Knight-Swift Transportation Holdings Inc. (KNX) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Karen, and I will be your conference operator today. At this time I would like to welcome everyone to the Knight Transportation Fourth-Quarter 2016 Earnings Call. [Operator Instructions]. Speakers for today's call will be Dave Jackson, President and CEO, and Adam Miller, Chief Financial Officer. Mr. Miller, the meeting is now yours.

Thank you Karen, and welcome to everyone who has joined the call. So you know, we have slides to accompany this call posted on our website at investor.knighttrans.com\events. Our call is scheduled to go until 5:30 PM Eastern time. Following our commentary we hope to answer as many questions as time will allow. If we are not able to get to your call, or not able to get to your question due to time restrictions you may call 602-606-6315 following the call and we will return your call. Again, that number is 602-606-6315. [Operator Instructions]. Onto the disclosure slide. I will 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 one of the Company's annual report on form 10K filed with the United States SEC for a discussion of the risks that may affect the Company's future operating results. Actual results may differ. Now I'll begin by covering some of the numbers in details, including a brief recap of the fourth quarter, starting with slide 3. For the fourth quarter of 2016 total revenue decreased 0.6% year over year to $289 million, while revenue excluding trucking fuel surcharge also decreased 0.6% to $264 million. As a note, during the fourth quarter of 2016 we accrued $2.5 million of expense, which was $1.5 million after tax, related to expected settlement costs for two class-action lawsuits involving employment related claims in California and Washington. We provided adjusted financial information that excludes these expenses from our results of operations, and we believe the comparability of our results has improved by excluding these infrequent expenses that are unrelated to our core operations. So our GAAP operating income decreased 20.4% year over year to $35 million, while our adjusted operating income decreased 14.8% to $37 million. Again, our GAAP net income decreased 24.2% to $22 million, while our adjusted net income was down 19% to just under $24 million. Based on GAAP we earned $0.20 per diluted share compared to $0.36 in the same quarter last year, while our adjusted earnings per diluted share were $0.29 for the quarter. Now onto slide 4. We ended the quarter with $786 million of stockholders equity, and over the last 12 months have returned approximately $60 million to our shareholders through dividends and stock buybacks. Our average tractor age continues to increase, and is up from 1.8 years in the second quarter of 2016 to 2.2 years in the fourth quarter of this year -- or fourth quarter of 2016. With rising new equipment prices and a weak used equipment market, we extended the expected trade cycle of our tractors. We have been proactive in managing our preventive maintenance program with the goal of mitigating the additional maintenance costs associated with the slightly older tractor. For the full year of 2016 we generated $154 million in free cash flow, which we have used to repurchase shares and pay down our debt. We expect to continue to generate meaningful cash flow, as we do not have plans to grow our fleet until customer demand exceeds supply. We currently have just $18 million outstanding on our unsecured $300 million line of credit, which is down from $112 million at the end of 2015. This continues to leave us with a meaningful amount of capacity for additional investments and acquisitions opportunities. Now onto slide 5. Our consolidated revenue excluding trucking fuel surcharges was down just 0.6% year over year as a result of slightly fewer tractors, as well as lower revenue per tractor when compared to the same quarter last year. Revenue from our logistics business was essentially flat, despite exiting our agricultural sourcing business in the first quarter of 2016. During what has been a moderate freight environment, we remain focused on improving the productivity of our assets in our trucking segment and expanding load volumes and margins in our logistics segment. During the fourth quarter when compared to the same quarter last year, we improved our miles per tractor 0.7%, which marks the fourth consecutive quarter with year-over-year improvement. Revenue for tractor excluding fuel surcharge decreased 0.4% year over year, as a 1.2% decline in average revenue per loaded mile offset the improvement in average miles per tractor. Revenue in our brokerage business grew 6.3% as a result of an 8.2% increase in load count offset by a 1.7% decline in revenue per load. We expect capacity to continue to tighten as a result of low new truck orders, a weak demand for used equipment and additional regulatory burdens expected to phase in over the coming quarters. With that being said, we remain focused on improving our lane density, increasing the productivity of our tractors, improving our yield, managing the size of our fleet based on market conditions and investing in the long-term growth of our logistics capabilities, as well as continuing to assess acquisition opportunities as a means to continue to grow our business. Now onto slide 6. We continue to execute on our strategy of managing inflationary pressures in order to maintain the lowest cost per] trucking segment and the lowest cost per transaction in our logistics segment. During the fourth quarter we faced several challenges that impacted earnings. Fuel prices steadily climbed during the quarter and led to a higher net fuel cost than originally estimated. Demand for used equipment remained particularly weak and resulted in gain on sale below our expectation. Other income was also ahead on a year-to-year basis. We are able to partially offset some of these cost challenges across several departments including our safety crew. As mentioned in the previous like our revenue per mile was down over year-over-year basis, which also impacted our earnings and we may face similar challenges in the first quarter as fuel and gain on sale may remain significant cost headwinds in the first half of the year. We remain highly focused on managing through the challenges our industry faces as they become more efficient with our nondriving employees and continue to find innovative ways to further increase that efficiency. We expect the environment to become more favorable in the back half of the year as we believe the past continue to exit the market and pricing will reflect positively. Therefore we continue to make investments in areas of our business that we believe will lead to double-digit returns on invested capital. I'll now turn it over to Dave Jackson for some additional comments on the fourth quarter.]

