NTTC Chairman Sexton Merger Pace Will Escalate in 1998

May 1, 1998
Marvin E "Buddy" Sexton has served in the tank truck industry for more than 25 years and currently is president of Montgomery Tank Lines Inc, the major

Marvin E "Buddy" Sexton has served in the tank truck industry for more than 25 years and currently is president of Montgomery Tank Lines Inc, the major operating subsidiary of MTL Inc. Montgomery Tank Lines is based in Plant City, Florida. Before joining Montgomery Tank Lines, Sexton was president of DSI Transports Inc.

Sexton was a major player in the decision-making process that led to Apollo Management's acquisition of MTL Inc, which was announced in February 1998. During a recent interview with Modern Bulk Transporter, Sexton shared his opinions on the future growth plans of Montgomery, as well as his perspective on the overall state of the tank truck industry.

MBT: What is going on with Apollo Management LP?

Sexton: First off, I can really only comment on the MTL-Apollo deal itself since that's the project with which I have had firsthand involvement. As you probably know, MTL announced in mid-February that it would be acquired by an affiliate of Apollo in a transaction valued at approximately $200 million. Both parties expect to close on the deal in early June.

The merger will have no impact on our operations other than enhancement of the company's capital base. We will gain access to Apollo's financial and strategic expertise.

Customer service remains the focus at MTL, and we'll embrace any input from our new partner that enhances our service capabilities. That could mean some minor retooling of our operations to achieve improved customer service.

I think the managements of both MTL and Apollo share the perspective that the key to continued growth is an emphasis on the basic fundamentals of tank trucking most commonly employed at the terminal level. It has always been MTL's philosophy that our terminal managers must run their operations as if they are independent businesses. That philosophy is the very foundation of MTL's Affiliate Partnership model, and I think our historical financial performance enforces this theory.

MBT: Who is Apollo?

Sexton: Apollo is a private investment company with over $7 billion invested. The company has 18 partners in New York and Los Angeles. The company's investment strategy is aimed at making conservatively structured investments in strong business franchises.

MBT: How long have they been in business?

Sexton: Apollo was founded in 1990. Over the past eight years, Apollo has demonstrated a history of partnering with companies that have a strong management team in place. These companies and their respective industries have attractive economic growth prospects.

MBT: How much capital does Apollo have at its disposal?

Sexton: As I mentioned, Apollo has over $7 billion invested and has recently closed on a fourth fund that will provide it with more than $3 billion in additional capital. They currently hold significant investments in approximately 30 diverse companies in a broad range of industries from coast to coast. Apollo's portfolio of investments has included companies such as Converse Inc, Ralph's Supermarkets, Culligan Water Technologies, Dominick's Supermarkets, Samsonite Corp, Florsheim Shoes, Vail Resorts, Whitmire Distribution, Furniture Brands International, and Weyerhaeuser Mortgage.

MBT: Who are the principals at Apollo Management?

Sexton: The group of 18 partners is led by Leon D Black, one of the nation's leading financial investors. Josh Harris, a partner, is the gentleman directly involved with the MTL deal. Harris is a well-known figure in the investment community and serves on the boards of several major companies.

MBT: What attracted Apollo to this industry?

Sexton: As I mentioned, Apollo's two major criteria include a strong management team and attractive economic growth prospects. They also focus on making investments in partnership with corporations in industries that offer both operating and financial synergies.

MBT: How did MTL enter the picture?

Sexton: Apollo carefully researched the tank truck industry and selected MTL as the carrier with the most successful model for providing superior service to its customers, both nationally and on the local level. Other key factors included: MTL's high performance ratings in an independent industrial study, its experienced management team, its consistent record of profitability, and its proven customer-service orientation.

MBT: What will be MTL's role in this new partnership?

Sexton: I think it is important to note that Apollo is a private investment company, not a trucking management firm. Therefore, don't expect to see any real impact on the management of our trucking operations. Our management team remains in place, and we remain committed to our growth strategy featuring a heightened focus on customer service.

Our role will be to keep up the performance that has allowed us to achieve 16 consecutive, comparable quarters above Wall Street estimates as a public company.

