For at least 18 months now I’ve been hearing about “zombie” truckers, motor carriers which are barely able to meet payroll from week to week yet somehow manage to hang on. Their continued existence maintains the capacity overhang that deflates rates since freight volumes during this recovery, especially in the LTL sector, are not growing as quickly as during prior recoveries. No doubt their desperation to secure any business that can keep them afloat for another week also contributes to depressed rates for the industry overall.
I’ve also been hearing for the last 18 months that until the lending institutions pull the plug on these severe underperformers the industry will continue to be mired in its over capacity/low pricing glut. Well folks, we may be waiting for a long time for that to happen.
Elian Terner, director, investment banking for Scotia Capital, was at our recent Carrier Workshop, sponsored by Peoplenet Canada and conducted in partnership with Dan Goodwill & Associates. Terner is a rising star in our industry and he provided his take on the industry’s future direction and what trucking executives must consider to best position their companies for the years ahead. You may not like what he had to say. Terner acknowledged that lenders have been reluctant to force delinquent operators into bankruptcy; used truck prices are still low enough lenders would not get much in return when selling off the equipment.
Would improved pricing for used iron change things? Perhaps, but as Terner pointed out, lending institutions don’t really want to be operating trucking businesses. “Generally speaking they’re not in the business of seizing assets. That’s not what they want to do. In many ways it’s better for them to keep the company alive,” he said.
So if the lending institutions don’t want to fix the industry’s problems then what? We should be doing what needed to be done all along; fix them ourselves.
1.For companies looking to grow organically, there needs to be a focus on limiting capacity. As Mark Seymour of Kriska Transportation recently pointed out at Transcore’s strongly attended users conference: “We are here to create a model we can live with for years rather than months.” That means not adding capacity unless absolutely certain of its long-term need and not getting trapped into other people’s pricing. Market share don’t mean a whole heck of a lot if you’re bleeding red while trying to achieve it.
2.For companies looking to grow by acquisition, Terner believes a number of attractive opportunities exist to acquire troubled carriers. “Consolidation will be a key theme for the trucking industry over the next several years…A highly competitive M&A market will be led by large firms focused on growth by acquisition and financial buyers with strong cash positions,” he says. But before that happens the companies in a good position to be acquirers need to get over their current cautious approach. Few seem willing to risk making a bad investment so soon after recovering from a nasty recession.
3.Company executives looking to sell need to get over their “wait and see” attitude. Those who may want to sell seem to be held back by the cold reality that their company is not worth anywhere near what it used to be. Also, many independently owned and operated trucking firms in the Canadian market do not have firm succession plans in place and in many cases no family members waiting in the wings and interested in becoming second or third-generation operators. Both those factors are pushing owners who could be selling towards a wait and see attitude. Yet, these are times when “wait and see” can have very negative consequences. That was made abundantly clear by the numbers provided by Terner. Consider that back during the industry glory days of 2002 to 2007, when trucking company valuations were going off the chart, we hit a peak of 10.7 x EBITDA. During the trough of the recession valuations dropped down to about 4.2X EBITDA, according to Terner. As he pointed out, can you imagine how much was lost by people who took a “wait and see” attitude because they did not properly understand the market trends and their company’s value? A return to peak valuations will likely take another 5-10 years, according to Terner and will require substantial sustained EBITDA growth.
Seems to me like there is no better time than the present for motor carriers to, as Terner put it: assess their strategic positioning and determine the best path forward.