Thanks Adam, and good afternoon everyone. Thanks for joining us. I will start with slide number 7. In the fourth quarter our asset-based trucking businesses operated at an 83.7% operating ratio, which includes our dry van businesses, refrigerated businesses, our drayage business and our dedicated business. The 300 basis points OR increase year over year was because of three things primarily, increased net fuel expense, lower gain on sale of equipment, and higher driver related costs. Our asset-based businesses remained focused on developing the type of freight in the specific lanes we desire at appropriate prices. We have chosen to extend the average age of our fleet, given the weakness in the used equipment market. Given the challenging rate environment in 2016, we kept our fleet size flat. We continue to manage costs aggressively. Miles per truck again saw meaningful improvement in the fourth quarter, being up 0.7% year over year, and our non-asset base logistics segment produced an OR of 93.3%. As Adam mentioned earlier, our brokerage business, which is our largest component of our logistics segment, grew volumes 8.2%, while gross margins contracted 50 basis points. Brokerage revenue increased 6.3% when compared to the fourth quarter of 2015. Next onto slide 8. This graph shows two directional measurements of the freight markets. The graph on the top illustrates the sequential changes in average revenue per total mile. It is noteworthy to point out the contrast in trajectory between the flat sequential rates between the third quarter of 2015 and the fourth quarter of 2015 compared with the 1.4% sequential increase from the third to fourth quarters in 2016. We view this as a sign of an improving market. The bottom graph illustrates the sequential increases in brokerage load counts over the last two years by quarter. We are encouraged by the load count growth, which represents increasing demand from our customers that requires significant coordination and technology to be able to operate a successful asset-based business and a growing high returns non-asset brokerage business. Now onto slide 9. This graph provides insight into each of our fourth quarters since 2002 for our trucking segment. Each of these fourth quarters have been unique. Some, like the fourth quarter of 2015, benefited from strong contract rates. 2014 saw meaningful noncontract premiums throughout the quarter. In previous cycles we have seen rates promptly catch up for previous years' inflation. There is pent-up unrecovered inflation over the last two years. We expect rates to inflect positively in the second half of 2017, with an increasing likelihood of materially stronger fourth-quarter rates in the fourth quarter of 2017. This outlook is based on the continued weakness in the used equipment market, limited capital investment in the equipment additions, and the implementation of electronic logging devices, or ELDs, that will reduce supply. Any pickup in the broader economy would only accelerate things. Next onto slide 10. This graph is similar to the previous, but shows the logistics segment. Despite the challenging rate environment, overall logistic revenues were flat year over year in the fourth quarter, and we only gave up 50 basis points in the gross margin. In a strengthening environment we believe we will see meaningful growth, as we are successful at finding capacity for our customers when they need it most with positive gross margins for our business. As an example you can see that trend on the graph from the fourth quarter of 2012 to the fourth quarter of 2013, and again from the fourth quarter of 2013 to the fourth quarter of 2014. Next onto slide 11. Our focus is on creating value for stakeholders. Our efforts to strengthen our value proposition to our customers, including our evolving service offering, continue without significant variation in the up-and-down markets. However, when it comes to creating value for our shareholders we adapt and change, depending on the opportunities and challenges associated with whichever end of the market demand spectrum we are faced with or anticipating. Stronger markets, we add trucks, often open service centers and explore acquisition opportunities. Growing logistics is always a priority. The variable nature of this business makes it even more attractive sometimes in challenging environments. When we see less robust freight demand, we are less likely to add trucks organically. This result in significant free cash flow, as we have seen in 2016. And now to slide 12, experience visibility to data and new technologies continue to aid our efforts to be the safest fleets on the road. In addition to the technology that we have included in the specs of new trucks for some time now that improve safety, we are deploying additional technologies that have been proven to be effective in the coaching and training of driving associates. Their exoneration in some circumstances of false allegations have been helpful in the settlement of claims. Reducing cost continues to be the most obvious item within our control that will have the most impact on earnings in the current term. We expect to improve costs, but not impair our longer-term growth capabilities. Improving the driving job remains a significant priority, and we are investing in new technology to help in this effort. We continue our vigilance in understanding the freight market trends to best position our Company. I'll now turn it over to Adam to present our earnings guidance.

