Pennypack Capital

Pacer International (PACR) For ValueX Vail 2013

Contact: Guowei Zhang Managing Partner gzhang@pennypackcapital.com

Introduction
Pacer is an asset-light 3rd party logistics company focusing on intermodal transportation
$220M market cap; $195M enterprise value 2012 Summary: $1.4B revenue; $9M of EBIT

Intermodal is the movement of goods via different modes of transportation truck and rail

3rd largest intermodal marketing company in the U.S.

Customers: Big Lots, Costco, Ford, P&G, Toyota, etc.

Investment Thesis: Substantial margin improvement opportunity in a secularly growing industry An attractive ultra long-term investment

Introduction (Continued)
Simple illustration of intermodal transportation Pacer Takes Care of Everything in Between

Shipper
Pacer sells its services to shippers Provides tracking capabilities and other customer services

Origin Drayage
Pacer responsible for pickup Delivery to rail intermodal terminal Equipment: minimal Partners: drayage companies, independent owneroperators

Railroad
Transportation by Railroad Pacer buys capacity from railroads Equipment: Containers & Chassis (leased) Containers (provided by railroads) Partners: Railroads

Destination Drayage
Pacer responsible for pickup from rail intermodal terminal

Receiver

Delivery to destination
Equipment: minimal Partners: drayage companies, independent owneroperators

Introduction (Continued)
Two business segments
(Figures in Millions)

Intermodal
Segment Revenue:

Logistics
$ 238

$ 1,180

2012 Segment EBIT (1):

38

(10)

Business Description:

International and domestic intermodal services. Include Mexican cross-border intermodal services.

International freight forwarding, warehouses, ports & transloading services, highway brokerage.

Capital Intensity:

Low have operating leases

Low have operating leases

(1) Does not include $19M of corporate and unallocated expenses

Investment Thesis
High ROIC business with substantial margin improvement opportunity in a secularly growing industry An attractive ultra long-term investment Solid secular growth story for the next decade and longer Strong business model with economies of scale

Low asset intensity

Substantial margin improvement story in Intermodal Low valuation: nearest competitor is twice the size of PACR in revenue, but trading at 7x enterprise value Potential short-term & long-term catalysts

#1: Solid Secular Growth Story

Intermodal volume grew at a 5.8% CAGR since 1980, much faster than rail and trucking volume Forecasted volume and revenue CAGR of 4.7% and 8%, respectively

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Source: ATA, IHS Global Insights, Norbridge.

#1: Solid Secular Growth Story (Continued)

Intermodal is only 2% of the overall transportation industry ($13B market). Meaningful opportunity for penetration

Trucking still represents 80% of the overall transportation market. Intermodal has been and will continue to take share from trucking
Intermodal transportation is 10-20% cheaper than trucking and has a lower carbon footprint

Rail is 3x-4x more fuel efficient than trucking

Just one long-distance, double-stack train between Chicago and Los Angeles can save 75,000 gallons of fuel by replacing 300 trucks, each traveling 1,983 miles.

Trucking cost continue to go up, which will support market shift towards intermodal; road congestion is getting worse
Tighter regulation, labor shortage and environmental concerns will continue to increase trucking operating cost
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#1: Solid Secular Growth Story (Continued)

CSX believes intermodal investments will expand addressable market in eastern U.S. by 150%; total intermodal opportunity of 20m units in the U.S. Piggybacking off of massive railroad investments
Greenfield and expansion of rail intermodal terminals; conversion of routes to double-stack

In total, the railroads are spending approximately 17-18% of revenue in capital expenditure ($14B), a large portion of which is to expand their intermodal networks
Investments by federal and local governments on top of railroad investments

These investments open up substantial new markets for intermodal

More reliable service attracts new customers switching from trucking Deeper penetration of intermodal terminals opens up new markets
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#1: Solid Secular Growth Story (Continued)

Intermodal is competitive around 800-1,000 miles, but as trucking costs go up, the breakeven point is declining

Source: Norbridge.

