After a tumultuous 2017, the New Year is shaping up to be an eventful and momentous year for Freight Transportation. These are a few of the trends to watch in 2018.

Trump Year 2 - the Sophomore Jinx and Crisis Management

America and the world have lived through year one of an American rookie politician and president. It was painful and disruptive with few solid accomplishments to point to. There is little consensus on the financial impact of the Tax Reform bill that was passed, Trump’s one big legislative achievement.

It was sad to read that Meyers Transport, a Canadian motor carrier that has served the needs of shippers in Ontario for 90 years, closed its doors on January 20. Meyer’s Transport has been one of those “salt of the earth” family run businesses that has been a part of the Canadian trucking scene for almost a century. This news caused me to reflect on the changes taking place in the Canadian freight industry.

The Meyers closing comes very shortly after the news that TFI (TransForce International) had acquired National Fast Freight in late December. TFI has been consolidating Canada’s east-west intermodal business through the acquisitions of Clarke Transport, Vitran and the Quiktrax division of QuikX. It should be noted that Clarke Transport and Vitran were the product of various consolidations over the years (i.e. TNT Railfast, CSR and Cottrell Transport in the case of Clarke). While there have been a few new entrants to this segment of the industry over the past 20 years (i.e. Quiktrax, M0 Freightworks), the number of independent players has been shrinking.

If one steps back and looks at the entire LTL sector of the Canadian freight industry, it is clear how much consolidation has taken place during this period. TFI now owns TST Overland Express, Kingsway Transport, QuikX Transportation, Concord, Tripar Transportation in addition to Clarke Transport, NFF, Vitran, Quiktrax and a host of smaller players. In Western Canada, the Mullen Group has acquired the Gardewine Group, Grimshaw Trucking, the Highway 9 Group of Companies, Jay’s Transportation, the Kleysen Group and other smaller companies, each of which has LTL operations. The Manitoulin Group has also been active in acquiring LTL carriers. Over the past few years, it has purchased the LTL business of Penner International, Smooth Freight, Jomac Transport, the LTL division of Highway 13 and Ridsdale Transport.

Of course, there has been consolidation in other segments of the Canadian transportation industry. TFI made big news a few years ago, by acquiring the Contrans Group that it added to its diverse portfolio of purchased truckload carriers. More recently it acquired the truckload operations of XPO logistics. Canada’s other major transportation companies have also been active in acquiring truckload carriers. In the small parcel sector, TFI owns Canpar, Dynamex and Loomis.

There have also been some big changes in Canada’s logistics service provider industry. Radiant Logistics of Bellevue Washington purchased the Wheels Group last year and in December of 2016, Transplace of Dallas Texas acquired Lakeside Logistics. Two of Canada’s leading freight management companies are now under American ownership. Clearly there has been much consolidation in the traditional sectors of Canada’s freight industry - - - small parcel, LTL, truckload and third party logistics.

As the year draws to a close, it is time to reflect on the major news stories in the world of freight transportation. These are the ones that struck me as being the most impactful.

1. The Economy – Two Steps Forward/One Step Back

US GDP grew by over 3 percent in 2014, its best showing in several years. A rise in employment levels, coupled with an increase in consumer spending, helped lift the American freight market. The long, slow post Great Recession recovery finally kicked into a higher gear, driving an upswing in freight activity.

However, November data highlighted a slowdown in the pace of recovery across the U.S. manufacturing sector. At 54.7, down from 55.9 in October, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest overall improvement in business conditions since the snow-related setback in January. Although the latest reading remained well above the neutral 50.0 threshold, the index has now dropped for three months in a row. Weaker rates of output and new business growth were the main negative influences on the headline PMI figure in November.

2. America - the Super Energy Power

If your trucking company hasn’t been purchased or doesn’t get purchased by TransForce, will it be in business in five years?  That is the question that came up in a recent discussion with a long time industry colleague.  The response I received was that he didn’t think his company would survive.  I was a bit surprised by the response and asked him for an explanation.  This led to an interesting discussion on what it is going to take to make it in the trucking industry in 2014 and beyond.

We both agreed that while the trucking industry has changed in some ways over the past decade (e.g. more use of technology, better cost controls after the Great Recession, LNG vehicles, greater use of 3PLs as customers), the industry is not that much different from ten years ago.  The slow economic turnaround since 2008 has created a challenging environment and there is little reason to expect a major improvement in the short term.  Rate increases are hard to come by, even with a tight driver situation.  Even more of a concern is the lack of innovation in the industry and the threat that such changes could wreak on so many complacent companies.