Thanks, Dave. All right. Slide 14's going to be our final slide where we will discuss guidance. Based on the current truckload market and recent trends, we are adjusting our previously announced first-quarter guidance of $0.26 to $0.29 per diluted share to $0.24 to $0.27 per diluted share. We are establishing our expected range for second quarter of 2017 of $0.27 to $0.30 per diluted share. And I will walk through some of the assumptions that management has made that goes into this guidance. No organic growth from our current tractor count. We expect revenue per total mile in the first quarter to be slightly negative as we work through the upcoming bid season and begin to revenue much of our business. We expect our revenue per total mile could turn positive in the second quarter as we begin to implement some of our bid awards. We also expect miles per tractor to continue to trim positively, but not to the same degree we experienced in 2016 as comparisons have now become a little more challenging. Our assumption is that net fuel expense will continue to be a headwind in the next two quarters; however, that can be very volatile and it can be difficult to predict. In our brokerage business we expect to see close to double-digit growth in both load count and revenue. However, may experience some margin compression as tighter capacity in certain markets may result in purchase transportation expense outpacing revenue per load improvement. As we have mentioned in prior calls, during the first quarter of 2016 we exited our agricultural sourcing business which has historically accounted for approximately 8% to 10% of the revenue reported in our logistics segment. And so we will lap this comparison in the second quarter of 2017, but that will be a headwind in the first quarter. Again long term we expect to be able to grow our logistics segment in that 25%-plus range while operating in a low to mid-90%s operating ratio. We expect driver wages will continue to be inflationary on a year-over-year basis, probably similar to what we experienced in the fourth quarter of 2016. We also expect gain on sale in the next two quarters will continue to be a significant headwind, as the used equipment market remains very challenging. For reference, gain on sale in the first quarter -- in the first and second quarter of 2017 were $3.2 million and $2.7 million respectively, while our fourth-quarter gain on sale was approximately $700,000. Those are some of the examples of the headwind we would face in the first half of this year. Other income will also be a headwind on a year-over-year basis for both the first and second quarter. As far as tax rate, we would expect that to normalize in the next two quarters around that high 38% to 39% range, again excluding any unusual items that may occur. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the risk factors sections of the Company's annual report for a discussion that may affect results. This concludes our prepared remarks. We would like to remind you that this call will end at 5:30 Eastern time. We will answer as many questions as time will allow. [Operator Instructions]. If we're not able to get to your call -- if we're not able to get your question, you may call 602-606-6315 and we'll do our best to follow up promptly today. Karen, we are open for questions.

[Operator Instructions]. Your first question comes from the line of Tom Wadewitz of UBS.

So I guess the question around kind of view on supply/demand that always comes up and you try to figure things out. Sound like you guys are constructive about some improvement later in the year. But what do you think about the bid season and the contracts that get repriced in first quarter/second quarter? Do you think that is up a couple points, a point or two positive? What would your best view be on that? And how much kind of visibility do you think you have for that at this point?

