Presentation to British Shippers Council: The State of the European Road Freight Industry

A presentation by Transport Intelligence to BSC, London John Manners-Bell, CEO; Thomas Cullen, Senior Analyst 30th January 2013

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Macro context - GDP

European economic growth rates 2005 to date

Although at present the macro-economic context is quite extraordinary in Europe.

Comparison of Road Freight and GDP

Comparison of Road Freight and GDP

Strong correlation between GDP growth and Road Freight output

Correlation 0.96

Fuel Costs Fuel costs have come off their peak – but still a third more than three years ago

Fuel Costs and Freight Rates

Very strong correlation but diesel prices are rising faster than the road freight rates. Competitor pressures compromising road freight hauliers ability to pass on increasing costs.

Correlation 0.85 Source: EU

70

80

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130

Q1

2008

Q

2 20

08

Q3

2008

Q

4 20

08

Q1

2009

Q

2 20

09

Q3

2009

Q

4 20

09

Q1

2010

Q

2 20

10

Q3

2010

Q

4 20

10

Q1

2011

Q

2 20

11

Q3

2011

Q

4 20

11

Q1

2012

Q

2 20

12

Q3

2012

Fuel Index

Rates Index

Transport company failures and Retail Sales

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96

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102

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106

108

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0 Q

1 20

08

Q2

2008

Q

3 20

08

Q4

2008

Q

1 20

09

Q2

2009

Q

3 20

09

Q4

2009

Q

1 20

10

Q2

2010

Q

3 20

10

Q4

2010

Q

1 20

11

Q2

2011

Q

3 20

11

Q4

2011

Q

1 20

12

Q2

2012

Company failures

Retail sales

Correlation -0.76

• Road freight operator performance

Section 2

Growth 2011-12

After strong growth seen across the market in 2011 – most major players have seen revenue growth diminish or revenues contract

Source: Ti

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Operating margin development

Very low visibility of operating margins for the large European-wide road freight operators.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Operating Margins

• Growth was seen largely in Germany and Eastern Europe • EBIT in the division improved by 11.6 % thanks to high gross profit

(perhaps, utilising capacity in the market and lower rates)

Company perspectives on the market

• Challenging market conditions, especially in Southern Europe due to the ‘economic crisis’

• Market volumes decreased by ‘1-2%’ in first nine months of the year • Northern and Eastern Europe much more positive – although these

markets stagnated in the third quarter • An increase in national distribution – fewer exports – impacting on yield • DSV was able to improve margins in first nine months – 4.2% compared

with 3.8%

Company perspectives on the market • Volumes stable despite a depressed market • "In a sharply deteriorating economy in the third quarter, especially in

France, Norbert Dentressangle held up well buoyed by strong new business wins and tight cost management."

• Volatile and lower volume (down 2%) market, particularly in Spain

• Shrinking volumes and increasing price pressure • Strong company momentum in Eastern Europe

• Tonnage at DB Schenker's European road freight business grew by 0.5%. • ‘The scope for price increases remains limited due to the sustained high

competition in the market and the volatile economic situation.’

Company perspectives on the market • Volumes have been affected by economic conditions which have resulted

in consumer retail volatility putting pressure on operations. In addition, customers' volume forecasts continue to exceed actual volumes.

• Revenue fell by 5.6% but margins up • Chilled operation has remained very challenging and management

decided to discontinue this business as a standalone unit. • December trading was comparable to last year within similar economic

circumstances.

• Kuehne + Nagel's European overland business was hit by seasonal volume declines and adverse macro-economic market conditions, especially in Southern Europe.

• Market plunged in terms of revenues after strong growth rates in 2011

• Volumes stagnant or falling, driven by weakness in France and Southern Europe

• Companies with emphasis on Northern Europe performing better

• Diesel prices rising at a faster rate than freight rates – hence compression of margins likely

• Margins also impacted by falling network volumes

Market Summary

Ti/Freightex European Road Freight Rate Index A quarterly analysis of European road freight rates provided by Transport Intelligence and Freightex

The statistics on which this analysis is based are taken from Freightex’s exchange activities and reflect the prices paid/bought for actual loads. This is an index and the numbers represent the inflation of prices from 28th May 2010

Longer term trends

Trends • Volatility. Depressing investment? • Could lead to higher prices in the medium-term due to shortages of

capacity if there is a bounce-back in demand. • Oil price remains the biggest driver of costs. So great that, for the

moment, purchasers of road freight should look to projections of fuel costs as the most powerful guide to short-term costs.

