Good afternoon, my name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation First Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And your speakers for today’s call will be Dave Jackson, President and CEO and Adam Miller, CFO. Mr. Miller, the meeting is now yours.

Thank you, Tracy. And good afternoon to everyone and thank you for joining our call. We have slides to accompany this call posted on our website at investor.knighttrans.com/events. The call scheduled to go until 5:30 p.m. Eastern Time. Following our commentary, we'll hope to answer as many questions as time will allow. If we’re not able to get to your questions due to time restrictions, you may call 602-606-6315 and we will return your call. Again, that number is 602-606-6315. And the rules for questions remain the same as in the past, one question per participant. If we don’t clearly answer the question, a follow-up question may be asked. But more often than not we end up with people in the queue that are not able to ask a question, so we ask again that we keep it to one question per participant. So to begin, I’ll first refer you to the disclosure on Page 2. I'll also read the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors or Part 1 of the Company's Annual Report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the Company's future operating results. Our actual results may differ. Now I'll begin by covering some of the numbers in detail including a brief recap of the first quarter starting with Slide 3. For the first quarter of 2016, we earned $0.28 per diluted share versus $0.36 in the same quarter last year. Later in the presentation I’ll go into greater detail on some items that negatively impacted our EPS this quarter, some of which are more…

Thanks Adam and good afternoon everyone. Now to Slide 7. In the first quarter, our asset-based trucking businesses operated at an 82% operating ratio, which includes our dry van businesses, refrigerated businesses, drayage business and dedicated business. Most of the 280 basis points of our increase year-over-year was a result of increased net fuel expense and lower gain on sale of equipment. Our asset based equipment businesses remain focused on developing the type of freight in the specific lanes we desire at appropriate prices through the bid process that continues with the several customers till to this day. Multiple cost reduction and efficiency improvement efforts are underway in every business and each service center is focused on closing the year-over-year OR gap. Our improvement in miles per truck of 1.8% year-over-year and improvement in maintenance cost help offset the inflationary cost pressures from increased driver wages. Our non-asset based logistics segment produced an OR of 94.8%. However, when adjusting for the $1.9 million expense associated with the exit of our ag sourcing business, the logistic segment operated at a 90.2%. As Adam mentioned earlier, our brokerage business, which is the largest component of our logistics segment, grew volumes 31%, expanded gross margins 350 basis points, which resulted in operating income growth of 13.7%. Lower fuel surcharge, shorter length of haul and lower non-contract pricing lead to an 9.2% decline in the revenues. We're encouraged by the pace of the volume growth, and believe that the growth momentum will continue. Our logistics performance continues to confirm the opportunities for growth as well as the value provided to our customers through our offering of transportation management brokerage and in a mull of services in addition to our asset based truckload services. Also provides an outlet for growth in times like the current…

Thanks, Dave. Slide 14 our final slide where we'll discuss guidance. Based on the current truckload market and recent trends, we're reducing our previously-announced second quarter 2016 guidance range from $0.32 to $0.35 per diluted share to $0.31 to $0.34 per diluted share; and our expected range for the third quarter of 2016 is $0.32 to $0.35. And so I'll maybe walk through some of the assumptions that's built into this guidance. As Dave mentioned, no organic growth from our current tractor count. In terms of rates, we expect total rate per mile in the second quarter to be down slightly from the previous year and for rates in the third quarter to be flat to slightly positive from the previous year. In terms of contract rates, we expect to see flat to 2% increase during the year. However, during the first half of the second quarter of 2015, we had more non-contract opportunities above contract rates that we -- than we would have expect to have this year. Therefore, we expect to see rates begin to improve in the aggregate in the back half of the year versus the second quarter. We also expect miles per tractor to continue to trend positively, so much as we experienced in the first quarter. Our assumption is that net fuel expense will begin to normalize and will be probably net neutral in the next two quarters. However, as we all know fuel can be very difficult to predict. Long-term, we expect to grow our logistic segment in the 25% plus range while operating with a low-to-mid 90s operating ratio. In the first half of 2016 we expect load count to continue to outpace that 25% grow target. However, we expect continued revenue per load headwinds that include lower fuel surcharge, a shorter…

[Operator Instructions] Our first question comes from the line of Brad Delco with Stephens. Your line is now open.

