Industry Review Economics, Transportation & Commercial Vehicles ACT Research Webinar October 20, 2015
Overview Introduction Economy Class 8/Freight/Transportation Used Trucks/Classes 5-7 Trailers Q&A/Wrap-up 2
ACT s Commercial Vehicle Services State of the Industry N.A. Classes 5-8 Vehicles Country Bus N.A. OEM Classes 5, 6-7 & 8 Build & Retail Sales U.S. Trailers Used Trucks Economic Database Publicly Traded TL Carrier DB Consulting/Speaking Private consultation/projects Speakers Bureau Forecasts ACT N.A. Commercial Vehicle OUTLOOK Transportation Digest China Commercial Vehicle Outlook The Global Commercial Vehicle Forecast Natural Gas The Future of Natural Gas Beyond the Engine: Understanding Natural Gas Fuel Systems Fuel Payback Calculators 3
FISCAL DEADLINES October 29, 2015 Highway Bill (Surface Transportation Bill) extension expires An extension to mid-december is best guess November 3, 2015 or thereabout US Treasury ability to borrow will end Threat of default and/or credit downgrading likely December 11, 2015 Funding of all government agencies expires Government office shutdowns unless budget deal is achieved December 31, 2015 Tax Extenders need to prevent key provisions from expiring 4
Real Gross Domestic Product (2009 to 2016) Real GDP Forecasts: 2015-2.5%; 2016-2.8% 5
REAL GDP: Q3 AND Q4 RGDP projected at 2.4% in each of the next two quarters Solid growth in consumption, as well as investment, both residential and non-residential Drag from the inventory and trade sectors Risk of surprise to the downside If adjustment occurs faster, real GDP could be as low as 1% Uncertainty could weaken Q4 too Q3 ended on a soft note Fiscal policy a negative Federal Reserve Policy posture also adds to uncertainty ACT Forecast Our projection is toward the mid-range of forecasters for 2015 and with the upper range for 2016 6
CPI Inflation Rate Total and Core (2010 to 2016) Headline inflation exhibits large swings reflecting the sharp movement of crude prices, strong dollar, and slow economic rebound overseas and in US. Core rate will remain below 2% for most of period. Wages are key indictor for price movement. 7
CPI Inflation Rate Total, Goods and Services (2010 to 2015), Y/Y Weakness in goods has kept headline inflation below 2%. Stability in energy and a flattening of dollar should push rate above 2%. Key is wage movement, which affects services. 8
Interest Rates (2015-2016) Federal Reserve decision: data dependent. Rising rate trend will be gradual and moderate. 9
Rig Count and Oil Prices Rig count has fallen by about 60% since Sept 2014. Indications are that another small leg down is underway. Weakness in energy sector has negatively impacted industrial production. Weakness in energy sector has had a positive effect on price indices. 10
Crude Oil Prices (Actual and projected Brent and WTI) Latest pump prices: Gasoline: $2.40; Diesel: $2.55. Crude prices at $50 imply gasoline around $2.40; diesel $2.60. Year-ago prices: Gasoline: $3.25; Diesel: $3.70. 11
Unemployment Rates (U3 and U6) 12
Class 8 Market Conditions Still positive demand driver alignment Fleet profits, still-old fleet, new truck MPG, driver shortage, CSA burden, credit availability, etc. But softness is becoming evident HoS productivity giveback, less pent-up demand, fleet growth above rate of freight creation since mid 2014 OEM Build Plan misses through Q3 Maxim: Truckers use trucks to haul freight, Truckers buy trucks to make money 13
Little Demand-Side Growth in 2015 ATA Truck Loads Index (SA) January '09 - August'15 (2000=100) 115 Index YY% Chg. 110 ATA LOADS INDEX 105 100 95 90 85 80 75 70 65 60 2009 2010 2011 2012 2013 2014 2015 30 25 20 15 10 5 0-5 -10-15 -20-25 YTD 08 y/y @ 1.9% Jan. March: 4.2% April-August: 0.6% August: 2.9% Source, American Trucking Associations, ACT Research Co., LLC: Copyright 2015 14
