US Logistics/Transportation Market Overview

Procurement – Market Intelligence TeamMarch 18, 2009

2

Macro-Economic Overview

Macro-Economic Trends

3

Macro-Economic Trends

A “Technical” Recession…

• US GDP with 2 consecutive quarters contracting. 2008 Q4 GDP growth revised to -6.2%

• US GDP to contract -1.6% in 2009 (IMF). Global Insight projection is -3.7%

• PMI below 50 for 13 consecutive months. Last 5 months below 40 (worst since 1980’s)

• PMI considered a leading indicator -> dropped below 43 in all recession periods since 1948

4

Macro-Economic Trends

• No “decoupled” economies.

• Economic downturn has rippled through the supply chain, affecting emerging economies.

• Most advanced economies projected to contract in 2009.

• Deceleration reflected in commodity prices and overall country inflation.

• PMI for Europe at historical lows as well.

…a Global Recession

Source: IMFSource: Markit Indices (Ariba)

5

Macro-Economic Trends

Other Parameters: Unemployment, Consumer Confidence, Interest Spreads, Home Values

Source: Wikipedia

Source: Conference Board

Source: Standards & Poor

6

Macro-Economic Trends

Industrial Output and Trade Activity

• US Industrial Output declining for 7 consecutive months.

• US trade deficit has declined for six consecutive months. US goods and services fell by 6.7% in January, while exports fell 5.7%

• Industrial output in negative territory for developed countries.

Source: US Department of CommerceSource: Haver Analytics, IMF staff

Source: Trading Economics

7

Macro-Economic Trends

A Weak Economy

• Machinery sectors down between 4-8% in 2009.

• Housing starts down more than 50% from peak levels (above 2 million units)

• Steel output set to decline globally by 2-3%. In US, mills operating below 40% capacity.

• Decline in manufacturing output for US deeper than GDP contraction.

Source: IHS Global Insight

8

US Trucking Indices

US Trucking

9

US Trucking – Market Environment

Sources: IHS Global Insight, American Trucking Association

Supply-Demand conditions

• Operators actively downsizing fleet size. Smaller TL companies downsized earlier.

• Class 3-8 truck sales dropped 19% in 2008 and are expected to decline 14% in 2009. Sales to spike in advance of emissions legislation effective in 2010.

• American Trucking Association (ATA) Truck Tonnage index contracted 7.8% in December 2008, and increased by 3.0% in January (2nd lowest level since October 2002)

• Freight demand to remain low due to generalized downturn affecting multiple sectors of the economy.

10

US Trucking – Cost Drivers

Cost Structure: NAICS 48412

Long-distance freight trucking

• Fuel cost component represents 27% of total cost structure, however this is set to decline given the drop in diesel prices. EIA forecasts $2.3/gal for 2009

• Wages remain main cost driver, expected to show minimal increase in 2009 (roughly 2% increase)

• Financial results of trucking companies depend on cost structure and asset base.

Source: BLS

Source: IBIS World

11

US Trucking – Forecast 2008/09

• Operators actively reducing supply, but demand slowing down at much faster pace.

• Decline in diesel prices have eased up pressure on providers.

• Tough market environment with mixed operational/financial results, sometimes driven by geographic coverage.

• Trend towards industry consolidation around larger, stronger players.

US Trucking Freight Outlook:

Sources: IHS Global Insight, Stifel Nicolaus (forecasts)

TL Price Trends (% change year-on-year)

12

US Rail Indices

US Rail

13

US Rail – Market Environment

Source: IHS Global Insight, AAR

Supply-Demand conditions

• At beginning of 2008, about 40% of fleet had been in operation for 25+ years.

• Freight-car deliveries expected at 60k units for 2008, a decline of 4.3%, and to drop below 40k for 2009.

• Push for productivity and efficiency improvements will drive the need for upgrades in equipment/technology.

• AAR reported a decline of 18% in US rail carloads for the first 2 weeks of 2009. Intermodal volumes down 14%.

14

US Rail – Market Environment

Source: AAR May 2008 report

Railroad Freight Revenue Segmentation

• Largest commodity is coal representing 21% of revenue.

• Agriculture outlook is positive, but includes ethanol-related production.

• All manufacturing related products have slowed significantly.

• Steel volumes and metals in general have dropped rapidly as mills have cut production in response to very weak demand.

• Commodity freight dropping by double digits (except coal).

15

US Rail – Cost Drivers

• Total wages remain as the main cost input. Data released for January show an increase of 4.7%

• Fuel cost component increased by 15% in 2008 , but now back to 2007 levels.

• All Class 1 railroads imposed fuel surcharge to offset increase anyways.

• Railroads are estimated to have a 30% cost advantage versus trucking services, because of higher fuel efficiency (source: MFS value fund)

Cost Structure: NAICS 48211

Rail Transportation

Source: IBIS World, BLS

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Support Activities for Other Transportation Including Rail, CEU4348890008

Average Hourly Earnings (AHE), % Change Y-o-Y

16

US Rail – Forecast 2008/09

• Supply is tighter to some degree, and demand has now slowed across all commodities.

• However - Highly concentrated industry (4 class 1 railroads).

• Result: railroads able to increase rates plus fuel surcharges. 2008 rates 14.4% above 2007 levels.

• Freight rate outlook is less volatile in rail (not considering fuel surcharges)

• Significant hikes in captive markets and/or long-term contracts with escalation clauses.

• Outlook for 2009 ranges from slight declines of 2-3% up to increases of 4-7% as expressed at end of fiscal years by the Class 1 operators.

Railroad Freight Outlook:

Sources: IHS Global Insight, Union Pacific

17

Financial Performance

Financial Performance

18

NASDAQ Transportation Index vs S&P 500 Index

Financial Performance

• Nasdaq Transportation Index containes 65 securities (air, rail road, water transport and related services)

• S&P 500 is a value indexed fund of 500 large cap common stocks.• Nasdaq: National Association of Securities Dealers Automated Quotation System.

19

A couple examples in trucking:

Financial Performance

US Truck (USK)JB Hunt Transport Services (JBHT)

Source: Companies’ Financial Reports

20

A couple examples in rail:

Financial Performance

Source: Companies’ Financial Reports

Burlington Northern Santa Fe - BNSF (BNI)

CSX Corporation (CSX)