Dave can you just talk about kind of the cadence of the freight market in the first quarter and what you've seen this far in April?

Yes. We -- as noted by the 1.8% improvement in miles per truck, you would have to go back a long time to find the quarter where we improved our miles to that degrees. So we felt pretty good throughout. I will tell you March was not as strong as we would have hoped. We had hopes for back half of March that was really tight. Things seemed to be a little warmer than normal and that didn’t materialize. It didn’t feel all that tight. It felt very similar maybe to the way the rest of the quarter was. All in all, from the volume perspective, it was better. When we look at from a pricing perspective, the contractual prices that took effect some point -- throughout some point last year, those are largely in place. So those would compare year-over-year favorably and then however there were no -- or very few non-contract premium pricing opportunities out there whereas in the first quarter of 2015 we definitely saw those opportunities. So that was a headwind in that balance. So if I were to look into April thus far, we would say what we have seen so far in April has been more of the same where we're seen our trucks run a little bit better in terms of miles' year-over-year and we’re seeing -- so therefore we’re seeing decent volumes on a year-over-year basis. Too early to know kind of how that pricing shakes out, but we’re definitely not seeing the non-contract premiums. Now a year ago, the extra money for the non-contract freight largely ran out by the end of March. So we’re starting to have a little bit of an easier comparison as we move into the second and third quarters, when we compare against the non-contract portion. And so the piece that remains to be seen is how well this contractual piece compared year-over-year, because we’re going to begin lapping those increases from a year ago. And clearly we don’t have the same level of increases to double up with.

Got it. That makes sense.

Did that answer your question Brad.

That’s perfect. And I want to respect to one question. But just to clarify, would there be any really difference between your driving and refrigerated on your comments?

I would say that both would fit into what I just described.

Your next question comes from the line of Kelly Dougherty with Macquarie. Your line is now open.

Just needed to follow-up on that one. Can you talk to us maybe about how the general outlook from your customers may differ depending on their end markets and maybe how the traditional retailers are feeling versus the e-commerce customers and whether their expectations are in line with or whether the volumes are in line with expectations and maybe similar -- more on the industrial dependent side of things?

Yes. Well, we probably don’t have as much inside there, as you would like and frankly as we would like. Where we do such a small piece with such large customers, it’s hard for us get a full view of that. Clearly there is one particular e-commerce customer that seems to be growing at unbelievable leaps and bounds. I think we know who that is. There are other customers we work with that are also growing in the e-commerce side. They have the traditional retail outlet, but they’re developing the e-commerce side and so we do see some growth on that side. We have others that are trying a little bit more of an omni-channel and we do see opportunities and growth there. But that growth is slow, steady, very measured. We don’t really have a lot of industrial, direct industrial exposure. So we just see what we read in Wall Street Journal and realize that that’s been a pretty rough place to be. So e-commerce clearly as moving. What I would maybe say about that is that what works for e-commerce or the needs associated with e-commerce are much different than what the needs are on -- just on your traditional full truckload store delivery distribution, regional distribution type of a network. And so we think that -- we think we’re starting to get handle on some efficient ways to address that. There is some unique things that we’re doing in that realm to try and help out, and I think as you see greater volumes and larger concentrations in certain geographies for the e-commerce, on the e-commerce side, I think there's a lot that the truckload guys can do the help out. If you look at just a typical e-commerce budget for a retailer, it’s costing them somewhere in the neighborhood of four to five times, the transportation cost to fill e-commerce versus their traditional distribution to store via truck load model. And that’s largely because the parcel guys and the LTL guys seem to be playing a role there. But it appears as a news flash, but it appears as though e-commerce is here to stay and that the Internet isn’t going anywhere. And so in light of that, as consumer behavior continues to move down this path, we’re going to see greater concentrations, we’re going to see opportunities, where we're capitalized with plenty of trailers and plenty technology, because the technology updates are totally different in the e-commerce space. But the players that can play of that pace and have the flexibility are going to have a chance to save those shippers a lot of money on their e-commerce, and the shipping community can begin to close the gap. So I know your question wasn’t so much about, tell me about e-commerce but that’s where I took it. So hopefully.

No, I appreciate that.

And somewhat answered your question.

