Transportation & Logistics

Transportation & Logistics

Anthony P. Gallo, CFA (410) 625-6319 office, (410) 382-7084 mobile

[email protected]

Michael R. Busche (704) 715-6406 office, (910) 987-1363 mobile

[email protected]

Understanding CSA

All estimates/forecasts are as of 12/03/2012 unless otherwise stated.

Please see page 27 for rating definitions, important disclosures and required analyst certifications.

Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

December 2012

mailto:[email protected]

mailto:[email protected]

December 2012 Wells Fargo Securities, LLC2

Agenda

Understanding CSA

The State of the Trucking Industry

Q & A


“Good Intentions, Unclear Outcomes”

FMCSA mission is to reduce crashes, injuries and fatalities involving large trucks and buses Identify unsafe motor carriers for intervention, Identify safety performance within broad areas at carriers, Monitor safety performance on a near-continuous basis

Compliance, Safety, Accountability (CSA) was developed in furtherance of this mission and to focus limited resources on the most problematic carriers

CSA assigns percentile rankings in seven “BASICs” (Behavior Analysis and Safety Improvement Categories) Unsafe Driving, Fatigued Driving, Driver Fitness, Controlled

Substances, Vehicle Maintenance, Cargo-Related and Crash Indicator

On May 16, 2012 FMCSA essentially placed due diligence responsibilities on brokers, shippers and insurers.


Our findings

No meaningful statistical relationship (using simple regression analysis) between unfavorable BASIC scores and actual accident incidence,

A Federal program executed at the State level with unexplainable differences in State enforcement and inspection protocols,

Severity weights that did not appear to accurately capture driving behaviors that lead to accidents,

Disproportionate inspection rate for small carriers,

Potential negative “feedback loop”,

Problematic crash reporting.

Wells Fargo Securities; three studies, most recently across a universe of 4,600 carriers with at least 50 inspections.


What others have found

UMTRI: high correlation between BASIC scores and crash rates

Wells Fargo Securities: no meaningful statistical relationships, only modestly higher accident rates for above threshold carriers, various problems with the program

“University of Maryland, Gimpel study”: highlights problems with selection bias

Transplace, Iyoob: refutes several UMTRI findings

ATRI: strong safety relationship for Unsafe Driving, Fatigued Driving, and Vehicle Maintenance, no positive relationship between Driver Fitness and Controlled Substance,/Alcohol BASIC.

No study has introduced control variables, such as time of day, traffic density or other factors that influence crashes and safety


We think the scope of CSA is limited

Number of Carriers with I nspections and BASIC Scores for Nationwide Carrier Fleet, March 2012

Inspections Carriers # with Scores % with Scores No Scores1 79,713 96 0.1% 79,6172 46,254 84 0.2% 46,1703 32,190 815 2.5% 31,3754 23,651 1,392 5.9% 22,2595 18,254 2,734 15.0% 15,5206 14,488 3,560 24.6% 10,928

7 11,761 3,963 33.7% 7,7988 9,680 4,191 43.3% 5,4899 8,010 4,108 51.3% 3,90210 6,608 3,865 58.5% 2,74311 5,714 3,638 63.7% 2,07612 4,916 3,413 69.4% 1,50313 4,416 3,249 73.6% 1,16714 3,686 2,832 76.8% 85415 3,396 2,695 79.4% 70116 2,939 2,435 82.9% 50417 2,570 2,143 83.4% 427

18 2,426 2,102 86.6% 324

19 2,113 1,868 88.4% 24520+ 43,555 41,991 96.4% 1,564Totals 326,340 91,174 27.9% 235,166Source: FMCSA