Root of the Current Soft-Patch 1.40 1.35 1.30 1.25 Inventory to Sales Ratio: Total Business IN/RS Ratio January 2010 - August 2015 Ratio-SAAR A lot of product was sourced on the off chance the West Coast ports strike ended badly Difference between 1.30 and 1.37 INRS: ~$90b excess IN 1.20 10 11 12 13 14 15 Source: Census Bureau, ACT Research: Copyright 2015 15
But a Surge on the Supply-Side 22 20 18 16 14 12 10 8 6 4 Units (000s) Actual 6MMA & Fcst ACT Research Co., LLC: Copyright 2015 U.S. CLASS 8 TRACTOR RETAIL SALES January '10 - September '15 Replacement + 2% GDP 10 11 12 13 14 15 16 Surprisingly weak September sales Sales above ~11,500 units/mo. = U.S. tractor fleet growth Above ~13,000, fleet growth rises above freight requirements ~155k-160k AR 2015 is forecast to be the biggest-ever U.S. C8 tractor RS year: 208.2k vs. 06 @ 201.2k 16
More Capacity = More Competition 98 96 94 U.S. Class 8 Implied Tractor Fleet Utilization Rate Fleet Utilization (%) July'15 Update 1997-2016 HOS Fcst. More fleets driving more new trucks suggests a lesslucrative for-hire market: 92 90 88 86 84 Target Utilization Rate: 90% Better utilization target? Or, will it be drivers who dictate capacity this cycle? 82 97 98 99 '00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 ACT Research Co., LLC: Copyright 2015 17
Orders Running Below Build (Data through September, annualized) (000s) Orders: NA 8 (AR) Orders: NA 8 (SAAR) Build: NA 8 (AR) Past 12 Mo. 350 -- 328 Past 6 254 281 343 Past 3 256 301 332 September 233 274 338 18
Housekeeping Time 5 % 4 3 TOTAL CLASS 8: N.A. CANCELLATION RATE Expressed as a percentage of Backlog January '10 - September '15 Actual & 6 Mo. Avg. As was the case in September, one OEM (different) was responsible for elevated cancellation levels as backlogged orders were cleaned/ rebooked into 2016 2 1 0 10 11 12 13 14 15 ACT Research Co., LLC: Copyright 2015 19
Tough Comps 200 175 150 125 100 75 50 25 0-25 TOTAL CLASS 8: N.A. BACKLOG & BL/BU RATIO Units (000s) BACKLOG January '10 - August '15 BL/BU RATIO (Right Axis) BL/BU Ratio (Months) 10 11 12 13 14 15 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Multi-year orders booked in Q4 14 suggest that stronger orders are likely to return in Q4 15 154k year-end BL implies ~95k orders in Q4 ACT Research Co., LLC: Copyright 2015 20
Critical 16 Forecast Consideration TOTAL CLASS 8: N.A. INVENTORY/RETAIL SALES RATIO 80 70 60 50 40 30 20 10 0-10 -20-30 Units (000s) January '10 - September'15 INVENTORY: Actual & SA IN/RS RATIO (Right Axis) IN/RS Ratio (Months) RETAIL SALES: Actual & SA 10 11 12 13 14 15 11 10 9 8 7 6 5 4 3 2 1 0 SA IN/RS up 60bps y/y to 2.8 months/61 days on fading sales rate INRS = Inventory (@ Sep. RS) 2.2m = 57.7k 2.0m = 52.5k September: Actual: 69,348 SA: 67,292 ACT Research Co., LLC: Copyright 2015 21
Trucker profitability Other Demand Factors Carrier profitability is a leading indicator of the start of a CV demand cycle Sadly, lagging indicator (coincident at best) on the downside Government regs Immediate: THUD 2-overnight provision of 34-hour reset from 2013 HOS Tandem trailer length law change: 28 to 33 Medium and longer-term rules with demand implications ELD, GHGp2, driver quality rules, CSA tweaks Used equipment Values Changes to the productivity trend Density, Utilization, Modal share 22
Carriers Buy Trucks to Make Money (and not pay so much in taxes) 7.0 6.0 % TL Carrier Database: Net Profit Margins SA Q1'96 - Q2'15 Early Q3 reporters beating and meeting Wall Street consensus expectations 5.0 4.0 3.0 2.0 1.0 0.0 12341234123412341234123412341234123412341234123412341234123412341234123412341234 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 ACT Research Co., LLC: Copyright 2015 23
Survey Says: Capacity Rising Faster Than Freight 75 70 65 60 55 50 45 40 35 Index ACT For-Hire Truckload Survey Capacity (Supply) Index Less Freight (Demand) Index January '10 - September '15 Improving Deteriorating J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N. '10 '11 '12 '13 '14 '15 25 20 15 10 5 0-5 -10-15 ACT Research Co., LLC: Copyright 2015 24
