North America The Rollercoaster Ride Ahead Kenneth Kremar Principal, Industry Practices
NAFTA Class 4-8 Retail Sales: 1996-2005 (000 Units) 325 300 Class 4-7: 2002-2005 +39% Class 8: 2003-2005 +73% 275 250 225 200 175 150 96 97 98 Classes 4-7 Heavy - Class 8 99 00 01 02 03 04 05 3
NAFTA Medium-Duty Sales by Manufacturer (Percent Market Share) 35 30 25 20 15 10 5 96 97 98 99 00 01 02 03 04 05 DaimlerChrysler International Ford General Motors Other 4
NAFTA Heavy-Duty Sales by Manufacturer (Percent Market Share) 40 30 20 10 0 96 97 98 99 00 01 02 03 04 05 DaimlerChrysler International Paccar Volvo Mack 5
North America: Still a Dynamic Market Sterling will move into Class 4-5 sourcing trucks from Mitsubishi Fuso in 2007 Paccar will expand its medium-duty line into Class 6 Paccar will redo its entire lineup of Class 8 trucks during model year 2007 Freightliner planning to boost heavy-truck making capacity by 2008 Mack is considering re-entering the medium-duty market, which it left in 2002 (Volvo bought 13% stake in ND) Hino, which has an assembly facility in Long Beach, CA has indicated it will open assembly facilities in Ontario, Canada and Arkansas 6
The Key Factors Influencing Truck Demand Will Keep the Rollercoaster Ride Going Economic Climate Diesel Fuel Prices Activity in Key Truck-Buying Markets For-Hire Carriers Construction Manufacturing, Wholesale & Retail Trade Agriculture, Mining & Logging Service Industries & Government 2007 and 2010 EPA Diesel Engine Regulations 7
U.S. Market Profile: Still the Straw That Stirs the Drink 3.3 million heavy (Class 8) trucks 4.6 million medium-duty (Class 4-7) trucks and buses The U.S. accounts for 86% of NAFTA medium and heavy-duty truck sales and 77% of production Top 100 For-Hire Carriers operate 400,000 heavy trucks and 240,000 medium-duty trucks Top 500 Private Fleets operate 131,500 heavy trucks and 400,000 medium-duty trucks Trucks account for 69% of total primary shipments measured in tonnage (12.6 billion in 2005) and 30% measured in ton-miles (1.6 trillion in 2005) Secondary truck movements rail and air drayage and warehouse and distributor movements total another 1.0 billion tons 8
Class 4-8 Truck Sales and The U.S. Economy 5 540 4 480 3 420 2 360 1 300 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 240 GDP Growth (Left) GVW 4-8 Sales (Right) Note: 2006-2011 Forecast 9
Oil Prices Reflect a Tight, Uncertain Market Strong demand growth, periodic supply disruptions, and speculation have led to high and volatile crude oil prices Although exploration and drilling have increased significantly, additions to supply are coming gradually High inventories and the commissioning of new capacity in OPEC and non-opec countries should lead to price erosion In many emerging markets, energy subsidies and price controls encouraged consumption Geopolitical tensions pose supply risks in the Middle East, Nigeria, Venezuela, Russia, and elsewhere Upshot the days of cheap diesel fuel are over 10
On-Highway Diesel Fuel Prices 75 60 45 30 15 4/17/06: U.S. Average = $2.765/gallon +22.5% 325 275 225 175 125 0 1998 2000 2002 2004 2006 2008 75 WTI $/bbl Cents Per Gallon 11
Manufacturing and Wholesale and Retail Trade (Percent Change) 6 4 2 0-2 -4-6 1995 1997 1999 2001 Wholesale & Retail Trade Traditional Manufacturing Note: 2006-2011 Forecast 2003 2005 2007 2009 2011 12
Construction Activity By Major Market (Percent Change) 600 560 520 480 440 300 270 240 210 180 400 1998 2000 2002 2004 Residential (Left) Nonresidential (Right) Public (Right) Note: 2006-2011 Forecast 2006 2008 2010 150 13
Net Farm Income (Billions of Dollars) 90 72 54 36 18 0 1995 1997 1999 2001 Note: 2006-2011Forecast 2003 2005 2007 2009 2011 14
Service Industry Output and State & Local Government Spending on Equipment - Percent Change 16 12 8 4 0-4 1995 1997 1999 2001 2003 2005 2007 Service Industry Output State & Local Government Equipment Spending Note: 2006-2011 Forecast 2009 2011 15