Accidents versus BASIC categories

Correl: .019

R2: .000

Source: FMCSA, Wells Fargo Securities, LLC

.0x

10.0x

20.0x

30.0x

40.0x

50.0x

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Acc

ide

nts

per

Mill

ion

Mile

s

Unsafe Driving BASIC

Top 4600 N.A. Trucking Companies

Correl: .031

R2: .001


.0x

10.0x

20.0x

30.0x

40.0x

50.0x

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Acc

ide

nts

per

Mill

ion

Mile

s

Fatigued Driving BASIC



Snapshot of publicly traded trucking company CSA BASICs

Correl: .052

R2: .003



.0x

.2x

.4x

.6x

.8x

1.0x

1.2x

1.4x

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Fatiqued Driving BASIC

Acc

iden

ts p

er M

illoi

on

Mile

s

ABFS

CNW

ODFL

HTLD

J BHTHUBG

WERN

LSTR

SWFT

CNW KNX

KNX

LSTR

R

FDX

UP S


Snapshot of publicly traded trucking company CSA BASICs

Correl: .148

R2: .022



.2x

.4x

.6x

.8x

1.0x

1.2x

1.4x

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Unsafe Driving BASI C

Acc

iden

ts p

er M

illio

n M

iles

ABFS

CNW

ODFL

HTLD

J BHT HUBG

WERN

LSTR

SWFTCNW

KNX

KNX

LSTR

R

FDX

UP S


A simple regression analysis showed very low correlations

CSA Correlation ComparisonAccidents per Million

Miles

Accidents per 100 Power Units

I nspection per Power

Unit

Unsafe Driver BASIC Correlation 0.019 0.116 0.301

Unsafe Driver BASIC R2 0.000 0.013 0.091

Fatigued Driver BASIC Correlation 0.031 0.122 0.290

Fatigued Driver BASIC R2 0.001 0.015 0.084

Unsafe Driver BASIC Correlation 0.024 0.104 0.258




Unsafe Driver BASIC Correlation 0.062 -0.007 0.221




Note: Values are statistical median


To

tal

450

0

Ca

rrie

rsA

bove

Th

resh

old

Be

low

Th

resh

old


Above Threshold carriers in certain BASICs did have higher accident rates

CSA Summary Statistics

Accidents per Million

MilesStandard Deviation

Accidents per 100 Power Units

Standard Deviation

Unsafe Driver BASIC Total .98x 1.21x 7.26x 5.77xUnsafe Driver BASIC Above Threshold 1.00x 1.24x 7.89x 6.87xUnsafe Driver BASIC Below Threshold .97x 1.21x 7.14x 5.44x

Fatigued Driver BASIC Total .98x 1.21x 7.26x 5.77xFatigued Driver BASIC Above Threshold 1.16x 1.25x 9.84x 6.08xFatigued Driver BASIC Below Threshold .87x 1.18x 6.00x 5.05x

Driver Fitness BASIC Total .98x 1.21x 7.26x 5.77xDriver Fitness BASIC Above Threshold .98x 1.22x 7.14x 5.91xDriver Fitness BASIC Below Threshold .98x 1.20x 7.53x 5.19x

Vehicle Maint BASIC Total .98x 1.21x 7.26x 5.77xVehicle Maint BASIC Above Threshold 1.21x 1.61x 8.89x 6.66xVehicle Maint BASIC Below Threshold .89x .93x 6.59x 5.04x

Note: Values are statistical median



Inconsistent enforcement among states and jurisdictions

Source: Viggilo, LLC; Wells Fargo Securities, LLC Source: Viggilo, LLC; Wells Fargo Securities, LLC

Source: Viggilo, LLC; Wells Fargo Securities, LLC Source: Viggilo, LLC; Wells Fargo Securities, LLC

Speeding (1-5 miles per hour)

Remaining States, 64.5%

I ndiana, 35.5%

False Logbook

RemainingStates, 59.1% Oregon,

16.7%

Arizona, 24.1%

Percent of National Violations: UNSAFE DRIVING BASIC: 1 Point Percent of National Violations: FATIGUED DRIVING BASIC: 7 Points

Failure to Wear Seat Belt

Remaining Sates, 84.20%

Arizona, Texas,& California

8.19%

Maine, 7.60%

Percent of National Violations: UNSAFE DRIVING BASIC: 7 Points Percent of National Violations: FATIGUED DRIVING BASIC: 7 Points

Requiring or Permitting Driver to Drive more than 11 Hours

Remaining States, 70.3%

Arizona, Georgia,

& Missouri, 29.7%

Source: Vigillo, LLC and Wells Fargo Securities, LLC





Fatigued Driving severity weights and violation description

Section

Violation Description Shown on Driver/Vehicle Examination Report Given to CMV Driver after Roadside Inspection Violation Group Description

Violation Severity

Weight[2]

