Too much to talk about with too little time. Several key industry topics were bantered about by some of the best thought leaders in the industry on the final day of Transparency19.
In a panel discussion, “The Bull, the Bear and the Other Guy,” moderated by FreightWaves President George Abernathy, insight was provided about the direction of the freight markets and how disruptors and technology will lead the way.
On the panel were: John Larkin, Managing Director–Investment Banking, Transportation and Logistics at Stifel; Donald Broughton, Managing Partner at Broughton Capital; and Thom Albrecht, Chief Financial Officer and Chief Strategy Officer at Celadon Group.
Abernathy said, “I’ll try to guess who is the bull, the bear or the other guy.”
Broughton said that the answer depends on the topic and the timeframe. He said that he is bearish on China and trade in the short-term and that after the huge tax reduction we had, we are on the verge of a serious tax increase in the form of tariffs. He’s very bullish long-term on technology and believes that this is the information age. He said that the U.S. is the dominant force in “lazy” creation and will lead the future evolvement of hardware and software.
Albrecht said that he thinks that the freight market will continue to deteriorate for the rest of the year. He said that the underlying economy is “reasonably good” with a moderation in growth being seen. He doesn’t believe that we are on the cusp of a recession. He’s concerned with the 491,000 truck orders last year and notes that every time there is a large truck order year, it’s not very long before we have a hangover.
“I think that the infusion of supply is larger than people are acknowledging, demand has moderated a little bit. One thing I’ve learned in the year and a half that I’ve been at Celadon is truckers lie to one another.” He said that capitalism works and that the driver pay increases definitely retained and brought incremental drivers to the market.
Larkin said that he’s been accused of being a cheerleader for the industry and a perma-bull. “I’m high on America, I’m high on capitalism and I’m high on all of the people who come to this event to demonstrate their new technology which is really remarkable,” he continued. He said that the “tariff scare” pulled freight forward into the last four or five months of 2018 and then poor weather compounded the problem. He still hopes for a May-June upswing, but is concerned operators will cave to rate pressure from shippers.
Abernathy’s next question was, “Are you feeling the same way [rate pressure] in you interactions with the carriers and the shipper community and do you believe that the shippers are up to their old tricks?”
Broughton said that many drivers and trucks were added to the industry. He believes that regulation around electronic logging devices (ELDs) will add more capacity to the market. He doesn’t think that we are headed to a recession, but noted that this capacity addition isn’t all that dissimilar from the 2000 Y2K supply-led recession. He said that he looks at the economy as three economies; industrial, consumer and tech, all of which appear strong. “The rate sloppiness is more a function of supply than it is demand,” said Broughton.
Albrecht said that trucking remains very cyclical with the booms only lasting five to six quarters followed by a series of corrections on the supply side. He equated that the addition of 3 percent of capacity to the truck market is the equivalent of adding 15 percent in other industries. “These are horrible numbers folks,” said Albrecht. He went on to provide two recent anecdotes.
He said that after a couple of rounds of bidding on a piece of reefer business, Celadon decided to sharpen the pencil and go hard after 12 of the shipper’s 38 lanes with quotes below their target price on all of the bids. They were only awarded one lane. Also, he spoke with a large freight broker that surveyed 850 brokers to gauge recent capacity additions. Those carriers grew capacity by 11 percent last year.
Larkin thinks that most people in the audience have a long-term orientation and doesn’t believe it matters if the market improves by summer. He’s looking forward to 2020, 2021 and 2022 and thinks that further conversion to ELDs (from automatic onboard recording devices, or AOBRDs) will restrict capacity. He sees tech and automation as a means to level out the trend of outsourced manufacturing overseas. He expects to see a big surge in demand as manufacturing returns. He believes Amazon (NASDAQ: AMZN) will take a bigger share of e-commerce and take labor out of the over-the-road workforce and deploy it in last-mile delivery.
Next, Abernathy asked, “Will the AOBRD conversion to ELDs be similar to the first ELD conversion? If we are already near full employment, how are you going to get new drivers?”
Albrecht believes that this ELD conversion will have little impact. He said that Celadon doesn’t have the balance sheet to enter the final-mile business, but that it will support its customers that have e-commerce platforms.
Abernathy then asked, “Who does Amazon as a broker impact most?”
Broughton thinks Amazon has been a strong disruptor, but in business-to-consumer markets where the buyer is unsophisticated. He hasn’t seen any successful Amazon disruptions in a business-to-business application where the buyer has scale and is very sophisticated.
“Will J.B. Hunt (NASDAQ: JBHT) be a major disruptor?,” Abernathy asked.
Larkin thinks that the asset-based carriers will see their operations more disrupted than asset-light third-party logistics providers. He said that Amazon has an in-house investment banking unit that can afford to pay higher multiples on acquisitions because they trade at a high multiple themselves. “It’s really difficult to insulate yourself from a big tech-driven e-commerce retailer that decides it wants to be in the transportation and logistics business,” said Larkin. He believes that Amazon could quickly get to scale faster than most in the brokerage arena, but doesn’t know if the company can develop better technology than what is being developed at the well-established high-tech brokers.
Albrecht thinks that JBHT’s unique culture could make them the rare disruptor that isn’t a new entrant to the marketplace. He thinks that in three to five years, Amazon’s prime delivery offering will be same-day with the top 100 metro markets’ distribution centers within 15 to 50 miles of the delivery area. He thinks that Amazon and Uber Freight and the other “not-for-profit” brokers are going to have a real impact on the market. He believes that there will be multiple compressions on the M&A of non-asset businesses and that peak valuations could be behind us.
Broughton said that he doesn’t believe that the line of demarcation is non-asset versus asset. He thinks that both can survive and thrive, but it depends on technology and transactions. He said that it’s not just building or owning the technology, but you have to have the experience and ability to use it.
Larkin noted that the risk to asset-intensive models is that they require a base level of volume in the network every day. If that volume is removed and they can’t get balance and utilization, they are at risk. He said that JBHT’s trailer pool strategy will be interesting because most shippers are likely to trust the company more than a broker attempting to throw trailer pools into a market.
Albrecht said that nothing will look the same in five years and that brokers will begin to own tractors if we have autonomous trucks. Albrecht concluded, “I think the gross margin 10 years from now for brokers is going to be significantly lower, what we call a healthy gross margin, compared to what it is today.”