GE Capital. Industry Research Monitor Canada Truck Transportation. Key Developments. Industry Outlook

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1 GDP at basic prices YoY% Change Industry Research Monitor Canada Truck Transportation Key Developments Canadian demand for heavy-duty trucks continues with double digit growth at % in 2Q vs. last year. The increase in heavy-duty demand was the result of increased retail and freight activity. Low diesel prices and focus on reducing costs and improving efficiencies contributed to maintain strong profitability. The leading indicator of profitability for truck transportation rose to 9.5 in June 20, 5 points up from 1 in June 20. Large bulk carriers in Canada such as Trimac Transport grew profits by 9. in the second quarter despite lower revenues. Truck Tonnage Index increased 1.8% in June vs. last year. January through June, tonnage was up 3. vs. same period last year. Declines in fuel prices during July and August should help to keep the index elevated as the industry prepares for the fall shipping season. Alberta class 8 sales decreased 5 in the 1 st half of the year. The low oil prices contracted Alberta s economy and the business activity in the oil patch with negative impact on freight and truckload (LTL) revenue, which was 2 lower in June vs. last year. Industry Outlook The freight environment during the second quarter of 20 was aligned with the expected tailwinds of improved weather and retail activity. Freight trends for the 3 rd quarter should continue to show improvement, given recent positive employment trends coupled with expectations of a modest acceleration in GDP growth for the 3 rd and 4 th quarter of 20. The outlook however, is not without potential challenges, particularly the likelihood of vulnerable oil prices, which could keep the truck tonnage constrained for Western Canada in particular. Real Gross Domestic Product (GDP) $1,780 $1,730 $1,680 $1,630 $1,580 $1,530 $1,480 GDP Transportation and Warehouse (billions 2007 dollars) GDP All Industries (billions 2007 dollars) YoY GDP % Chg $1,430 Aug- Mar- May- Dec- Feb- 4.5% % % % % 0. GDP across all industries decreased 0. in May vs. last month and increased slightly 0.5% YoY. The decrease in May was mainly in mining & oil & gas industries. GDP of transportation and warehousing also decreased 0.8% in May YoY, driven by lower industry revenues due to soft manufacturing shipments. However in June and July, freight activity went up, which should drive an increase of the trucking industry s GDP for Q2 and Q3. Industry Research Update: Truck Transportation 1

2 Employment Transportation and Warehouse (person2 x 1000) Retail Trade (Seasonally Adjusted) Leading Indicator of Industry Profitability Macroeconomic Indicators Leading Indicator of Industry Profitability Leading Indicator of Truck Transportation Industry Profitability (index, January 2007=100) Leading Indicator of All Industries Profitability (index, January 2007=100) Source: Conference Board of Canada Profitability in the trucking industry remains strong. In June 20, the leading indicator of profitability for truck transportation rose to 9.5 which is 5.4 points higher than June 20. Of the 49 industries monitored, 32 sectors showed improved profitability. This is the 1st time in 4 months that the majority of industries have registered gains, especially retail; a positive indicator for the trucking industry. Most of the gains of the profitability index in the retail industry in June came from furniture and appliance stores and housing starts. Retail Sales (Seasonally Adjusted $MM) $44,000 $43,000 $42,000 $41,000 $40,000 $39,000 $38,000 $37,000 $36,000 $35,000 $34,000 Thousands Retail Trade 7% 5% 3% 1% -1% - Retail Sales increased 2.7% in May 20 YoY, growing to $42.8 billion. Gains were reported in all subsectors; with the highest increase of 9. in building materials and garden equipment dealers. In May. retail sales were up in 9 provinces. The highest increase in retail sales was in Ontario, Nova Scotia and, to a lesser extent, British Columbia. Also motor vehicle and car dealers continue to grow at 5.7% due to record car sales in Canada and the highest US car sales since This trend is benefiting auto-haulers and automotive parts carriers. Truck Transportation Employment (Seasonally Adjusted) Employment Transportation and Warehouse Canada 1 8% Adjusted on a seasonal basis, truck transportation employment increased in June 20, reaching 931,000 employees. The improved pay packages for drivers and owner/operators is benefiting the creation of employment, reducing driver shortages. Twenty-two fleet employers earned honors through the 2 nd Annual Top Fleet Employers program. Recipients included a mixture of forhire and private fleet companies across Canada that demonstrated industry best practices on employee recognition, compensation, engagement, development, recruitment and retention. Industry Research Update: Truck Transportation 2