We will start with the disclaimer that we don't have a tremendous amount of visibility because we are early on in that process. I would say that since kind of the mid- to early fall we have seen probably 100 bids so far, which I would say is typical of what we would have seen at this point. And they start, and there is usually a bit of a process and time that goes through before it is all done. Based on what little we have seen but what we kind of expect looking forward, we would say that we would expect the outcome to be in the low single digits. When we look at 2017 as a whole where we expect to end up from a rate perspective, we would see that still in the low single digits. So that might suggest that a portion of the rate's going to come through contracts, and then potentially we will see some spot activity at the very end or towards the end of the year that helps us a little bit more. So I know that's a little bit vague, but we are talking about positive rates, but probably not significantly positive. I think if you look at where our rates have been and how we would maybe compare on a year-over-year basis, we've got a stiff challenge here probably in the first quarter when we look at where rates ended in the fourth and where they were a year ago in the first. So we are probably going to continue to see rates trend negative in the first quarter but then flattening out. And then we would expect to start to turn positive as we move through the back half of the year. I hope that is helpful, Tom.

Your next question comes from the line of Matt Brooklier of Longbow Research.

How are you doing, Dave? Another pricing question, if I may. The sequential improvement that you saw on fourth quarter, was that a faster rate than 3Q? Can you talk to what contributed to that improvement? I am assuming most of it was the spot market, but maybe provide a little bit more color in terms of how much of the improvement was related to the spot market. Did you have more trucks in the spot market during the fourth quarter versus 3Q? And were contract rates any part of the improvement that we saw in yields during the quarter? Thanks.

Hey, Matt. This is Adam. Maybe I will walk through how that quarter played out and hopefully answer your question through my commentary there. As we began the fourth quarter, October actually started out fairly decent. We saw some spot market activity which we had not seen really in the third quarter, which resulted in some sequential rate improvements from September to October, and also begin to see some healthy miles per tractor improvement. So we were fairly optimistic going into November. Where in November we did see some continued spot market activity, but maybe did not see the acute tightness that we were expecting. Now, it was certainly better than 2015, but maybe not as strong as 2014 or 2013. But pricing did continue to improve from October to November, really driven by the spot market activity. But we also started to feel some of the cost pressures from fuel and gain on sale, they became a lot more evident as we were looking through November's results. And then in December, that spot market began to loosen up a little bit and we did not have nearly as many opportunities as we were hoping for. Now, miles were still improved and the cost pressures certainly were still there in December that we had begun to feel in November. So really that sequential -- that 1.4% sequential improvement really has been a result of the spot pick-up that we saw in October, and then in November and the kind of the tail end in December.

Okay. And just a quick follow-up. Did you have more trucks in the spot market during fourth quarter versus third quarter?

Yes, we did. And I would say we had a few more than we had a year ago in the fourth quarter. We were not a tremendous amount more, but we would have seen spot as a percentage of that total in that upper single-digit percentage range for us, which was up slightly from where it had been the previous year. And we would have done everything we could to increase that more if we saw more widespread strength. It is encouraging that when you find pockets of the country that are exceptionally tight, which we did see that, but it was just too short a period in too few places to move the needle as much as maybe we would have hoped for. But we think that day is coming.

Your next question comes from the line of Brandon Oglenski of Barclays.

Dave, can you talk about how the environment is shaping up this year, because I know there has been a lot of investor expectations that ELDs are going to really constrain capacity come the end of the year. From an industry perspective, do you think a lot the folks are already starting to adopt to this new rule? Are we going to see a lots of folks potentially exit the business? Or is it just not shaping up maybe quite as draconian and as we might have thought?

