Industry Research Update Truck Transportation Key Developments According to the advance estimate from the U.S. Commerce Department, annualized GDP growth during the 3 rd quarter of 2015 grew at a modest rate of 1.; down significantly from robust growth of 3.9% during the 2 nd quarter and well below the 4.3% growth in the year earlier quarter. XPO Logistics is buying Con-way for $3 billion, the highest price ever paid for a U.S. trucking company. Con-way is listed as the 4 th largest domestic general freight carrier according to CCJ s 2015 rankings. Despite multi-year lows in fuel prices, a growing number of carriers are planning increases in noncontractual freight rates. Notable recent announcements include Con-way, UPS Freight and Fedex Freight all with average increases of 4.9%. Navistar and GM agreed to jointly develop and manufacture class 4-5 medium duty trucks that are planned to reach the market in 2018. According to the American Trucking Associations (ATA), annualized driver turnover within large truckload fleets rose from a four-year low of 8 during the 1 st quarter to 87% in the 2 nd quarter. Meanwhile, annualized turnover at smaller TL fleets fell 7 percentage points to a two year low of 7. Industry Fundamentals Despite significant volatility in the financial markets that rattled consumer confidence, the freight environment exhibited modest signs of improvement during the 3 rd quarter of 2015. The tailwinds of post recession highs for residential construction activity and light vehicle sales were just enough to offset lackluster retail sales as well as severe weakness in energy and commodity production. Nonetheless, the heavy duty equipment cycle is clearly past it s peak with the pace of new equipment orders recently experiencing a swift correction. Large numbers of recent new truck deliveries have easily outpaced freight growth resulting in reduced capacity utilization and a softening rate environment. Not coincidently, several large carriers announced 3 rd quarter earnings that were below expectations despite multi-year low fuel costs. Industrial Production (Seasonally Adjusted) 110 Source: Federal Reserve 108 106 104 102 100 98 96 94 92 90 Industrial Production 107.1 3% 1% The Industrial Production reflects a clear slowing of economic growth during the 3 rd quarter. The September reading represented the lowest year-over-year growth of 2015 and the 7 th month out of the previous 9 where the index had declined month-overmonth. Reflecting slackening production, capacity utilization for the industrial sector decreased by 0.3 percentage points in September to 77.5 percent. This is 1 percentage point below the level of a year earlier and 2.6 percentage points below the long-run (1972-2014) average of 80.1 percent. Industry Research Update: Truck Transportation 1
Truck Transportation Employment Retail Sales & Food Services Macroeconomic Indicators ISM Purchasing Managers 65 Source: Institute For Supply Management 60 55 Expansion 50 45 The Purchasing Managers (PMI), which is a measure of near-term business conditions in the manufacturing sector, has fallen to a 2-year low and is on the cusp of falling into contraction territory. The September PMI of 50.2 represented a 3 rd consecutive month-over-month decline and is down significantly from the 56.1 reading a year earlier. Nonetheless, the average YTD PMI and the past relationship between the PMI and GDP suggests annualized GDP growth of 2.9%. In addition, if September s PMI is annualized, it would equate to tepid GDP growth of 2.. Retail Sales & Food Services (Seasonally Adjusted $Bn) 450 Source: U.S. Census Bureau 440 430 420 410 400 390 380 370 Retail Sales & Food Services 1 9% 7% 3% 1% Retail Sales and Food Services during September reached a new all-time high. That being said, year-over-year growth has been locked in an underwhelming range of 1.-2. for most of the year. Year-todate through September, retail sales were up 2. compared to the same period a year earlier, which represents a noticeably slower pace than the 3.9% rate of growth during all of 2014. Truck Transportation Employment (Seasonally Adjusted 000s) 1,460 Source: Bureau of Labor Statistics 1,420 1,380 1,340 1,300 7% 3% Truck transportation employment in September retreated modestly from an alltime high in July while the rate of growth has been decelerating throughout the year. On a seasonally adjusted basis, industry employment at the end of September was down 0.3% from August but grew 2.1% compared to a year earlier. 1,260 1,220 1% Employment Industry Research Update: Truck Transportation 2