Mining and Logging (Percent Change in Output) 170 150 130 110 90 70 1995 1997 1999 2001 Logging Non-Oil Mining Oil and Gas Patch Activity Note: 2006-2011 Forecast 2003 2005 2007 2009 2011 16
For-Hire Carriers Trucking companies were caught short of equipment as the economic recovery hit its stride and traffic hit record levels Major spending programs were launched to replace older equipment and new trucks and trailers to the fleet Major trucking reported strong revenues in 2004 (+8.2%) and 2005 (+12.4%) Big Trucking will only get bigger weak sisters in the industry will continue to fall by the wayside private fleets will continue to outsource their transportation needs The driver shortage is a major problem for truckload (TL) carriers Trucking companies will increase their use of the rails if service levels meet shipper demands 17
The Driver Shortage The Problem The driver shortage coupled with more restrictive hours-of-service regulations constrains ability to increase capacity Demographics suggest a worsening problem The white male population of ages 35-54 (over half of all truck drivers) will be declining in the years ahead Approximately 17% of the current drivers are 55 years old or older and will retire in the years ahead Relatively low wages and poor working conditions make it difficult to attract and maintain qualified drivers The housing boom has siphoned off potential candidates 18
Average Hourly Earnings: Truck Driver Versus Competing Careers 20 19 18 17 16 15 14 2005: TL = $16.75, LTL = $19.50, Goods Producing = $17.60, Construction = $19.50 1999 2000 2001 2002 2003 2004 2005 TL LTL Goods Producing Construction 19
The Driver Shortage Some Suggestions Boost driver wages to a level where they are competitive with other blue collar careers Working condition improvements the major complaint among drivers is extended periods away from home and unpredictable schedules for getting home Increased use of rail intermodal services...which may have implications for the kind of equipment required more medium-duty trucks More aggressive marketing of driver training programs designed to increase not only the number of drivers but the number of qualified drivers Conclusion: Major TL carriers have the clout to deal with the driver shortage problem Big Trucking gets bigger 20
For-Hire Carrier Tonnage 6 4 2 0-2 -4 1995 1997 1999 2001 2003 2005 2007 2009 2011 Percent Change in For-Hire Carrier Tonnage Note: 2006-2011Forecast 21
Weighted Index of End-Market Activity and GVW 4-8 Truck Sales 8 550 6 500 4 450 2 400 0 350-2 1995 1997 1999 2001 2003 2005 2007 2009 2011 300 Percent Change in End-Market Activity (Left) Class 4-8 Truck Sales (Right) Note: 2006-2011Forecast 22
The Canadian Truck Market 270,000 heavy (class 8) trucks 75% of the fleet is used to haul freight 25% in construction/vocational markets 300,000 medium-duty trucks usage is split about evenly between freight hauling and construction, making service calls, and other so-called vocational applications Top 100 For-Hire Carriers operate 150,000 heavy trucks and about 10,000 medium-duty trucks Trucks account for 12.5% of Canadian freight traffic measured in ton-miles rail dominates the freight transport landscape 23
The Mexican Truck Market Trucks dominate freight transportation accounting for 85% of total tonnage moved and 80% of ton-miles 71% of the exports to the U.S. are moved by truck Commercial truck fleet totals about 230,000 units Small and medium fleets (under 100 trucks) dominate running a combined fleet of 165,000 trucks Larger fleets (over 100 trucks) run a combined fleet of about 20,000 trucks In addition, there are approximately 88,000 owner-operators in Mexico 24
The Canadian and Mexican Economies 8 6 4 2 0-2 -4-6 -8 90 92 94 96 98 00 02 04 06 08 10 Mexico Canada Note: 2006-2011 Forecast 25