MBT: Where do you stand now in the acquisition process?

Sexton: MTL and Apollo have signed a definitive agreement, and we anticipate closing sometime in June. We are currently preparing the requisite filings and disclosure documents. Once we respond to SEC (Securities and Exchange Commission) comments, we will forward proxy statements to our shareholders. Since the merger requires shareholder approval, we will tally the proxy statements at our next shareholders meeting, which will be scheduled for sometime near the end of May.

MBT: Do you plan to continue with the affiliate program?

Sexton: Absolutely.

MBT: How have the affiliates reacted to the merger activities?

Sexton: At this stage, the affiliates are very excited about our expansion plans. Right now, our largest affiliate generates about $12 million in revenue. We think there is still room for current affiliates to grow and for more carriers to be brought in as affiliates. Prospective candidates will need strong customer relationships in strategic locations and must share our customer-service philosophy.

Personally, I must say that I think this is a great opportunity. We've spent a considerable amount of time talking with our customers about the state of the industry and potential consolidation. We have found that the shippers are not necessarily opposed to this consolidation trend, but they do have concerns based on experience with the Union Pacific Railroad situation. As long as service remains consistently good at the local level, future consolidation within our industry has the potential for acceptance and success.

MBT: What do you see as Apollo's continued role?

Sexton: I think Apollo, as an investment company, will consolidate the tank truck industry to a certain level. If the market becomes appropriate, they will turn it back over in an IPO and go public with it again.

MBT: Will Buzz Babbit stay with Montgomery?

Sexton: Buzz remains as MTL's chairman of the board. He also has invested a substantial amount of money in the transaction, as have Charlie O'Brien, Dick Brandewie, and myself.

MBT: Do you think we are going to see further merger activity in the industry?

Sexton: It's my opinion that we will.

MBT: Will the consolidation activity attract new players to the business?

Sexton: It could, but I think it's important to note that numerous barriers to entry still prevail in our industry. These include rising costs of revenue equipment, insurance coverage, and environmental compliance. The other major barrier is operating experience. Simply put, this highly competitive and complex industry makes it difficult for inexperienced newcomers.

MBT: Moving beyond the acquisition and merger issue, how was the past year for the tank truck industry?

Sexton: Overall, I would say 1997 was a good year for the tank truck industry. Volumes seemed to be up throughout the country. However, speaking from my Montgomery position, I would say that some of the volume increases related to the UP/SP rail problems were not necessarily more profitable. Equipment was displaced as we were forced to reposition our fleet to assist our distressed Gulf Coast customers. We ran an awful lot of empty miles to take care of business that we normally would have been better off not to handle.

But the customer is king and clearly we had to stay true to our customer-service orientation. I'm not sure if the entire industry experienced this phenomenon, but I believe we lost some money or barely broke even on this rail-related volume increase.

MBT: Have the freight volumes remained high going into 1998?

Sexton: Yes they have. It's hard to say how much longer we'll be servicing this rail overflow business. I understand that the railroad anticipates resolving the service shortfalls sometime within the next three to six months. Conversely, shippers tell us they foresee continued problems for the next 18 to 24 months.

I believe improvements are forthcoming within the next year to year and a half. A lot depends on whether the customers maintain these shipping levels.

Another key factor is the economy. The US economy is enjoying its longest peacetime expansion in our nation's history. Unemployment is at a historic low. New jobs are plentiful in the service sector, versus a decline in the manufacturing sector. I'm not sure what the economy holds for our industry. I don't think we understand how fast our economy can grow.

MBT: Is the tank truck industry able to keep pace with rapid economic growth?

Sexton: Yes, I believe a great deal of overcapacity remains in our industry.

MBT: Do we have a driver shortage that could pose problems?

Sexton: I think the industry has a driver shortage, but I would focus more on the retention side of that argument. I do not think the shortage per se is as bad as people say. I agree with a couple of magazine articles I've seen and the recent ATA Foundation-Gallup study that conclude that we have too many transient drivers moving around from one company to another. There is a lot of lost productivity in our industry with drivers moving around. If they stay in place, I don't know that we'd have a shortage.

MBT: What will it take to keep drivers in place?

