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Dahlman Rose & Co. Global Transportation Conference 2009 (Day 2: Trucking)

September 10th, 2009 Michael McDonough

*Real Time Notes, Updated Frequently

Today I am attending the second day of Dahlman Rose & Co’s Global Transportation Conference, and will be speaking with and listening to presentations from several trucking company executives from companies including: Werner Enterprises, Inc. (NASDAQ: WERN), Con-Way, Inc. (NYSE: CNW), Arkansas Best Corporation (NASDAQ: ABFS), Celadon Group Inc. (NASDAQ: CLDN), Transplace, Old Dominion Freight Line, Inc. (NASDAQ: ODFL), Saia Inc. (NASDAQ: SAIA), & Vitran Corporation, Inc. (NASDAQ: VTNC).  Due to popular demand from yesterday’s format, I will be posting my real time notes as the day progresses, so please check back frequently for updates. The conference should begin within the hour.


The company likes to focus on customers with less cyclical and volatile businesses.  WERN is debt free with a strong balance sheet.  John is again heavily emphasizing the company and their clients’ stability.  He is now discussing how the company is implementing new technology to increase productivity.  As for revenue, 39% is derived from their one-way trucking business, 40% from dedicated trucking, and the rest from logistics. WERN’s biggest growth plan is in high value dedicated trucking and logistics.  Optimally WERN would like to see 1/3 of its revenue come from each  of the three categories.  In the past dedicated trucking has helped buffer the company from economic slowdowns.  The company has increased their dedicated fleet line over the past year helping to buffer declines in other segments of the company.

Freight market conditions have continued to deteriorate, which is the opposite of what you would expect in a peak season.  But, we have seen some indications of improvement.  Freight volumes have been stable in 3Q09 after showing some gains in 2Q09.  (This portion of the presentation was very short and very quick, hopefully more comes out in the Q&A on the outlook).

He is now discussing how clients can benefit from their logistic offerings.  Revenues for the segment has experienced growth since 2003.  They anticipate this segment will grow substantially once the freight markets improve.

New truck builds peaked in 2006, and have been significantly below the replacement level since 2007.  This makes John believe the supply of trucks will be tight moving into the future. John also anticipates the company will become cash flow positive over the next couple quarters. The company has taken measures to improve fuel consumption through mpg improvements to help reduce costs, which they estimated to be at US$0.02/share.  The company expects further cost saving benefits in the quarters ahead.

John is optimistic their prospect for the future is excellent as the demand for shipping eventually returns.  He believes the company has one of the most diverse service portfolio in the industry including asset and non-asset products. The company began shrinking its fleet size two years ago.  They anticipate generating a significant amount of free cash flow in 2009.

Q&A Highlights: What would pricing look like in a more favorable environment? Shippers have had some leverage, which has forced us to offer lower rates.  We anticipate a further decline in 3Q09 vs 2Q09, but, we hope that 3Q09 will be a bottom for rates.  However, that will depend on how the economy appears and what happens to the excess capacity in trucking.  They believe as things improve pricing will improve along with it.  The company is taking a market based approach, so as the market improves so will rates.

What has Werner seen in terms of smaller carrier failures? Failures up to 3Q09 have been below levels that were expected.  Our data shows lenders are being extremely lenient with companies who have been unable to make payments, which is leaving some supply in the market that wouldn’t necessarily be there.  It is hard to predict where failures are going, but we definitely haven’t had the number of failures I would anticipate.

How much more can you improve fuel MPG? In 2008 we improved the idle percentage by changing driver behavior.  We also installed apu’s and want to increase that to 100%.  We are also designing system and better planning tools to monitor the amount of miles that we are not compensated for.  There are a number of other initiatives in place to improve this further to aerodynamic trailers and automatic tire inflaters.  Over the long run we expect fuel prices to go up so it will be critical to continue improving this.

