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Industrial Research March 20, 2014
Global Freight Flows on the Mend
Benjamin J. Hartford
414.765.3752
Kenton Moorhead
414.298.1864
Jack Smith
414.298.5277
Please refer to Appendix –
Important Disclosures and Analyst Certification
If you would like to be added to our monthly research distribution list, which we make freely available,
please email me at [email protected]
2 2
Global Freight Flows On The Mend Focal points for 2014:
• We expect US and global growth to reaccelerate.
• US Industrial Production -- History suggests ~20% more upside this cycle.
• The US consumer is crucial to carrying the recovery. Demand remains soft, but
some early signs of engagement are emerging.
• Bottom line: Federal Reserve actions have proven successful so far -- but the
private sector must now carry the baton.
3 3
A Look Back At This Cycle
Source: FactSet, Federal Reserve
78
82
86
90
94
98
102
106
600
800
1,000
1,200
1,400
1,600
1,800
2,00020
07
2008
2009
2010
2011
2012
2013
2014
Ind
ust
rial
Pro
du
ctio
n
S&
P 5
00
S&P 500 (L) Industrial Production (R)
Peak: October 2007
Trough: March 2009
Current: +20% from Prior Peak
Current: +175% from Trough
4 4
S&P 500 Returns From March 2009 Lows Fueled By The Fed
Source: FactSet, DoubleLine Funds
700
900
1100
1300
1500
1700
1900
2100
Mar
-09
Jul-0
9
Nov
-09
Mar
-10
Jul-1
0
Nov
-10
Mar
-11
Jul-1
1
Nov
-11
Mar
-12
Jul-1
2
Nov
-12
Mar
-13
Jul-1
3
Nov
-13
S&
P 5
00
No Policy QE1 Expansion QE2 Operation Twist Op Twist Extension and QE3 QE4 "Tapering"
+47%
+2% -12%
+10%+16%
+5%
+28%+3%
5 5
S&P 500 Returns From March 2009 Lows Fueled By The Fed
Source: FactSet, Federal Reserve
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
S&
P 5
00
Fed
eral
Res
erve
Ass
et B
ase
($, b
ln)
Federal Reserve Asset Base (L) S&P 500 (R)
6 6
0
20
40
60
80
100
120
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Ind
ust
rial
Pro
du
ctio
n
NBER-Defined Cycles Industrial Production, SA
US Industrial Production Has Returned To Pre-Recessionary Levels…
Source: Federal Reserve, NBER
7 7
80
86
92
98
104
110
1,500
1,700
1,900
2,100
2,300
2,50020
07
2008
2009
2010
2011
2012
2013
2014
IP, S
A
Car
load
s (1
3-w
eek
trai
ling
, 000
s)
Industrial and Chemical Carloads (trailing 13-week) (L) Industrial Production, SA (R)
…While Industrial Rail Carloads Are Nearing Prior Peak
Source: AAR, Federal Reserve
2013 Carloads 2%
Below Peak
8 8
Market Multiples Remain Reasonable
Source: Bloomberg
5x
10x
15x
20x
25x
30x
35x
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
S&P 500 NTM P/E Average: 16.3x
9 9
Peak TroughPeak-to-Peak
Duration (months)
Peak-to-Peak
Growth
February-45 October-45 45 -10%
November-48 October-49 56 36%
July-53 May-54 49 11%
August-57 April-58 32 8%
April-60 February-61 116 65%
December-69 November-70 47 18%
November-73 March-75 74 12%
January-80 July-80 18 -1%
July-81 November-82 108 21%
July-90 March-91 128 45%
March-01 November-01 81 11%
69 20%
December-07 June-09 73 0%
Average
And Historical Cycles Suggest 20% More Growth
Source: Federal Reserve, NBER
Note: Past performance is no guarantee of future results.