I think if we talk about the facts that we know, what we know about ELDs are that they are still in a minority of the trucks. And at least at the last thing I saw that seemed to be -- seem to have a handle on the couple of million trucks in the space, how many actually have been ELD and it is still less than half. We know, or at least the data suggest, that somewhere approaching 60% of all the capacity in the country is provided by carriers with less than 50 trucks. And it is the carriers with less than 50 trucks that have been the slowest to adopt those. So what we also know is that back in 2004, January 2004 when the hours of service rules had a dramatic change in how the clock starts and that doesn't stop, and that is very, very difficult to enforce with a paper log, and particularly when you have small fleets that don't have electronic equipment that leaves a breadcrumb trail that would make auditing, log auditing reasonable or feasible. So if we take those facts into play and you consider fleets that might not be fully compliant with the 2004 role, let alone have limited to no wiggle room, if you will, in even going from paper to the electronic log, you are talking about a meaningful change in the number of hours that a driver can drive in a day. And so -- and in a week. So that number, in our experience, has proven to be somewhere close to 10%. That is a meaningful number when you think about half the trucks that don't have these yet. So this will be interesting to see how this goes through. We don't have a whole lot of insight into the rate of adoption, although from some of the surveys we have seen, from some of the companies that are for sale, we see a lot of fleets that seem very ill-prepared and seem to be basically just putting it off for some reason and maybe underestimating what's involved in implementation, and ultimately what the impact on their business might be. We continue to have conviction that this is going to be meaningful, because -- and that conviction is based on our own personal experience. I don't think it's based on wishful thinking. So we'll have to see how all of that plays out. Now, you can -- we know when the regulations going to take effect. We know what is involved in the regulation. We don't know how the enforcement will go. But it is our belief that there are a multitude of interested parties in this regulation that will aid in the enforcement beyond just law enforcement. For example, insurance companies will have great interest in whether or not a company truly complying, and may not the willing to write coverage to a fleet that they can't validate is compliant, and/or the carrier may not be able to afford the insurance if they cannot validate that they are compliant. And without insurance the brokers, and in some cases customers, get immediate notification that an insurance certificate has expired and therefore it become virtually impossible to haul a load, at least in the traditional route through a broker or through a 3PL, or in some cases directly with the customer. And that's a group, the group we're talking about, less than 50 trucks is highly dependent on brokers and third parties for their loads. So the insurance piece could be a big deal. And then customers are interested in it. Customers, we know that it is on their radar. So we will have to see where that goes. I think a big question is brokers, where do brokers stand and to what degree do brokers take a leadership role in validating and ensuring that third-party carriers are compliant. So we will have to see how that plays out. So all of those factors, I think we begin to feel those as we go throughout the year. And as customers make decisions, as carriers have difficulty renewing insurance policies without adopting, and then in addition to some carriers not being able to run as many miles, some may not be able to make the economics work and might find themselves not surviving. So I don't know that it is going to be that draconian for most. It is just probably just going to create some tightness that will hopefully make it a little healthier for those of us in the business. And maybe most importantly, give our drivers an opportunity to see an increase in pay that I think is long overdue.

All right. I appreciate that. How proactive are customers being about this, though?

Since we have been compliant for so many years, it is not an issue where we have customers putting us -- putting an ultimatum for us. So it is hard for us to totally know. I can tell you some of the visits I've made with customers that usually they can tell you how many, if any, of their carriers that they are using don't have ELDs. And the one exception to that is sometimes they might discount the fact that they use brokers, and they kind of count that as different kind of capacity for some reason, rather than considering whether the carriers they deal with directly have ELDs. So that is going to have to get addressed and reconciled somehow. That is something to be seen later, and we will have to see what happens.

Your next question comes from the line of Ravi Shanker of Morgan Stanley.

A couple questions. I'm sorry if I missed it. Did you comment on conditions in January so far? And whether the looseness that you said you saw in late December continue to January and second question is on ELD's. What is the latest in the interim of timing when you start to see that tightening coming up. I think most people on the carrier site expected midyear impact in are you hearing any delay from either shippers are carriers given the new administration hoping that the mandate does not enforce?

