Transportation & Logistics Industry Update Q3 2012 Review Member FINRA/SIPC www.harriswilliams.com Transportation & Logistics Industry Update Q3 2012 Review Greetings from the HW&Co. Transportation & Logistics Team Welcome to the first issue of the Harris Williams & Co. Transportation & Logistics (T&L) quarterly newsletter. We hope to use this forum to keep you (investors, senior managers, entrepreneurs, and others focused on the T&L sector) up to speed on what we are seeing in our sector, apprised of industry news and events, and connected to the T&L companies that we are fortunate to work with everyday. We hope to bring you transcripts of relevant discussions we have with senior industry professionals, like this month’s discussion with Kerry Byrne, Executive Vice President of Total Quality Logistics (TQL). We also want to keep you apprised of the transactions we are executing in our various sub-sectors, including non-asset and asset-based logistics, the automotive aftermarket, air, rail, and marine products and services, and infrastructure. We hope you enjoy reviewing this each quarter and please email us your thoughts and opinions. We want to ensure that this newsletter is informative and helpful as you continue to focus on the transportation and logistics space. Regards, Contacts Frank F. Mountcastle, III Jason D. Bass Joseph H. Conner, III Managing Director Managing Director Director [email protected] [email protected] [email protected] +1 (804) 915-0124 +1 (804) 915-0132 +1 (804) 915-0151 Richmond Boston Cleveland London Minneapolis Philadelphia San Francisco P: +1 (804) 648-0072 P: +1 (617) 482-7501 P: +1 (216) 222-9870 P: +44 203 170 8838 P: +1 (612) 359-2700 P: +1 (267) 675-5900 P: +1 (415) 288-4260 F: +1 (804) 648-0073 F: +1 (617) 482-7503 F: +1 (216) 222-0158 F: +44 207 681 1907 F: +1 (612) 359-2701 F: +1 (267) 675-5901 F: +1 (415) 288-4269 1 of 9 Transportation & Logistics Industry Update Q3 2012 Review Trade Lanes with Bio: Kerry Byrne is responsible for sales operations at Total Quality Logistics Kerry Byrne, (TQL) and has been with the company for 8 years. With more than $1 billion in EVP of TQL sales in 2011, TQL is the nation’s third largest freight brokerage firm and specializes in the transportation of full truckload shipments for thousands of companies among various industries. TQL’s reputation for service commitment, integrity, and reliability has helped it grow to more than 2,000 logistics professionals facilitating the movement of over 500,000 truckload shipments each year for its customers. Kerry is a 1987 graduate of the University of Cincinnati, where he earned a Bachelor of Science degree in marketing. Prior to joining TQL, Byrne spent 17 years at Fifth Third Bancorp where he held the position of Vice President and Director of the Private Client Group. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ HW&Co.: Recent remarks by management teams at bellwether brokerage names have underscored just how significant margin compression has been for many truck brokerage businesses. Fairly substantial growth in gross revenue, double digit in many cases, but a stagnant net revenue line. Are you facing the same headwinds at TQL? Kerry Byrne (KB): Many of the analysts who cover our publicly traded competitors have written about “a band of equilibrium” in terms of supply and demand, which has put negative pressure on margins. I agree with that analysis. Year-over-year margin comps have been a bit of a challenge as well. We are experiencing some of that, but we're doing fine. HW&Co.: Besides continuing tight capacity, persistent cost inflation, and increasing competition, what other growth and margin constraints are you seeing in the marketplace? How has TQL mitigated these pressures? KB: We all know that there will always be short and long-term challenges in this business. Regardless, there is tremendous opportunity to grow in this market space, and I don’t necessarily agree with the theory that increased competition is a huge factor given the size of the market. We have always chosen to power through the short-term market headwinds, continue to invest in the company, and maintain our focus on growth. HW&Co.: What economic indicators do you have your eye on for signs of growth or weakness in the economy? Where do you think we are headed in the near term? KB: None of us are economists (or analysts for that matter). However, unless we get a bounce that positively impacts freight volumes or an event that pulls capacity from the market in a big way, I think that most of us expect a pretty flat market into next year. That does not mean that you can’t grow, it just makes it a little harder. 