What is the extent of the investments you have made in improving fuel consumption? The biggest investment we have made thus far is in the auxiliary power units, which we are depreciating over a significant period.  Thus far the units have worked quite well and are paying for the investment we have made.  The elss significant costs are changes to our software.  Higher costs options are aerodynamic trailers, we do a cost analysis on all ideas.

CON-WAY, INC. (NYSE: CNW): Douglas W. Stotlar, President & Chief Executive Officer & Robert L. Bianco, Jr.,  Senior Vice President of Con-Way & President of Menlo Worldwide Logistics, LLC

They are planning on giving a general overview of the Con-Way Corporation.  They are going over the company’s three sectors, Menlo Logisitics, Freight, and Truckload.  Since 2008 CNW reacted quickly to a deteriorating economy reducing staff, and 2009’s capex spending plan.  In April 2009 CNW applied wage and salary reductions while suspending and cutting some benefits.  These measures helped the company’s 2Q09 earnings.

In June 2009 CNW launched new ‘True LTL pricing’ for large LTL shipments, ensuring that the price will be less than shippers would pay a Truckload carrier.  In 2008 the company had a network reorganization and began initiating new sales and marketing campaigns that led to increased market share in a declining market.  In August they grew their tonnage 4% y/y, and they anticipate this will continue in September.

Conway Truckload guarantees that they never overbook, which has helped build a dedicated client base.  Conway developed its three segments to provide strategic advantages across the company.  (Thus far the presentation has been a very high level look at the company without many specific details to the outlook or strategic initiatives).

Rob is now discussing the scope of Menlo Worldwide Logistics.  International expansion has helped to increase the amount of contracts for the logistics business to 85 in 2008 from 43 in 2007.  Net revenue increased to US$510mn from US$446mn during the same period.  Rob believes Menlo is in a counter cycle industry, which is a positive during these tough times.  Customers are trying to lower their cost structures through outsourcing, which helps Menlo.  During the 1H09 they were able to show modest growth with some margin expansion.

The company believes they have ample liquidity and have strong cash flow, and have a note coming due next year that will help deleverage the company.  They expect they are well positioned to handle this, and are satisfied they have the means to handle their future capex spending plans.

Q&A Highlights: What costs will come back? In Q4 they may unuspended some benefits if the company meets some internal goals (US$$4.5mn).  In April 2010 there may also be a US$50mn expense increase, spread evenly,  from changing crew methods.

What benefits are left for Menlo and Con-way? He beleives they have only scratched the surface on that relationship.

What is Conway’s feelings on the Employees Free Choice Act? Conway believes the act that the act goes above and beyond what is necessary. They are actively involved in the debate and trying to influence a balance outcome, but they can not support the current legislation.

Are you hiring and bringing truck back online and if so why? All of the hiring we have done this year has been in response to dealing with our growing market share and seasonality.  We downsized last year with the tonnage that went away and as it as come back we have had to hire incremental employees.  All the equipment we have bought has been for replacement not new business.  We are dealing with the here and now and not the future.

Any spending going towards more fuel efficient vehicles? They are always looking at new technology  including hybrid and alternative fuels.  They are also looking at additives, but are not currently running any alternative fuel vehicles.  They are working with UMich on new technology that might be promising in the future.

Talk about tonnage: September should be better than August, because of a weak base, but by how much we don’t know yet.

Coffee Break: Thus far the presentations have been pretty mundane without much discussion at all of the sector’s outlook.  From the best of my judgment the presenters seem slightly less optimistic than yesterday’s railroad companies.


The opening was telling, “I’m ready for better times”.  She is now going over the background of the company.  Revenues have remained relatively steady, while net income has fallen much more substantially in 2008.  The company has virtually no debt.   They feel they have the reserves necessary to weather though this difficult period, and take advantage of emerging opportunities.  The company pays one of the highest dividend yields in the industry.  ABFS anticipates spending US$45mn on net capital expenditures in 2009, mostly on equipment replacement. Judy is now going over the company’s accolades.