Tonnage Indicators Through September, the freight environment began to show improvement from weakness during the Spring and early Summer. Despite the headwinds of lackluster industrial production and retail sales, most freight indicators exhibited positive year-over-year growth throughout the 3 rd quarter. Heading into the final quarter of the year, the tailwind of strong residential construction trends will be challenged by relatively high levels of retail inventory coupled with ongoing weak conditions in the energy and commodities sectors. ATA Truck Tonnage (Seasonally Adjusted) 138 Source: American Trucking Associations 134 130 126 122 118 114 110 1 1 - - FTR Truck Tonnage (Seasonally Adjusted) 134 Source: FTR Associates 130 126 122 118 114 110 1 - - ATA Truck Tonnage FTR Truck Tonnage Cass Freight - Shipments Transportation Services (Freight) 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 Source: Cass Information Systems 1 1-124 120 116 112 108 Source: U.S. Department of Transportation N.A. 1-0.90-104 - Shipments Class 8 Capacity Utilization 94 Source: FTR Associates 92 90 88 86 84 82 80 78 The September ATA advanced seasonally adjusted For-Hire Truck Tonnage improved 0.7% from August and year-to-date was up 3.3% compared to the same timeframe a year earlier. The FTR Truck Tonnage exhibited accelerating improvement during the 3 rd quarter with year-over-year growth reaching an impressive 5.3% during September. The Cass Freight Shipment saw sequential improvement during September but remains 1. lower than a year earlier. The TSI Freight exhibited modest improvement in the 3 rd quarter and reached a new all time high in August. Despite large numbers of new trucks entering the market, Class 8 Capacity Utilization has held steady at relatively high levels albeit below the peak seen at the end of 2014. Industry Research Update: Truck Transportation 3
Average Price $ Diesel Fuel Price Revenue And Expense Indicators Cass Truckload Linehaul 130 Source: Cass Information Systems 125 120 115 110 105 100 2 2 1 1 The Cass Truckload Linehaul has shown steady year-over-year growth in the range of 3- since April and has increased month-over-month for four consecutive months through September. Looking ahead, strength in linehaul rates may taper as a sluggish freight environment conspires with a steady flow of new trucks hitting the road. Truckload Linehaul On-Highway Diesel Fuel Price (Monthly Average $/Gallon) 4.50 4 4.25 Source: U.S. Department of Energy, Energy Information Administration 3 4.00 2 3.75 1 3.50 3.25-1 3.00 2.75-2 2.50 2.52-3 2.25-4 At the end of October, the average price of on-highway diesel fuel remained near multiyear lows. The average retail price of $2.52 per gallon during October was the 2 nd lowest monthly average since 2009. That being said, energy prices are expected to stabilize and thereafter increase heading into next year. As of October, the EIA forecasted onhighway diesel prices to average $2.72 per gallon in 2015 (vs. $3.83 in 2014) and $2.77 per gallon in 2016. Diesel Fuel YoY % Chg Average New Heavy Duty and Used Truck (All Types) Prices ($) 160,000 Source: Rush Enterprises 128,699 131,302 140,325 142,275 139,053 138,783 140,000 133,646 128,092 125,888 125,461 120,000 100,000 80,000 60,000 40,000 41,915 44,232 43,530 39,168 39,397 39,404 39,437 41,952 43,226 41,607 20,000 0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Avg New Heavy Duty Truck Price Avg Used Truck Price (all classes) Average prices of new heavy duty trucks sold by Rush Enterprises during the 3 rd quarter decreased from the 2 nd quarter and by a similar 2.1% compared to the year earlier quarter. Slowing sales to the energy complex, which typically carry higher prices, and higher sales to large over-the-road fleets, kept a lid on the mix of overall average selling prices. Average prices of all used trucks sold by Rush Enterprises saw a fairly steep correction during the 3 rd quarter. The average retail price of a used truck sold by Rush Enterprises decreased 7.7% compared to the 2 nd quarter but were down less than 1% compared to the year earlier 3 rd quarter. Industry Research Update: Truck Transportation 4
