Los Angeles Transportation Club David R. Parker, Chairman & CEO Covenant Transportation Group
DISCLOSURE STATEMENT This presentation and discussion includes forward-looking statements within the meaning of the Private Securities Litigation reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on Covenant Transportation Group s current plans and are not guarantees of future performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results and the company s plans and objectives to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties are discussed further in Covenant Transportation Group s reports and filings with the Securities and Exchange Commission. 1
Topics Company Summary U.S. Economy Consumers Industrial Truckload Industry Trends Supply/Demand Capacity Fuel Equipment Pricing Summary Questions 2
Company Summary Group of companies focused on targeted markets offering just-in-time and other premium transportation and logistics services including team expedited long-haul, refrigerated, regional, event, brokerage, factoring, tractor/trailer sales, and equipment leasing services Group operates about 2,775 tractors and 6,800 trailers Young average tractor age (5/31/13): 2.1 years (or 25.3 mos) Utilize 8 full size terminals and 21 drop yards Focused on providing exceptional service to our customers Fiscal 2012 Revenue, including FSC: $674 Million Headquarters: Chattanooga, TN NASDAQ GS: CVTI 3
Who/What is CTG CTG is a holding company: 3 Specialized Asset-Based Trucking Companies Expedited (Covenant Transport - Chattanooga) Regional (Star Transportation Nashville) Refrigerated (SRT - Texarkana) 1 Non-Asset Based Brokerage Covenant Transport Solutions (Chattanooga) 1 Equipment Leasing Company Transport Enterprise Leasing (Chattanooga) 4 For more information, please visit: www.ctgcompanies.com
Do You Know My Reps? Cindy West Covers Southern CA & AZ wescin@covenanttransport.com Mark Pare Covers Northern CA, OR, WA, UT,Vegas and the Kansas City Area parmar@covenanttransport.com Kent Wickham Covers the Western Region wicken@southernref.com 5
U.S. Economy 6
6% Economy GDP Real Gross Domestic Product (quarterly, annualized rate percent change, 2005 dollars) 2010 Q4 2013 2012 2013 4% Real GDP +2.2% +2.5% Growth Potential 2% 0% -2% 2010 2011 2012 2013 Sources: BEA and ATA
$4,000 $3,900 $3,800 $3,700 $3,600 $3,500 $3,400 $3,300 $3,200 $3,100 $3,000 Consumer Spending on Goods Billions 2012 2013 Goods Spending (Current $) Economy - Consumers +4.3% +2.9% Goods Consumer Spending (Seasonally Adjusted Annualized Rates) Year-over-Year Percent Change 2005 2006 2007 2008 2009 2010 2011 2012 2013 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Sources: Department of Commerce & ATA
13% 12% 11% 10% 9% 8% 7% 6% 5% Economy Consumers U.S Unemployment Rate 2012 2013 Jobs (Avg./month) 181k 196k Rate 8.1% 7.6% Change in Employment (Thousands) Unemployment Rate 4% 2005 2006 2007 2008 2009 2010 2011 2012 2013 600 400 200 0-200 -400-600 -800-1000 Sources: Department of Labor & ATA
$110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Economy - Consumers Crude Oil Prices Impact? WTI, US$ per Barrel 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 10 Source: IHS Global Insight
Economy - Industrial Housing Is Turning the Corner Millions of Starts (Single & Multi-family) 2.8 2.3 Housing Starts 2012 2013 781,000 (+28%) 970,000 (+35%) Year-over-Year Percent Change (Speed) 60% 40% 20% 1.8 0% 1.3 0.8 Level (Direction) -20% -40% 0.3 2005 2006 2007 2008 2009 2010 2011 2012 2013-60% Sources: Census Bureau & ATA
Good Auto Production but Yr/Yr Changes Moderate Yearly changes in auto production moderate 18 in 2013 16 Three straight years with annual 14 production increases 12 above 1.5M units 10 Now good absolute 8 numbers, but slower unit growth 6 N.A. Auto Production (M) 15.8 16.5 13.4 11.9 8.8 2009 2010 2011 2012 2013E Source: BB&TCM; Bloomberg
Truckload Industry Trends 13
2005 = 100 110 TL Supply vs Demand 105 100 95 TL Tractor Count Index TL Loads Index 90 85 80 Through March 2013 Oversupply Source: ATA
LTL Supply vs Demand 2005 = 100 120 115 110 105 100 95 90 85 80 75 70 65 60 Through March 2013 Oversupply LTL Tractor Count Index LTL Shipments Index Source: ATA
Changes in Loads by Sector (Q1 2013 vs Q1 2012; Seasonally Adjusted) 10% 6.1% 6.8% 7.5% Why? 6.6% 5% 3.1% 1.3% 0% No Spring -5% -3.5% Dry Van Flatbed Temp Controlled Tank TL Intermodal LTL DAT Spot Market Loads Sources: ATA and DAT.com Notes: ATA s data is a mix of contract freight and spot market. Tank includes bulk and liquid freight.
