Data through April 211, annualized) Classes 5-7 Orders Truck (s) Bus (s) RV (s) Total (s) Past 12 Mo. 9.6 23.4 13.8 148.8 Past 6 (AR) 136.4 23. 12.9 172.3 Past 3 (AR) 139.9 26.8 13.7 18.4 April 151.6 25.2 22.9 199.7 Apr. (SAAR) 214.9 29
Housing Starts vs. Cl 5-7 Truck Sales Y/Y % Change of SAAR 8% 6% 4% 2% % -2% -4% -6% -8% Jan-1 Apr-1 Jul-1 Oct-1 Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan- Apr- Jul- Oct- Jan-11 Apr-11 Source: ACT Research Co., LLC, US DOC Census Bureau HOUST CL 5-7 TRUCK RS Poly. (HOUST) Poly. (CL 5-7 TRUCK RS) 3
Add 25k to 211-213 Forecasts - Probably N.A. Classes 5-7 Production 24-216 3 275 25 225 2 175 15 125 Units (Thousands) 275 253 235 27 158 98 118 148 176 196 212 222 236 75 5 25 '4 '5 '6 '7 '8 '9 ' '11 '12 '13 '14 '15 '16 31
ACT Research Company, LLC 11545 North Marr Road Columbus, IN 4723 Phone: (812) 379-285 Fax: (812) 378-5997 Email: trucks@actresearch.net www.actresearch.net 32