Okay. Ravi, I will try to answer your three questions -- two and half. First talking about January. Yes I think we have seen the December -- the kind of looseness if you will in December to continue that we saw in late December continue into January. So I would say that January has not been overly robust. A couple things we take into consideration in that is I think that we got the holiday fell started the new year off to a pretty slow start. When you have a Sunday New Year's Day with that recognized on a Monday, we got off to a little bit of a slow start. And then we've had a heavy dose of where the Mac so far. In these first few weeks of January. So when we look at -- when we measure kind of the freight market from the load volume perspective or a miles per truck perspective it has been a bit challenging. As weather gets out of the way and you don't have the holiday affect that is in the numbers on a year over year basis then maybe we will start to feel a little bit better as we meet January into the rest of the quarter. But that is kind of what we are seeing bear. As for ELD's and when we see that take effect, I would not say -- I don't think I would even say midyear. I would say towards the back certainly the back half in probably not until closer to the back quarter -- maybe towards the end of the third quarter we start to see that bigger role, but I don't know -- you may have some pleads that are implementing. It may be bit of a distraction but that may not necessarily mean that there wholesale in and enforcing it within their own companies the way they need to and I think you will see that happen as the year goes on a little bit more. Now there are other factors that could need for us to. Is a little stronger with the seasonality of the second quarter hits and beverage quarter hits whether it hits -- just how many carriers are able to muscle their way through the unfavorable fuel comparisons which we now have had two quarters third and fourth quarter both were unfavorable for a few comparison perspective as compared to what we have seen over the past probably couple years. So that has been a little bit of a challenge. I think they will finally inflate the insurance market with the renewals that oftentimes happens towards the beginning or the end of the year. I think they will find some installation bear particularly in the workers compensation world. Carriers still have it right bit to digest for the use market is at the moment. If it gets the best of them, and we have less and less toxic and we have high seasonal pickup, and maybe even economy starts to come alive a little bit, then we could see pickup in the freight market sooner with ELD's team kind of an encore in the back half of the year. And then your last point about with the new administration and changes -- you know the hours of service rule is not an executive order or a department regulation. It was a lot of that was passed by Congress. It's been challenged in the courts, been appealed unsuccessfully with additional attempts to appeal that were turned down. It seems like it's in pretty firm footing. When you look at the level of deep regulation that this industry is in how free market this industry really is, one thing that we cannot compromise is safety and we need very strong, good, sensible safety regulations and I think that that data would suggest that ELD's fit that criteria and I think not only do you have it passed as a law by Congress, but to also have in industry where it is largely supported particularly from those that have the best safety ratings and use it and wholesale recommended as well. So we feel pretty good that that will continue as planned.

Your next question comes from the line of Kenn Hoekstra of Merrill Lynch.

So Adam just on your outlook. I just want to understand. What changed in the Outlook what you set. Is that mostly rate or you noted earlier purchase transportation is in an out paste when you look forward. Is that what changed in your Outlook that not only brings your 1Q down but your caution on 2Q as well. . I think it is more on the cost side, Ken. As we mentioned before fuel has been a headwind for us and I think we seek early trends in January. We are expecting to see that continue. And then as a gain on sale perspective I think we knew the environment was weaker but we only had $700,000 of gain in the fourth quarter and that number could come down even from their in the first quarter. So we do have a pretty big headwind from a cost per mile standpoint. That is why we are more cautious but from a revenue standpoint we are fairly similar to where we were originally projected.

So if I can get a follow-up to clear that up I guess on the expense side you have always been so religious Don focusing on cost. When you look at that purchase transportation you mentioned -- what is driving that? I would presume trucking capacity freight? Is that solely on your brokerage side because I would imagine that if you are getting charged for you are also able to charge more or is that the delay in able to get those rates through?

Right, but when we talk about purchase transfer we are looking at purchase transfer for the fourth quarter, that’s higher as a percentage of revenue but if you -- our logistic business makes up a larger portion of our revenue this year than it did last year. As that grows the purchase trans grow because that is the associated with that revenue. So we made the comment that we expect to grow that business on a per load count and a revenue perspective but there is some contraction in gross margin. We saw 50 basis points in the fourth quarter and we would expect to see a little bit more on a year over year basis in the first half of the year and that's given the fact that capacity is a little tighter in certain markets but rate has not caught up to that yet and one of the factors there is contract rates you have to go to a big cycle before you really are able to move the numbers there so I think there is a bit of a lag that we may feel on the logistic side.

Your next question comes from the line of [indiscernible] of Susquehanna.

You look at a lot of potential acquisitions. I am just curious from your guys perspective. Why haven't we seen more large truckload mergers across the industry in recent years and what if anything might change that over the next 12 to 18 months?

Well, this is a tough business. If you are going to do acquisitions, you probably have to have a good handle on your business and have to have a good handle on earning an adequate return on invested capital. To answer the question why we haven't seen more of this in the industry as I think far too often you have firms who don't exceed their weighted average cost of capital. So we happen to be one who does. It's not easy to get there and we fight our way to get the kind of efficiency and earnings that we get, so when it comes time to acquiring another company, you've got to really have conviction that you can take that business and improve their returns and that you can do it in a way that you are the better for it and you can create a lack of value. Those kind of opportunities don't present themselves probably as often as one would like but I wouldn’t say that those opportunities can't exist or won't exist, but that’s my best guess on why you have not seen that happen more often.