Violation in the DSMS

(Y/N)392.2H State/Local Hours of Service (HOS) Hours 7 Y392.3 Operating a CMV while ill/fatigued Jumping OOS/Driving Fatigued 10 Y395.1(h)(1) 15, 20, 70/80 HOS violations (Alaska-Property) Hours 7 Y395.1(h)(2) 15, 20, 70/80 HOS violations (Alaska-Passenger) Hours 7 Y395.1(h)(3) Adverse driving conditions violations (Alaska) Hours 7 Y395.1(o) 16 hour rule violation (Property) Hours 7 Y

395.3(a)(1)Requiring or permitting driver to drive more than 11 hours Hours 7 Y

395.3A1R 11 hour rule violation (Property) Hours 7 Y

395.3(a)(2)Requiring or permitting driver to drive after 14 hours on duty Hours 7 Y

395.3A2R 14 hour rule violation (Property) Hours 7 Y395.3(b) 60/70- hour rule violation Hours 7 Y395.3BR 60/70 hour rule violation (Property) Hours 7 Y395.3(c) 34- hour restart violation (Property) Hours 7 Y395.5(a)(1) 10- hour rule violation (Passenger) Hours 7 Y395.5(a)(2) 15- hour rule violation (Passenger) Hours 7 Y395.5(b) 60/70- hour rule violation (Passenger) Hours 7 Y395.8 Log violation (general/form and manner) Other Log/Form & Manner 2 Y395.8(a) No drivers record of duty status Incomplete/Wrong Log 5 Y395.8(e) False report of drivers record of duty status False Log 7 Y395.8(f)(1) Drivers record of duty status not current Incomplete/Wrong Log 5 Y395.8(k)(2) Driver failing to retain previous 7 days’ logs Incomplete/Wrong Log 5 Y395.13(d) Driving after being declared out-of-service Jumping OOS/Driving Fatigued 10 Y

395.15(b)Onboard recording device information requirements not met EOBR Related 1 Y

395.15(c) Onboard recording device improper form and manner EOBR Related 1 Y

395.15(f)Onboard recording device failure and driver failure to reconstruct duty status EOBR Related 1 Y

395.15(g) On-board recording device information not available EOBR Related 1 Y

395.15(i)(5)Onboard recording device does not display required information. EOBR Related 1 N

398.6Violation of hours of service regulations—migrant workers Hours 7 Y

Source: FMCSA


The strongest relationship we observed was inspections to scores

Correl: .290

R2: .084


.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Insp

ect

ion

per

Pow

er

Un

it

Fatigued Driving BASIC



Small carriers appear to have disproportionate inspection rates


Carrier Comparison by Fleet Size

178 216

413

1,047

1,368 1,379

0

200

400

600

800

1,000

1,200

1,400

1,600

Above 1000 500 to 999 250 to 499 100 to 249 50 to 99 25 to 49

Number of Trucks in Fleet

Nu

mb

er

of

Ca

rrie

rs

Fleet Size Comparison Median

% of totalNumber of

CarriersNumber of

P ower UnitsInspection per mm

milesInspection per

P ower Unit

178 Above 1000 1.57x .96x

216 500 to 999 1.69x 1.15x

413 250 to 499 1.96x 1.28x

1,047 100 to 249 2.07x 1.45x

1,368 50 to 99 2.23x 1.62x

1,379 25 to 49 2.56x 2.00x

Total: 4,601 Median: 2.19x 1.59x

Source: FMCSA and Wells Fargo Securities, LLC

18

%8

2%


Industry wide inspection statistics

Average: 3.05x


Top 4600 Carriers Inspections per Million Miles

.0x

10.0x

20.0x

30.0x

40.0x

50.0x

Average: 1.85x


Top 4600 Carriers Inspections per 100 Power Units

.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

December 2012 Wells Fargo Securities, LLC

Potential negative feedback loop

17


Lack of “responsibility” assigned to accidents is problematic in our view

Data for Calander year 2011 Crashes with Driver-Related Factors Recorded

For Large Truck For Passenger Vehicle

Crash TypeFatal

Crashes Number Percent Number PercentLarge Truck Rear-Ending Passenger Vehicle 73 36 49.3% 33 45.2%Passenger Vehicle Rear-Ending Large Truck 290 49 16.9% 224 77.2%Large Truck Crossing Center Median (Head-On) 50 29 58.0% 23 46.0%Passenger Vehicle Crossing Center Median (Head-On) 288 18 6.3% 276 95.8%Large Truck Striking Passenger Vehicle (Other) 504 123 24.4% 403 80.0%Passenger Vehicle Striking Large Truck (Other) 419 99 23.6% 345 82.3%Other Collision 85 22 25.9% 72 84.7%Total 1,709 376 22.0% 1,376 80.5%