Reality Says: Spot Rates Roll Over in June 24 20 16 12 8 4 0-4 -8 DAT Trendlines: Dry Van Revenue per Mile (exfsc) Year over Year % Change Freight Rate YY % Chg. January '10 - September '15 (2000=100) SPOT CONTRACT 2010 2011 2012 2013 2014 2015 With new tractor capacity additions accelerating, and freight stagnant YTD, spot rate growth has decelerated. Positive: From Aug. 13 to Aug. 15, Dry Van for-hire contract rates (ex FSC) up 17% Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2015 25
Spot-Contract Gap Increase: Dry Van 35 30 25 20 DAT Trendlines Dry Van Rate Gap: Contract Minus Spot January '09 - September '15 (2000=100) Rate Price Gap (in Cents) 3mma Contract - Spot Gap Falloff in spot rates occurring in a period of elevated tractor retail sales with more strong sales to come 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2015 26
Also in Reefers & Flats 35 30 25 20 15 10 5 0-5 -10-15 DAT Trendlines Contract Minus Spot Rates: Reefers, Flats January '09 - September '15 (2000=100) Rate Price Gap (in Cents) Reefer Rate Spread Reefer 6MMA Bar 2009 2010 2011 2012 2013 2014 2015 Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2015 Energy sector weakness 45 40 35 30 25 20 15 10 5 0-5 Reefer van competition? DAT Trendlines Contract Minus Spot Rates: Flats January '09 - August '15 (2000=100) Rate Price Gap (in Cents) Flat Rate Spread Flat 6MMA Bar 2009 2010 2011 2012 2013 2014 2015 Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2015 27
Directionally Predictive at 6-7 Months 20 15 10 Dry Van Rate Pressure Analysis: Contract less Spot rate relative to targe rate spread January '10 - September '15 (2000=100) Contract Rate Pressure (Cents) Contract Rate YYChg. 3MMA Overlaying the pressure analysis with lagged (7mo) on actual contract rate changes indicates a healthy degree of correlation (81%) 5 0-5 -10 Rate Pressure Analysis: 6MMA 2010 2011 2012 2013 2014 2015 2016 Conclusion: without a freight rebound to strengthen spot rates, contract rate environment likely to level-out in 2016 Source, Transcore Commercial Technology Group, ACT Research Co., LLC: Copyright 2015 28
Summary: Downward Pressure 2016 another good year for freight, fleet profits but with softening for truckers accelerating by ~2 nd half Rising domestic economic growth But strong US$, weak world economy, keeps overall growth spotty Lower energy prices likely to persist New truck purchases above the rate of economic growth will erode growth in contract freight rates by early 2016 First clean correction since 1995-1996 NABU: 248k, 194k; NARS: 237k, 201k When market does roll over, the need to pare inventory will create additional drag on production rates Potentially considerable GHGp2 costs starting in 2021 and imbedded cycle timing suggest a strong ramp into 2019 The economy/trucker profits will be key determinants of degree 29
Used Class 8 Trucks Average retail at $54,500 in preliminary September data Pricing up 5% YTD 2015 Mileage is improving (September exception) Age has also turned the corner (ditto) Excess of late-model sleepers, commoditization pressuring used truck pricing Exports slowing, but regaining a little ground Down 21% YTD August (vs 35% in May) Mexico now taking 18% of the units, down from 59% YTD 2014 30
September (P) Prices Mixed Used Class 8: Average Retail Selling Price January '10- Preliminary September '15 60 55 50 $(000s) per Unit Monthly & 3MMA Y/Y % Chg. 70 60 50 45 40 35 30 Y/Y % Chg. 40 30 20 10 80 70 CLASS 8: U.S. USED TRUCK AVERAGE SALE PRICE 4 to 5 years old, 400-500,000 miles Total Reported Price ($000) January '09 - Preliminary September '15 Same Dealer Sales Monthly & 6 Mo. Avg. Y/Y % Change 400 350 25 0 60 300 20 10 11 12 13 14 15-10 50 40 250 200 ACT Research Co., LLC: Copyright 2015 30 150 20 10 100 50 0-10 Y/Y% Chg. (right axis) 09 10 11 12 13 14 15 0-50 ACT Research Co., LLC: Copyright 2015 31