Declines in tonnage weighted Industrial production, housing starts and consumer confidence have all place significant pressure on the sector.  They see some hope in upticks in US manufacturing sector and hope it translates to an increase in demand.  They feel the pricing environment has been growing increasingly competitive as the year progresses.  The company has reduced headcount by 23%, tractors by 20%, and realigned the company’s management organization.  As for 3Q09 they have seen some improvements through some modest market share/economic increments, but the majority is due to a weak base in 3Q08.  Judy is now discussing the benefits of the companies IT systems.

On a personal note, the undertones of Judy’s presentation highlight the uncertainty and fears trucking executives presently hold toward the future of the industry.  With direct customer contact it is unusual that she quoted only upticks in the ISM as an indicator of demand growth, rather than actual client actions.

Q&A Highlights: Much of the improvements in the y/y declines are due to a weak 3Q08, this trend worsened in 4Q08, so the weak base will continue.

Talk about pricing: Our approach toward pricing hasn’t changed, which is to focus on account by account profitability.  In a situation like this more of our costs become fixed, and so we do have adjustments, but the philosphical approach to the market hasn’t changed.

Where are union negotiations? We recently had a meeting and discussed the recession and agreed to continue a dialogue to address what needs to happens with wages benefits and jobs of our workers.  But, we do not want to give a lot of details as it is not good to neogtiate in the public.  We have competitors with much lower cost structures, so we must address this. On the union side we have not had cost of living increases for some time so I should note this.

Can you talk about Capex plan? For 2010 we haven’t fully developed the plan yet, but if we are to agree there isn’t much of a change in the environment we would be looking at maintenance capex, and would be doing less of that than normal. (She didn’t mention a scenario if the market picks up).

Discuss market share improvements: We are gaining share, but it is only a modest part of our improvement in y/y declines.  We can’t site any specific examples of gaining business due to economic improvements in business.

Coffee Break:

CELADON GROUP INC. (NASDAQ: CLDN): Stephen Russell, Founder, Chairman & CEO

Celadon operates 2,900 tractors, with 250 in Canada, and another 250 in Mexico.  Capex will be virtually 0 over through 2011 as they have already met new engine standards.  Average driver age is 47, which is higher than the average, very strict standards for hiring drivers.  Interestingly, if you walk around a tractor trailer 25 times it equals one mile…

The company started in the mid 80s as an automotive carrier primarily working with Chrysler, and has since diversified via acquisitions.  Income in 2008 and 09 have dropped off substantially, given weakness in the sector.  EBITDA peaked in 2007 at US$62.0mn and has since declined to US$46.1mn in 2009.  The company has significantly reduced debt to US$43.5mn in June 2009 compared to US$59.4mn a year prior.

We’ve taken costs out, we have reduced MPG, but lower utilization had the biggest impact on our results, reducing EPS by US$0.13, with lower rates per mile bringing down the EPS an additional US$0.15. We were significantly impacted by a massive slowdown in Mexico.  Recently we have begun to see improvements in miles, but rates will likely remain ‘awful’ for the remainder of this year.  Rates could see a jump in the January bidding season.

“Lean into the pain don’t run from it. Unless we lean into the pain we can’t get done what needs to get done, and we have leaned into the pain”.  They have reduced idling, fired drivers, lowered starting pay, and adjusted maximum pay.  Customers added in 2009 from a new sales force include, Home Depot, Coca Cola, LG, Best Buy, and Georgia-Pacific–to name a few.  Wal-mart is 4% of the company’s business.

Q&A Highlights: What would be potential uses for your available cash? There are differing opinions on this and the right decision will eventually be made for the shareholders.

Do you see any potential acquisitions on the non-asset based side? Definitely not on the trucking side, many companies owe more to the bank than their trucks are worth. Right now it would be ‘crazy to be good will’.