Okay. I appreciate that color and just as an aside can you comment -- the private multiples that you are seeing on ideals, do they resemble the public multiples? I just kind of curious what you are seeing?

Our experience with the private have been lower. Obviously multiples have had a step up here over the past few months in our space but our most recent experience with private multiples have been a little while ago but they were lower and often because of unique situations. It might be because a customer -- that carrier has may be has a higher concentration of customer or some other part of their business maybe sets it up to not be quite as well rounded as some of the larger public guys but by and large I would see that we have seen it lower.

Your next question comes from the line of Chris Wetherbee of Citigroup.

I want to get on the use truck pricing topic for a minute. So you had highlighted that in the quarter as being that and a couple of other items as sort of that 5% year-over-year headwind when you’re doing your earnings bridge. It sounds Adam like that will be something that sticks around for a bit longer as we go through this year. I guess in the context of ELD, how do we think of the duration of this headwind. I want to get a sense will a deal make it better or worse? And do we think that maybe the sort of headwind from lower gains or maybe even losses at some point, sticks around beyond just the first couple quarters in 2017.

Well, that is a great question. I think that what may have -- when you look at one impacts are used in used truck market, you have the appetite for growth is part of that which is inseparably connected to the rate pricing environment and so it's no surprise that rates turn negative in 2015, second half of 2015 we saw the used equipment market significantly cave. So you have a couple of things. The other factor clearly would be the ability to get financing and that’s part of the predict entirely on how that might look and then you have the supply of equipment. So if what we expect to happen is that ELD's might lead to some trucks to find their way to the sidelines, well that would exacerbate a weak used equipment market and would potentially set it back even for a further amount of time with more equipment to be worked through, more used equipment to be worked through. Now as a result of that kind of tightness it would probably be I guess improve pricing. So eventually pricing will improve to a level that certain fleets, assuming they are able to find drivers, might go back into growth mode. Hopefully we have all learned from the cycles and we are deliberate and careful on how that works. I know we will be, but I will tell you that the day will come where folks will want to add the trucks again and have an appetite for equipment whether new or used because they can get the returns. So I think that you will see that happen. I think you will see that happen not very far after the tightness comes -- probably ELD's playing a big factor in that and then the question will be who can grow? Who can participate in that? And it will probably be a more limited group than what we have ever seen before because in the past we seem to see a lot of growth with the very small fleets. They can go buy up a lot of used equipment real fast and grow up really fast. Well in ELD world, they have got some challenges of their own. The group that can grow is probably the group that has already digested the ELD's and their impacts and then can find ways to add drivers which is a much smaller number than what we normally see so hopefully what that leads to is maybe a little bit more balance and a little less feast or famine that we normally see in these cycles when we go from peak to drop [ph] so quickly. Maybe it can be a little more orderly and last for a period of time but those are all I think the key factors we just have to watch to be close to.

And just I think to add on to Dave's comment. I mean we have two options and when we dispose of equipment. We can sell to third parties which we typically do when the environment is stronger but we also have the option to do a trade back or buying new equipment and so, that’s right the trade back kind of provides us support in terms of the exposure we would have to a very weak environment. So we have tried to position ourselves so that we don't -- we are never in a position to take a loss on our equipment.

Your next question comes from the line of [indiscernible].

This is [indiscernible] on for Allison. Thank you for taking our question. I know you are anticipating net fuel expense may continue to create drag in 1Q and 2Q. We’re just wondering if you could explain what is causing the divergence between your fuel expense and fuel surcharge and perhaps how significant it might be in 1Q compared to what you just saw in 4Q or what potentially might swing it one way or the other in the fuel environment that could change it.

Yes. The direction of fuel has a big impact on our P&L. So given the nature of how we charge fuel surcharge which is typically adjusted on a weekly basis tied to what the national average does, we end up rising fuel price environment. We end up always behind because it would mean for the current week we are charging a fuel surcharge that’s based on a stale fuel cost number and we are actually paying higher. So when we see a quarter or a prolonged period of time within a quarter where you continue to have these step ups, and then only for it to kind of flatten out but never come back down and allow you to catch up, then that’s when we feel it on net fuel expense on the P&L. So we were on the unfavorable side if you will in the third and fourth quarter and it's not uncommon when you have four consecutive weeks of rising prices for us to see that lead to a negative to the tune in our business of about $1 million often times with a kind of steady increase that we saw happen in the fourth quarter, a $1 million in a month after four weeks of increases. So now if you have a quarter where it stair step up and then stair steps back down at the same time then you are kind of neutral and you will come out okay but if you continue to digest the increases which has been the case then it becomes problematic. The second side to that is the higher the absolute price of fuel, clearly the more your empty miles cost you. So one of the factors that we have on 11% give or take of our miles here in the first quarter that we are running without -- that are empty without any fuel surcharge being paid we’re paying -- we got to a higher price than what we would have paid a year ago.

