Spotlight News

RBC Newsletter

Recents

Editorial Team

1

Jakob SchusterEditor in Chief Arsh ToorManaging Editor Amir KhodManaging Editor

Research TeamIndustry EditorsDrew BarotMax LaiJames Newman Taha Rizwan

Investment Banking TeamJim McMullenPartnerKevin Scieszinski Analyst

Freight Spending and Shipment GrowthRecent data from the U.S. Bank Freight Payment Index suggests rising freight spending and shipment levels during the third quarter. Accelerating growth in the U.S. economy has driven up demand for distribution services, along with spot rates and freight spending which increased quarterly and annually, 8.3% and 12.6% respectively. Although weather catastro-phes including Hurricane Harvey and Hurricane Irma negatively impacted shipments, volumes continued to increase by 3.3% quarterly and 8.6% annually.

Growth drivers for the encouraging freight data during the quarter include stable retail sales, accelerated investment in capital equipment, factory output, and the pending housing recon-struction in areas affected by the hurricanes. Regionally, the Northeast saw a 10% shipment index jump, leading the nation, as the Midwest recorded a 13.3% increase in freight spend-ing. Both regions outperformed the others due to stronger manufacturing activity during the quarter.

Mack Trucks, a truck-manufacturer and subsidiary of Volvo (STO: VOLV-B), reported a strong 73% surge in Q3 orders compared to the same period last year. Mack Trucks drew attention by unveiling its new Anthem model during the North American Commercial Vehicle show in late September, which was followed by a strong influx of orders. Management noted that the company’s long-haul

Royal Blue Capital, LCC is a boutique investment bank located in Kansas City that provides M&A advisory services to companies active in the manufacturing, transportation & logistics, and food & agribusiness industries, as well as to companies across all industries throughout the Midwest.

Mack TrucksSpotlight News

Table of Contents

Mack Trucks

Freight Spending and Shipment GrowthCaterpillar Beats Analyst ExpectationsUPS to Open a Processing Hub in Plainfield, INCN Rail and Norfolk Southern PartnershipTransportation Industry Outlook Heartland Express Earnings DropIncreased Distribution Investment in Kentucky & Kansas City

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segment, which makes up 41% of total truck sales this year, is expected to grow substan-tially with this wave of demand, and gradually increase to 48%–50% of total truck sales.Several economic factors contributed to this increase in demand included strong manufac-turing and construction activity, as well as rising freight rates and volume. Management is expecting continued order growth, and as a result, Mack has been investing in production facilities to meet current and potential demand with 150 additional employees hired last month for its assembly plant in Lehigh Valley, PA. Mack Trucks continues to adjust its pro-duction and employment plans to align with market conditions and is expecting full produc-tion of the Anthem to begin in 2018.

December, 2017

Caterpillar Beats Analyst Expectations, Sales and Pro�t Continue to GrowCaterpillar (NYSE: CAT.N) once again exceeded analyst expectations this quarter, raising its year-long forecast for the second time in 2017. Shares rose 5.4% on October 24th to a five-year high after the announcement, closing at $137.81, with a YTD growth of 47%. Revenues exceeded analyst expectations ($11.3B acutal versus $10.93B expected), while net income grew by 46%.

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UPS to Open a Processing Hub in Plain�eld, IndianaUnited Parcel Service (UPS), has planned to construct a new 893,000 square-foot package processing center in Plain-field, IN. The $260 million project is estimated to be completed by 2019 and expected to bring around 600 full-time high-wage jobs into the market by 2023. For UPS the plan is to increase its reliability by providing a more efficient path-way for processing and distribution.

Eric Holcomb, Governor of Indiana, stated, “Our state’s top-ranked infrastructure network has been key to growing our economy-es-pecially in the manufacturing and logistics sector.”

Indiana Economic Development Corporation (IEDC) has extended its assistance to UPS by providing $200,000 grants in training for employees and $7 million in tax incentives. To maximize productiv-ity, the processing hub located in this logistics powerhouse would also be home to special conveyor belts for advanced processing and package sorting. Such growth for UPS through capital expan-sion would be crucial to cater to a broad market by widening its reach and ultimately increasing its customer base.

Abstract from UPS Annual Report 2016

Source: The Globe and Mail

Caterpillar has made an incredible recovery from the revenue slump it faced earlier last year. This rebound resulted primarily from increased sales in all three segments of the business and recovering Chinese demand. While demand for the company’s products had been low the past few years due to falling commodi-ty prices and worldwide economic uncertainty, sales for all three operating arms of the company’s business rose. North American sales were up 7% on account of increased commodity prices for the mining and energy sectors. Moreover, resumed Chinese construction projects as part of the “Silk Road” initiative meant a push towards infrastructure development, leading to sales from Asia Pacific increasing 23%.

$4.9BDeliveryVolume

2016

114,000Vehicles in

Delivery

434Employees

2,000WorldwideOperating Facilities

More than26,000Access

Locations

December, 2017

CN Rail and Norfolk Southern Partner to Reduce Transit TimesCanadian National Rail (NYSE: CNI) and Norfolk Southern Corp (NYSE: NSC) have agreed on a train interchange deal outside of the Chicago rail hub. The result could see transit times cut by one to two days for the freighters.