How many trucks do you have parked currently? We have 200 trucks parked for sale, and a minimal amount otherwise.  Trucking companies aren’t being put into bankruptcy because banks don’t want the trucks, but they wont make working capital loans.  What companies then do to stay alive is to park the truck and stop paying drivers, insurance, etc…  You keep collecting the cash that was already generated by that truck, without the expense, which gives the company the ability to survive.  If something breaks in a working truck, then you can take it out of a parked truck.  The longer these trucks are parked the more they will be cannibalized and the higher the cost to bring them back online.

Pricing: They are confident rates will go up in January.  If demand kicks up there will be a 8% to 10% rate increase, if demand remains constant increments will be in the 3% range.   If demand diminishes further the economy is in bigger trouble…  The only thing that will help small carriers will be a virtual change in the banks’ philopshies, which I think weill be hard to turn around. Most trucking companies are small companies.

The bidding season is January to June, so it is essentially over, but spot rates have begun to move up over the past couple months, especially in the South-East.  There has been an improvement related to a shortage in capacity.

What about insurance rates? They have locked in their insurance rates through the end of 2010, which was s lightly less than they had been paying.

They consider a big issue is whether or not the Mexican border gets open to allow Mexican truckers to come into the US.  There was a pilot program that allowed Mexican companies to come into the US if they bring a load back into Mexico.  The Obama administration stopped this program, and Mexico increased tariffs on apples in response. The company would like to see the border re-open, as they receive better prices. They believe it will happen, but it has been delayed for some time, and it is now likely a back burner issue.

TRANSPLACE: Non-asset based third-party logistics provider offering manufacturers and retailers logistics technology & transportation management services

What are the issues for the transportation management logistics industry? 1) global recession, 2) globalization, 3) consolidation, 4)technology, 5) process management, 6) green, 7) brokerage proliferation, and 8) legal and regulatory environment. The industry has annual revenues of around US$127bn., most of which come from international transportation management.

Transplace offers a portfolio of products that include everything from total management of the shipping process to technology needs.

Global recession: Demand for freight has plummeted.  The Cass Freight Index is down 15% in July y/y.

Globalization: Globalization an Asian sourcing led to a number of mega-providers.  In the US logistics providers must be able to handle imports and exports and have North American expertise, but do not need to be global to survive or even thrive.

Consolidation: M&A activity is strong, private equity interest in non-asset and asset-light businesses remains strong.

Technology: Customer demand for technology is high and growing.  Many LSPs are not meeting customer technology expectations.

Process Management: Customers expect a high level of process management and process change expertise, and this demand is growing.

Green Logistics: Increased emphasis on carbon footprint calculation and reduction.   Emphasis is on saving money and the environment.

Brokerage Proliferation: Explosion in brokerage as asset based carriers create brokerage/logistics businesses and new brokers spring up everywhere.

Legal & Regulatory: CSA 2010 FMCSA could significantly reduce the supply of smaller safety-approved carriers.

On a personal note, I am not finding this presentation to be terribly informative, but I am starting to believe that a solid logistics position could be a much better play on the transport sector versus an asset-based transport company itself, as more and more companies look to ways to reduce costs and increase productivity.

Lunch Break: What I have found most interesting thus far is the fact that banks are unwilling to seize property on companies who have fallen behind on their payments as banks don’t want to have to liquidate the assets.  This is leading to an excess supply of trucks in the market, putting additional pressure on already punished rates.  Presently, I am of the mindset that the outlook for the sector is pretty negative over the next year or two.  Compared to this point yesterday, I had better feelings toward the railway sector than I do now about trucking.


There has been a paragon shift to asset based carriers that realized brokerage has changed from a place where you would take your overflow fright to a standalone business. In going there they are taking some trucks off the road to subsidize their in-house brokerage.  Some say that JB Hunt could do US$3bn to US$5bn over the next several years.  “This is the most brutal supply environment I have ever seen”.  The little guys are getting beaten up to death.