Your next question will be coming from [indiscernible].

Dave, curious about your perspective on maybe the logistics side and the opportunity on -- outside of the core truckload business and the core truck brokerage business fulfillment in capturing B2C and delivering and building out logistics and have been creative with that and there is a lot of growth opportunity there. To what degree can you use that on the small package B2C fulfillment side to complement your core truckload, the asset side and the asset light side.

Yes. Well we have seen very healthy growth in what we consider to be expedited business. And so that could be your traditional full truckload but that is under an expedited circumstance, maybe tied to e-commerce of some sort or some type of expedited load B1 where it is kind of a zone skipping type scenario where you are actually full of parcel deliveries and you are getting those 300, 400, 500 miles down the road to be dropped or parcel delivery save significant amount of money. There continues to be more and more demand for those types of deliveries, it seems like if it can't be ordered online and delivered within two business days, we just don't order it online or maybe go find it in a store or most likely we just keep looking online until we somebody who can get it to us in two days. That seems to be the new norm is for e-commerce is to figure out how to get there in two days. Well that’s not so bad for us because that creates a significant amount of truckloads. When you think about the kinds of staging and positioning of inventory that has to happen in order for inventory to be spread throughout the country in a way that it can be anywhere within two days via parcel. So we like that and then when there is really a need you even need even use an airplane or there is enough concentration of those kind of moves. It used to be just a particular customized part that was holding the plant up that would get overnighted or you know things that would tie up a manufacturing line. Today we kind of have everything. Everything moving at those kind of paces. So there is enough of it that we are starting to see enough concentrations that you could go pick those up at a consolidated warehouse perhaps or sometimes even at an airport. So ultimately the moving loads via a full truckload carrier is by far the least expensive way to move freight and we can do it smooth, we don't have to deal with multiple freight carriers or we don't have track [ph] that creates limitations. We can pick something up and get it delivered at significantly lower rates than what parcel we bring and still some people don't realize this but at a significant discount to what LTL rates would be. So we are doing everything we can and there are some very innovative shippers out there that are doing everything they can to maximize the number of full truckloads and so one way we find is within our logistic group is often times they have more flexibility, we can be more flexible because of the ability to use third-party carriers that really allows us to experiment and continue to find more ways to drive deeper value into supply chains by using the most efficient way to move which is full truckload.

Your last question comes from the line of Brian Ossenbeck of JPMorgan.

Maybe I'll just stick with quick high-level one. The impact of ELD stock [indiscernible] but I'm asset light on the brokerage side, Dave mentioned that this could be upto them to kind of force that. So how do you see that playing out in your own business? And do you think brokers will be able to maintain the supply base overall? And will there be a bigger shift than people might be expecting towards the asset heavy carriers?

Well we do think that you will see a bigger shift. We are feeling that already. We have through what we have seen in [indiscernible] season thus far is there has been a push towards more asset and dealing directly with more asset providers. So which seems to make a lot of sense for us, there is a lot less uncertainty there and then as for the third-party carriers that we use, we are working with them and working to develop ways that they can be compliant and successful in their business at the same time and one thing we bring is several years of experience of using ELDs, adopting ELD's, and so in the end this may create an opportunity for us to develop maybe even stronger bond and relationship with some of the third-party carriers that we use as we help them somewhat peer to peer we help them through their learning curve and it takes a trucker to know a trucker. So that may be a little more difficult for somebody who has yet to buy their first truck or hire their first driver by their first gallon of fuel and so it's not our first rodeo. So we hope to be able to help and add some value different than what maybe a non-asset-based broker might do. So hope that answers your question. That is about all I have time to give you anyway.

Thanks for the question. That concludes our call. We appreciate you joining us this afternoon. We appreciate your interest. Take care.

This does conclude today's call. Thank you for joining us and you may now disconnect.