The warning signs are there.  As a Canadian, you don’t have to look much further than Nortel and Blackberry to see what can happen to industry leaders that were not able to keep up with changing consumer needs and quality competitors.  At the same time, one can observe what companies such as Amazon and Apple have been able to do to change the paradigm of some long established industries. 

Some of the large trucking industry players are making investments in technology and people.  They are integrating back offices and focusing on achieving economies of scale.  They are thoughtfully expanding their service portfolios and geographic footprints. 

Some of the small players are offering solutions that are very tailored to certain industry verticals and geographic areas.  Companies that are focused on same day delivery, refrigerated intermodal service, pooled LTL service, energy distribution and other emerging capabilities are creating a space for themselves in the industry.

At a recent Driving for Profit Seminar in Toronto, Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics Magazine, led two trucking company investment advisors, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc. through a discussion of how to buy and sell trucking companies in 2012.  Here is what they had to say.

From a buyer perspective, they encouraged companies to be proactive in seeking out prospective acquisition candidates.  Since so much about buying is timing, it always important to plant the seed and remain in contact.  While a trucking company’s leaders may not be ready to sell their enterprise in the second quarter of 2012, it is at least important as a purchaser to express your interest. One should also keep in mind that the purchase process itself can take six to nine months or more complete.

The buyer should carefully think through some key questions such as “why” make this purchase, what are the underlying business risks of a potential acquisition, do they have the investment advisor team in place to guide them through the process and do they have the “bandwidth” (management team) to manage the acquisition? In other words, can the company manage its current base of business while it is trying to assimilate new customers, new employees and possibly fit two cultures together?

The two advisors mentioned that they use a valuation multiple for an asset-based business of 3.75 X normalized EBITDA.  The word “normalized” is an important concept since this refers to what the earnings will look like when certain expenses or withdrawals that are taken out of the company by the current owners are removed from the income statement to better reflect what the business will look like on a going forward basis.

The purchaser must look at a number of variables in determining how to pay for the company.  The advisers related it to buying a home. The purchaser looks at what they can make in terms of a down payment and the level of mortgage they wish to carry.   Similarly, when buying a trucking company, one needs to consider the financial structure of their offer.  This involves an evaluation of cask payment, business loan and earn-out.  The latter is a common term that refers to principle of paying the seller part of the purchase price from monies earned by the business over a period of years.  If the sellers remain with the business after implementation and help maintain the income flow, they are rewarded with a business retention bonus for their efforts. 

Two experts in trucking company acquisitions predicted this week that we are in store for an upswing in industry consolidation in 2012.  This was one of the highlights of the Driving for Profit event that was held in Mississauga this past week.   Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics interviewed two gentlemen who play significant roles in these types of activities, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc.

In the initial stages of the interview, Lou asked these gentlemen about why we did not see more consolidation during the recent recession. The key takeaway from this discussion was that during this difficult period, trucking companies hunkered down into a “survival mode.”   The recession created devaluations of trucking company businesses.  Most truckers decided to tough it out until valuations improved.  Lenders, who saw trucking as a core industry, chose to support the industry until economic conditions improved.

The two investment advisors now believe that M & A activity will now increase.  They base this conclusion on the fact that after a 3 year hiatus, there is a pent-up demand.  There is a “ton of cash” waiting to be invested.  Balance sheets are healthy again.  During the recession, many trucking companies right-sized their businesses.  Investors will now see more efficient, stable businesses. 

Demographics will also play a part as many baby boomers who are seeking an exit strategy are three years older and their timetable for leaving the industry is now shorter.  We now have willing buyers, sellers and bankers.  While the two gentlemen do not predict a “feeding frenzy,” they do expect to see a doubling in the volume of trucking company acquisitions as compared to what we saw the last three years.

Lou then asked these advisors about the types of deals we are likely to see.  They expressed the view that there will likely be more “bolt-ons” where companies seek to expand a core business.  These types of deals allow companies to “improve overheads, bring margins into line” and “reduce dependence: on certain “key customers.”  When asked a question about whether we can expect to see a blockbuster deal like the Yellow-Roadway merger in the U.S., Doug Nix made the observation that the money would be there if the right plans with the right people are put in place.  However he opined that he does not think Canadians have the “chutzpah” to make a deal of this nature.