Bottom Line on Capacity Carrier Fleet Reductions Tighter Capacity 17 Source: ATA
TL Dry Van Carriers: Not As Many Carriers as You Might Think ~600,000 fleets with operating authority, but... 406,000* can be eliminated due to oddball categories 70% of the remaining 194,000 operate Class 3-7 trucks This leaves 58,000 fleets Approximately 30% of those are private or not-for-hire fleets Of the 41,000 remaining fleets, 58% are dry van More than half of those 24,000 fleets operate 5 or fewer trucks About 8,000 10,000 fleets are in the dry van, for-hire market with more than 5 trucks Top 250 control approximately 35% 45% of the trucks *Excludes selected categories (migrant, unspecified, US mail, exempt, government, Indian tribe, private property, private passenger bus, private non-passenger bus, road repair and other classifications totaling 406,000 fleets) that do not compete in the OTR truckload market Source: ATA, Federal Motor Carrier Safety Administration; Office of Motor Carriers; BB&TCM
Capacity Changes (Percent Change in the Number of Company & IC Tractors) 5% 0% -5% -10% 0.6% 1.0% -5.0% -8.3% -0.8% -15% -20% From Q1 2012 From Dec 2007-15.0% -25% Small TLs have $30 million or less in annual revenue. Large TLs Small TLs LTLs Source: ATA
Costs and Mileage Productivity Difficult Trends Carrier costs per mile (excluding fuel expenses) have risen 12.6% since 2008 Numerous fleets have bought used tractors and trailers to offset the higher costs of new equipment $1.20 $1.10 $1.00 $0.90 2008 2009 2010 2011 2012 $1.020 $1.046 $1.062 $1.116$1.152 Carrier Costs per Mile (Excluding Fuel) Annual cost inflation has averaged 3.02% However, driver wages fell in 2009 and were flat in 2010 Driver pay and benefits have been increasing since 2010 and could be entering a highly inflationary period 12,500 10,000 7,500 5,000 10,946 8,926 Monthly Miles per Truck 7,604 8,250 8,080 7,791 2007 2008 2009 2010 2011 2012 Source: BB&TCM estimates; ATA Atri division
Sources: Tractor values from Navistar from 2000-2010; from BB&TCM for 1990, 1995, and 2012; Class 8 tractor sales from A.C.T. Research. Tractors: $40,000 More Expensive Since 01 but Nothing Added to Residuals; Late-Model Equipment Shortage Will Hurt Many Carriers $140,000 $120,000 $125,000 Lots of late-model used trucks in last two downturns; fewer now 5 years, not 4 $100,000 $80,000 $60,000 $40,000 $20,000 $0 $57,000 $84,210 $87,000 Value After 1 Year* 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 862,082 902,466 719,233 1990 2000 2002 Average Selling Price 4-Year Average Residual 2004 2006 2008 2010 2012 3-Year Residual Value 100,000 1997-2000 2003-2006 2008-2012 *First-year D&A is ~ $38,000, meaning value is $87K after one year. U.S. Class 8 Tractor Sales
Maintenance Costs per Mile Rising, Even for Young-ish Fleets $0.26 $0.24 $0.22 $0.20 $0.18 $0.16 $0.14 $0.12 $0.10 Carrier A: Good OR, No Debt $0.11 $0.18 $0.16 $0.21 $0.20 2000 2003 2006 2009 2012 $0.25 $0.20 $0.15 $0.10 $0.05 Carrier B: 100 OR; Debt-laden $0.10 $0.21 $0.19 $0.15 $0.11 2000 2003 2006 2009 2012 Maintenance Costs per Mile Maintenance Costs per Mile Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of 2012. Source: Carrier data.