10 10
This Recovery Doesn’t Appear To Be Over
80
90
100
110
120
130
140
150
Pea
k
Yea
r 2
Yea
r 3
Yea
r 4
Yea
r 5
Yea
r 6
Yea
r 7
Yea
r 8
Yea
r 9
Yea
r 10
Yea
r 11
Pea
k-to
-Pea
k In
du
stri
al P
rod
uct
ion
Ind
ex
Jul-81 Jul-90 Mar-01 Dec-07
Source: Federal Reserve, NBER
11 11
65%
70%
75%
80%
85%
90%
Pea
k
Yea
r 2
Yea
r 3
Yea
r 4
Yea
r 5
Yea
r 6
Yea
r 7
Yea
r 8
Yea
r 9
Yea
r 10
Yea
r 11
Cap
acit
y U
tiliz
atio
n
Average of Previous 4 Cycles Since WWII Jul-90 Mar-01 Dec-07
Headwinds Remain: 1) Capacity Utilization Levels Remain Weak
Source: Federal Reserve, NBER
12 12
Headwinds Remain: 2) Commercial Lending Growth Is Slowing
Source: Federal Reserve
-15%
-10%
-5%
0%
5%
10%
15%
$0
$2
$4
$6
$8
$10
$12
$1420
03
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Co
mm
erci
al L
end
ing
Gro
wth
, yo
y
Co
mb
ined
Fed
Ass
ets/
Co
mm
erci
al L
end
ing
($ in
tri
llio
ns)
US Federal Reserve Asset BaseUS Banks' Commercial LendingCommercial Lending Growth (yoy)
13 13
But Headwinds Remain: 3) As Is Net Private Capital Stock Investment Growth
Source: BEA, Baird estimates
* Net Private Capital Analysis= Current-Cost Net Private Fixed Assets
0%
2%
4%
6%
8%
10%
12%
14%
16%
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Net Private Capital Stock (Current-Cost, rolling 5-year CAGR)
14 14
Headwinds Remain: 4) Business Spending Remains Well Below Prior Peaks
Source: BEA
10%
11%
12%
13%
14%
15%
16%19
67
1972
1977
1982
1987
1992
1997
2002
2007
2012
Per
cen
tag
e o
f No
min
al G
DP
Business Spending % of Nominal GDP
3% of GDP =
~$500 bln
15 15
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Ro
llin
g 5
-Yea
r C
AG
R
US Labor Productivity (Output/Hour) US Labor Force "Potential" US GDP
But Headwinds Remain: 5) And Slowing US Productivity & Employment Growth Limit “Potential” US GDP Growth
Source: BLS, CBO
16 16
0%
2%
4%
6%
8%
10%
12%
14%
16%
1.0
1.5
2.0
2.5
3.0
3.5
4.019
62
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
US
10-
Yea
r Tr
easu
ry
Vel
oci
ty o
f Mo
ney
Velocity of Money (L) US 10-year Treasury (R)
So Continue To Expect An Accommodative Fed
Source: Federal Reserve, FactSet
17 17
Watch The 10-Year
Source: FactSet
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
US 10-Year Treasury
18 18
-15%
-10%
-5%
0%
5%
10%
15%
0.60
0.80
1.00
1.20
1.40
1.60
1.8020
07
2008
2009
2010
2011
2012
2013
2014
IP G
row
th,
YO
Y
New
Ord
ers
-to
-In
ven
tori
es
New Orders/Inventories (3-mo. avg.) (L)
Industrial Production, SA (R)
But, Recent Industrial Order Data Suggest A Strengthening Recovery
Source: Institute for Supply Management, Federal Reserve
19 19
But, Recent Industrial Order Data Suggest A Strengthening Recovery
Source: Institute for Supply Management, Federal Reserve
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
<1.0 1.0-1.05 1.05-1.10 1.10-1.15 1.15-1.20 1.20-1.25 1.25-1.30 1.30-1.35 1.35-1.40 >1.40
Su
bse
qu
ent Y
ear I
nd
ust
rial
Pro
du
ctio
n G
row
th
New Orders to Inventories 3-mo. Average to End Year
Average Subsequent
IP Growth: +5.2%
2013 New Orders to
Inventories Ratio to
End Year: 1.26
20 20
Growth Expected To Reaccelerate In 2014
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%20
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
2015
E
Gro
wth
, YO
Y
Real GDP Industrial Production, SA
Source: Federal Reserve, BEA
21 21
Global Data Suggests Similarly Strengthening Demand, Though China Has Softened
Source: Institute for Supply Management, Markit, HSBC
30
35
40
45
50
55
60
65
2007
2008
2009
2010
2011
2012
2013
2014
PM
I
United States Eurozone China Global Composite PMI (L)
22 22
While Rising Yields In Developed Nations Suggest Signs Of Reflation Expectations
0%
1%
2%
3%
4%
5%
6%
7%
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
10-Y