#1: Solid Secular Growth Story (Continued)

Gradual market shift from trucking to rail as service level and penetration improve Currently still a significant portion of transportation over 2,000 miles done via trucking!

Current Rail Intermodal Market

% of Market Share

Projected Market Shift

Current Truck Market

Source: ATA, IHS Global Insights, Norbridge.

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#2: Strong Business Model

Natural economies of scale through asset utilization. As revenue grows, margin should structurally improve
Illustrative Business Model Number of Containers Container Turn Per Month Total Intermodal Revenue Cost of Goods Sold Rail Cost as % of total cost ~50% 571 18,000 1.80 1,180 Where is Economies of Scale?

More containers means better customer service and fuller coverage: PACR has the 3rd largest fleet in the industry Key driver of profitability is how well containers are utilized.

Better contracts with rail carriers means better ultimate service for customers (priority loading, etc.) and potentially lower cost Key driver of profitability: Optimization of trucking operations and density dictate margins Container usage optimization improves margins Network balance, etc.

Drayage (trucking) Cost

~25%

285

Container/Equipment Cost Other Cost Total Cost of Goods Sold Gross Profit Gross Margin SG&A EBIT EBIT Margin

~10%

114 107 1,078 102 8.7% 64 38

LOW MARGIN BUSINESS. SUBSCALE PLAYERS CANNOT COMPETE. Substantial SG&A leverage. LOW MARGIN BUSINESS. SUBSCALE PLAYERS CANNOT COMPETE.

3.3%

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Note: Unit economics based on 2012 figures. Does not pro forma for the new Mexico auto contract.

#2: Strong Business Model (Continued)

An example of economies of scale in in-house drayage to remove empty miles
Non-optimized Drayage

In-House Drayage with Network Density

This type of economies of scale also occurs in lane density and equipment utilization (balanced box flows, empty box repositioning, chassis utilization)
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#2: Strong Business Model (Continued)

Good economies of scale due to fragmentation of shippers, origins, destination, fragmentation of truckers and the need for asset/network optimization
price is not our only weapon that we have here in order to become more efficient and expand the gross margins. We can also do it through operating efficiencies. We can do it through better balance within our dray network. We can do it by handling more of our own drayage. We can do it by better turn times.

- HUBG CEO on efficiencies, 1Q 2013 earnings call

There are some new players. This is a business of scale and scope and understanding how to effectively operate in an intermodal environment. It's not a simplistic thing for a new entrant. So the vast majority of the competitive environment is driven by the traditional players. And again, we include ourselves in that. And one other large provider we think is kind of -- are the 2 largest in the space and I think, at this point, the most efficient. And so again, it's just -- it's difficult for a new entrant with a 1,000 or 2,000 containers to really do much of anything because you can't necessarily market that. It's not a large enough network to have much of an impact on your customer base - HUBG CEO on competition, 1Q 2013 earnings call
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#3: Margin Improvement Story

Pacer is substantially underperforming its nearest competitor in margins
(Figures in Millions)

PACER(1)
Revenue: $ 1,180

HUB (2)
$ 2,392

Gross Margin:

8.7%

11.0%

EBIT Margin (3):

1.9%

4.1%

(1) Only intermodal division. (2) Does not include the Mode division. Results also include truck brokerage and logistics. (3) PACR: Assumes corporate SG&A allocated on a revenue basis.

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#3: Margin Improvement Story (Continued)

Scale and business mix explain some of the margin differential

PACER
Business Transformation:

HUB
Mostly retail operation

Transitioned from wholesale to retail only recently (2010). Moving up in the value chain.