Kind of do a quick follow up to the mention of technology, the spending on brokerage and logistic side, should we assume that that maybe a headwind from a margin perspective as you guys look to invest a little bit more in the technology side there?

Not so much. Those systems, we capitalize that expense over time and we don’t spend $15 billion a year in R&D like some firms do. So it's big for us, but you would have already begun to see it. Now, that’s what we have already spent in terms of the ability to have a robust transportation management or TMS system. Then we also have a new system that we're just -- I think a barely a year into full 100% implementation using in our brokerage business and we think it is helping our margins, and it's not overly costly. But you will see us invest in technology in a much bigger way. Already today we have allocated some of our most experienced and talented people in that realm, and you're going to see us continue to spend money. Now I don’t expect you to read a press release where we're blaming not being where we want to be earnings wise, because we're spending too much money on technology. It's not that big, but for us, relative to historical, you will see us spend and invest a lot of money there. There -- where -- we have a little bit of catch up to play to but we think we have got some clear visibility on where the path is going and it effects virtually every side of our business, whether it's to the customer, it's to the driver, it's the way we use equipment, it's the way we improve safety. So we're moving down several paths at the same time and it's going to get faster.

Your next question comes from the line of Tom Wadewitz from UBS. Your line is now open.

On the first -- excuse me on the fourth quarter call, I think you had some commentary where you said look, there's this kind of natural balancing that occurs in the truck load market, lower Class 8 orders and so forth and you anticipated some improvement in the second half for the year, I think is what you characterized it then. Has that view changed in terms of how long it takes the balance? And it sounds like you still have some optimism for second half for the year. How much conviction do you have that you'll see a tightening in maybe third quarter, fourth quarter on kind of contract pricing you get then?

Okay. Yes, great question. So I think that we continue -- I’ll start off by saying yes, we continue to have conviction that we'll see things improve by the back half for the year and I’ll tell what that’s predicated on right now. So we are just now here in late April, beginning to lap the year-over-year double digit declines that we saw on these load boards which would be your most transactional largely used with -- through and by non-asset base brokers. And so we're now lapping -- a year ago it was down 20% -- 18%, 20%. Now that included fuel. As we lap it, it continues to be negative and still significantly negative. So if you start to look at it over a two-year period, it's an unbelievable decline in pricing. And so in some cases it's even with a shorter length of haul, which exacerbates how much it's declined and so we view that as not an issue of how long will these small carriers hold on, but it's just how long can they when they are hauling -- in many cases have haul loads below their cost. So most truckers -- every truck load carrier I know of, you haul back haul loads where you lose money, your revenue is below to your cost but you have a head haul that help more than make up for that. And so today for the small carrier, when you look at those rates and we compare them to our cost per mile, and hey we do a decent job on cost per mile. And when we look and see that on head haul rates it's below our cost per mile, we make the assumption that it's below theirs. And so that's clearly not sustainable, particularly for small…

Okay great so that sounds like you still got confidence that you are going to balance and the market can't stand up that much longer in terms of capacity needs to come out I guess, right.

Yes. So sorry Tom, was that a yes or no. So I just said yes to that question.

No I think the color was very helpful but you think it's going to -- the capacity will really start to come out in a meaningful way and that's the key to balancing the market.

We think that's the key, to say nothing about demand, to even say nothing about ELDs at this stage of the game; which there is plenty to say there. But not even including that, when we just look at new orders, used equipment pricing and non-contract rates, those three we think can be very predictive of what's to come in the not too distant future.

Your next question comes from the line of John Barnes from RBC Capital Markets. Your line is now open.

So I guess piggybacking on what Tom was asking, obviously the industry is going through this massive self-correction in terms of industry orders and that kind of thing. Do you think enough of the headwinds correct themselves to allow the industry to begin to maybe add capacity again in 2017? Does it allow Knight to add capacity in 2017 or are way too early in the process to figure out? I guess I'm asking how do you feel? If you get past these near term headwinds, do we start to see fleet growth again for the industry and more importantly organically growth again for Knight in late 2016, early 2017?