ear
Trea
sury
Yie
lds
US UK Germany
China Australia Japan
Source: Bloomberg
23 23
But Stabilizing Global Growth Puts A Floor Beneath AF Volume Growth
Source: Institute for Supply Management, Markit, JPM, HSBC, IATA
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
30
35
40
45
50
55
60
65
70
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
IATA
To
tal A
irfr
eig
ht
Glo
bal
PM
I
Global Composite PMI (L) Global JPM PMI (L) IATA Total Airfreight (R)
24 24
Accelerating US Industrial Production Should Support Accelerating Industrial Freight Growth (Logically…)
Source: AAR, Federal Reserve
-15%
-10%
-5%
0%
5%
10%
15%
-30%
-20%
-10%
0%
10%
20%
30%20
07
2008
2009
2010
2011
2012
2013
2014
IP G
row
th,
YO
Y
Ind
ust
rial
/Ch
emic
al R
ail C
arlo
ad G
row
th, Y
OY
Industrial and Chemical (trailing 13-week) (L) Industrial Production, SA (R)
25 25
The Recovery Is Still Tenuous
Source: AAR, Institute for Supply Management
44
46
48
50
52
54
56
58
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%20
12
2Q12
3Q12
4Q12
2013
2Q13
3Q13
4Q13
2014
US
ISM
PM
I
Car
load
Gro
wth
, YO
Y
Industrial and Chemical Carloads (trailing 13-week) (L) US ISM PMI (R)
26 26
Auto & Housing’s Recovery Have Had Leadership This Cycle…
Source: US Census Bureau, Ward’s Auto
6
8
10
12
14
16
18
20
22
24
26
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,40019
86
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
US
Lig
ht V
ehic
le P
rod
uct
ion
(mln
)
Ho
usi
ng
Sta
rts
(000
)
US Annualized Housing Starts (L) US Light Vehicle Production, SAAR (R)
27 27
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Spending on Autos, Housing as a % of GDP
Source: BEA, Ward’s Auto, Baird estimates
…And Their Contribution To US GDP Remains Below Trend…
Current:
5.6%
Average:
8.1%
28 28
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%D
ec-0
7
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Gro
wth
, YO
Y (
3-m
o. A
vg.)
US Annualized Housing Starts US Light Vehicle Production, SAAR
Source: US Census Bureau, Ward’s Auto
…But Growth Is Slowing
29 29
-4%
-2%
0%
2%
4%
6%20
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
2015
E
Gro
wth
, YO
Y
Real GDP Real Personal Consumption Expenditures
What Drives The Next Leg Of Expansion? The Recovery Needs Engagement From The Consumer
Source: BEA
30 30
Consumption Still Drives US GDP Growth
Source: BEA
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Rea
l PC
E a
s a
% o
f Rea
l GD
P
Personal Consumption Expenditures as a % of GDP Average: 65%
31 31
The Housing/Equity Market Recovery Should Support Improved Consumer Demand
Source: Federal Reserve, BEA
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1985
1989
1993
1997
2001
2005
2009
2013
PC
E G
row
th, Y
OY
Ho
use
ho
ld N
et W
ort
h G
row
th, Y
OY
Household Net Worth (L) Personal Consumption Expenditures (R)
32 32
Some Indication Of An Improving Consumer
Source: Federal Reserve, Thomson Reuters/University of Michigan
50
55
60
65
70
75
80
85
90
95
100
105
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,00020
01
2003
2005
2007
2009
2011
2013
Co
nsu
mer
Sen
tim
ent
Ho
me
Eq
uit
y -
Mo
rtg
age
Deb
t ($,
bln
)
Home Equity - Mortgage Debt (L) University of Michigan: Consumer Sentiment (R)
33 33
Some Indication Of An Improving Consumer
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%Ja
n-08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Ho
url
y E
arn
ing
s G
row
th,
YO
Y
Average Hourly Earnings
Source: BLS
34 34
-8%
-4%
0%
4%
8%
12%
% R
emo
ved
fro
m P
re-R
eces
sio
n P
eak
Em
plo
ymen
t
Jan '08 Avg. of Last 2 Recessions Avg. of 7 Recess. Prior to Last 2 Avg. of Last 9 Recessions
US Unemployment At/Near Prior Peak Levels
Source: BLS
35 35
A Restock, Or Weaker-Than-Expected Demand?