Sexton: Higher wages and a better understanding of our drivers' work environment. I believe rising turnover numbers relate to personality conflicts between drivers and dispatchers. I do not believe higher wages alone can resolve the turnover problem.

MBT: If we have overcapacity, why is so much new equipment on order?

Sexton: When we have two to three good years of industry prosperity, we tend to believe that it will stay good forever. That doesn't always happen, as many of us industry veterans know very well.

In addition, one industry theory holds that business follows the equipment-or "if you buy it, they will come." Well maybe, maybe not. But, if you have the latest equipment and enough drivers, you'll get the business.

MBT: Is that true?

Sexton: Yes and no. Yes, in certain situations and no, from an overall industry standpoint. We're building up even more overcapacity with the new equipment on order. What we need to do is get the 20-year-old trailers out of the fleets. Retire them, put them into storage use, or even send them out of the country.

MBT: What will the new highway bill mean to the tank truck industry?

Sexton: It will put more money into highway repairs, and it has been a long time in coming. It will bring increased movements of construction materials that benefit various tank truck carriers.

It will keep a positive focus on the economy. We'll continue to sell new cars and other products that should keep the chemical and petroleum carriers busy.

We're hopeful that the federal government will move ahead on the new interstate highways that are intended to facilitate freight movements to and from both Mexico and Canada as part of NAFTA (North American Free Trade Agreement).

MBT: What would those proposed highways mean to the tank truck industry?

Sexton: We could build roads and bridges that would allow us to increase productivity through higher weights. However, we would have to buy new equipment, because much of what we have today would be rendered obsolete.

I favor higher weights, but we have to make sure there is a level playing field. I also think that trailer productivity can be increased to some degree without going beyond the 80,000-pounds gross weight limits. I believe we could build trailers today that are capable of 50,000- to 52,000-pound payload. We can do that even without increasing gross weights.

MBT: What would be a realistic higher weight in the context of NAFTA?

Sexton: I see no realistic means of going beyond 85,000 to 86,000 pounds without major changes in the way tank trailers are configured. If we switch to tri- or quad-axle trailers, 100,000 pounds would be realistic.

MBT: Do we need gross weights that are comparable for all three NAFTA countries?

Sexton: No. However, most people will argue with me on this. The biggest problem I see is that our customers are limited in storage capacity. We couldn't make full use of the bigger equipment in many cases. It's a much bigger, more complex issue than simply buying bigger trailers.

MBT: When will the NAFTA delays be resolved?

Sexton: That's a difficult question, because it contains a mechanism for an immediate increase in weights. Are we ready for that? No, I don't think so.

MBT: Is it likely that the freeze will be lifted before President Clinton leaves office?

Sexton: No, I do not think so. I think it may be a long time before the freeze is lifted, because there is discomfort concerning an abundance of Mexican t rucks running on US highways. I am sure that the Mexicans feel the same way about US trucks running on their highways.

We need a single set of rules for trucks to operate in the US, Canada, and Mexico. But I think there are quite a few technical issues to be ironed out first.

MBT: What are the biggest concerns?

Sexton: How do you retool the industry if gross weights go to something like 100,000 pounds?

MBT: Putting weights aside, what are your other concerns?

Sexton: I want to know that the equipment is properly maintained and doesn't create a safety issue. Rules are in effect, but are they being followed? Do we have enough vehicle inspection stations? I'm just not sure how to go forward with NAFTA.

MBT: How are relations between shippers and carriers at this time?

Sexton: We are seeing more real partnerships. Shippers are beginning to realize that there are some economies in giving more volume to fewer carriers. Responsible Care has become more relevant than ISO 9002. The ISO program does give a roadmap of how you should control your business, but Responsible Care guides a business toward increased environmental awareness. It also heightens the importance of community relations for each partner.

Shippers are getting into supply-chain management to maximize purchasing power. They are sitting down on a regular basis to discuss operational problems with customers. They are changing, and we are changing.

MBT: What is occurring in communication technology?

Sexton: You are going to see more satellite communications in vehicles. As the carriers get bigger through consolidation, they must have better ways to stay in touch with the trucks that are out there. Two-way communication must improve in our industry.