Environmental Regulations Truck Costs Will Be Significantly Higher Triggering a Pre-Buy The particulate matter emission standard takes full effect in the 2007 The Nox (nitrogen oxide) and NMHC (non-methane hydrocarbons) standards are phased-in with 50% of new sales meeting the standard in 2007-2009 100% meeting the new standard in 2010 Availability of ultra low sulfur fuel is critical to the new engines meeting their emission goals. Low-sulfur diesel will cost 5 to 13 cents more per gallon and has a lower energy content making fleets less fuel efficient Price increase on 2007 models $7,000-$10,000 for heavy trucks $4,000- $6,000 for medium-duty trucks Expect increased operating/maintenance costs and some loss of fuel efficiency Because exhaust systems will be larger and burn hotter body configurations will have to change pushing prices up further New engines were supposed to be in the hands of major fleets in large numbers for testing by mid-2005 that didn t happen 26
Pre-Buy: The Bottom Line Pre-buying will make the truck market stronger in 2006 than the underlying economic and market fundamentals would suggest Pre-buying will be most dramatic at the upper-end of the GVW ratings (class 7 and 8) Large for-hire and private fleets will account for the lions share of the pre-buy Smaller general freight carriers, vocational markets, the farm sector, government, and individuals will play less of a role Pay-back for the 2006 pre-buy will drive 2007 truck demand lower than the underlying economic and market fundamentals would suggest EPA regulations hitting in 2010 are expected to trigger a similar prebuy/pay-back in 2009-2010 27
2006: Truck Sales Are Off to a Strong Start (Q1 2006 versus Q1 2005) Retail Sales 2005 2006 % Change United States Class 4-7 57,393 62,648 +9.2% Class 8 55,959 65,523 +17.1% Canada Class 4-7 3,616 3,466-4.1% Class 8 7,246 8,269 +14.1% Mexico Class 4-7 2,716 2,898 +6.7% Class 8 4,126 5,475 +32.6% NAFTA Class 4-7 63,725 69,012 +8.3% Class 8 67,331 79,267 +17.7% 28
NAFTA Retail Sales By Manufacturer (% Change Q1 2006 vs. Q1 2005) Class 4-7 Q1 2006 Class 8 Q1 2006 Ford +19.7% DC +10.7% DC -2.6% International +17.0% International +3.9% Mack +24.1% General Motors +3.0% Paccar +25.9% Other +22.6% Volvo +17.6% Total +8.3% Total +17.7% 29
Net New Orders for Medium and Heavy Trucks 45 36 000Units 27 18 9 0 1998 1999 2000 Medium-Duty Heavy-Duty 2001 2002 2003 2004 2005 2006 30
Order Backlogs Are Swelling 000 Units 275 250 225 200 175 150 125 100 75 50 25 0 1998 1999 2000 Medium-Duty Heavy-Duty 2001 2002 2003 2004 2005 31
North American Medium-Duty Truck Sales (000 Units) 300 275 250 225 200 175 21 18 15 12 9 6 150 1996 1999 United States (Left) Canada (Right) Mexico (Right) 2002 2005 2008 2011 3 32
North American Heavy-Duty Truck Sales (000 Units) 300 270 240 210 180 150 42 35 28 21 14 7 120 1996 1999 United States (Left) Canada (Right) Mexico (Right) 2002 2005 2008 2011 0 33
NAFTA Medium and Heavy Truck Production (000 Units) 400 300 200 100 0 99 00 01 02 03 Class 8 Heavy Trucks Classes 4-7 04 05 06 07 08 09 10 11 34
NAFTA Class 4-7 Production By Manufacturer (Percent Market Share) 40 30 20 10 0 1996 1998 2000 2002 2004 2006 DaimlerChrysler International Ford General Motors Other 2008 2010 35
NAFTA Class 8 Production By Manufacturer (Percent Market Share) 42 36 30 24 18 12 6 0 1996 1998 2000 2002 2004 2006 DaimlerChrysler International Paccar Volvo Mack 2008 2010 36
Conclusions The economic climate will remain favorable Motor carrier traffic will gain additional ground Construction, service and other vocational markets will provide additional support Diesel fuel will remain expensive The driver shortage will ease a bit but remain a problem Replacement demand will dominate but fleet carrying capacity will have to be expanded The demand for new equipment will remain robust during the 2006-2011 period But 2007 and 2010 EPA regulations will distort normal buying patterns 37
Thank You Kenneth Kremar Principal, Industry Practices E-mail: kenneth.kremar@globalinsight.com