Miles Trending Down, Age to Follow 650 600 CLASS 8: U.S. USED TRUCK AVERAGE MILES January '09 - Preliminary September '15 Total Reported Miles (000s) Same Dealer Sales Monthly & 6 Mo. Avg. Y/Y % Change 175 150 550 125 500 450 100 75 CLASS 8: U.S. USED TRUCK AVERAGE AGE January '09 - Preliminary September '15 Same Dealer Sales 400 50 350 25 96 Total Reported (Months) 300 250 Y/Y% Chg. (right axis) 09 10 11 12 13 14 15 0-25 84 ACT Research Co., LLC: Copyright 2015 72 60 48 09 10 11 12 13 14 15 ACT Research Co., LLC: Copyright 2015 32
Exports Slowing Used Class 8 Tractor Exports 2007 - August 2015 30.0 25.0 Units (Thousands) Actual Estimated 20.9 22.1 22.0 20.0 15.0 16.0 13.5 14.4 15.2 15.5 11.0 10.0 5.0 0.0 '07 '08 '09 '10 '11 '12 '13 '14 '15e International Trade Commission, ACT Research Co., LLC: Copyright 2015 33
Medium Duty Cancellations and key ratios (BL/BU and IN/RS) suggest fundamentals are solid. Can always use more orders. Key drivers of MD truck demand coming into place: Consumers more confident now than in a long time Confident consumers are more willing to spend Construction market (resi/non-resi) is especially important to MD trucks State and local governments transitioning towards growth RS forecast below replacement levels until late 2016 Cl.6-7 at ~160k/yr, Cl.4-5 at ~70k/yr Competitive landscape rumblings 34
N.A. Classes 5-7 Order Distribution (Data through September 2015, annualized) Classes 5-7 Orders Truck (000s) Bus (000s) RV (000s) Total* (000s) Past 12 Mo. 166.1 38.8 17.3 230.1 Past 6 (AR) 148.9 43.1 17.9 218.0 Past 3 (AR) 152.2 45.6 19.6 223.8 Sep. (AR) 178.8 53.5 20.2 264.8 Sep. (SAAR) 257.5 * Total includes Step Vans 35
Backlog/Build Ratio Slips, but TOTAL CL. 5-7: N.A. BACKLOG & BL/BU RATIO January '10 - September '15 65 Units (000s) BL/BU Ratio (Months) 12 60 55 50 45 40 35 30 25 20 15 10 BL/BU RATIO (Right Axis) BACKLOG 10 11 12 13 14 15 11 10 9 8 7 6 5 4 3 2 1 ACT Research Co., LLC: Copyright 2015 36
Existing Home Sales vs. Cl 5-7 Truck Sales 8,000,000 Existing Home Sales (SAAR) Cl 5-7 Truck Sales (SAAR) 250,000 7,000,000 200,000 6,000,000 150,000 5,000,000 100,000 4,000,000 50,000 3,000,000 - Source: ACT Research Co., LLC, NAR USEDHOUS Cl 5-7 TRUCK RS Poly. (USEDHOUS) Poly. (Cl 5-7 TRUCK RS) 37
U.S. Trailer Market Update 2015 shipments tracking to historic peak Orderboard commits industry through most of Q1 16 Van and Reefers vs. Vocational Trailers Energy sector impact on Tanks and Bulks GHG II regulations trailers into regulatory arena Approaching the normal order season Early orderbook opening could temper the flow Recent change in order patterns will likely continue Order season pulled forward Major fleet investment decisions driving the pattern shift with increasing impact 38
Trailer and Tractor Investment NET ORDER RATIO U.S. TRAILERS & U.S. CL.8 TRACTORS 3 Month Moving Averages, January '10 - August '15 45 Units (000s) Trailer:Tractor Ratio 6.5 40 6.0 35 5.5 30 25 20 TRAILERS 5.0 4.5 4.0 BUILD RATIO U.S. TRAILERS and U.S. CL.8 TRACTORS 15 10 5 0-5 -10-15 -20 10 11 12 13 14 15 ACT Research Co., LLC: Copyright 2015 CL. 8 TRACTORS TRAILER:TRACTOR ORDER RATIO (Right Axis) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 25 20 15 10 5 0-5 -10-15 Units (000s) 3 Month Moving Averages, January '10 - August '15 TRAILERS CL. 8 TRACTORS BUILD RATIO (Right Axis) Trailer:Tractor Ratio 10 11 12 13 14 15 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ACT Research Co., LLC: Copyright 2015 39
GHG II and Trailers Box trailers of primary interest Dry vans and Reefers Majority of trailers (TIO)/higher mileage applications Efficiency achieved from Aerodynamic devices Low rolling resistance tires (LRR) Automatic Tire Inflation Systems (ATIS) Light Weight Components Non-Box trailers LLR and ATIS No trailer retrofits proposed 40
GHG II and Trailers Public commentary period extended, but now closed Implementation schedule MY 18 20 Voluntary Mandatory compliance MY 21 Mandatory compliance MY 21 & 24 Increasing stringency MY 27 Full implementation Smaller Trailer OEMs get an added year < 500 Employees Small Business per Federal SBA definition We re questioning everything now. You have to question all the assumptions. - Mark Rosekind Administrator NHTSA 41
