Los Angeles Transportation Club David R. Parker, Chairman & CEO - - PowerPoint PPT Presentation

Los Angeles Transportation Club

David R. Parker, Chairman & CEO Covenant Transportation Group

DISCLOSURE STATEMENT

This presentation and discussion includes forward-looking statements within the meaning of the Private Securities Litigation reform Act of 1995. Words such as “expects,” “anticipates,” “intends,” “estimates,” or similar expressions are intended to identify these forward-looking statements. These statements are based on Covenant Transportation Group’s current plans and are not guarantees of future performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results and the company’s plans and objectives to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties are discussed further in Covenant Transportation Group’s reports and filings with the Securities and Exchange Commission.

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Topics

• Company Summary
• U.S. Economy
• Consumers
• Industrial
• Truckload Industry Trends
• Supply/Demand
• Capacity
• Fuel
• Equipment
• Pricing
• Summary
• Questions

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• Group of companies focused on targeted markets offering just-in-time

and other premium transportation and logistics services including team expedited long-haul, refrigerated, regional, event, brokerage, factoring, tractor/trailer sales, and equipment leasing services

• Group operates about 2,775 tractors and 6,800 trailers
• Young average tractor age (5/31/13): 2.1 years (or 25.3 mos)
• Utilize 8 full size terminals and 21 drop yards
• Focused on providing exceptional service to our customers
• Fiscal 2012 Revenue, including FSC: $674 Million
• Headquarters: Chattanooga, TN
• NASDAQ GS: CVTI

Company Summary

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Who/What is CTG

CTG is a holding company:

• 3 Specialized Asset-Based Trucking Companies
• Expedited (Covenant Transport - Chattanooga)
• Regional (Star Transportation – Nashville)
• Refrigerated (SRT - Texarkana)
• 1 Non-Asset Based Brokerage
• Covenant Transport Solutions (Chattanooga)
• 1 Equipment Leasing Company
• Transport Enterprise Leasing (Chattanooga)

For more information, please visit: www.ctgcompanies.com

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Do You Know My Reps?

Cindy West Covers Southern CA & AZ

wescin@covenanttransport.com

Mark Pare’ Covers Northern CA, OR, WA, UT ,Vegas and the Kansas City Area

parmar@covenanttransport.com

Kent Wickham Covers the Western Region

wicken@southernref.com

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U.S. Economy

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• 2%

0% 2% 4% 6% 2010 2011 2012 2013

(quarterly, annualized rate percent change, 2005 dollars)

Real Gross Domestic Product

Sources: BEA and ATA

2010 – Q4 2013

2012 2013 Real GDP +2.2% +2.5%

Growth Potential

Economy – GDP

Sources: Departm ent of Com m erce & ATA

• 12%
• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% $3,000 $3,100 $3,200 $3,300 $3,400 $3,500 $3,600 $3,700 $3,800 $3,900 $4,000 2005 2006 2007 2008 2009 2010 2011 2012 2013

Consumer Spending on Goods

Goods Consumer Spending (Seasonally Adjusted Annualized Rates) Year-over-Year Percent Change Billions 2012 2013 Goods Spending (Current $) +4.3% +2.9%

Economy - Consumers

Sources: Departm ent of Labor & ATA

• 1000
• 800
• 600
• 400
• 200

200 400 600 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 2005 2006 2007 2008 2009 2010 2011 2012 2013

Unemployment Rate Change in Employment (Thousands) 2012 2013 Jobs (Avg./month) 181k 196k Rate 8.1% 7.6%

Economy – Consumers

U.S Unemployment Rate

Source: I HS Global I nsight

$ 0 $ 1 0 $ 2 0 $ 3 0 $ 4 0 $ 5 0 $ 6 0 $ 7 0 $ 8 0 $ 9 0 $ 1 0 0 $ 1 1 0

2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10 2 0 11 2 0 12 2 0 13

Crude Oil Prices – I m pact?

W TI , US$ per Barrel

Economy - Consumers

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Sources: Census Bureau & ATA

• 60%
• 40%
• 20%

0% 20% 40% 60% 0.3 0.8 1.3 1.8 2.3 2.8 2005 2006 2007 2008 2009 2010 2011 2012 2013

Housing Is Turning the Corner

Millions of Starts (Single & Multi-family) Year-over-Year Percent Change (Speed) Level (Direction) 2012 2013 Housing Starts 781,000 (+28%) 970,000 (+35%)

Economy - Industrial

Good Auto Production but Yr/Yr Changes Moderate

Source: BB&TCM; Bloomberg

• Yearly changes in auto

production moderate in 2013

• Three straight years

with annual production increases above 1.5M units

• Now good absolute

numbers, but slower unit growth

6 8 10 12 14 16 18 2009 2010 2011 2012 2013E 8.8 11.9 13.4 15.8 16.5

N.A. Auto Production (M)

Truckload Industry Trends

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Source: ATA

80 85 90 95 100 105 110

TL Supply vs Demand

2005 = 100

Through March 2013 TL Loads Index

TL Tractor Count Index

Oversupply

Source: ATA

60 65 70 75 80 85 90 95 100 105 110 115 120

LTL Supply vs Demand

2005 = 100

Through March 2013 LTL Shipments Index

LTL Tractor Count Index

Oversupply

• 3.5%

3.1% 6.1% 6.8% 7.5% 1.3% 6.6%

• 5%

0% 5% 10%

Dry Van Flatbed Temp Controlled Tank TL Intermodal LTL DAT Spot Market Loads

Why?