• Likely compression in the margins of LTL providers. A combination of higher costs of truck services, higher fuel costs and new entrants into the market are likely to drive-down profit margins that up until now have been comparatively strong.

• It is notable that many of the biggest network providers are now very asset –light. Perhaps K+N is one of the few to move against this trend.

• Questions over the issues raised by direct purchasing by big shippers in such a volatile market

Freight Index – The past 3 months Prices over the 4th Quarter 2012 and into January 2013 vs. 4th Quarter 2011 & Jan/Fed 2012

Quarterly comparison

• The level of price increase less than in previous years in the run-up to Christmas.

• Faltering price rises around late November which halted the market, leaving a limp recovery before Christmas

• Prices have fallen less than normal after Christmas. • There appears to have been more of a ‘Christmas rush’ in that the

normal rise in prices was compressed into a shorter time. • Speculate that demand over Christmas may have been less or that

confidence has been less, leading to tighter inventory management and a rush to ‘stock-up’ later in the month.

• Volatility declining? Standard Deviation falling from 2.773 in the same period last year to 1.825

Compare & Contrast Markets

Germany Nov 2012– Jan 2013 Spain Nov 2012-Jan 2013

Smooth Broad, long Christmas

Spiky, sharp rises & falls Sharper increases (6 points vs 4.5)

Fuel is the most important driver of price increases

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27 M

ay 1

0 10

Jun

10

24 Ju

n 10

08

Jul 1

0 22

Jul 1

0 05

Aug

10

19 A

ug 1

0 02

Sep

10

16 S

ep 1

0 30

Sep

10

14 O

ct 1

0 28

Oct

10

11 N

ov 1

0 25

Nov

10

09 D

ec 1

0 23

Dec

10

06 Ja

n 11

20

Jan

11

03 F

eb 1

1 17

Feb

11

03 M

ar 1

1 17

Mar

11

31 M

ar 1

1 14

Apr

11

28 A

pr 1

1 12

May

11

26 M

ay 1

1 09

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11

23 Ju

n 11

07

Jul 1

1 21

Jul 1

1 04

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11

18 A

ug 1

1 01

Sep

11

15 S

ep 1

1 29

Sep

11

13 O

ct 1

1 27

Oct

11

10 N

ov 1

1 24

Nov

11

08 D

ec 1

1 22

Dec

11

05 Ja

n 12

19

Jan

12

02 F

eb 1

2 16

Feb

12

01 M

ar 1

2 15

Mar

12

29 M

ar 1

2 12

Apr

12

26 A

pr 1

2

Freightex Consolidated Index

Diesel Price Index €

Source Ti/ Eurostat Diesel index

Tentative Conclusions • Low and unpredictable consumer demand may be affecting

inventory policy • If so, this would represent a major ‘knock-on’ cause for

volatility in the road freight market • On the one hand volatility within the quarter has increased,

yet the price increase is less compared to last year. • Hard not to think that macro-economic factors are

underlying this • Overall it appears – putting together both company results

and the freight index – that Southern Europe is bad, whilst Northern Europe is not so bad; which is hardly news!

• In terms of future growth and inflation, the reduction in capacity suggests the potential for inflation.

• As usual the road freight market remains opaque with ridiculously bad economic data available. This is warning to anyone paying too much attention to quarterly GDP data!

• Ti/Freightex European Road Freight Rate Index (data available on Ti Dashboard, updated weekly)

• European Road Freight Report 2013 • Ti Dashboard and Logistics Briefing • All available from the Ti website

www.transportintelligence.com • Global Supply Chain Intelligence Portal

www.gscintell.com

Sources