Source: US Census Bureau, FactSet
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1.2x
1.3x
1.4x
1.5x
1.6x
1.7x
1.8x
1.9x
1992 1995 1998 2001 2004 2007 2010 2013
US
10-
Yea
r Tr
easu
ry Y
ield
Ret
ail I
nve
nto
ry/S
ales
Rat
io
Retail Inventory/Sales (6-mo. avg) US 10-Year Treasury Yield
36 36
Consumer Spending Matters…To Intermodal Volume Growth
-24%
-16%
-8%
0%
8%
16%
24%
32%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2007
2008
2009
2010
2011
2012
2013
2014
NA
To
tal I
nte
rmo
dal
Lo
ad G
row
th, Y
OY
PC
E G
row
th, Y
OY
Personal Consumption Expenditures (L) Intermodal (trailing 13-week) (R)
Source: BEA, AAR
37 37
-24%
-16%
-8%
0%
8%
16%
24%
32%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2007
2008
2009
2010
2011
2012
2013
2014
Tru
cklo
ad V
olu
me
Gro
wth
, YO
Y
PC
E G
row
th, Y
OY
Personal Consumption Expenditures (L) Truckload Volume (R)
Source: BEA, Company data
Consumer Spending Matters…To Truckload Volume Growth
38 38
-30%
-20%
-10%
0%
10%
20%
30%
40%
-6%
-4%
-2%
0%
2%
4%
6%
8%20
07
2008
2009
2010
2011
2012
2013
2014
IATA
To
tal A
F G
row
th,
YO
Y
PC
E G
row
th, Y
OY
Personal Consumption Expenditures (L) IATA Total AF (R)
Source: BEA, IATA
Consumer Spending Matters…To Airfreight Volume Growth
39 39
We’re All Tired Of Talking About The Weather …But it will remain a topic among transports well into 2Q14. Some early 2014
themes that build off of the severe winter weather:
1) Asset-based transports across modes (Integrators, Rails, LTLs, TLs) have
acknowledged both elevated operating expenses and negative network
utilization due to this year's severe winter weather.
2) 2014 core pricing growth ahead of expectations given 1Q capacity shortages.
3) Below-seasonal retail demand in January presents a potential above-seasonal
tailwind in March and into 2Q14.
40 40
US 10-Year Yield Closely Tracking US & Global PMI Readings
Source: FactSet, Institute for Supply Management, Markit
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
42
44
46
48
50
52
54
56
58
60
F-1
2
M-1
2
A-1
2
M-1
2
J-12
J-12
A-1
2
S-1
2
O-1
2
N-1
2
D-1
2
J-13
F-1
3
M-1
3
A-1
3
M-1
3
J-13
J-13
A-1
3
S-1
3
O-1
3
N-1
3
D-1
3
J-14
F-1
4
M-1
4
US
10-
Yea
r Tr
easu
ry
PM
I
US PMI Eurozone PMI China PMI Global PMI US 10-Year Treasury (R)
41 41
Asian Airfreight Trends Softening In 2014 Into Weaker China Data
Source: PACTL, HSBC, Baird estimates
47
48
49
50
51
52
53
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
HS
BC
Ch
ina
PM
I
Sh
ang
hai
AF
In
dex
vs.