Changes in Loads by Sector

(Q1 2013 vs Q1 2012; Seasonally Adjusted)

Sources: ATA and DAT.com Notes: ATA’s data is a mix of contract freight and spot market. Tank includes bulk and liquid freight.

No Spring

Bottom Line on Capacity

Tighter Capacity Carrier Fleet Reductions

Source: ATA

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TL Dry Van Carriers: Not As Many Carriers as You Might Think

Source: ATA, Federal Motor Carrier Safety Administration; Office of Motor Carriers; BB&TCM

• ~600,000 fleets with operating authority, but...
• 406,000* can be eliminated due to oddball categories
• 70% of the remaining 194,000 operate Class 3-7 trucks
• This leaves 58,000 fleets
• Approximately 30% of those are private or “not-for-hire” fleets
• Of the 41,000 remaining fleets, 58% are dry van
• More than half of those 24,000 fleets operate 5 or fewer trucks
• About 8,000–10,000 fleets are in the dry van, for-hire market

with more than 5 trucks

• Top 250 control approximately 35%–45% of the trucks

*Excludes selected categories (migrant, unspecified, US mail, exempt, government, Indian tribe, private property, private passenger bus, private non-passenger bus, road repair and “other” classifications totaling 406,000 fleets) that do not compete in the OTR truckload market

0.6% 1.0%

• 0.8%
• 5.0%
• 8.3%
• 15.0%
• 25%
• 20%
• 15%
• 10%
• 5%

0% 5%

Large TLs Small TLs LTLs

From Q1 2012 From Dec 2007

Capacity Changes

(Percent Change in the Number of Company & IC Tractors)

Source: ATA Small TLs have $30 million or less in annual revenue.

Costs and Mileage Productivity–Difficult Trends

Source: BB&TCM estimates; ATA Atri division

 Carrier costs per mile

(excluding fuel expenses)

have risen 12.6% since 2008  Numerous fleets have bought used tractors and trailers to

• ffset the higher costs of new

equipment  Annual cost inflation has averaged 3.02%  However, driver wages fell in 2009 and were flat in 2010  Driver pay and benefits have been increasing since 2010 and could be entering a highly inflationary period $0.90 $1.00 $1.10 $1.20

Carrier Costs per Mile (Excluding Fuel) $1.020 $1.046 $1.062 $1.116 $1.152

2008 2009 2010 2011 2012 5,000 7,500 10,000 12,500 2007 2008 2009 2010 2011 2012 10,946 8,926 7,604 8,250 8,080 7,791

Monthly Miles per Truck

Tractors: $40,000 More Expensive Since ‘01 but Nothing Added to Residuals; Late-Model Equipment Shortage Will Hurt Many Carriers

Sources: Tractor values from Navistar from 2000-2010; from BB&TCM for 1990, 1995, and 2012; Class 8 tractor sales from A.C.T. Research.

$125,000 $84,210 $57,000

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 1990 2000 2002 2004 2006 2008 2010 2012 Average Selling Price 3-Year Residual Value 4-Year Average Residual

862,082 902,466 719,233

100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

1997- 2000 2003- 2006 2008- 2012

U.S. Class 8 Tractor Sales

Value After 1 Year* $87,000

Lots of late-model used trucks in last two downturns; fewer now

5 years, not 4

*First-year D&A is ~ $38,000, meaning value is $87K after one year.

Maintenance Costs per Mile Rising, Even for “Young-ish” Fleets

Source: Carrier data.

$0.11 $0.16 $0.18 $0.20 $0.21

$0.10 $0.12 $0.14 $0.16 $0.18 $0.20 $0.22 $0.24 $0.26

2000 2003 2006 2009 2012

Carrier A: Good OR, No Debt Maintenance Costs per Mile $0.10 $0.11 $0.15 $0.19 $0.21

$0.05 $0.10 $0.15 $0.20 $0.25

2000 2003 2006 2009 2012

Carrier B: 100 OR; Debt- laden Maintenance Costs per Mile

Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of 2012.