Wholesale

Retail

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#3: Margin Improvement Story (Continued)

Scale and business mix explain some of the margin differential
PACER
Scale:

HUB
HUB is effectively twice as large as Pacer in intermodal

Need to continue to build retail salesforce as transition to retail is new Strong in transcon and north/south. Weak in local east Box turn is 1.8

Business Mix:

HUB is 1/3 local east, which means faster container turn Box turn is 2.4

Rail Cost:

NA

HUB may have cheaper rail contracts due to size?? Because of size, has better density for trucking, which minimizes empty miles Leases and owns containers.

Drayage Cost:

NA

Equipment:

Leases containers

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#3: Margin Improvement Story (Continued)

Management wants to get to HUBGs margin levels and is active in improving margins.
Margin Improvement Actions
Sales: Rail:

Aggressive at reducing low margin business. Working collaboratively with rail partners to bid for new business This improves pricing vs. rail cost visibility Improve carrier mix Improve street efficiency Accessorial management Improve equipment utilization Improve network balance Aggressive at controlling SG&A Lean processes

Dray:

Equipment: Network: SG&A:

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#3: Margin Improvement Story (Continued)

Pacer and HUB both focused on getting better pricing
The decline in domestic revenues is mostly a result of our efforts in the second half of last year to pare low-margin freight that we had won in the first half of that same year, but later became unattractive due to large unexpected rail cost increases in Transcon lanes. As we described in both the third and fourth quarters of last year, we repriced much of that business and as a result, some of that volume went away. Additionally, our approach to this year's bid season has been to be very disciplined in our pricing.

- PACR COO, 1Q 2013 earnings call We certainly saw some business in which we were the incumbent, that went out to the market and
came back at prices that were simply not compensatory for us. And it's hard to walk away from business, but the right answer isn't always yes. Sometimes the right answer is no, contrary to what many of our sales people believe.

- HUBG CEO, 1Q 2013 earnings call

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#3: Margin Improvement Story (Continued)

Margin improvement is starting to show up in the results, but 2012 is an easy comparison

YoY Margin Changes

1.0% 0.5%
0.0% -0.5% -1.0% -1.5% 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013

-2.0% -2.5%
GM YoY Chg. EBIT Margin YoY Chg.

Margins were substantially depressed in 2012 due to mismatch of rail cost vs. pricing (more on this later)
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#4: Low Valuation

Headline valuation is misleading as it includes losses from the Logistics division
Headline Valuation 2012 EV/EBITDA EV/EBIT P/E 2013E EV/EBITDA EV/EBIT P/E Normalized FCF Yield (3) 11.3x 21.0x 53.0x Valuation Excluding Logistics (1)(2) 6.4x 8.6x 17.0x

7.8x 11.0x 20.6x 6.0%

5.6x 7.1x 13.3x 8.7%

(1) Assumes corporate costs are allocated into segment results based on segment revenue. (2) Assumes tax rate of 40%. (3) Exclude 1x working capital benefit in 2013.

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#4: Low Valuation (Continued)

Logistics division is undergoing a turnaround. A perennial money loser that should be divested if turnaround is not successful
Revenue Segment EBIT 2005 458 5 2006 397 2 2007 402 4 2008 456 (0) 2009 386 (4) 2010 422 1 2011 304 (2) 2012 238 (10) 2013E 232 (7)

Managements rationale for keeping Logistics division:

Logistics division completes Pacers comprehensive service offering

New management and sales force hired. Needs time for turnaround

My take:
Logistics division has very little synergy with Intermodal A low-cost option on the turnaround: currently no value is assigned to the Logistics division. Low capital intensity business that does not cost much to wait for an eventual turnaround.

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#4: Low Valuation (Continued)

Pacer trades at a substantial discount to HUB. Current valuation seems to assume no margin improvement potential. I believe that Pacers valuation will increase once execution is proven
Pacer Excluding Logistics (1)(2) 2012 EV/Sales EV/EBITDA EV/EBIT P/E 2013E EV/EBITDA EV/EBIT P/E Normalized FCF Yield (3) 0.16x 6.4x 8.6x 17.0x HUB 0.43x 9.9x 11.8x 19.9x Pacer Discount -61% -36% -27% -14%

5.6x 7.1x 13.3x 8.7%

8.9x 10.5x 17.4x 5.9%

-37% -33% -23% -33%

(1) Assumes corporate costs are allocated into segment results based on segment revenue. (2) Assumes tax rate of 40%. (3) Pacer: normalized for 1x working capital benefit. HUB: normalized capex.

