Enjoying the Ride: Optimizing the Trucking Industry Surge

From the middle of 2017 to the middle of 2018, trucking was on a roll. With industry growth of three percent – a seismic number compared to other industries – trucking outpaced GDP. Leaders agree the heydays are unlikely to continue at such an impressive pace, and a reversion to the mean is expected, but the industry is still well-poised to maintain a positive outlook going forward.

Along with Truckload Carriers Association, Katz, Sapper & Miller’s Transportation Services Group, and KSM Transport Advisors hosted the TCA Profitability Program (TPP) on Dec. 4 at KSM’s Indianapolis office. Trucking industry specialists offered presentations on the future of the sector, trends, the changing financial reporting and tax landscape, and strategies for maintaining positive growth. Facilitators and presenters included:

• Thom Albrecht, CFO, Celadon Group
• Tim Almack, partner, KSM
• Chris Henry, program manager, TCA Profitability Program
• John Lyboldt, president, Truckload Carriers Association
• Kirby McLinn, director of analytics, KSM Transport Advisors
• Jason Miller, partner, KSM
• Troy Hogan, director, KSM
• Jack Porter, managing director, TCA Profitability Program
• Karen Smerchek, president, Veriha Trucking, Inc.
• Spencer Tenney, managing partner, Tenney Group

Peering into the Future

“2019 is going to be all about selling driver services, not trucking.”

Jack Porter repeated this statement multiple times during the day-long event, the first occasion during a panel discussion that kicked off the meeting. Joined by Thom Albrecht and Karen Smerchek, and moderated by Chris Henry, the panelists covered several issues as they reflected on the past year and offered strategic assessments of the future of trucking.

All agreed that after a robust 2017 and 2018 in which the market peaked, 2019 looks promising, but with the caveat that growth cannot continue at the current pace. Though rate increases led to a top-line revenue surge of 14 to 18 percent, costs have also increased related to driver pay and retention. “Attracting human capital is going to get tougher and tougher,” said Porter.  Changing driver pay from by-the-mile pricing and pay to hourly or salary may be required.

Albrecht believes the key data to watch is shifts in industrial production (IP). “In 2015 and 2016, IP was negative for eight straight quarters,” he said. “It may grow as much as 2.5 percent next year, but eventually will level off.”

Albrecht concurred with Porter’s assessment that driver totals are still a problem, and will continue to be so. But he also believes a driver shortage is a good problem for trucking because it supports just the right amount of turnover the industry can bear.

Smerchek believes one of the most important considerations for trucking companies going forward is the importance of remaining diversified. Even her company’s largest customer is responsible for less than 10 percent of their revenue. “You have to differentiate between customer-based and commodity-based offerings,” she said. “And if you can’t differentiate your services, customers are always going to go back to price.”

Albrecht also focused on shifting industries. “Auto, housing, and aerospace have all peaked,” he said. “Companies must gain exposure to ecommerce, which now owns almost 10 percent of total sales, energy, and startup disruptors. You want to align with customers that have a healthy, vibrant ecommerce platform, are capable of growth, and can at least keep brick and mortar flat.”

Porter made the point that millennials and subsequent generations are not starting trucking companies. The future of the industry requires finding a way to scale company growth while reaching younger people entering the workforce and management. Incentive plans and nurturing are a necessity. “We must create greater industry visibility earlier in their career, provide training and eliminate the fear of failure, and be transparent about opportunities and culture.”

On the subject of recent tax cuts, many were in agreement that they offered unnecessary incentives and artificially stimulated too many industries. Too much buying power will eventually lead to some form of business hangover. What that may be for the trucking industry remains to be seen.

Porter put a bow on the discussion by saying that carriers with strong service records and unassailable relationships are untouchable. “You have to tell your own story.”

