Good afternoon. My name is Julie and I'll be your conference operator today. At this time, I would like you to welcome everyone to the Knight Transportation second 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. 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, Julie, and welcome to all of you who have joined our call. We have slides to accompany the call posted on our website at investor.knighttrans.com\events. As usual, 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're not able to get to your questions due to time restrictions, you may call 602-606-6315 following the call and we'll return your call. Again, our number is 602-606-6315. The rules for the call remain the same as in the past. One question per participant, and if we don't clearly answer the question a follow-up question may be asked. More often than not, we end up with people on the queue that are not able to get a question asked, so please respect the one question rule. I refer you now to page two of our slides. It was our disclosure page. 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 I 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. Actual results may differ. I'll now begin by covering some of the numbers in detail, including a brief recap of the second quarter results starting with slide three. For the second quarter 2016, we earned $0.31 per diluted share compared to $0.33 on a GAAP basis for the same quarter last year. The second quarter of 2015 included a $7.2 million expense or $4.4 million after tax expense related to…

Okay, thank you, Adam, and good afternoon, everyone. I will start with slide seven. In the second quarter, our asset based trucking businesses operated at an 82.7% operating ratio, which includes our dry van businesses, our refrigerated businesses, drayage business and dedicated business. Most of the 390 basis point OR increase year-over-year was a result, as Adam had mentioned, of lower rate per mile, increased net fuel expense, and lower gain on sale of equipment. Our asset based businesses remain focused on developing the type of freight in the specific lanes we desire appropriate prices. We've done much in prior quarters to prepare our costs for this current environment, including decreasing the fleet late last year and reducing non-driver head count. We continue to manage costs aggressively. Operations and maintenance would be another example of that this quarter. Miles per truck again saw meaningful improvement in the second quarter, being up 1.7% year-over-year. Our non-asset based Logistics segment produced an OR of 94.4%. As Adam mentioned earlier, our brokerage business, which is the largest component of our Logistics segment, grew volumes 28.4% and expanded gross margins 110 basis points, which resulted in operating income growth of 6.2%. Lower fuel surcharge, a shorter average length of haul, and lower non-contract pricing led to a 2.1% increase in brokerage revenue, despite the low growth we experienced. We are 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 intermodal services, in addition to our truckload services. Now I'll move to slide eight. This graph provides insight into each of our second quarters since 2012 for our Trucking segment. Each…

Thanks, Dave. Slide 14 is our final slide here where we'll discuss guidance. Based on the current truckload market and recent trends we're adjusting our third quarter 2016 guidance range to $0.27 to $0.30 per diluted share. And our expected range for the fourth quarter of 2016 is $0.30 to $0.33 per diluted share. The reduction to the previously announced third quarter 2016 guidance is primarily driven by a weaker than expected rate environment. And then maybe I'll go through some of the assumptions that management has made for the expected ranges we just disclosed. So the first one would be no organic growth from our current tractor count. We expect our total rate per mile in the third quarter to be down similar to the second quarter of 2016. We expect rates to begin to improve in the fourth quarter, sequentially, however still trending down on a year-over-year basis but not to the same degree as the second or third quarter. We also expect miles per tractor to continue to trend positively similar to what we experienced in the first and second quarter. Our assumption is that net fuel expense will continue to be a headwind the next two quarters similar to that of the second quarter. Fuel can obviously be very difficult to predict, but if we look at what occurred last year, fuel prices were falling pretty consistently through the back half of the year. So even if they were to remain stable, that would result in a headwind from a cost standpoint. From our logistics standpoint, we expect to continue to grow our Logistics segment in the 25% plus range while operating with a low 90%s operating ratio, and that's kind of our long term expectation. In our brokerage business, which is the largest component of…

Your first question comes from the line of Kelly Dougherty from Macquarie. Kelly, your line is now open. Kelly Dougherty - Macquarie Capital (USA), Inc. Hi, guys.

Hi, Kelly. Kelly Dougherty - Macquarie Capital (USA), Inc. Hi and thanks for taking the question. Adam, just want to follow-up on the comments about a lower 3Q guide. Obviously you're saying it's primarily from a weaker rate environment. Maybe you could give us a little bit of color on what you're now seeing and expecting from a pricing perspective. And then just what gives you confidence that things should improve? I guess it was relatively speaking in the fourth quarter. Are you assuming kind of a benefit from peak? Are you thinking that some of the capacity trends that you talked about really start to kick in? Just a little bit of color on that would be great.

Sure. Well, when we look at, just from a pricing standpoint, we're expecting to see pricing hold fairly consistent with where it was in the second quarter. And so if that, in fact, holds true, that would result in the revenue per mile decrease that I assumed on the guidance. And so we feel pretty confident about where we stand today on rates and how that would hold through the third quarter. And in terms of our confidence in seeing maybe a little – a bit of an uptick in the fourth quarter, well, when we look at how the second quarter played out, we had April which was the weakest of the three months, but that would be typical in a normal second quarter. But we still saw strength on a year-over-year basis in terms of productivity miles per tractor and that continued into May. And then we felt some tightening in the back half of May and that tightening continued into June as we kind of ramped up through the quarter end and the Independence Day. So that gives us some signs that, or some signals that enough capacity started to come out of the market where this incremental demand that occurs at quarter ends and through holidays, you start to feel some tightness throughout the country, tells us that enough supply has come out where a peak season could be in play this year. And so, if that were to occur, we would expect to see some incremental improvement in rate from third quarter to fourth quarter. And so that's why we took out our guidance improving from third to fourth as we laid out. Kelly Dougherty - Macquarie Capital (USA), Inc. Okay, great, thanks. I will jump back in the queue with some other ones.

