Vitran Corp. believes it is creating a new North American model for motor carrier infrastructure. President and CEO Richard E. Gaetz explains how in an exclusive interview.
CT&L: Since taking over as President and CEO of Vitran Corp. about 10 months ago, what would you consider to be the greatest challenge you have faced?
Gaetz:It has been a clean transition. I was COO prior to this role and the structure I have reporting to me has remained identical. So not much has changed from an internal challenge perspective, Vitran’s goal continues to be executing our strategy and delivering results to our customers and shareholders. The non-controllable aspect that has been most frustrating for us has been the state of the North American economy, particularly the U.S. economy where Vitran does a considerable amount of business. The market continues to be soft and we have made plans around the current conditions. Although we are not expecting the U.S. economy to significantly recover in 2003, we will continue to generate a business strategy that aims to deliver optimal results in a challenging economic environment
CT&L: Every CEO brings his own blend of strengths and sense of direction to the job. How will Vitran be different under your guidance? What stamp would you like to place on the company?
Gaetz:We’ve always been a performance-driven organization. The stamp that I expect our team to put on this organization is simply one of delivering results. We are going to continue to be aggressive from a revenue perspective and we are going to make sure that our people manage the detail in this business too. I’ve been around long enough to know that if you don’t manage the detail in this business you are not going to be successful. We are going to roll up our sleeves and make sure we are one of the top performers in each of our business sections. That’s our objective and the stamp I would like to leave on the company.
CT&L: Looking at Vitran overall, from the shipper’s perspective what is unique about what it has to offer?
Gaetz:We are a company with a predominant LTL network augmented by a solid and full-service logistics operation. We have a significant North American footprint. We have coverage in Canada on both a regional and national basis; we have coverage in the Midwest U.S. When we get in front of our customers today in U.S. and Canada we can offer them a regional business, a North American presence that covers all of Canada and 17 central U.S. states, we can offer an expedited product for both Canada and the U.S., and a cross border product, all augmented by a tremendous information systems support. We like to think we are creating a North American model that doesn’t exist today. There is not a U.S.-based company that has a self-owned and controlled infrastructure that Vitran has in Canada, nor is there a Canadian-based company that has a self-owned and controlled infrastructure that Vitran has in the U.S. And we’re not finished yet; the geographic stamp remains to be expanded.
CT&L: In October Vitran reported a significant year-over-year improvement for the first three quarters of 2002. Yet the stock market has never been particularly kind to trucking companies. How are you feeling about Vitran’s stock price? Does it accurately reflect what the company has to offer?
Gaetz:Based on most financial measurements we feel we are an undervalued company relative to our peer group in the North American transportation and logistics industry. We created some earnings momentum in the back half of 2001 that carried on throughout 2002 and we expect to continue to generate solid results in 2003. Our stock price in Canada has gone up significantly but in our mind our company remains an undervalued property and part of that is because the Canadian market doesn’t give the transportation sector the attention it deserves. I do believe, and in recent months this has been noticeable, there is a renewed interest for real companies with real revenues.
CT&L: I noted that your cross border business is growing at a double-digit pace. In view of the continued growth potential for this side of your business how concerned are you about the direction that U.S. Customs is taking in terms of security at the border?
Gaetz:We need ease of entry both north and southbound. But we cannot forget what has gone on since the terrorist attacks in the U.S. and we are going to see continued pressures in terms of security at the border. We support greater security but what we need is a logical, well thought out plan that doesn’t discriminate and works for credible key players that are crossing the border on a daily basis. Fortunately we have a lobby in Canada through the Canadian Trucking Alliance that is very effective and spends a lot of time presenting the industry’s position on border issues. The American Trucking Associations also is very effective at lobbying. Everyone has the same interests. The American and Canadian governments, the ATA and CTA, shippers and carriers all want product to flow intelligently and quickly at the border crossings but they want to participate in creating this security environment. There are hiccups, such as the ability of Canadian fleets to carry explosives into the U.S. and proposals for a driver identification card, that clearly are important to us as Canadian carriers. My personal view is that logic will prevail. We will find a way to make the border more secure while allowing goods to flow in a proper manner. But I don’t think that’s going to happen over night. Where there are willing parties we will find a solution that works.
CT&L: There is concern that FAST will never work for LTL carriers who have shipments with multi origins and multi destinations. What’s your view?
Gaetz:We are in the process of completing registration for FAST. At the end of the day, those LTL carriers who are clearing multiple shipments have always had to adapt to new technologies and new systems being used at the border. Typically these programs have been beneficial to both customers and carriers as well as the government as they’ve brought new levels of efficiency to the process. What we have today is the same objective everyone wants a more efficient, reliable method of clearing product at the border but we have the security issue that has rightly crept into the mix and we just have to find a balance that works for every body.
CT&L: Has your company worked out what impact all the new security requirements will have in terms of your cost structure? Are these costs that shippers should expect to be passed on to them?
Gaetz:They are not all known yet, of course, but the costs associated with border clearance are no different than the costs associated with all the other accessorial parts of our business. All of these issues whether border clearance-related, appointment delivery-related or return-pallet related — have costs, and the industry over time is finding a way to deal with these associated costs. At the end of the day we have to charge the customer a competitive rate but it has to be a rate that reflects the true cost of handling that particular shipment. We are going to become as productive and as lean as we can in every aspect of our business, but once we have achieved that level internally the customer has to pay for the difference. I think that any client that doesn’t appreciate that their costs will likely go up as a result of enhanced security measures is a customer that is not in tune with the market place.
CT&L: How through general rate increases or surcharges?