A Short Look Back

After discussing what the future holds for the industry, Chris Henry provided a presentation reflecting back on whether the predictions by carriers in the TCA Profitability Program for 2018 came true. For the most part, expectations were spot-on, including:

• Eight to 22 percent organic revenue growth
• Zero to 14 percent improvement in gross margin results
• Driver and non-driver payroll increases
• Shorter length of haul
• Continued driver retention issues, though higher wages reduced turnover

Henry also raised the issue of offering higher driver wages and its potential impact on gross margin, noting it was still too soon to know the downstream effects. Henry noted that gross margin would, however, shift as increased automation lowers overhead administration expenses.

Building a Profitability Model

“Trucking is a business of pennies,” said Kirby McLinn during his presentation on developing an ideal freight network.

McLinn broke down the basics of Freight Network Engineering 101. Major points in his presentation included the following:

• Profit begins with the revenue model, but companies must focus on margin, not just revenue
• Time is critical
• Metrics to measure performance continue to shift
• While the current industry focus is on margin per day to improve the carrier profitability by maximizing yield or operating ratio, yield and margin are relative and can be compared only within the context of the carrier’s network
• That said, you always want to increase yield

McLinn wrapped up his presentation with the following key takeaways:

• As others noted, market improvements may slow in 2019
• Single-lane profitability or margin analysis tells an incomplete story
• Operators should maximize data to monetize the relative values of customers and lanes from a network view
• Incorporating analysis results into pricing decisions and negotiations is critical
• With solid strategies, and by executing actionable and agreed-upon solutions, you can beat the market

Company for Sale?

Spencer Tenney discussed best practices when you are approached with unsolicited offers to purchase your trucking company. Tenney noted the reason for the uptick in offers of late is that companies with capital to spend are in need of more drivers. Factoring in reasonable interest rates, it is an ideal time to purchase.

“Money isn’t the only reason to consider selling,” said Tenney. “Security for your family and your employees, your legacy in the community, and a way to open doors for future – all are reasons for contemplating a sale.”

Tenney then provided some best practices should the opportunity to sell meet your goals:

• Set Rules of Engagement – Establish confidentiality, expectations (including information to be shared and getting a value range), and a timeline for action
• Get an Offer – Establish the context for the offer, evaluate the offer against goals, define gaps in the offer, and identify tools to close gap valuations
• Enhance the Offer – Look for opportunities to maximize and not opt for convenience

Going Forward

The final presentations of the day all focused on areas trucking companies can improve heading into 2019.

The Knowing-Doing Gap Survey

Throughout the seminar, Tim Almack and Chris Henry discussed the results of the Knowing-Doing Gap Survey, highlighting the key issues on the minds of owners. The survey explored the connections between how companies are turning knowledge and information into actionable items. Company vision and values are key factors in building relationships with employees. The survey also addressed factors such as profitability and workforce strength. Other key points included:

• Communicating company mission
• Implementing effective employee onboarding
• Ongoing training and workforce development
• Competitive intelligence
• Incentive compensation
• Transparency

Building Your Strategic Plan

Jack Porter provided the framework of a plan to ensure a profitable 2019. While driver services were again a point of emphasis, Porter noted four key areas of focus:

• Customer demands
• Profitability and efficiencies in the changing market
• Reducing costs
• Talent growth

Porter proceeded to deliver a high-level overview of tactics necessary for building an effective strategic plan, which included:

• Translating planning into execution through leadership, operations, tracking, and more
• Developing your business strategy by reviewing the market, assessing competition, and understanding the supplier/buyer power dynamic
• Creating a plan to enact those strategies and establishing a leadership framework to execute
• Identifying goals and establishing a path and systems toward reaching them
• Measuring the outcomes

Porter asked attendees a key question to take with them as they left the session: If every other aspect of their business remained consistent at the current levels of performance, what is one change they could make that would have greatest impact?

Tax and Accounting Update

Rather than try to condense comprehensive changes to the tax code into a short presentation, Troy Hogan opted for an open floor question-and-answer session to address the most pressing concerns of attendees. Jason Miller addressed changes to revenue recognition accounting rules in 2019 and shifts in the rules regarding operating leases and recognition on balance sheets effective in 2020.

As the day-long session ended, a sense of optimism was palpable. While trucking owners do not expect business to scale the heights of the past year, there is still a belief that operations will continue trending in a positive direction.