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#5: Short-Term Catalyst

Divestiture of Logistics division if turnaround is unsuccessful No value is currently assigned to the Logistics division A potential divestiture, even for a nominal amount, will be beneficial to Pacer
Focuses managements attention on the Intermodal division Eliminates near-term P&L losses Improves headline valuation

But would be much better if the turnaround is successful!

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#5: Long-Term Catalyst

Economies of scale motivates greater industry consolidation. Would not be surprised if M&A activity occurs

Rationales for industry consolidation

Greater and more flexible asset base provides better customer service Greater economies of scale, better efficiency, better margins Greater negotiating leverage with railroads and customers Less industry competition

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Investment Thesis Summary

A combination of positive forces
Near-term catalyst

Steady secular growth and penetration of intermodal

Potential improvement in intermodal margins

8% Revenue CAGR

Doubling of margins?

Divest Logistics; or success in its turnaround

Long-term catalyst

Industry consolidation

Structural improvement in margins due to economies of scale

Valuation improvement due to better execution

Good Moat

Closing of value gap Between HUB and Pacer

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Investment Risks
Right industry, but wrong company?
Industry risks
Ability to pass on rail and trucking cost increases Railroads as good partners? Cyclical business; high operating leverage Independent contractors vs. employees in drayage operations

Company specific risks

Substantial execution risks in margin improvement Failure in turning around the Logistics division Lack of exposure to local east intermodal market, which is growing rapidly Lack of clarity in new auto contract with UNP; exposure to the auto industry, which represents 40% of total sales Panama canal expansion in 2015 and potential traffic shift to the eastern U.S. market, where Pacer is underrepresented

Tumultuous company history

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Risk #1: Ability to Pass on Cost Increases

Can Pacer pass on rail and trucking cost increases to customers?

In 2012 intermodal marketing companies operated in a competitive bidding environment and lost margins due to the inability to match pricing with rail cost increases
Rail and trucking costs expected to increase for the foreseeable future due to the need to generate an attractive ROI on rail investments and higher labor and equipment costs for truckers Mitigating factors:
Industry is becoming more concentrated. Top 4 now represent close to 50% of the overall intermodal market Participants are disciplined and are giving up low margin business Railroads are looking for intermodal to grow (now 40% of total rail volume) and will adjust pricing to drive volume
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Risk #2: Railroads as Good Partners?

IMCs are highly dependent on their rail partners UNP is Pacers rail partner in western U.S. Pacer leases UNP equipment. UNP accounts for the majority of Pacers rail costs UNP and other railroads have their own intermodal marketing operations that sometimes compete with Pacer Railroads offer container capacity to the intermodal industry Railroad performance may suffer Mitigating factors:
Railroads are highly dependent on intermodal for growth

Railroads intermodal marketing operations are more wholesale focused. They lack national coverage and are dependent on retail intermodal marketing companies for business
Potential forward integration is not likely given railroads historical failure at retail intermodal. Minimal experience in sales
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Risk #3: Cyclical Business, High Operating Leverage

Transportation industry is highly cyclical. High operating leverage introduces sharp volatility in earnings

HUB revenue fell 20% in 2009. EBIT margin down 140bps

Pacer revenue fell 27% in 2009, although part of this was due to the wholesale to retail transition Mitigating factors:
Chart
100.00% 95.00% 90.00% 85.00% 80.00% 75.00% 70.00% 65.00%
60.00%

