Transportation Industry: Trends Impacting Truckload and Less Than Truckload Carriers

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1 Transportation Industry: Trends Impacting Truckload and Less Than Truckload Carriers MAY 2012 RKJ Partners, LLC is an Atlanta, Georgia based investment banking firm designed to specifically assist lower middle-market growth companies in executing transactions between $2MM to $75MM. IN THIS ISSUE: OVERVIEW 1 DEDICATED CONTRACT BUSINESS IS BACK! 1 FUEL SURCHARGES, SPOT RATES & CONTRACT RATE TRENDS 3 NEW TRUCK ORDERS 4 ABOUT RKJ PARTNERS, LLC 5 SELECT TRANSPORTATION INDUSTRY TRANSACTION EXPERIENCE 6 CYRIL JONES Managing Partner cyril@rkjpartners.com GREGORY FICKLIN Managing Partner greg@rkjpartners.com RKJ PARTNERS, LLC 4514 Chamblee Dunwoody Rd. Suite 170 Atlanta, Georgia p f I. OVERVIEW RKJ Partners, LLC ( RKJ ) is pleased to present our report entitled: Transportation Industry: Trends Impacting Truckload ( TL ) and Less-Than- Truckload ( LTL ) Carriers. Over the near term, assuming the US economy continues to recover, TL and LTL carriers are expected to continue generating attractive financials results. Several key data points allow RKJ to possess an optimistic view of the TL and LTL industries, namely: RE-EMERGENCE OF DEDICATED CONTRACT BUSINESS: Dedicated trucking operations are booming! As the overall US economy improves, shippers are increasingly choosing dedicated as a way to guarantee capacity while simultaneously assuring top-notch service. Dedicated is consistently growing at near double-digit percentage rates. Industry experts estimate that dedicated contract carriage will hit $11.5 billion in revenue over the course of 2012, up 9% from last year when Dedicated grew 10.6%. SPOT RATES, CONTRACT RATES & FUEL SURCHARGES REMAIN ATTRACTIVE: Between March 2011 and April 2012, spot rates for dry van, reefer and flatbed truckload carrier remained virtually unchanged. However, over the aforementioned period, contract rates for each carrier type materially increased. Given the rise in diesel fuel prices, fuel surcharges also experienced material increases. NEW TRUCK ORDERS FLAT: March 2012 new orders and net orders hit 22,038 units and 20,025 units, respectively, according to ACT Research ( ACT ). ACT previously forecasted that its preliminary net orders for March 2012 would total approximately 20,000 units. February 2012 net orders totaled 22,366 units. The lack of significant new truck orders will exaggerate the capacity issue currently experienced by shippers over the near term. As a result of the capacity imbalance, TL and LTL carriers should realize increases in line haul rates. II. DEDICATED CONTRACT BUSINESS IS BACK! With capacity already tightening and increasing federal regulations threatening to exacerbate the driver shortage issue, dedicated trucking should continue to grow at double-digit percentage rates. Dedicated trucking operations are booming! As the overall economy improves, shippers are increasingly choosing dedicated as a way to guarantee capacity while simultaneously assuring top-notch service. Dedicated is consistently growing at near double-digit percentage rates. Industry experts estimate that dedicated contract services will hit $11.5 billion in revenue over the course of 2012, up 9% from last year when it grew 10.6%. As the name implies, dedicated trucking involves carriers dedicating a certain percentage of its fleets to customers who can secure capacity through longterm contracts. This guarantees capacity for shippers, provides fleets with a consistent base of customers that do not churn as much as a typical customer, and guarantees drivers a predictable number of miles along very

2 familiar routes that they may drive every day. receivers. Dedicated is a win-win-win for shippers, trucking companies, and The biggest names in dedicated contract services are also among the biggest names in the trucking industry. J.B. Hunt s dedicated division generated revenue of approximately $907 million in That was nearly a 20% jump over the previous years. Werner Enterprises dedicated business generated revenue of $744 million in 2010, representing a 14.5% increase. In total, the top 10 dedicated carriers generated $5.7 billion in business in 2010, representing a 12.3% year-over-year increase. This re-emergence in dedicated trucking actually began in 2008 and 2009 when the economy declined and a many one-way truckload companies were forced out of business. The industry was comprised of significant idle capacity. Then, about three years ago, asset-based companies with idle trucks began to move into dedicated one- and two-stop deliveries to grow accounts. The multi-year contracts yielded as much as 6% to 12% profit margins. With capacity tightening and increasing federal regulations threatening to exacerbate the driver shortage, dedicated trucking continues to be a growing option for many shippers. Dedicated business allows