Gaetz:It depends on the stability of the costs as we come to better understand those costs. Anything that is not going to be volatile and is a new cost of doing business is best dealt with through pricing as opposed to surcharges. The surcharge mechanism makes sense with fuel because of price volatility but there aren’t many other areas where surcharges make sense. The industry came close a year ago to looking at insurance liability surcharges but didn’t d
o it for the right reasons. The surcharge mechanism only works in situations where the impact is going to be long term and volatile.
CT&L: Starting last May and continuing into the fall we noted a shortage of capacity in the marketplace. Have you seen that? How long do you expect it to continue and what impact do you see it having on rates?
Gaetz:In the LTL sector we have not felt the capacity issue as much as the TL sector and that’s for a couple of reasons. From a facility perspective most LTL companies have some capacity. And the real driver behind the capacity issue is the driver shortage. In the LTL business most of our drivers are working in local P&D applications where they are home at night with their families or they are running scheduled routes between an origin service centre and a destination service centre. Typically those are shorter routes and they too are home most nights. It makes for a more stable driver environment. Where the driver shortage is more acute is in the longer haul TL segment where the drivers are away for many days at a time and aren’t sure where their next load will take them. That is the market that is feeling the driver shortage most significantly. Now you throw some interim delays going on at the border and you find that the carriers that are handling TL freight internationally are even more exposed than domestic TL carriers. Has the capacity shortage allowed the industry to move pricing? I think the industry has been working very hard the last few years to take pricing up, as it has to. Clearly the small amounts of consolidation that are going on in the market have assisted that process but carriers have to improve their yield, whether they are publicly held or not, if they want to continue to reinvest in their business and be players in the upper quartile and be able to give customers what they want every day. We’ve seen prices inching up a little bit. I think TL players for the first time in a long time are seeing an improvement in pricing and it was long overdue. And we will likely continue to see price pressure in TL long term because the driver issue is not going to go away. Once drivers start to get better pay and stay in the industry, rates will stabilize.
CT&L: Let’s talk about your intermodal division. Transport Minister David Collenette has been quite vocal of late about the need for more cooperation and less competition among rail and trucking. What is the extent of your intermodal services and where do you anticipate growth in this area for Vitran?
Gaetz:Vitran operates intermodally throughout North America but our biggest single relationship is with Canadian National Railway domestically. We understand the role that intermodalism can play in the market place but in all due respect to Mr. Collenette there are in many cases two distinct markets. The railway cannot compete in some lanes and on some commodities and in some supply chain structures. That issue is not going to go away. There has been a significant conversion from rail to truck over the years but as the railways continue to do a better job there is opportunity for rail to grow their business a little bit. If you spoke to many players in the Canadian transportation scene, you might be shocked at how many have a relationship with one of the two railways in Canada. There clearly is an emerging understanding of how the railways can play a role in the Canadian market but the supply chain strategy in Canada would have to be modified to incredible levels for the railways to take away much of the mid-range and short haul trucking business. We like intermodalism; we have the experience and expertise to know in which parts of our business it works and in which it doesn’t. We’ve had a great relationship with CN for many years and we expect to continue that relationship in the future.
CT&L: You also have a logistics division. Some leading carriers have preferred to stay out of the logistics arena. Why has Vitran chosen to get into it?
Gaetz:We got in the business seven years ago. We are very careful, very selective; we don’t have a logistics shingle hanging on our building just for the sake of it. We will participate at any and all levels of reengineering a supply chain for the customer. We like to do it when it drives revenue into our transportation infrastructure. If someone wants a pure independent 3PL there are other players that may be a better fit for that customer than Vitran is. But if someone wants to listen to and understand a lower-cost overall solution to their supply chain management and transportation then we are a pretty effective solution.
CT&L: Vitran has made considerable investments in technology in recent years. Can you outline some of the key benefits to shippers created by this investment?
Gaetz:I would argue that Vitran has one of the best IT solutions in the market place today. As a customer of Vitran you can track and trace on the Internet, you can download document images on the Internet, you can place your order on the Internet, you can customize management reporting by province, state, country, lane, customers on the Internet, you can check your claims status and AR status. You can conduct your entire business with us over the Internet. These are wonderful tools for those that take advantage of it but it’s still an underutilized asset. We have many large customers who take advantage of the information available to them but we have many small and mid-sized clients who still don’t take advantage of the wealth of real-time information that Vitran makes available to them. The industry in general is typically ahead of our client base. Some of our future IT initiatives will be more internally focused in terms of productivity putting more technology on our dock and in our trucks, for example — which will also further ratchet up the productivity level we provide to our customers.
CT&L: You’ve also done some "bricks and mortar" investing of late in your Canadian LTL operation.
Gaetz:We built the new facility in Montreal in 2000 and then we opened the Vancouver facility last summer. Both are particularly important because they put us in better locations in each of those cities to conduct our business. These are true truck intermodal facilities. Vancouver is a dynamic marketplace. In the LTL industry you have as much capacity as your smallest facility and we were very tight in Vancouver. The new facility more than doubled our size and allowed us to operate more efficiently and it will allow us to continue to grow our base of business in the Canadian market.
CT&L: What should shippers expect to see from Vitran in coming years. Are there other areas or markets included in your growth strategy that you could share with us at this point?
Gaetz:When a customer thinks of Vitran we want them to see us as an industry leader, we want them to see us as an LTL player that has more reach in North America than any other competitor. We want them to see a company that has a logistics service that can augment their transportation requirements. We want to be a clear leader from a technology perspective and from a performance perspective, not only from a damage-free, on-time service point of view but also from a financial point of view. We want to show our customers that we can charge them a fair price and make a proper return so we can continue to reinvest in our business to make it even better. Our customers should view us as the pre-eminent LTL player in the market.