Net Orders Net Orders Net Orders Truck and Trailer Orders U.S. Class 8 Net Truck Orders 42,000 36,000 30,000 24,000 18,000 12,000 6,000 0 10 7 5 2-2 -5-7 Following a breakout finish to 2014, U.S. Class 8 net new truck orders saw a sharp deceleration through the first 3 quarters of 2015. Net orders during the 3 rd quarter grew from the 2 nd quarter but were 1 lower than the year earlier quarter. YTD through September, net orders were down compared to same period of 2014. Net orders during the month of September were down 3% compared to August and 19% compared to the same month a year earlier. Class 8 Net Orders YoY % Chg U.S. Class 5-7 Net Truck Orders 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 9 6 3-3 Following a seasonally weak 1 st half, U.S. Class 5-7 Net Truck Orders mirrored strength in residential construction and rebounded during the 3 rd quarter. Net orders during the 3 rd quarter increased 7% compared to the 2 nd quarter and were also higher than the year earlier quarter. YTD through September, net orders were up compared to the same timeframe in 2014. Net orders during the month of September were up 23% compared to August and up nearly 19% compared to the same month a year earlier. Class 5-7 Net Orders YoY % Chg U.S. Net Trailer Orders 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 10 8 6 4 2-2 -4 U.S. Net Trailer Orders have followed a volatile yet somewhat predictable seasonal order pattern over the past few years with Fall/Winter the usual timeframe for fresh capital commitments. True to form, net trailer orders saw a strong sequential uptick during the 3 rd quarter. Net trailer orders increased 3 compared to the 2 nd quarter while also increasing 7% compared to the year earlier quarter. However, due to pronounced weakness during the February- May timeframe, YTD net orders through September were down compared to 2014. Trailers Net Orders YoY % Chg Industry Research Update: Truck Transportation 5
Months 3/7 Ratio Other Business Indicators U.S. Class 8 Trucks Sold In The Past 3 Years Compared To The Past 7 Years (3/7 Ratio) 0.60 0.55 0.50 0.45 Theoretical Level where fleet expands 0.40 0.35 0.30 0.25 0.20 Following a robust 19% increase in retail sales during 2014, retail sales of heavy duty trucks remained strong through the first three quarters of 2015 (+2 YTD) and in aggregate have accelerated over the past 3 years. As such, the percentage of trucks sold within the past 3 years compared to all trucks sold over the past 7 years remains solidly above the theoretical level where normal equipment replacement transitions into fleet expansion. U.S. Class 8 Backlog/Build vs. Inventory/Sales 9 8 7 6 5 4 3 2 Class 8 Backlog/Build (Left) Class 8 Inventory/Sales (Right) U.S. Class 8 Retail Sales vs Builds 30,000 25,000 20,000 15,000 10,000 3.0 2.5 2.0 1.5 1.0 0.5 0.0 The heavy duty backlog-to-build ratio has trended sharply lower throughout 2015 as a modest deceleration in builds did not keep pace with a sharper correction in orders. During the 3 rd quarter, the industry backlog decreased significantly as the number of monthly builds averaged nearly 5,400 more than the average number of net new orders. The heavy duty inventory-to-sales ratio trended sharply higher during the 3 rd quarter as three consecutive decreases in monthly retail sales outpaced a more modest deceleration in builds. At the end of September, inventories represented 2 ½ times the level of sales during September, which is a high watermark for 2015. Sales and builds of new heavy duty trucks decelerated throughout the 3 rd quarter. During the 3 rd quarter, HD sales decreased compared to the 2 nd quarter but were up 13% compared to the same quarter a year earlier. Similarly, builds during the 3 rd quarter were down compared to the 2 nd quarter but were up 7% compared to the same quarter a year earlier. 5,000 Class 8 Retail Sales Class 8 Build Industry Research Update: Truck Transportation 6
