ACT Methodology

Supply = Class 8 Tractors

Class 8 demand forecasting is built on three-principles:

Principle #1 - Stock Replacement - helps to conceptualize how many Class 8 tractor units need to be replaced each year.

Principle #2 - Economic Activity (freight) - helps to determine how many new Class 8 tractors need to be added to the population to meet freight activity.

Principle #3 - Productivity - because it's not only about economic activity and freight creation but also the changes in utilization and tractor density that impact the amounts of work to be done.

Stock Replacement is built on three lifecycle assumptions and historical retail sales figures (which come from the OEMs).

Lifecycle Assumptions

1. First trade pressure = Is the value of my tractor worth enough now to trade in, or should I hang on longer?
2. Active fleet = How many tractors are available to do the work now?
3. Total fleet = How many total tractors are available now to do the work?

From the stock replacement model, there are three outputs:

1. Total fleet population
2. Fleet age
3. Underlying replacement demand

From here, we use our used truck database, measuring odometer and transaction readings to understand when a Class 8 tractor moves from useful life (active population) to secondary use (total population).

This gives us a total market useful life, where we measure tractors at age 15 years and younger (U15). This is an all-in number accounting for truckload (for-hire and private fleets), less-than-truckload, intermodal, drayage, and agricultural use.

To narrow the market further, we remove those tractors that aren't performing regular truckload freight and focus on the under 11-year-old population (U11).

To understand the market and supply over time, we build our Class 8 freight-hauling (Cl8 U11) population through a series of "cuts."

Let's break new capacity growth into a simple equation: (Total Class 8 retail sales) - (Class 8 straight truck retail sales) = Class 8 tractor retail sales.

Then, updating our population with another equation: (Class 8 tractor retail sales) + (Class 8 tractor U15 population) - (Class 8 tractor U11 population) = Class 8 tractor U11 population

Economic activity can get complicated quickly; as mentioned earlier, we like to keep things simple. There are lots of ways to measure economic activity and the amount of freight it produces. We've opted for a simple but effective measure we call the ACT Freight Composite Index.

The Freight Composite Index is a hallmark of our forecasting. It is a freight-weighted GDP measurement of the economy that conceptualizes economic and freight correlation. It also measures both for-hire and private fleet activity.

Dollars of economic output are not equal in terms of freight generation; as we like to say, "there isn't a lot of freight in a haircut."

Even though nondurable goods and services represent the majority of US economic activity, durable goods consumption, manufacturing, and residential and business investments are the primary generators of freight drivers of Class 8 market cycles. Add to this Alan Greenspan's insights that people consume about the same weight per capita as 50 years ago, and we know that more people = more stuff.

Again, creative yet simple solutions to analyzing a complex freight market.

Another measure of freight activity that we utilize is the Cass Shipment Index, a view into the transactional market of freight expenditures to gauge our Freight Composite Index and understand the data inside this market at a more granular level.

Productivity changes over time with improvements in or changes to the need for new vehicles and the work to be done by that number of Class 8 tractors. Productivity is made up of three components:

1. Density changes brought about by shippers' efficiency to improve package and delivery
2. Modal shifts that create shipper cost savings and have the potential to improve scope emissions
3. Utilization, which we like to break down as an equation (a - c + b = Utilization)
   1. = demand for new Class 8 tractors (converting economic data points into freight activity)
   2. = stock replacement demand for new Class 8 tractors (estimate the number of tractors that need replacing)
   3. = productivity of the fleets and shippers combined (a measure of the drive for efficiency)

Ability and willingness are the final measures of supply. Class 8 tractors are tools in a fleet tool belt; they are the literal drivers of freight across the country.

The purchase of these vehicles is entirely about economics and the fleet's ability to maximize the investment in these tractors to turn a profit.

So, we analyze whether a fleet is able to purchase new vehicles and whether the current environment creates a willingness to buy new vehicles. To do this, we've recorded the quarterly earnings and financial statements of the publicly traded truckload carriers for decades. Understanding the publicly traded carriers' financial health is an excellent proxy for the overall market, and as these are the top-performing fleets, they are also some of the largest buyers of Class 8 tractors.

If fleets make money, they replace their tractors or expand their fleet. When they aren't making money...they don't.

Demand = Freight activity

It's ironic that our supply measurement is so heavily influenced by the measure of freight-generating economic activity when demand is freight-generating economic activity. Maybe not...

You already understand how we view freight demand, what components of the market we focus on, and why. But to reiterate, let's look at the top of the freight summary section of our forecast, showcasing the forecast methodology we've outlined above.

Here, you can see it all come together:

Supply: Class 8 Tractor Retail Sales (actual and forecast), Class 8 Tractor Population, U11 (actual and forecast), and Truckload Carrier Net Income Margin (actual and forecast)

Demand: Cass Shipments Index (actual and forecast), ACT Freight Composite Index (actual and forecast), and Productivity Composite (actual and forecast)

The simple but deliberate and balanced methodology builds out the forecasts for spot and contract rates across the dry van, reefer, and flatbeds.