Source: National Highway Traffic Safety Administration, Fatality Analysis Reporting System (FARS)


FMCSA commentary demonstrates program limitations


Might shippers, brokers and insurers be confused?

FMCSA properly uses BASICs for safety interventions and prioritization, but makes BASIC scores available to the public, All motor carriers are lumped together despite vast differences in

operations (LTL, long-haul TL, dedicated fleets, parcel, etc.)

FMCSA explains that “BASIC assessments are not safety ratings” …but “believes [BASICs] provide users…informed, current and

comprehensive picture of a motor carrier’s safety and compliance…”

Only 19% of active carriers have at least one BASIC score

Nearly 58% of active carriers have insufficient data to have a BASIC score

54% of carriers with a BASIC score have had fewer than 20 inspections

Nearly 57% of crashes are from carriers with NO scores above threshold


Agenda

Understanding CSA


Q & A


A very fragmented industry

United States Truckload Industry 2011E $239 Billion

Source: Wells Fargo Securities, LLC estimates

Remaining TL Market, 90%

Top 25 Share, 10%


Driver turnover remains an industry headwind

Source: ATA, Wells Fargo Securities, LLC

Truckload Annualized Driver Turnover Rates

0%

20%

40%

60%

80%

100%

120%

Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212

Pe

rce

nta

ge

%

Large TL Small TL


Industry fleet age is at all time highs…

Source: ACT Research Co. and Wells Fargo Securities, LLC

Average Fleet Age: U.S. Class 8 Active Population

5.3

5.5

5.7

6.1

6.36.3

6.36.4

6.4

6.16.0

6.1

6.3 6.3

6.0

5.6

5.4 5.45.5 5.5

5.3 5.3

5.6

5.8

5.95.9

5.85.7

6.0

6.2

6.5

6.7 6.7

6.6

6.4

6.16.0

6.1

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

7.00

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013E 2015E

Ag

e i

n Y

ea

rs


Maintainence expense accelerates after ~5 years

Source: ACT Research and Wells Fargo Securities, LLC

$0.00 $0.02 $0.04 $0.06 $0.08 $0.10 $0.12 $0.14 $0.16

<=175K

250K

350K

500K

>550K

Cost per mile

Eq

uip

me

nt

Mile

age

Class 8 Tractor Maintenance Expense

Estimated Mileage of 5.5+ year old equipment


Equipment prices have grown consistently over the past 5 years

Source: ATA and Wells Fargo Securities, LLC

$45$75

$105

$50

$50$20

$0

$25

$50

$75

$100

$125

$150

2006 2011 2011

Eq

uip

me

nt

Co

st in

00

0's

Equipment Finance Differential

Financing Tractor Trade

New Tractor $95K

New Tractor $125K

7-yr old tractor trade $20K


Agenda

Understanding CSA


Q & A


Disclosures

Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/ -20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: 11/30/2012

49% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform.

Wells Fargo Securities, LLC has provided investment banking services for 44% of its Equity Research Outperform-rated companies.

49% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform.

Wells Fargo Securities, LLC has provided investment banking services for 35% of its Equity Research Market Perform-rated companies.

2% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform.

Wells Fargo Securities, LLC has provided investment banking services for 21% of its Equity Research Underperform-rated companies.


DisclosuresImportant Information for Non-U.S. Recipients

EEA – The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited (“WFSIL”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Services Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.

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The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moody’s Investors Services Inc, Standard & Poor’s Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies’ websites.

About Wells Fargo Securities, LLC Wells Fargo Securities, LLC is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp.

This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC, to be reliable, but Wells Fargo Securities, LLC, does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC, at this time, and are subject to change without notice. For the purposes of the U.K. Financial Services Authority's rules, this report constitutes impartial investment research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright © 2012 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

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