Sea
son
alit
y
2013/2014 Shanghai (PACTL) AF Versus Normal Seasonality
HSBC China PMI
42 42
Recent Softening in US ISM PMI Consistent With Industrial Carloads
Source: Institute for Supply Management, AAR
(5.0)
(2.5)
0.0
2.5
5.0
7.5
48
50
52
54
56
58
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
Ind
ust
rial
Car
lao
ds
vs. S
easo
nal
ity
US
ISM
PM
I
ISM PMI 2012-Present Industrial Carloads vs. Normal Seasonality
43 43
Industrial Rail Carloads Below Seasonal To Begin 2014
Source: AAR
75
80
85
90
95
100
105
110
4Q 1Q 2Q
Ind
ust
rial
Car
load
Ind
ex
(Sep
t.-N
ov.
Ave
rag
e =
100)
2014 Average
44 44
Stable Intermodal Volumes YTD Despite Hampered Rail Service
Source: AAR
75
80
85
90
95
100
105
110
4Q 1Q 2Q
Inte
rmo
dal
Car
load
In
dex
(Sep
t.-N
ov.
Ave
rag
e =
100)
2014 Average
45 45
A Cold Winter Could Drive Cabin-Fever-Induced Retail Strength In 2Q14
Source: National Climatic Data Center, Federal Reserve
99
100
101
102
103
104
December January February March April May June
Ret
ail S
ales
Ind
ex (D
ecem
ber
= 1
00)
Severe Winter Average Mild Winter Average Normal Winter Average 2014
46 46
Weather Has Driven Above-Seasonal Spot Demand Trends YTD
Source: Industry data, Baird estimates
20
40
60
80
100
120
140
2013
Wk
5
Wk
9
Wk
13
Wk
17
Wk
21
Wk
25
Wk
29
Wk
33
Wk
37
Wk
41
Wk
45
Wk
49
2014
Wk
5
Wk
9
Wk1
3
Sp
ot T
ruck
Dem
and
(W
eek
13=1
00)
2013-2014 Average
47 47
Three Emerging Concepts This Cycle… 1) Pricing power is shifting to the capacity providers given changes to capacity
management behavior
2) Transport models are converging
3) Supply chains and freight flows are changing
48 48 Source: ATA, ACT Research, Baird estimates
Carriers Now Managing Capacity To The Trough, Not The Peak
1.4
1.5
1.6
1.7
1.8
1.9
2
2.1
2.2
2.3
2.4
45
54
63
72
81
90
99
108
117
126
135
1987 1991 1995 1999 2003 2007 2011
Tota
l Cla
ss 8
Tru
ck F
leet
(u
nit
s, in
mill
ion
s)
ATA
Tru
ck T
on
nag
e In
dex
ATA Truck Tonnage Index (adjusted) Total Class 8 Truck Fleet
49 49 Source: ACT Research, Company data, Baird estimates
*Large Public Carrier Fleet includes: CGI, CVTI, HTLD, JBHT, KNX, MS Carriers, SWFT, USAK, WERN
Truckload Capacity Trends Have Inflected This Cycle
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
1987 1991 1995 1999 2003 2007 2011
Fle
et S
ize
(un
its,
in m
illio
ns)
Truck Fleet (15-yr useful life)
Addressable For-Hire Truck Fleet (6.25-yr useful life)
50 50 Source: ACT Research, Company data, Baird estimates
*Large Public Carrier Fleet includes: CGI, CVTI, HTLD, JBHT, KNX, MS Carriers, SWFT, USAK, WERN
Truckload Capacity Trends Have Inflected This Cycle
-10%
-5%
0%
5%
10%
15%
20%
25%
1995 1998 2001 2004 2007 2010 2013
Gro
wth
(yo
y)
Addressable For-Hire Truck Fleet (6.25-yr useful life)
Large Public Carrier Fleet
51 51 Source: US Bureau of Economic Analysis, ACT Research, Company data, Baird estimates
Truckload Capacity and Productivity Trends Relative To The Broader US Economy
-8%
-4%
0%
4%
8%
12%
16%
1987 1991 1995 1999 2003 2007 2011
Gro
wth
(yo
y)
Truck Fleet (15-yr useful life)
Addressable For-Hire Truck Fleet (6.25-yr useful life)
Net Private Capital Stock
52 52 Source: US Bureau of Labor Statistics, ACT Research, Company data, Baird estimates
Truckload Capacity and Productivity Trends Relative To The Broader US Economy