What happens once demand comes back and capacity is tight what challenges will brokers face? To be a successful broker you have to be sophisticated and know when to raise your rates at the right time, and keep margins around 15%.

“Conditions are the worst I have ever seen”.  “We are shipping some loads at 1990’s rates I would bet”.  “But, BJ’s and Cosco two of our bigger customers have maintained their volumes”.

“We are not seeing any sort of uptake at this moment, and when people talk about it, it is probably based on hope.”

OLD DOMINION FREIGHT LINE, INC. (NASDAQ: ODFL) David S. Congdon, President & CEO & J. Wes Frye, Senior VP & CFO

This is ODLF’s 75th year in business.  ODFL is broken into five business segments with OD domestic being 94.2% of the company’s business.  Headcount has decrease, while the amount of trailers and tractors have increased, and this was intentional.  The company says they have enough capacity to take advantage of any market opportunities that represents itself.  The company is not unionized, which gives them wider flexibility to react to market conditions.

The company sees a lot of growth opportunity in high value areas including expedited freight.  The company has experienced a 10 year earnings CAGR of 20%.  Over the past five years revenue growth and margins have been well above the industry average.  In 2Q09 revenues shrunk 24%, compared to a decline of -32% for the peer group.  During the downturn the company has implemented the following strategies  1) emphasize growing markets, 2) improve service, 3) invest in technology and equipment, 4) maintain pricing discipline, 5)maintain strong financial position, & 56) take care of employees.

For LTL overnight and second day shipments are the biggest areas of growth in the country, but LTL on the whole has been on the decline.  OD has been focusing on their overnight and second day delivery service.  They presently have plans to open 50 additional service centers.

Yield percentage has only come down modestly since 2008, which they believe is a good accomplishment.  Capex expenditures have been heavy due to real estate, IT systems, and equipment.  They feel they are the best positioned LTL carrier to weather to storm and to come out of it with improvements and profitability. OD holds the leading margins in the LTL sector.

Q&A Highlights: Have you benefited from not cutting benefits? The results we are delivering are because the strength of our team. The idea of cutting benefits concerns us, in terms of being a competitive employer.  It delights me to be the m,sot profitable carrier out there that pays the best.

We have lost some customers in bidding to other carriers who are coming in with bids that are below what we would be willing to accept.

What will base capex be going forward? We anticipate that our real estate capex has peaked so that will come down.  US$80 to US$90mn is probably our average maintenance capex.  Capex next year on the equipment side could be as little as 0 , while real estate capex could be half of what we spent this year.  Capex was front laoded this year so we could see some cash flow going forward.

If Yellow (YRC) was to liquidate what would the impact on OD and the industry be? We are carrying excess equipment tractors and trailers to accommodate what our potential share gain might be out of that.  We have also added more real estate this year and more door capacity across the network along with the excess capacity we current have.  Our employees are working in the low 40 hour a week range and we could increase that around 30% for a short period of time before we can hire some new employees or some employees we had to let go.  We are in good shape.  I think the overall supply and demand equation for the industry will go from over supply to under demand, to an equilibrium if ROC goes out.

What happens to YRC is the msot important factor that goes into investing in LTL trucking.  How much will the rest of the industry feel if YRC goes? I think that there percentage of the industry is something around 18% or 19%.  If they went it would definitely ease the pricing situation.   Most contracts can be re-bid on 30-day notices.

Any alternative energy vehicles in the fleet right now? We have not dabbled in any hybrids, our green initiative is to increase fuel economy. They are purchasing the systems through  PeopleNet to  do so.

SAIA, INC. (NASDAQ: SAIA): James A. Darby, VP of Finance & CFO

Saia competes in second day and overnight freight market.  The company has coverage in 34 sates, compared to just 21 states in 2001.  Saia is doing everything they can to save every dollar they can.  The company is non-unionized.

Personal Note, I am surprised that none of these companies have even brought up the potential competition from railroads.  Yesterday, there was a definite theme between the railroad executives of bringing in more business from traditional trucking routes.

