NE Supply Chain September 21, 2004

1
NE Supply ChainSeptember 21, 2004

• Thom S. Albrecht, CFA
• BBT Capital Markets
• talbrecht_at_bbandt.com
• 804-787-8231

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My, How The Industry Has Changed!!
The truckload industry is one of the great
growth industries for investors to consider.
Research report, 1983 Our goal is to grow,
grow, grow. Were gonna be a 1 billion company
by 1992 J.B. Hunt, 1987 Well never have a
relationship with any railroad. Don Schneider,
1988 Were working harder, making less money
and enjoying it less. Mike Starnes,
1990 Were not just in the trucking business
anymore. J.B. Hunt, 1995 He who has the
drivers wins. Kirk Thompson, J.B. Hunt
Transport, 1999 Volume is vanity. Profit is
sanity. Duane Acklie, 2002 The 1 quality we
look for in drivers is if they are breathing.
Fleet Owner, 2004
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Conventional Wisdom - Early Deregulation

• Wide Open Growth
• All Things to All People
• Get Big Fast
• Size/Scale Market Share Were Keys To
  Profitability
• Centralized Approach Purchasing Economies
  Back Office Efficiencies
• Multiple Equipment Types
• Diseconomies of Scale Theory Emerged In Mid-1980s

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Conventional Wisdom - Circa Now!

• Each Account, Lane And Truck Must Be Profitable
• Control Your Costs
• Margins--Not Market Share
• Decentralized PL Mitigates Diseconomies Of Scale
• Capital Is Precious
• Proper Working Capital Management Creates

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Truckload Model of the 21st Century?

• Brokerage-Mode Indifferent Protect Assets
• Intermodal (Preferably with Assets)
• Intense Dedicated Focus (WERN is 1/3 Dedicated)
• Downplay OTR
• Regional Service
• Team/Expedited

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Evolution of Industries--5 Stages

• Entrepreneurial Growth - wide open, 40-100
  rates
• Manageable Growth - more controlled, but 15-25
  still possible
• Growth Cyclical - subject to economic swings, but
  still 10-15
• Stalwart - growing faster than GDP, but main
  profit growth is
• from efficiencies, not top-line, e.g.,
  Coca-Cola in the 1990s
• Mature - growing at the rate of GDP or less
  market share battles
• consolidation cost pressures greater than
  growth long-haul LTL
• acquisitions are sometimes the only source
  of growth

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What Caused Excess Capacity in 2000-2001?
Big Freightliner Share Grab in 1990s (18 to
35) Accelerated Equipment Trade Cycles FTL
Selling New Trucks to O-Os from 1997 Onward Zero
Down Purchase Programs The Associates IPO Huge
Growth in WOR Paper Aggressive Growth
Expectations By Wall Street
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Selected CompetitorsTypical ProfileMix of the
Big BoysDistance Rate AnalysisCosts
Analysis
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Typical Truckload Carrier Financial Profile

• OR of 94.5 95.2 in 1998-99
• OR of 98.5 98.0 in 2001-02
• Tractor Age 58 Months vs. 44 in 2000
• Trailer Age 72 Months vs. 58 in 2000
• Surviving Doesnt Ensure Thriving
• Source ATA A.C.T. Research BBTCM estimates.
  Those with 20 or more trucks.

10
Freight Mixes of the Big 3 Public Carriers
Source Company reports and BBT Capital Markets
estimates.
11
Heartland and Knights Industry Mix
Source Company reports and BBT Capital Markets
estimates.
12
Selected Keys to Heartland and Knight

• Both Pretax Costs Per Mile Approximate 1.15 or
  Less
• Focus on Driver Retention More than Recruiting
• Fanatics About Personnel Training
• De-Centralized Terminal PL
• Ongoing Tractor-to-Non Driver Improvement
• KNGT 4.31.0 in 2000 5.61.0 Today
• HTLD 5.51.0 in 2000 6.41.0 Today
• Neither Wants a Lot of Employees on Site

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Swift Raising Rates Or Merely Shrinking Its
Average Haul?
Source Company reports
14
Knight Rising Rates Despite Longer Length of Haul
Source Company reports
15
J.B. Hunt Rates Rising Faster Than Length of
Haul Declines
Source Company reports
16
Since 1999 Costs Have Risen 3x Faster Than in
Previous Years
Source Company reports and BBT Capital Markets
estimates. Represents an index of
pretax costs/mile for 10 TL carriers.
17
Case 1 Knights Cost Per Mile and Pretax Margin
Source Company reports
18
Case 2 Werners Cost Per Mile and Pretax Margin
Source Company reports
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Case 3 Swifts Cost Per Mile and Pretax Margin
Source Company reports
20
What are Carriers Up To?
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Attitudes of the New Millennium

• Intense Yield Management
• Commitment To Servicing Business, Not Just
  Winning It
• Helter Skelter Lanes-Nope
• Managing Through Cycles
• A Time To Grow, A Time To Pull Back
• Aggressive With Accessorial Fees
• Philosophy We Expect To Get Paid For ALL Of Our
  Work

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Other Attitudes Of Successful Carriers

• Existing Freight Is Constantly Scrutinized-Is It
  Meeting Expectations?
• Pursuing Rate Hikes is a 24/7/365 Job
• Fuel Surcharge Innovation
• Pre-Book Philosophy Versus Daily Poker
• Nancy Reagans, Just Say No!

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Productivity Whats Important to Carriers?

• Revenue Miles/Truck/Day
• Rate Per Mile
• Tractor To Non-Drivers
• Drivers To Non-Drivers
• Operating Pre-Tax Costs/Mile
• Revenue/Non-Driver Employee
• Note Deadhead is Usually 3rd Most Important,
  Not First

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Other Expense Trends
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Average BIPD Deductibles Are Up 6-Fold Since
1999
Source Company reports and BBT Capital Markets
estimates. Self insurance retention (SIR) per
BIPD incident. Figures represent
average deductibles for a group of 11 TL
carriers.