Cancellation as % of Backlog Other Business Indicators U.S. Housing Starts (Seasonally Adjusted, Annualized Rate) 1,300 Source: U.S. Census Bureau 1,200 1,100 1,000 900 800 700 600 500 Housing Starts (thousands) Housing Starts in the U.S., which are a strong influencing factor in the overall direction of freight tonnage, were at multi-year highs through September. Despite choppiness induced by the potential of rising interest rates, the monthly average annualized rate of 1.163 million units during the 3 rd quarter of 2015 was more than 13% ahead of the pace in the year earlier quarter. Following an abysmal winter where the rate of starts was lower year-over-year during January and February, annualized starts during September were 1 higher than a year earlier. U.S. Light Vehicle Sales (Seasonally Adjusted, Annualized Rate) 20 18 16 14 12 Source: Bureau of Economic Analysis Light vehicle sales in the U.S. are also an indicator of the overall direction of freight tonnage. Similar to housing starts, annualized sales of light vehicles have shown significant improvement throughout 2011-2015. Annualized sales reached a new cycle peak of 18.1 million units during September, which was the highest rate since 2006 and the 9 th highest monthly reading in the past 40 years. 10 Light Vehicle Sales (millions) U.S. Class 8 Order Cancellations 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Class 8 Order Cancellations Cancel % of Backlog 3% 1% While mirroring the significant increase in backlog since 2014, Class 8 cancellations in absolute terms have understandably trended higher. While eye catching, the spikes in August and September appear to be following a familiar seasonal pattern of OEM orderbook clean-up in advance of a new model year. Nonetheless, given the dramatic 5 drop in monthly gross orders since a peak in October 2014, the recent spike in the cancellation rate (as a % of backlog) also reflects a broader and fairly rapid reset of expectations for new capacity requirements. Industry Research Update: Truck Transportation 7
Net Income $ millions Operating Expense Ratio % Other Business Indicators Public Truckload Carrier Composite Net Income & Operating Expense Ratio 350, Company Reports 300 250 200 150 100 50 96 94 92 90 88 Due to the combination of low fuel costs and a steady rate environment, Net income for public carriers during the 2 nd quarter of 2015 was stronger than typical historical seasonal trends. The combined net income of a composite of public trucking companies during the 2 nd quarter increased 9% compared to the year-earlier quarter and 27% for the entire 1 st half of the year. The benefits of a 7% increase in operating revenue coupled with a 3 decrease in fuel costs more than offset a 27% decrease in fuel surcharge revenue and a 3% increase in other non-fuel operating costs. As a result, the average operating expense ratio during the 2 nd quarter decreased to 90.3%, down from 91.1% in the year ago 2 nd quarter. Inquiries About Financing John Dietze (469) 586-2144 John.r.dietze@ge.com Industry Research Contact Michael Zimm, CFA michael.zimm@ge.com is an extension of GE s rich heritage of building and supporting growth. Investing in the sectors we know best, we can provide more than just financing: We bring insight, knowledge and expertise to every loan. And as a result, businesses that finance with benefit from the global know-how and expertise of GE. gecapital.com Copyright 2015 Corporation. All rights reserved. "GE", "General Electric Company", "General Electric", 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 reprint or forward this presentation to others provided that it is reproduced or distributed in its entirety, including this disclaimer. IMPORTANT DISCLAIMER: This presentation provides general information and should not be used or taken as legal, regulatory, business, financial, tax, accounting or other advice, or relied upon in substitution for the exercise of your independent judgment. For your specific situation or where otherwise required, expert advice should be sought. Although GE believes that the information contained in this presentation has been obtained from and is based upon sources GE believes to be reliable, GE does not guarantee its accuracy and it may be incomplete or condensed. GE makes no representation or warranties of any kind whatsoever in respect of such information. GE accepts no liability of any kind for loss arising from the use of the material presented in this presentation. Although General Electric Capital Corporation ( GE ) believes that the information contained in this newsletter has been obtained from and is based upon sources GE believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. GE makes no representation or warranties of any kind whatsoever in respect of such information. GE accepts no liability of any kind for loss arising from the use of the material presented in this newsletter. This newsletter is not to be relied upon in substitution for the exercise of your independent judgment or legal advice. Industry Research Update: Truck Transportation 8