2 of 9 Transportation & Logistics Industry Update Q3 2012 Review Trade Lanes HW&Co.: Now that the brokerage model has proliferated over the past several years, what is the (continued) competitive dynamic like in the current market and what recent initiatives has TQL employed to maintain its competitive advantage? What do you think it takes to be successful long term in the sector? KB: We like to keep things simple. For us, it is about finding the best talent, focusing on their training, and supporting a culture where acquiring quality customers and taking care of them is rewarded. We have said for years that we invest in people and technology, and that is unlikely to change anytime soon. HW&Co.: If you would, please discuss the current strategic, “deal” environment from TQL’s perspective. What types of strategic activity are management teams and boards discussing? Is industry consolidation through M&A a likely scenario? KB: While we are not active players in terms of M&A, we generally hear what is happening out there. There is little doubt in my mind that we will continue to see consolidation through M&A, as there appear to be a number of determined buyers. On the sell side, there are enough small to mid-size players that will decide to sell for any number of reasons, and a number of bigger players that may be searching for alternatives due to the current depressed state of the IPO market. HW&Co.: Brokerage in general, and specifically truck brokerage, remains one of the most attractive T&L subsectors to the public markets as well as private equity. For those thinking about buying a brokerage business (either some number of shares or majority control), what ultimately separates a winning investment from a losing one in your mind? KB: Critical mass, growth, and profitability. There are a number of companies that can check one or two of those boxes, but there seems to be a smaller group that can check all three. That involves some speculation, as my opinion is based in part on anecdotal evidence. HW&Co.: Being a Cincinnati guy a) Will the Reds win the pennant? World Series? b) What's the over/under on Bengals wins this season? KB: As you know, I’m a big baseball fan, and I’m obviously thrilled that the Reds will win the NL Central. Anything can happen in the post season. We need to get the bats hot again to make a run. The Bengals will be competitive. We have a good group of young players, but I’m a little concerned about the defense. I hope we don’t have to score more than 30 to win each week…..my number is 8 on the over/under. 3 of 9 Transportation & Logistics Industry Update Q3 2012 Review What We’re . Transportation stock woes a sign of future markets? Business Insider reports that transportation stocks Reading have not bothered to retest the year’s February highs, contributing to a new theory about the future of the broader Dow Jones index. If transportation stocks won’t confirm the strength in stocks of industrials companies, this could bode poorly for the market over the next few months. FedEx warns Chinese slowdown will hurt logistics companies: The Wall Street Journal reports that FedEx has cut earnings expectations as declining Chinese export manufacturing is weighing on profitability. Both FedEx and UPS have cut capacity in Asia as Chinese manufacturing slowed at its sharpest pace since March 2009. Bakken development fueling another rail renaissance: Railroads continue to outperform the rest of the T&L sector on the back of rapidly expanding crude-by-rail in the Bakken shale and Canadian oil sands, Reuters reports. Refiners are racing to expand rail terminals as BN, CN, and UP look to more than double capacity in the region. Disciplined pricing, balanced capacity – ‘Keep on Trucking’: Despite slower North American economic growth, Heavy Duty Trucking reports that the trucking industry has not added back the capacity removed in the recession and faces largely positive pricing trends. TL rates are expected to increase 1-3% this year while the more consolidated LTL market expects rate increases of 3-5%, both excluding fuel surcharges. ($ in millions) EV/LTM Transportation Date Announced Acquirer Target Sector Target Description EV Revenue EB ITDA & Logistics 9/24/2012 CH Robinson Worldwide Phoenix International Freight Logistics Phoenix International Freight Services Ltd., $635 3.9x 12.5x Inc. Services Ltd. a logistics company, provides international Q3 M&A freight forwarding, consolidation, NVOCC, and customs brokerage services.