Yes, that's a great question. I think the easy answer for me right now would be to say that it's too early to tell. I think that it's a really good question and I think a very difficult question to answer, because I think the game begins to change in 2017. I think that the behaviors start to change and will start to change from the shipping community, just because the current process of appointment pick-ups and appointments per deliveries and the waiting around to be loaded or unloaded, and in some cases, the amount of time it takes to unload a draft trailer, will need to change to be more sensitive to the ELD environment. And so I think as a result of that, a lot of good things happened, one of which is that our drivers can hopefully begin to utilize a much greater portion of the available driving time, whereas today we’re only using 65% to 70% of the available drive time. And it’s been hard with a minority of the carriers having ELDs to really change that game. And so I’m optimistic that some of those things may start to even improve and change in 2017. If you think back to 2004, 2004 is when really the real substance of the hours of service rules that are intact today, that’s when they really took effect and there wasn’t a carrier that I'm aware of that charged for any kind of detention of equipment in the driver time prior to 2004. And so what we have with ELDs is they're really finally enforcing the 2004 standard. And so some people might be confused that just when you move from paper to logs, the reality is you’re moving from pre-2004 that many carriers are still stuck in pre-2004…

Your next question from Todd Fowler from KeyBanc Capital Markets. Your line is now open.

Dave, just on the slippage in the expectations for contract rates, the 2% to the 3% at the beginning of the year down to the flat to 2%, can you help give us some context around what percentage of your freight has already been out for bid, what percent you’ve gotten back, and then maybe help us think about is there additional risk if we move through April and May and we don’t see any additional seasonality, that there is more pressure on the contractual rate expectations from the flat to 2%.

Well, I would say that we’re -- of the bids that we would expect to see in the bid season, we received a majority of them. And of those that have actually gone through and are all the way through the process, it’s probably just -- my guess would be a little over half. So a lot of these seem to drag out a little longer than we would have the normal. But I think that there have been -- as it’s going on, the longer it’s going to on, it’s seems like maybe the more aggressive we've seen from some in the shipping community. I think that correlates to the fact that we have seen the non-asset based brokers get more aggressive as time has gone on in the bid season. And so I think that there is a kind of a correlation to that. And I am not-- we're not surprised to see the non-asset brokers be variable and maybe move around a little. We are a little surprised at the level of aggressiveness in lowering pricing to win bids, because that in turn means much lower rates for the carriers that they are relying on, and it's right on the eve of arguably the biggest change in challenge in those small carriers' businesses history by converting to ELDs and like I said before -- in my mind anyway living up to the 2004 rule finally. And so I think -- I'm not sure that if that larger brokers had the experience that the larger carriers have had in adopting to ELDs, if they would be as aggressive as they have been. For us pre-2004 versus post-2004, we lost 14%, almost 15% in terms of miles per truck from what we used to run. And so the only thing I can conclude is that those non-asset brokers are underestimating this, and I don’t really fault them for that, because we underestimated what the impact was, and we actually own trucks and we actually audit logs and we actually have, and had the safety program for a paper log world, and still we underestimated the challenges in what was associated. So I think you have a little bit of opportunistic behavior going on and so that seems to changed things here just a little towards the end of this -- what seems like this current bid season.

Okay, so you've got about half the bids back at this point, but the longer it's been taking the bids to come back, you have seen deterioration from the earlier bids this year?

That’s correct, Todd.

Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.

Dave, I don’t think we're going to see many truckers with positive utilization this quarter and so the fleet cuts seems to be working. I guess I'm wondering, are you entertaining the idea of additional cuts to the fleet at least in the near term. And then maybe if I can just broaden the question on industry capacity little bit, so I guess following up on your points with Tom like, I think everything you said makes sense in terms of low use truck pricing and low rates are going to pressure capacity. I'm wondering why you think we're not seeing it yet and is it possible that low fuel is just changing the math or the numbers and it's keeping this capacity in longer than you would have thought?

Yes, good questions. So the -- I remember your second question. What was your first question?

Just on are you thinking about cutting the fleet more [Multiple speakers].