MBT: What will happen if the federal government begins, as threatened, to demand access to your satellite tracking information?

Sexton: That's the price of playing poker. You've got to accept that and operate your equipment as you should. Logs should be accurate. Drivers have to drive as they log and log as they drive.

MBT: What needs to be done to improve log accuracy?

Sexton: The new regulations, when they do come out, will not specifically regulate a driver's driving time. Instead, they will focus on his resting time. Still, I don't think they will let somebody stay behind the wheel more than 70 hours in eight days.

It is very difficult to regulate all kinds of truck drivers with one set of rules. Some people can stay up 24 hours and be alert, and others can't stay up more than four hours. We need to measure alertness.

I know DOT is doing some studies with some electronic systems to measure alertness. If we can develop a technology of this sort, we may begin to see a reduction in driver-fatigue-type accidents.

MBT: Circadian rhythms have been cited as an important factor. How do truck drivers avoid altering their circadian rhythms?

Sexton: Unfortunately, I'm not sure they can. Different drivers have different patterns. Some like to drive two hours and take a break. Others get behind the wheel and drive for eight hours. We have to give the drivers flexibility to do what works best.

This is one reason we need the technology to measure alertness from the truck cab. It may be expensive, but this is one instance where we may have to step up to the table and do what is right.

MBT: Are we seeing a shift away from traditional electronic data interchange to the Internet?

Sexton: Montgomery Tank Lines' whole information system is based on the Internet. We will see more companies move away from the mainframe, centralized computer systems. The computing power will be more in the trucks and the terminals. More data will be handled real time, and you can't do that with a centralized computer system.

MBT: How important is Internet marketing for the tank truck industry?

Sexton: It will be valuable in the future. It's possible we will someday see loads tendered over the Internet. Some of us have people in place in our customers' shipping departments right now. That function could be done from our own offices via the Internet.

MBT: Are companies looking at major investments to reach the needed level of technical sophistication?

Sexton: Yes, systems today are very expensive. A big challenge is to retain good systems experts. There is such a market out there that salaries are already high and will continue to climb. Having the right systems means we need fewer of these experts.

MBT: What sort of industry changes have you seen over the course of your career?

Sexton: I started in the business over 25 years ago. Technology has brought major changes in the way we do business and the equipment we use. We're just in the beginning stages of the current technology revolution. We're doubling our information flow every two years right now. It's amazing.

However, we must remain focused on the industry's fundamentals. Someone still has to take orders and manage drivers. They have to manage the cleaning racks and the maintenance shops. Loads have to be picked up and delivered on time without accidents or spills. Drivers still have to pump- or pressure-off loads just like they have done for years.

MBT: In this time of intense industry change, what will NTTC have to do to stay viable for the next 50 years?

Sexton: I think there will be fewer potential NTTC members, but that doesn't mean the revenues will be less. We're going to have the same number of drivers in the business.

We still need NTTC even if we go from say 200 members to 175. We still need the information, services, and legislative representation. The bigger carriers will simply pay more dues. That's not the issue. We still need an organization that enables us to get together to discuss various issues of concern to the whole membership.

NTTC will continue to provide the same services and will continue to serve as a conduit for our industry. NTTC will continue to keep us informed on regulatory issues and will work with suppliers on equipment technology.

I know a lot of people are concerned about NTTC, but it does have value. We don't know what's going to happen to ATA right now. NTTC may have to pick up the slack for that organization.

MBT: How do you bring tank truck carriers that aren't currently members into the association?

Sexton: Certainly, there are companies out there that should join. We have to get them to believe that they will get more than just social interaction out of NTTC. Once we get them in the door, I believe they will find that it is a valuable organization. It's a place where they can get help in dealing with customers and suppliers, as well as understanding the latest regulations.

I can't understand why anybody wouldn't join.

MBT: What can be done to expand NTTC through more of North America?

Sexton: We already have numerous members in Canada. Mexico is a tough environment. There are a number of first- class Mexican tank truck carriers today that would benefit from NTTC membership. Many of the ones doing import/export business with the United States are linked to NTTC through their US partners. They look to us to keep them informed on issues that affect them.