This presentation is very broad with a lot of backward looking information, and thus far hasn’t held much value for investors.  The company is looking to build density and not expand into new markets.

Q&A Highlights: Have YRC freight bleeds slowed down? We don’t know, but we have seen customers concerned about who will carry their freight going forward come to us, and this has been pretty steady.

You maintain a lot of self-insurance have you thought about changing that? We have, and we looked at it, and priced it; when we looked at the costs we felt like it was more adventitious for us to stay with the higher retention level.  Thus, we decided not to do it.

Has anyone gone back and modeled when CF went out what the spread looked like across the survivors? Is it a sugar rush or has it already bled off? The distribution on CF went between the remaining major players, the smaller guys got very little; it was a very different scenario back then.  Looking at YRC right now, the distribution would likely be much different than it was then.

VITRAN CORPORATION, INC. (NASDAQ: VTNC): Richard E. Gaetz, President & CEO

VC is unique in that they have a significant infrastructure in both Canada and the United States.  83% of the companies revenues are derived in LTL. 12% in logistics, and 5% in truckload.  The company faced two issues from 2006 to 2008 that included the recession and internal integration.  They anticipate debt to fall in the back half of the year.  In the US the company has a traditional asset model, while in Canada they use an asset light hybrid system.  In Canada they own the fleet and trailers, but are able to use the railways on a lot of their routes, and use owner operated tractors.  When factoring this in the company generates roughly 40% of revenues from an asset light sector.

The company has made nine acquisitions, with the most recent being L.A. Express Inc. in business to expand their footprint.  This gave them access to the Port of Long Beach. Every deal they made was accretive to EBITDA.

They may have a month ahead where activity levels could be higher on a year over year level.  Believes there are reasons to anticipate that things are improving a little bit.  The company expects its current opportunities to lie in LTL failures, improved 4Q09 retail sales, economic recovery in Canada & US, and improving US transport data points (uptick in international air cargo, rail cargo loading posted sequential improvements, & July class 8 truck orders are up sequentially).

Current initiatives include selling real estate (Cleveland planned to close Sep 30 US$800K & offers for St. Cloud in process), reduce legacy LOC’s US42.0 to US$2.5mn, reduce DSO further two days net US$4.0mn, adding new logistic accounts, Canadian LTL business adding new accounts on competitor opportunities, and launch new marketing and branding campaign.

Q&A Highlights: Can your feel good number in logistics continue and where will the margins go to? My view is the market should always prevail, and in this type of model there will be a point you can’t improve the margin.  I don’t know if we can make the margin much better, but they are sustainable and we can continue to find opportunities for our clients.

When will you get rid of the 5% wage reduction? At the end of the month the message will be that we are all working hard, and that the pricing environment remains tenuous.  Once prices come back to where we can make a reasonable profit we will reinvest back into our business.

What has pricing been doing? We think we are seeing fewer re-bids, but it has not improved yet. I dont think it is worsening, but it is still in a bad spot.  The longer we have wounded players operating in the business the hard it will be to move price as quickly as we would like.

Why did the June and July dip in activity occur? I cant answer for June, but July is seasonally slow.

We anticipate our LTL growth to grow more significantly as we come out of this economic malaise, leaving or percent of revenues for the logistics business to be around current levels.  Truckloads will likely remain around 5%

Acquisition focus? That would be on LTL or logistics if  it is accretive to our shareholders and business.

How much market share growth do you expect from your re-branding? I cant give you numbers but what I anticipate is that the model we have put together is attractive to our customer’s and the management team we have im place is a solid team and we expect to make enhancements that way.

Are you looking more toward acquisition or organic growth? I think both we are more likely to organically grow in the northeast and use acquisitions to grow in the southwest.  There have been some informal deal talks, that could eventually turn into something, and we will continue looking.

Any plans to employ Canadian rail assisted shipments in the US? Maybe on a limited basis.

The conference has concluded…


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