50
60
70
80
90
100
110
120
130
140
150
160
1996 1998 2000 2002 2004 2006 2008 2010 2012
Ind
exed
(199
6 =
100)
US Labor Productivity: Output/Hour
Truck Productivity: Miles/Truck
Truck Productivity: Loaded Mile/Cost (ex-fuel)
53 53 Source: ATA, ACT Research, Baird estimates
Pricing Growth Has Slowed This Cycle; 2014 Presenting An Inflection
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2003 2005 2007 2009 2011 2013
Pri
cin
g G
row
th (
yoy)
LTL Pricing IM Pricing TL Pricing Railroad Pricing
54 54 Source: Armstrong & Associates, Company data, Baird estimates
Changing Dynamics Pressuring Freight Brokers’ Gross Margins
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
$10
$15
$20
$25
$30
$35
$40
$45
$50
$55
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
E
CH
RW
Tra
nsp
ort
atio
n G
ross
Mar
gin
Do
mes
tic
Tran
spo
rtat
ion
Man
agem
ent
Sp
end
(in
bill
ion
s)
Domestic Transportat ion Management Spend
CHRW Transportation Gross Margin
55 55 Source: Company data, Baird estimates
Continuum of Domestic Freight Capacity Needs And The “Pyramid of Pressure” This Cycle
$10 bln
$1 bln
$100 mln
$10 mln
$1 mln
$0.1 mln
Dynamics this cycle
Bro
ker/
carr
ier
Tra
nsp
ort
atio
n S
pen
d
(lo
gar
ith
mic
ally
pro
po
rtio
nal
)
*Pressures to shippers operating private
fleets (rising equipment costs, capital
scarcity , driver regulations) leading to
elevated inquiries about outsourcing
management to dedicated fleet operators
*Core carrier concept among shippers
highlights credible concerns about access
to reliable capacity
*Carriers with scale strategically
positioned to protect margins and expand
serv ice offering
*Small carriers/indiv idual owner-operators
facing numerous headwinds, limiting
*Pressures to small
carriers/owner-operators (~80%
of TL market) limit available
capacity base
*Coupled with slower end-market
growth and increasing
competition, expect gross margin
pressure for brokers lacking
*Constraints to capacity base
similarly pressures gross
margins
*But, brokers filling need
(exception/emergency freight) or
niche (specialized equipment) in
position to deliver value,
particularly among small/medium-
Dedicated Irregular Route/For-Hire Scheduled Exception
Exception
"Asset-based" "Non-asset based"
Dedicated Irregular Route/For-Hire Scheduled
LSTR
CHRW
RRTSHUBG
ECHO
JBHT SWFTWERN
KNXHTLD
R
56 56
Global Freight Flows On The Mend 2014 headed toward more "normalized" growth, both in the US and globally.
Positive sources of growth:
• Structural gains from energy (both crude and petrochemical), domestic intermodal
• Changing sourcing patterns (i.e., B2C) an opportunity for some
• Agricultural volumes should recover following 2012's drought
• Reindustrialization of US/North America should support continued growth in US Industrial
Production this cycle
• The US consumer is healing; and US business investment has yet to fully engage this
cycle
• Rising consumption in emerging global markets (Asia, South America, Eastern Europe,
Africa)
Risks and headwinds to growth:
• Regulatory changes
• Structural declines in certain industries (coal, paper)
• Freight growth impediments from digitalization
• Geopolitical risks and macro shocks
57 57
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