3 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q For-Hire Motor Carrier Freight Services Index (index, 20 = 100) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Canada Class 5-7: Net Orders 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Canada Class 8: Net Orders Truck Orders and For-Hire Motor Carrier Freight Services Index Canada Class 8 Net Truck Orders Class 8 Retail Sales Heavy-Duty Truck Orders are growing strong in Canada. Canadian net orders of heavy trucks (class 8) grew. in 2Q YoY. 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: ACT Research The current sales increase of class 8 trucks indicates that the market in heavy trucks in 20 is driven by both replacement demand and by fleet expansion plans of the class 8 trucks. However, the low oil prices have contracted Alberta s economy and the business activity in the oil patch with negative impact on freight and truckload (LTL) revenue in Alberta. LTL revenue was 2 lower in June vs. last year. Also sales of class 8 trucks in the province decreased by almost 5 in the 1 st half of the year. Canada Class 5-7 Net Truck Orders 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Class 5-7 Retail Sales Medium-Duty Truck Orders are recovering from last year. Canadian net orders for Class 5-7 medium-duty trucks in 2Q increased.7% YoY. The major driver of increased medium-duty trucks demand is the improved consumer spending in retail, representing a growth opportunity for local freight services. 0-4 Source: ACT Research For-Hire Motor Carrier Freight Services Price Index. General Specialized The For-Hire Motor Carrier Freight Services Price Index, which measures the movement of prices for the services provided by the trucking industry, decreased 3.5% in General Freight and 4. in Specialized Freight YoY in 1Q. Last year, freight rates dropped in the 2nd quarter and climbed up again in July. If seasonal patterns repeat as last years, the high rates in July should carried over into the first week of August, Fuel prices also fell in recent weeks, adding downward pressure on freight rates. Spot market rates are typically quoted "all in" as dollars per trip or per mile, while fuel prices are changing the surcharge in the background. Industry Research Update: Truck Transportation 3

4 Diesel Retail Price Total Freigth Costs (Index Value) Revenues and Expenses Indicators Canadian General Freight Index 1,200 1,0 1,100 1,050 1, Canada General Freight Index Source: CGFI - Nutlogx The Canadian General Freight Index (CGFI) indicated that the Total Cost of ground transportation for Canadian Shippers increased by 0.3% in May 20 when compared with April. The index increased 4.85% YoY. The Base Rate Index, which excludes the impact of accessorial charges assessed by carriers, increased by 1. when compared to April. Average Fuel Surcharges assessed by carriers decreased this month. Fuel was.465% of total costs of ground transportation for Canadian shippers in May versus 16.0 in April. In the GTA, ON, the Pan Am/Parapan Am games increased costs by 1 for truckers in July and August, as a result of road closures, lane restrictions and increased congestion. Diesel Fuel Price (Monthly Average cents/litre) $0 $0 $0 Diesel Retail Fuel Price (Including tax) The average monthly price of retail diesel was CAD 0.5 cents per liter in July, it was the 1st lowest monthly average since December That being said, energy prices are expected to stabilize and thereafter increase heading into next year. $0 $0 $100 $ As of July, the EIA forecasted diesel prices to average USD 2.86 per gallon in 20 (CAD 94. cents per liter without taxes) and USD 3.03 per gallon in $80 Source: The Kent Group -3 Canadian Dollar Canadian Dollar to US Dollar % 1 5% -5% -1 -% The Canadian/US dollar reached the lowest monthly average exchange rate since 2009 at 0.77 CAD to USD in July, 20. The Canadian dollar is likely to fall further in the coming months, hit by both a weak domestic economic outlook and an anticipated rise in interest rates in the United States. The relatively low Canadian dollar will continue to raise the price of imported trucks and autoparts, but will continue to stimulate exports and some domestic retail sales, benefiting freight activity Source: Bank of Canada Industry Research Update: Truck Transportation 4