carriers to maximize their drivers hours of service if you can work with multiple customers to create a continuous loop of freight. If properly routed, every one s costs are reduced. There are three basis market factors driving the growth in dedicated business for carriers: drivers, regulations, and service levels. Factor #1: Drivers: The driver shortage in TL and LTL is well documented. A combination of demographics, increased scrutiny (including mandatory drug and alcohol testing), and the industry s inability to market itself to minorities and women has meant that jobs that can pay as much as $60,000 annually are going unfilled even in a time of 8.5% unemployment. However, it is important to understand that driving a truck is a challenging job. A normal TL and LTL driver with a 1,200-mile length of haul can be away from home as much as three weeks at a time. Dedicated truck driving is totally different. Because the average length of haul is much shorter, drivers can be home nearly every night or every other night. The loops tend to be predictable, breeding familiarity with dock personnel and customers. In addition, because drivers are paid by the mile, dedicated offers a guaranteed base of pay that is often higher than that of their long-haul brethren. Lastly, truckers are doing everything they can to retain drivers, and dedicated operations certainly help. Factor #2: Regulation: Trucking is clearly in Washington s regulatory sights. The new Compliance, Safety, Accountability ( CSA ) standards threaten to sideline as many as 150,000 of trucking s 3-million long-haul operators when fully implemented. On top of CSA, hours of service ( HOS ) regulations are being tweaked so that drivers may be forced into more mandatory rest periods. In addition, there are tighter background checks, mandatory drug and alcohol screening, and other increased scrutiny of drivers in the wake of the Patriot Act and other responses to 9/11. The proposed HOS changes could have a drastic effect on shippers unless, of course, capacity is locked in through long-term dedicated contracts. Factor #3: Service, service, service: Dedicated business can take nearly every imaginable form. There can be team operations that emphasize transit time speed. Dedicated business can provide ultra-high levels of service with ancillary services such as store set-up and takeaway of old merchandise. There can also be regional loops that carry the freight of two or more shippers who may have operations in the same area that can be linked in pickups and deliveries. Loops provide both shippers with very high levels of service, while reducing carriers empty miles. Certain industries automotive and retail are two lend themselves more to dedicated business. The biggest opportunity is blending routes of two or more customers to create a continuous triangulation of business. Shippers are increasingly locating their distribution centers to take advantage of continuous loops that dedicated regional service provides. Dedicated is ideal for any business with specialized equipment requirements and multiple or complex transportation and distribution challenges. Whether shippers need to deliver perishable products or high-value freight that requires high security, dedicated helps lower transportation costs and increase efficiency. The Future is Bright By all accounts, top trucking officials agree that dedicated trucking will continue to outpace overall growth in the industry, at least in the near term. What s driving dedicated trucking is the fear of not having capacity coupled with uncertainty of rates. Shippers will certainly benefit from capacity guarantees and rate stability, but there is a downside. If the economy tanks, shippers will be stuck with a contract they need to honor, and they will not be able to take advantage of lower spot market pricing. 2 RKJ PARTNERS, LLC: TRANSPORTATION INDUSTRY TRENDS IMPACTING TL AND LTL CARRIERS

3 III. FUEL SURCHARGE, SPOT RATE & CONTRACT RATE TRENDS Between April 2011 and April 2012, spot rates for dry van, reefer and flatbed truckload carrier remained virtually unchanged. However, over the aforementioned period, contract rates for each carrier type materially increased. Given the rise in diesel fuel prices, fuel surcharges also experienced material increases. DRY VAN RATES Between April 2011 and April 2012, average dry van spot rate slightly declined from $1.32 per mile to $1.30 per mile, representing a 1.5% decline. Between March 2011 and March 2012, average contract rate experienced a material increase from $1.44 per mile to $1.56 per mile, representing an 8.3% increase. Over the same period, the average fuel surcharge increased from $0.42 per mile to $0.52 per mile, representing a 23.8% increase. Exhibit #1: Dry Van (TL Rates): Fuel Surcharge, Spot Rate & Contracts Rate March 2011 thru April 2012 $1.80 $1.60 $1.44 $1.56 $1.40 $1.20 $1.00 $1.32 $1.30 $0.80 $0.60 $0.40 $0.20 $0.42 $0.52 $- Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 FSC Spot Contract Source: DAT TransCore FLATBED RATES Between March 2011 and April 2012, average flatbed spot rate remained virtually flat at $1.63 per mile. Between March 2011 and March 2012, average contract rate experienced a material increase from $1.69 per mile to $1.76 per mile, representing a 4.1% increase. Average fuel surcharge over the same period increased from $0.52 per mile to $0.56 per mile, representing a 7.7% increase. Exhibit #2: Flatbed (TL Rates): Fuel Surcharge Rates, Spot Rates & Contracts Rates March 2011 thru April 2012 $2.00 $1.80 $1.69 $1.76 $1.60 $1.40 $1.63 $1.63 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.52 $0.56 $- Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 FSC Spot Contract Source: DAT TransCore 3 RKJ PARTNERS, LLC: TRANSPORTATION INDUSTRY TRENDS IMPACTING TL AND LTL CARRIERS

4 REEFER RATES Between March 2011 and April 2012, average reefer spot rate per mile remained flat at $1.45 per mile. However, between April 2011 and March 2012, average contract rates experienced a material increase from $1.55 per mile to $1.63 per mile, representing a 5.2% increase. Average fuel surcharges over the aforementioned period, increased from $0.50 per mile to $0.54 per mile, representing an 8.0% increase. Exhibit #3: Reefer (TL Rates): Fuel Surcharge Rates, Spot Rates & Contracts Rates March 2011 thru April 2012 $1.80 $1.60 $1.55 $1.63 $1.40 $1.20 $1.45 $1.45 $1.00 $0.80 $0.60 $0.40 $0.20 $0.50 $0.54 $- Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 FSC Spot Contract Source: DAT TransCore Given the seasonality in the trucking business, TL and LTL generate a significant portion of their annual revenue in the second and third quarters of the calendar year. Given this annual trend, coupled with the current capacity shortage and the re-emergence of dedicated contract business, carriers should continue to experience rate increases over the near term. IV. NEW TRUCK ORDERS ACT Research, a provider of data and analysis for trucks and other commercial vehicles, reported Class 8 new and net orders in March 2012 were the lowest they have been since July March 2012 new orders and net orders hit 22,038 units and 20,025 units, respectively, according to ACT. ACT previously forecasted that its preliminary net orders for March would come in around 20,000 units. February net orders hit 22,366 units. When the preliminary orders were initially released, ACT said that the preliminary Class 8 orders were below expectations in what is typically one of the seasonally strongest months of the year. On a seasonally-adjusted basis, Class 8 orders are at its lowest point since hitting 18,400 units in September For many truck drivers, the gap between new and used prices remains particularly large. Given data points presented above, plus rising diesel prices through Q1 2012, it is easy to understand why the industry has softened. However, RKJ believes a continuation of reasonable freight growth, strong trucker profits, and healthy used truck prices will push demand higher once the current period of uncertainty has passed. 4 RKJ PARTNERS, LLC: TRANSPORTATION INDUSTRY TRENDS IMPACTING TL AND LTL CARRIERS

5 ABOUT RKJ PARTNERS, LLC ( RKJ Partners is an established advisor to leading lower middle-market growth companies. We provide our clients with experienced-based solutions and unbiased advice. Our comprehensive array of strategic advisory and execution capabilities allows us to meet the needs of our clients and provide an outstanding level of service in connection with a variety of transaction processes, including: CAPITAL ADVISORY: RKJ possesses substantial expertise in assisting lower middle-market clients raise capital to fund growth strategies. Whether the capital source is senior debt, mezzanine/subordinated debt, private equity, or venture capital, RKJ has both extensive and relevant relationships within the capital community to enable the deployment of optimal solutions for our clients. MERGERS & ACQUISITIONS: RKJ serves as a trusted advisor in executing merger and acquisition transactions for lower middle-market clients. In addition to our significant investment banking transactional experience, RKJ s bankers have owned businesses and have served in interim CFO roles for clients. As a result of our experiences as business owners and senior level managers, RKJ s bankers are able to bring a unique perspective to the mergers and acquisitions process. RKJ s mergers and acquisitions services include: Buy-side and Sell-side Advisory Divestitures Leveraged & Management Buyouts STRATEGIC ADVISORY: RKJ provides financial advisory services to owners, management, shareholders and their boards to assist in the evaluation strategic alternatives and options for extending and/or maximizing shareholder value. RKJ s advisory services include: Business Valuations Capital Structuring & Planning Negotiating Joint Ventures Strategic Business Development PLEASE REFER ANY QUESTIONS OR COMMENTS TO: CYRIL JONES GREGORY FICKLIN MANAGING PARTNER MANAGING PARTNER RKJ PARTNERS, LLC RKJ PARTNERS, LLC 4514 CHAMBLEE DUNWOODY ROAD, SUITE CHAMBLEE DUNWOODY ROAD, SUITE 170 ATLANTA, GEORGIA ATLANTA, GEORGIA P P CYRIL@RKJPARTNERS.COM GREG@RKJPARTNERS.COM RKJ PARTNERS, LLC: TRANSPORTATION INDUSTRY TRENDS IMPACTING TL AND LTL CARRIERS