Productivity Down, Rates up Modestly, Input Costs Up 225 200 175 150 125 100 75 50 25 0 1990 1995 2000 2005 2010 Annual Miles per Tractor (Productivity) New Class 8 Tractor Price (Input Cost) Tractor/Trailer Price (Input Cost) Avg RPLM (Payment) Analysis of a composite of 5 carriers. Trailer tractor ratio was 1.7; 2.0; 2.5; 2.8 and 2.5, respectively. All four data figures began at 100.0 in 1990. Source: BB&TCM analysis;
July HOS Changes Major Concerns 30 Minute Break requirement 34 Hour restart span 2 consecutive 1 a.m. to 5 a.m. periods Results: Lost revenues Increased transit times On-time performance pressure Other Concerns Increased fuel consumption (more idle time) Lost wages for drivers Increased risk of parking lot incidents Source: CVTI Testing
Truck Driver Turnover Rates 1996-2012 150% 125% LTL driver turnover average 9% in 2012. 130% 100% 98% 75% 50% 50% 25% 0% 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: ATA
Annual Change in Construction Jobs (000s) Negative Implications for Truck Drivers from 2013 Onward Year Total Construction Jobs Residential Construction Jobs 2002-85 88-173 2003 127 161-34 2004 290 230 60 2005 416 268 148 2006 152-62 214 2007-198 -273 75 2008-787 -510-277 2009-1,053-431 -622 2010-149 -113-36 2011 144 50 94 2012 99 40 60 2013YTD 79 55 24 Non- Residential Jobs 2,500 2,000 1,500 1,000 500 0 160% 140% 120% 100% 80% 60% 40% 20% 1998 115% 98% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E Housing Starts Driver Turnover 136% 127% 39% 00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4 Driver Turnover Unemployment Rate 140% 120% 100% 80% 60% 40% 20% 12% 10% 90% 8% 6% 4% 2% Construction hiring picking up in 2013 Lots of cash payments in 2012 and absorption of late 11-early 12 hiring Drivers will be targeted for hiring Source: BLS, May 2013 report for left table; ATA TRAC report for driver turnover; BLS for unemployment; US Census Bureau for housing starts
Why Drivers Leave Their Jobs It s a Shipper Problem not Just a Carrier Problem 42.9% Pay 38.0% 34.1% Lack Of Recognition & Respect 29.8% 23.8% Didn't Get Home Enough 18.3% 18.4% Didn't Get The Right Loads, Or Enough Loads 22.3% I Just Wanted To Make A Change 10.4% 13.8% They Were Running Me Too Hard 9.4% 7.3% Have Not Left A Trucking Job 15.9% 16.5% Other 28.0% 28.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Owner-Operator Company Driver Does the shipper value a driver s time? Bathrooms, phones Wifi availability Helpful staff Parking availability Clear signs Paper work handled courteously & simply 3 rd Parties @ Gate-Do they share your view? 3% rate hike- ~1% goes to driver Source: BB&TCM (photo, analysis and survey); comments on right from BBTCM
12-Step Program to Become a Shipper of Choice Source: BB&TCM
Shippers: Be Wary of the Procurement Trap Procurement Mentality The Problem Run competitive bids Seek the lowest price Don t discount overall value but price is a big component Useful for inventory, planning and operations Allows a Co to periodically test where the market is Can be a good thing, but Businesses: tend to be saddled with fixed costs and capital investments OR people challenges related to intellectual assets-rarely both Ex: steel and software Trucking is the worst of both worlds, i.e., large fixed costs and capital needs with very high people turnover (inc. non-driver turnover, e.g., getting chewed out for failing on 15-min delivery windows) Q: is your organization left with procurement professionals or transportation specialists? Source: BB&TCM
Summary Shippers Capacity has been relatively loose since June 2012, but be wary Capacity could tighten on a dime; don t be penny-wise and pound foolish Positive economic surprises would make it clear there are not enough trucks New July 1 st HOS will hurt productivity and accelerate failures Between housing and HOS; balance could shift in 2H 13 or in 2014 to carriers Carriers Engage shippers about productivity hit on HOS Show your costs and continue to control them, but also recognize that supply and demand drives rates Determine customers that hurt you the most when HOS changed Pricing opportunity exists in 2H 13 and into 2014 from the impact of new HOS regulations Fleets that can attract and retain drivers and Owner Ops. will be ahead of the pack Source: BB&TCM analysis
Questions? Thank You! 31