5 Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Index Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Sep- Nov- Mar- May- Index Purchasing Managers Index Other Industry Indicators Ivey Purchasing Manager Index (Seasonally Adjusted) Canada Ivey PMI Inventories Index Deliveries Index The Purchasing Managers Index (PMI), which is a measure of near-term business conditions, stood at 55.9 in June on a seasonally adjusted basis, indicating that purchasing activity in Canada increased vs. May. PMI increased 19% in June 20 YoY and while inventories increased 5., deliveries increased 10.. The major industries that contributed to the PMI s growth were the aerospace sector, which is ramping up production to fill up order backlogs, the auto & parts manufacturing sector, after several months of retooling, and the chemical industry that is benefiting from reduced natural gas costs. 40 Aug- Nov- Feb- May- Aug- Nov- Feb- May- Aug- Nov- Feb- May- Source: Ivey Western University 0 The strong economy s growth in the U.S. also provided a boost to Canada s forestry, manufacturing, and export-focused service sectors. ATA Truck Tonnage Index in the US (Seasonally Adjusted) ATA Truck Tonnage Index in the US % 1 8% The June ATA advanced seasonally adjusted For-Hire Truck Tonnage Index increased 2.8% in July from June and year-to-date was up 3.7% compared to the same timeframe a year earlier According to ATA, tonnage really snapped back in July, being the single best monthly gain since November 20. Factors contributing to July s strength, including better retail sales, factory output, and housing starts Source: American Trucking Association (ATA) FTR Truck Tonnage Index in the US (Seasonally Adjusted) FTR Truck Tonnage Index in the US The FTR Truck Tonnage Index through June exhibited relative stability albeit with YoY growth decelerating to below % - - Through June, the freight environment mirrored a sluggish recovery from exceptionally poor weather early in the year. Despite the headwinds of lackluster energy economy, most freight indicators remained (barely) in positive territory on a YoY basis throughout the 2 nd quarter. That being said, sequential freight trends into the Fall should continue to reflect the gradual improvement expected in overall economic activity as the year progresses. Source: FTR Associates Industry Research Update: Truck Transportation 5

6 New Developments at Key Agreements to Facilitate Trucking Industry s Shift to Natural Gas Vehicles (NGV) in Canada Shell & Canada. In May 28, 20,, Canada announced the signing of a commercial agreement with Shell Canada Products (Shell). Under this agreement, and Shell will work together to reduce monthly payments for truck fleets that lease NGVs. Specifically, fleets owners can sign natural gas fueling contracts with Shell and, separately, secure loans or leases for LNG vehicles with. The agreement covers equipment that will purchase fuel from Shell s facilities. Gaz Metro & Canada. In July 6, 20,, Canada announced the signing of an strategic agreement with Gaz Métro Transport Solutions (GMTS). Under this agreement, fleet operators will work with GMTS for natural gas supply and purchase and separately, with to secure loans or leases for either CNG or LNG vehicles. Canada Market Insights Michelle Cortes michelle.cortes@ge.com brings a customer focus approach to middle-market financing one that s rooted in an understanding of your industry and business. We deal with all makes of highway tractors, trucks and trailer equipment, and are able to match the financial product you need to the intended use and lifespan of your equipment. We understand the specific regional issues that you face, and we are committed to helping you get the transportation equipment you need. Canada Direct Financing Nicolas Lessard T Mike Noble T gecapital.ca 20 General Electric Capital Corporation. All rights reserved. Disclaimer: This publication provides general information and should not be used or taken as business, financial, tax, accounting, legal or other advice. It has been prepared without regard to the circumstances and objectives of anyone who may review it; therefore, you should not rely on this publication in place of expert advice or the exercise of your independent judgment. The views expressed in this publication reflect those of the authors and contributors and not necessarily the views of General Electric Capital Corporation or any of its affiliates (together, GE ). GE does not guarantee that the information contained in this publication is reliable, accurate, complete or current, and GE assumes no responsibility to update or amend the publication. GE makes no representation or warranties of any kind whatsoever regarding the contents of this publication, and accepts no liability of any kind for any loss or harm arising from the use of the information contained in this publication. Nothing herein shall be construed as an approval or commitment to finance or for provision of other service by GE to any person. All transactions are subject to final investment/credit approval by GE and the execution of mutually satisfactory definitive documentation. GE, General Electric Company, General Electric, General Electric Capital Corporation, the GE Logo, and various other marks and logos used in this publication are registered trademarks, trade names and service marks of General Electric Company. You may not use, reproduce, or redistribute this publication, any part of this publication, or any trademark or trade name without the written permission of GE. Industry Research Update: Truck Transportation 6