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Trucking Along: Leveraging 2018's Momentum Into 2019

February 21, 2019

Transportations Services Group

After an impressive 2018 – a year many consider one of the most successful since deregulation – trucking industry leaders seem confident and ready to tackle whatever shifts may be in store for 2019.

Katz, Sapper, & Miller’s Transportation Services Group, Scopelitis, Garvin, Light, Hanson & Feary, and KSM Transport Advisors hosted the 20th Annual Trucking Owners and Leaders Roundtable on Feb. 5 in Indianapolis. A full itinerary of presentations and panel discussions provided attendees with insight into what to expect in the domestic transportation space in 2019, along with information on strategies to maintain positive momentum.

Following brief opening comments from Tim Almack, partner-in-charge of KSM’s Transportation Services Group, Brad Delco, senior vice president, research analyst at Stephens, Inc., kicked off the proceedings with an overview of 2018 results in the transportation industry. Delco also touched on key indicators for 2019 and which trends to be aware of as the year progresses.

Through an Analyst’s Eyes

The overwhelming theme of Delco’s presentation was simple: After impressive growth in 2018, all signs point to some correction in 2019. “Demand trends were robust in 2018,” said Delco. But with a small sample size for 2019, the market has some uncertainty due to trade and tariff concerns, which is creating choppiness in freight patterns. “We’re seeing signs of inventory levels building, outpacing sales growth,” he said.

Delco noted the same issues that affected carriers in 2018 show no signs of ending. “The economy is full and unemployment is holding steady at a low four percent,” said Delco, “so it’s hard to find drivers, which, of course, constrains the supply side.” On top of that existing concern, Delco believes the rate of growth is decelerating. He highlighted a few key data points:

  • Housing starts are slowing down
  • U.S. auto sales demand is flattening
  • Monthly tonnage peaked in October 2018, but has already declined 5.6 percent since

On a positive note, e-commerce, which is a good indicator of freight demand, continues to show strength. “Consumer sales are on the rise and retailers have healthy sales growth,” said Delco. But this good news was countered with the awareness that freight demand is slowing for the first time in a couple of years. “Through September,” said Delco, “sales outpaced inventory. The surplus has developed since the end of 2018, which is a concern.”

Carriers are beginning to see more cancellations as new truck orders have decreased from all-time highs. Additionally, the demand for drivers shows no signs of wavering. “It’s a tight labor market for drivers,” he said. “The average driver age continues to rise and pay continues to lag despite recent wage increases when compared against other vocational jobs.”

Delco closed his presentation with a succinct summary: The trucking economy is still showing healthy growth, yet signs indicate a downside may be imminent.

TCA Profitability Program Primer

Chris Henry, program manager of the TCA Profitability Program (TPP), delivered a presentation on the value of the TPP program, their processes, key performance indicators (KPIs), and industry objectives. Henry highlighted results from the TPP Top 20 program’s accurate predictions for 2018, including:

  • Organic revenue growth of eight to 22 percent
  • Up to 14 percent improvement in gross margin results
  • Payroll increases
  • Ongoing driver retention challenges

Henry then provided some insight on what to expect going forward for gross margin, including:

  • Higher driver wages will hurt gross rate margin
  • Anticipated higher external spend on maintenance
  • Increased automation will lower administrative overhead relative to gross margin
  • The rise of virtual terminals will impact fixed overhead

Marketing and Advertising to Improve Driver Recruiting and Retention

Jeremy Reymer, founder and CEO of DriverReach, moderated a panel on the challenges of recruitment and retention. Joining Reymer were:

  • Chad Hendricks, president, Brand Outcomes, Inc.
  • Chris Thomas, director of enterprise marketing, CRST International
  • Max Farrell, CEO, WorkHound

The general consensus from the panel was that companies need to find ways to differentiate their organizations to stand out in the market. “Trucking companies look like a commodity,” said Hendricks. “For drivers it often comes down to pay rate.”

“We need to shift the mindset,” said Thomas. “Advertising for drivers is different than other types of recruitment marketing. You need to thank drivers for what they do and discuss opportunities for growth.”

“Recruiting is sales,” said Farrell. “You need to get on the same page with employees and stay aligned – and that requires maintaining communication.” Farrell noted that also entails meeting expectations on anticipated home time and quality equipment. Even after you have hired a driver, you must work to continue selling the company.