Pennypack Recession Indicator - Leading

100% 95% 90% 85% 80% 75% 70% 65%

60%

55.00% 50.00%

55% 50%

Apr-69 Jan-70 Oct-70 Jul-71 Apr-72 Jan-73 Oct-73 Jul-74 Apr-75 Jan-76 Oct-76 Jul-77 Apr-78 Jan-79 Oct-79 Jul-80 Apr-81 Jan-82 Oct-82 Jul-83 Apr-84 Jan-85 Oct-85 Jul-86 Apr-87 Jan-88 Oct-88 Jul-89 Apr-90 Jan-91 Oct-91 Jul-92 Apr-93 Jan-94 Oct-94 Jul-95 Apr-96 Jan-97 Oct-97 Jul-98 Apr-99 Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12
Recessions Indicator

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Risk #4: Independent Contractors vs. Employees

Government authorities may assert that independent owner-operators are employees

Most of the drayage operations is currently performed by independent owner-operators

Change to employee status will require a change in financial and business model more capital intensive, but offset by better margins Different risk and liability profile Mitigating factors:
Short-term disruption, but doesnt take away from the industry story Eliminates small competitors

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Risk #5: Substantial Execution Risks

Transition from wholesale to retail operations was painful. Can Pacer improve margins? What happens if Pacer doesnt improve margins? Pacers transition from wholesale to retail operations occurred recently. Completion only happened two quarters ago with the new Mexico auto contract

Management team is unproven in execution

Mitigating factors:
Taking the right steps so far Current valuation doesnt assume margin improvement

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Risk #6: Failure in Turning Around Logistics

Failure in turning around the Logistics division will impact short-term earnings

Logistics division is subscale

Undergoing its own transition from wholesale to retail in the international freight forwarding business New management and sales team need time to turn leads into revenue Failure in turning around operations will result in poor headline and short-term profitability impact Mitigating factors:
Management will shut down or sell the division if turnaround is not successful
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Risk #7: Lack Local East Exposure

Pacers local east business is small and not competitive Local east is growing rapidly due to railroad investments to open up secondary markets. This is a huge growth opportunity that Pacer is currently missing out on Pacers local east offerings are not competitive given low drayage density

Mitigating factors:
This also represents a large opportunity for growth. Current sales force is not adept at converting trucking customers to intermodal. Need substantial dedication in sales effort

Although Pacer is weak in local east, it is very strong in north/south lanes, which will take advantage of huge growth in near-shoring and the Mexican cross-border market
CSX, Pacers eastern rail partner, may lower rail costs to improve intermodal volume, which benefits Pacer
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Risk #8: Lack of Clarity on New Auto Contract

The recently renegotiated Mexican auto contract with UNP lacks details

New Mexican auto contract changes the role of Pacer from a wholesale intermodal marketing provider to a network manager for UNPs auto business
Although margin contribution will be the same in 2013, future revenue and profitability is uncertain over the remaining term of the agreement, our revenue and margin for the services and equipment provided under the agreement decline absent growth in our retail direct US-Mexico business - Pacer 10Q

Mitigating factors:
New contract allows Pacer to sell directly to intermodal customers, which was generally not feasible under the old contract Allows management to offset any potential drop in revenue specified in the contract with new Mexican cross-border business, which is growing rapidly

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Risk #9: Panama Canal Expansion

Panama Canal expansion will shift volume to the local east market, which is not Pacers strength

Doubling of Panama Canal capacity by 2015

Benefits east coast ports and reduces demand for west coast ports Mitigating factors:
Its up to the railroads to make intermodal transportation competitive. UNP plans to protect its intermodal franchise This may involve the reduction of rail pricing to offset any potential drop in demand

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Risk #10: Tumultuous Company History

Painful transformationwhats different now? Is this the wrong company in a good industry?
Explanation:
Renegotiation of below-market UNP contract in 2009 Transition to retail and loss of all wholesale business

Difference now:
Delevered substantially. Now in net cash position Transition to retail complete Cleaner story 36