What about 33 Pups? Battleground has moved to FY16 Appropriations Bill THUD Transportation and Housing and Urban Development Both House and Senate versions include 33 s House passed Senate committee approval, awaiting floor vote Minor differences between versions Next steps Senate approval/merge versions/ House & Senate vote President signs bill? Threat of veto over both 33 and 34 hour restart roll-back Also major fleet coalition in opposition to 33 s 42
Current Production Activity Build consistent at high levels No issues heard regarding component supplies Continuing attention to a judicious usage of overtime Workforce burnout concerns, skilled worker availability No material change in production levels, but reports of new capacity being added 35 30 25 Units (000s) Build & 6 Mo. Av g. (Left Axis) TRAILER INDUSTRY BUILD Year Over Year Percent Change January '10 - August '15 Y/Y % Change 400 350 300 1500 1250 1000 750 Units TOTAL TRAILERS BUILD PER DAY Year Over Year Percent Change January '10 - March '16 BUILD/DAY Y/Y % Change 240 220 200 180 20 250 500 160 15 200 250 0 140 120 10 5 Y/Y % Chg. (Right Axis) 150 100-250 -500-750 100 80 60 0 50-1000 40-5 -10 10 11 12 13 14 15 0-50 -1250-1500 -1750 Y/Y % Change (right axis) 10 11 12 13 14 15 16 20 0-20 ACT Research Co., LLC: Copyright 2015 ACT Research Co., LLC: Copyright 2015 43
Total Trailers Actual Category Aug-15 Last 12 Mo Aug-15 Last 12 Mo Backlog 152,119 166,785 Build 27,174 26,921 Inventory 18,004 16,708 New Orders 25,693 33,519 Cancelations 1,161 1,180 Net Orders 24,532 32,563 Shipments 27,481 25,640 Seasonally Adj. Stability continues on a seasonally adjusted basis Build, inventory, shipments Orders driving seasonally adjusted BL upwards Cancellation impact more in vocational segments Shipments tracking for best year in history 44
Trailers & Fleet Investment 150 125 TL Carrier Database: TL Carrier Net Incom e (Ex QLTY, SWFT, UACL) & New US Trailer Orders Y/Y % Chg. Year over Year Percent Change Q1' 10 - Q2 '15 Carrier Income Y/Y % Chg. Total Trailer GO Y/Y % Chg. 100 75 50 25 0-25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 10 11 12 13 14 15 ACT Research Co., LLC: Copyright 2015 Latest fleet financials show growth, but improvement is slowing Equipment investment continues, but might be easing Growth in fleet capacity will be closely monitored Still old rolling stock in operation Customer service levels Driver satisfaction and CSA can be impacted 45
Trailer Demographics Population remains well below 2006-2007 peak Growing since 2011-2012 bottom Forecast projects population will eclipse 2007 in 2020 With very-old trailers falling out of the fleet and a multi-year string of solid demand, fleet age is coming down rapidly Dry vans, reefer vans and flats all nearing equilibrium ages Underlying replacement rates reaching peak levels Dry van and reefer van rates roll over in 2015 Dry rate falls substantively into 2020 Reefer rate reengages in 2017 46
350 Orders (000s) U.S. TRAILER FACTORY SHIPMENTS 2010-2016 Dry Vans Reefer Vans Flatbeds All Other Trailers 300 250 200 150 100 50 0 '10 '11 '12 '13 '14 '15 '16 Total Trailers 124 204 232 234 269 308 291 All Other Trailers 29 38 44 42 48 49 45 Flatbeds 8 16 25 22 26 32 28 Reefer Vans 27 33 34 36 39 46 41 Dry Vans 60 117 130 135 156 181 178 ACT Research Co., LLC: Copyright 2015 47
Build/FS Forecasts 2013 2014 2015 2016 2017 NA Class 8 (000s) 245.8 297.1 331.1 296.5 250.9 NA Classes 5-7 (000s) 201.4 225.7 225.6 229.1 241.2 US Trailer FS Total Trailers (000s) 236.7 268.7 307.5 291.1 274.7 48
Questions? Our next webinar is scheduled for December 18th at 11:00 Eastern Plan to join us at Seminar #54 March 29-31 Columbus, Indiana 49
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