“You need a process to listen, act, and respond to drivers,” said Farrell. Values and a mission statement unique to your company can provide clarity. He added that it is critical to have initiatives and roles within your organization to gather and react to feedback, including empathizing with the driver experience. “Competition isn’t just from other carriers,” he said. “It also comes from other industries and opportunities.”

Bridging the Knowing-Doing Gap

A second panel discussion followed, moderated by Almack and David Roush, president, KSM Transport Advisors, on ways carriers can bridge the knowing-doing gap. On the panel were:

  • Steve Hoekstra, president, Hoekstra Transportation, LLC
  • Justin Weber, COO, Venture Transportation Partners
  • Thom Albrecht, CFO, chief strategy officer and EVP, Celadon

Almack and Roush led the panelists through a discussion on tactics and strategies for optimizing company performance. Hoekstra, Weber, and Albrecht all contributed suggestions on methods to improve overall performance. Highlights included:

  • Developing a mission, vision, and values that are helpful in guiding actions within  the company among all employees
  • Focusing on problem solving by changing the mentality of employees to not just report on what is happening now, but to establish proactive efforts and build accountability while remaining conversational
  • Encouraging ownership of process by using a control mechanism to ensure steps are followed through, KPIs are monitored, and engagement occurs when necessary
  • Identifying what matters most for business, including revenue per truck, customer value, and driver and customer experience

The Lending Environment

The final panel discussion of the day focused on the current bank lending environment for the industry. Moderated by KSM partner, Jason Miller, featured speakers included:

  • Fritz Schutte, managing director, Periculum Capital
  • Filip Gagovic, senior vice president, Huntington Bank
  • Travis Severson, relationship manager, vice president, First Merchants Bank

The panelists were unified in their belief that although there was a significant amount of success in the industry in 2018, there is a sense the market is slowing down in 2019. Despite this turn, plenty of money is still available to make deals. “The strength of 2018 still makes it a borrowers market,” said Schutte. “Add in a world of robust mergers and acquisitions, you are still looking at more buyers than sellers.”

“Carriers are always looking for new efficiencies, including implementation of new technology and assessment of data,” said Severson. “Banks are always looking for full bank relationship opportunities, which will lead to more competition.”

Gagovic noted that capital is available, but companies must do all they can to make an impression on the bank. Schutte agreed, saying there is a shortage of strong, quality companies. “You want to put your company in the best position and showcase credibility.” “Be able to tell the story of your company,” said Severson. “That helps to make a case for generating capital.”

The Legal Landscape

Braden Core, partner, and Ashley Paynter, attorney, from Scopelitis, Garvin, Light, Hanson & Feary shared information on some of the larger legal issues facing the industry in 2019. Key points included:

  • No big-ticket legislation is expected to be passed by Congress in the next two years
  • Federal agencies will relax enforcement while state agencies will likely become more aggressive
  • Impact of the Fair Labor Standards Act (FLSA) shows no signs of slowing, as 2018 saw a record high number of FLSA class actions certified

Core and Paynter also discussed complications of arbitration agreements between federal and state regulations, changing class action laws, and independent owner-operator contract concerns.

Accounting and Taxes

Stephen Royster, partner in KSM’s State and Local Tax Group, closed out the day by providing a high-level overview of why transportation companies need to have an ongoing awareness of state and local tax issues. The issue of nexus as the first step in evaluating a state return was a key point of discussion. Companies are required to file a state return only if nexus has been created with that taxing jurisdiction. Nexus is the connection needed between the company and the state for the state to be constitutionally allowed to impose its laws on the company. Each state has its own interpretation of nexus, so it is a gray area often determined by subjective tests.

Royster also noted the reason state and local tax is such a complicated subject is because:

  • Trucking is a multi-state industry, so laws often conflict
  • There is compliance complexity, in which regulations often do not align
  • Risk management is an ongoing concern
  • Due diligence responsibilities are constantly in flux
  • Officer responsibility hinges on a shifting industry paradigm

Attendees exited the event with a comprehensive understanding of the challenges and opportunities ahead in 2019. The trucking business is still in an enviable economic position compared to many other industries. Although business may not reach the peaks of 2018, carriers still have reason to anticipate a successful 2019.

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