Chicago’s hub is the largest in the US, converging six different rail tracks. As such, it accounts for 25% of all US rail freight passes and is congested with traffic causing freight delays. Presently, most trains exchange railcars and reassem-ble before going to their destination. The new agreement allows Norfolk to use CN’s bypass route (acquired in 2007 for $300M), and CN to use Norfolk’s Elkhart terminal. Both of the terminals are outside Chicago’s network and bypass the congestion. As a result of this agreement, CN’s Western Canadian routes are now directly connected to the US East coast via Norfolk’s existing lines. The reduced transit time is expected to attract customers to both companies. With nearly one quarter of all CN traffic going through Chicago, CN can expect significantly lower transit times on shipments as well. On Norfolk’s end, the agreement attempts to win over customers from CSX, who is also currently attempting to streamline operations in Chicago.

Transportation Industry Outlook Earlier this year, the American Trucking Association (ATA) released its annual forecast in collaboration with IHS Global Insight, providing an outlook on long term trends in various freight industries. Freight tonnage and revenues are expected to grow by 28.6%, and 74.5%, respectively over the next decade. This is primarily driven by continued growth in the energy sector and international trade, as well as population growth. Pipelines will benefit the most from the energy boom, growing to 18.1% share of annual freight tonnage. While trucking and railcar freight will see nominal increases, a move-ment towards intermodal freight – projected at a CAGR of 4.5% through 2021 and 5.3% afterwards will cause pureplay trucking and railcar freight to dip slightly in share of total freight tonnage.

While growth in the trucking industry is expected in the long term, recently the ATA has been working to address a lack of qualified drivers to meet new demand. While the industry is expected to eventually implement the driverless technology, mechanical and regulatory limitations keep such a transition out of reach. The demand for trucking jobs has been low due to the long hours, health risks, and inadequate long term job security in the face of driverless technology. If the current trends continue, the new freight demand discussed earlier, coupled with hours-of-service limits, could cause the driver shortage to increase from 50,000 to 174,000 by 2026, according to ATA Chief Economist Bob Costello. While driverless technologies will take away the actual job of driving, new hires should prepare for this transition by training for new roles, such as maintenance or operational analysis for the trucking fleet.

Finally, this past month the ATA released a policy framework for autonomous trucking. While acknowledging that the regu-latory implications of autonomous driving must be scrutinized by the government, the paper emphasizes the need for continued innovation and the increased safety driverless vehicles can provide. Another discussion centered around driver-assisted vehicles, where the driver would take on a customer service and analysis role when not handling difficult traffic situations. While both growth and technological development has sparked interest in the industry, recruiting skilled labor as the industry transitions to autonomous technologies remains a challenge.

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December, 2017

Heartland Express Earnings Drop 37% Following AcquisitionHeartland Express’s (NASDAQ:HTLD) Q3 bottom-line showed a steep drop due to increased operational expenses. The medium-haul trucker acquired Interstate Distributor Co. (IDC) this past July at a $133M enterprise value, all cash transac-tion, anticipating long-term cost synergies due to similar geographies and operations. Since July, HLTD’s operating ratio has increased from 86.7% to 92.9% as it began integrating IDC. Management expects a return to a historical low-80s operating ratio in the medium-term as the expected synergies are realized. HLTD’s past acquisition of Gordon Trucking in 2013, allowed HLTD to gain presence in the West Coast, but did not give management the geographic synergies that they are looking to gain from IDC.

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Increased Distribution Investment in Kentucky & Kansas CityThe state of Kentucky experienced a total of seven mergers and acquisitions in the first quarter of 2017. Kentucky’s valuable location and network of 20 interstate highways position it within 600 miles of more than 65% of the nation’s popu- lation. Economist’s have shown that over 25% of the state’s economy is made up of industries highly dependent on trans- portation, this compares to approximately 19% nationally. With this in mind, Kentucky has been steadily increasing state and local infrastructure expenditure on a per capita basis since 1995. Kentucky has successfully integrated many facili- ties with the technology systems that are able to efficiently keep track of deliveries. By April, Kentucky recorded a total of approximately 3,650 new jobs and a $1.86B injection into the logistics sector, setting an all-time high investment record. This includes, industry leader Amazon who, in January, invested $1.49B into the new air shipment hub for Amazon Prime logistics, located in Hebron, KY. The investment is scheduled to bring an additional 2,700 jobs and help relieve pressure in the other 11 fulfillment centers located in Northern and Central Kentucky.

Logistics Park Kansas City (LPKC) serves as another central hub with its railway network which starts in California and spans all the way to Chicago, as well as its multimodal facilities which are significant for international trade with China and Pacific Rim. Amazon has also planned to conduct its distributional operations in a new 822,000 square-foot fulfill- ment center in LPKC. In addition, companies such as S&S Active Wear, FoodServiceWarehouse.com and Jet.com have all recently invested approximately $150M in warehousing and distribution in Kansas City.

Jim McMullen, Partner Jim.McMullen@RoyalBlueCapital.com +1.913.998.6082

Kevin Scieszinski, Analyst Kevin.Scieszinski@RoyalBlueCapital.com +1.913.998.6083

Royal Blue Capital, LLC5251 W 116th Pl Suite 200Leawood, KS 66211, USA

Contact Information

Jakob Schuster, Editor in Chief Jakob.Schuster@RoyalBlueCapital.com

Arsh Toor, Managing Editor Arsh.Toor@RoyalBlueCapital.com

Amir Khod, Managing Editor Amir.Khod@RoyalBlueCapital.com

Editorial Team

December, 2017