So Scott, we were pretty early. This was early last year when we decided to pull back on the reins from an equipment addition perspective. So this isn’t a -- we didn’t just decide it. And I would say that right now things continuing at the pace where we are, we don’t fill the need to go pull out a bunch of trucks. But we would be more inclined to pull trucks out than we would be the lower rates. So that -- we'll continue to watch that. That's somewhat of a fluid decision for us. Now for the second part of your question, and wondering maybe why have we not seen more come out, when you look at the number of trucks that we brought in, in such a short time, I mean we're talking -- if the 10-year average is to buy about 240,000 trucks, the industry brought in, in 2014, 380,000 new tractors. '15 was 290,000. So you had this massive wave that came in and I'm not so sure that us larger fleets and our desire to have the latest and greatest in terms of fuel efficiency and technology and driver amenities with buying on such aggressive new cycles, I'm not sure we haven’t somewhat been part of the problem, because we've made a lot of high quality equipment available on that secondary market where it is more affordable. And so I think we almost have to reevaluate a little bit how that looks, not so much because of the supply side but because most of the large players were specking a more advanced speck. We have -- over half of our fleet and that has automated manual transmissions. Those are expensive but they are good for host of things, and we have the collision avoidance…

Your next question comes from the line of Jason Seidl from Cowen & Company. Your line is now open.

I guess I'll switch segments for my question here. And you mentioned that a little bit in some of your comments, but looking at the logistics side, clearly you guys are doing well. Your load count is up 31%. You are growing your gross margins and that obviously hasn’t to do with what the spot market is doing, but talk a little bit about the outlook there? What we should we look for continued growth going forward in terms of your loads and who do you think you are taking market share from? Because I don’t think the industry is growing like this?

Yes. Well number one, we're not huge. So -- and yet were doing over a $1 billion a year with a full truckload business with customers. And this business represents low 20% of what we do. So we think it should be much bigger and we think that customers should have a desire to work with us because we already do so much for them on the asset side and we know and understand their business. And so when they have -- particularly when they have surges or have seasonal volume changes, we just think we're the right partner to do that. So yes, that would be, we would be outplacing somebody who is maybe more of a one dimensional play with the customer. So I think that’s where we see a lot of the opportunity that we do get. Our outlook is that revenue still going to be pressured for the reasons we talked about. You don’t feel surcharge is down year-over-year, just as a nature of fuel prices are. And we’ll begin eventually to lap the shorter length of haul, but length of haul is shorter and the spot rate as talked about several times now are lower. So what’s happening is that revenue per load is down. So makes it hard to see the revenue side. We're a little more focused at the moment on volume because that’s what we can control and as some of those other market factors turnaround, if we still have -- we’re increasing the throughput of the transactions and doing so profitably, which we have been, then we like -- we like our changes have been able to have all three categories positive over 20%, which those three categories would be load count, which our outlook would be that we’re going to be able to maintain a 25% plus improvement in load count volumes year-over-year. The second category would be operating income or margin dollar growth. And that’s a number that is probably going to not quite be the 25%, but we still expect to be up positive year-over-year with double-digits this last quarter. And then the third one would be revenue. We'd like to see revenue north of that 25%. Were some of those factors to change -- if that were to happen, we would be thrilled. We’ve not been in that environment really yet. We got close a couple of years ago. And so for right now, what’s most predictable for us are the volumes and the throughput.

The margin -- going forward on the gross margin, obviously it’s a good result early on here. But is your outlook projecting that those gross margin gains are going to start to narrow?

I think as the market gets -- as capacity tightens, which is what we think has a good chance of happening late in the year, then yes, those margins probably start to tighten back-up again. Long-term, it’s hard to imagine -- it’s really hard to imagine that a middleman with no capital investment is going to be able to hold onto his higher returns as the brokerage has always held onto. So we are -- we feel like we’re prepared for that day, because our operating costs of doing business are very low, because of the way that we can leverage what we already are doing on the asset based side. And so we think we have a low cost option for brokerage. So that the returns, we can still justify the investment and the returns, but that it can over time probably be a little more competitive on the profit side than what it is today.

Listen guys, thanks for getting me in here and I really appreciate the time as always.

Okay, we appreciate it. It looks like we’re little overtime. You got in under the wire. So thanks Jason. Okay. So Tracy, looks like that’s -- we-re overtime. So for all that have participated and listened, we appreciate your interest and support. Those that have been in the queue, that did not get an answer, we hope that you'll call the number we’ve mentioned earlier and we’d be happy to try and answer your questions. Thank you.

Thank you for joining. This concludes today’s conference call. You may now disconnect.