Productivity Down, Rates up Modestly, Input Costs Up

Source: BB&TCM analysis;

25 50 75 100 125 150 175 200 225 1990 1995 2000 2005 2010 Annual Miles per Tractor (Productivity) New Class 8 Tractor Price (Input Cost) Tractor/Trailer Price (Input Cost) Avg RPLM (Payment)

Analysis of a composite of 5 carriers. Trailer tractor ratio was 1.7; 2.0; 2.5; 2.8 and 2.5, respectively. All four data figures began at 100.0 in 1990.

July HOS Changes

Source: CVTI Testing

Major Concerns

• 30 – Minute Break requirement
• “34 Hour restart” span 2 consecutive 1 a.m. to 5 a.m. periods

Results:

• Lost revenues
• Increased transit times
• On-time performance pressure

Other Concerns

• Increased fuel consumption (more idle time)
• Lost wages for drivers
• Increased risk of parking lot incidents

Source: ATA

130% 50% 98%

0 % 2 5 % 5 0 % 7 5 % 1 0 0 % 1 2 5 % 1 5 0 %

1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0 2 0 1 2

Truck Driver Turnover Rates

1996-2012 LTL driver turnover average 9% in 2012.

Annual Change in Construction Jobs (000s)— Negative Implications for Truck Drivers from 2013 Onward

Source: BLS, May 2013 report for left table; ATA TRAC report for driver turnover; BLS for unemployment; US Census Bureau for housing starts

Year

Total

Construction

Jobs Residential

Construction

Jobs Non- Residential Jobs

2002

• 85

88

• 173

2003 127 161

• 34

2004 290 230 60 2005 416 268 148 2006 152

• 62

214 2007

• 198
• 273

75 2008

• 787
• 510
• 277

2009

• 1,053
• 431
• 622

2010

• 149
• 113
• 36

2011 144 50 94

2012

99 40 60

2013YTD

79 55 24

• Construction hiring picking up in 2013
• Lots of cash payments in 2012 and absorption of late ‘11-early ‘12

hiring

• Drivers will be targeted for hiring

98% 115%

500 1,000 1,500 2,000 2,500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 20% 40% 60% 80% 100% 120% 140%

Housing Starts Driver Turnover

90% 39% 127% 136%

20% 40% 60% 80% 100% 120% 140% 160%

00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4

2% 4% 6% 8% 10% 12% Driver Turnover Unemployment Rate

Why Drivers Leave Their Jobs—It’s a Shipper Problem not Just a Carrier Problem

Source: BB&TCM (photo, analysis and survey); comments on right from BBTCM

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

Other Have Not Left A Trucking Job They Were Running Me Too Hard I Just Wanted To Make A Change Didn't Get The Right Loads, Or Enough Loads Didn't Get Home Enough Lack Of Recognition & Respect Pay

28.8% 16.5% 7.3% 13.8% 22.3% 18.3% 29.8% 38.0% 28.0% 15.9% 9.4% 10.4% 18.4% 23.8% 34.1% 42.9%

Owner-Operator Company Driver

• Does the shipper

value a driver’s time?

• Bathrooms,

phones

• Wifi availability
• Helpful staff
• Parking

availability

• Clear signs
• Paper work

handled courteously & simply

• 3rd Parties @

Gate-Do they share your view?

• 3% rate hike-

~1% goes to driver

12-Step Program to Become a Shipper of Choice

Source: BB&TCM

Procurement Mentality

• Run competitive bids
• Seek the lowest price
• Don’t discount overall value but price

is a big component

• Useful for inventory, planning and
• perations
• Allows a Co to periodically test where

the market is

• Can be a good thing, but…

The Problem

• Businesses: tend to be saddled with

fixed costs and capital investments OR people challenges related to intellectual assets-rarely both

• Ex: steel and software
• Trucking is the worst of both worlds,

i.e., large fixed costs and capital needs with very high people turnover (inc. non-driver turnover, e.g., getting chewed out for failing

• n 15-min delivery windows)
• Q: is your organization left with

procurement professionals or transportation specialists?

Shippers: Be Wary of the Procurement Trap

Source: BB&TCM

Shippers

• Capacity has been relatively loose

since June 2012, but be wary…

• Capacity could tighten on a

dime; don’t be penny-wise and pound foolish

• Positive economic surprises

would make it clear there are not enough trucks

• New July 1st HOS will hurt

productivity and accelerate failures

• Between housing and HOS;

balance could shift in 2H’13 or in 2014 to carriers

Carriers

• Engage shippers about

productivity hit on HOS

• Show your costs and continue to

control them, but also recognize that supply and demand drives rates

• Determine customers that hurt

you the most when HOS changed

• Pricing opportunity exists in

2H’13 and into 2014 from the impact of new HOS regulations

• Fleets that can attract and retain

drivers and Owner Ops. will be ahead of the pack

Summary

Source: BB&TCM analysis

Questions? Thank You!

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