6 SELECT TRANSPORTATION INDUSTRY TRANSACTION EXPERIENCE Mergers & Acquisition Transactions Project Seaside (Expected close - June 2012) Project Spartan (Expected close - July 2012) Buy-Side M&A Sell-Side M&A Advising client on acquisition of truckload asset-based carrier. Specific role and responsibilities included: sourcing and selecting target(s); negotiating letter of intent (LOI); drafting offering memorandum; developing financial projection model; sourcing and negotiating terms with financing partners; overseeing due diligence process including partnering with legal/accounting advisors; and managing closing process. Advising client on sale of freight brokerage company. Specific role and responsibilities included: sourcing and selecting buyer(s); drafting offering memorandum; developing financial projection model; sourcing and negotiating terms with financing partners; overseeing due diligence process including partnering with legal/accounting advisors; and managing closing process. Arcadia Capital Group Buy-Side M&A Advised Arcadia Capital Group on the acquisition of DJL Express, Inc. Specific role and responsibilities included: sourcing and selecting target(s); negotiating letter of intent (LOI); developing post-acquisition growth strategy. Jones + Ingram Logistics, Inc. Sell-Side M&A Advised Jones + Ingram Logistics, Inc. on the sale of the company to Orbis Transportation, LLC. Specific role and responsibilities included: sourcing and selecting buyer; negotiating letter of intent (LOI); managing due diligence/transition plan; and developing post-acquisition growth strategy. Strategic Advisory Engagements Allied Logistics, Inc. Advi sory Evaluated three (3) acquisition targets in the freight brokerage industry. Specific role and responsibilities included: sourcing and selecting target(s); developing preliminary financial projection models for each target; and preliminary negotiations with targets. Brick Transportation, LLC Advi sory Evaluated acquisition target - FedEx carrier. Specific role and responsibilities included: negotiating letter of intent (LOI); evaluation of financials and financial projection model; and sourcing and preliminary negotiating of terms with financing partners. CRST International, Inc. Advi sory Evaluated multiple acquisition targets - west-coast based freight brokerage companies. Specific role and responsibilities included: sourcing, selecting and presenting target(s). K&L Trucking, Inc Advi sory Presented "roll-up" strategy to senior management team. Specific role and responsibilities included: sourcing, selecting and presenting potential target(s); and evaluating preliminary structure for each potential target. Monr oe Logi sti cs, LLC Advi sory Evaluated three (3) separate acquisition targets - small package delivery companies. Specific role and responsibilities included: developing financial model for each potential target; and leading preliminary negotiations with each potential target. Paul way Group, LLC Advi sory Evaluated three (3) acquisition targets - logistics related software company; asset based carrier & freight brokerage company. Specific role and responsibilities included: developing financial model for each potential target; and leading preliminary negotiations with each potential target. TSE Logistics, Inc. Advi sory Evaluated cross-border (Canada) acquisition target - asset based carrier. Specific role and responsibilities included: negotiating letter of intent (LOI); developing financial projection model; and preliminary negotiations with target. Capital Raising Engagements Project Peppercorn (Expected close - May 2012) Senior Debt Recapitalization Advising client on recapitalizing their balance sheet. Specific role and responsibilities included: sourcing and selecting senior lender; assisting lender with preliminary structure; drafting information memorandum; developing financial projection model; and managing closing process. Al li ed Logi stics, Inc. Equity Capital Raise Advised Allied Logistics in its equity capital raise. Specific role and responsibilities included: evaluating preliminary term sheet, identifying appropriate legal counsel to negotiate letter of intent (LOI); and developing postacquisition growth strategy. Pilot Travel Centers Senior Debt Recapitalization Assisted Pilot Travel Center in its senior debt capital raise. Specific role and responsibilities included: developing financial projection model; and reviewing preliminary loan documents. 6 RKJ PARTNERS, LLC: TRANSPORTATION INDUSTRY TRENDS IMPACTING TL AND LTL CARRIERS