Thanks.

Our next question comes from the line of Scott Group from Wolfe Research. Scott, your line is now open.

Hey, thanks, afternoon guys.

Good afternoon.

Good. So, I wanted to just kind of follow-up there a little bit and maybe, Dave, kind of just talk us through the recent environment that you've seen in kind of June and through July. The environment that you talk about is going to get tighter, do you feel like we're already seeing that or would you characterize kind of the June and July as more seasonal? And, I guess, kind of, if I want to marry that with the guidance, your commentary about where things are going sound very positive, yet the guidance for third quarter is worse than what it typically is 2Q to 3Q. So, I'm struggling a little bit to kind of marry the optimism on the call with the actual guidance.

Okay. Yeah, let me take the first part of your question. So, June, July, as Adam mentioned, we saw that seasonal tightness that we're accustomed to end of June. It was good to see it. Based on our miles per truck on a year-over-year basis, the fact that we're running more miles to us is a positive. We didn't see demand – any driver on the demand side that was substantially different, leads us to conclude that it probably meant more that we were competing with fewer trucks. So we – because we weren't overly aggressive on rate, trying to get just volume. So that helps us to be a little bit more comfortable that we've got a little stronger of a supply-demand balance, or at least stronger in our favor. And I'll speak a little bit to July. So, month-to-date in July, our trends and volumes and productivity have been positive on a year-over-year basis. So it's continued into July. I don't know how long it's going to continue. I don't necessarily expect this inflection point, if you will, to be so strong that it overrides the normal seasonality that we see late summer, like in August when there's really not a whole lot of demand going on. But it's very encouraging for us to see solid demand continue past the Fourth of July. Some years we see things get really soft by mid-July and in late July it can be like that later summer feel. And so that seems to be a deviation this year versus what we saw last year. In any kind of turnaround or recovery of the market, the volume comes first, pricing comes second. And so that probably is partly what answers your second question about guidance in the third quarter. We need – we have to see stronger volume, stronger demand, some tightness before we're able to usually get pricing as an industry. This feels a little bit like 2013 did. We probably said that before. Maybe we said that last quarter, I'm not sure. But where you had a decent second quarter, third quarter wasn't as strong. Not so much because of the fundamentals, but maybe more so because of kind of the full effect of a round of pricing that was a little bit maybe more aggressively focused on price only by the shipping community, and you kind of feel the brunt of that in the third quarter where there isn't a whole lot of seasonality. And then by fourth quarter you've got seasonal strength and things start to turn. So, it feels like we're beginning to see the signs of volume coming with pricing to come next. And based on the pace at which things are moving, we think that probably in fourth quarter, November probably becomes pretty tough to find trucks and then pricing comes around and that's when you'll start to see the earnings lift a little bit more.

Okay. Thanks, Dave.

Yep, thanks.

Your next question comes from the line of Brad Delco from Stephens. Brad, your line is now open.

Good afternoon.

Hi, Brad.

Hi, Adam, hi, guys. Thanks for taking my question. Dave, you made a comment in your prepared remarks about keeping a close eye as to what's going on in the market, and you guys don't necessarily react, but you're effectively preparing yourself for what you think will be the turn. I think in some of your comments you suggested that could be as early as late this year. What exactly do you mean when you say you're sort of – you've set the business up and you've prepared the workforce for that? And I know you guys had to make some tough decisions earlier this year. How quickly can you sort of undo some of those cost saving initiatives?

Yeah. Great question. Really fast. Really quickly. So, it has more to do with if you feel like we're going to be in a really good market, you get ready on the market side. You get ready with people that know and understand pricing in markets so that we're responsive to our customers when they have needs, and we're very, very in tune to markets. And so, a lot of that stuff has been set up and in place and worked for us in fourth quarter of 2013 all the way till today. So, that isn't stuff that changes dramatically. I think a lot of the positioning of our business has to do with the fact that we had 2.5% less trucks year-over-year for the quarter, and the fact that we started pulling those trucks before the end of last year and the fact that we made some people adjustments earlier on in the year, and so those kind of changes have positioned us where the second quarter we can kind of keep our costs somewhat in check when we're seeing a negative pricing environment. I think when you look at the potential for things to be better in the fourth quarter, let's just say that doesn't happen, and pricing doesn't improve, but we still have strong volumes. I'm expecting another robust bid season for the 2017 bid season. But I think the focus will be a little bit different. The focus this go around for shippers was – it felt like almost exclusively price. Price will always be an important part, no question of course, but I think the 2017 bid season will be more about securing capacity in light of what's going to happen with ELDs. And I think with some of the tightness and difficulty in covering…

And maybe, Dave just a quick follow-up there. Seems like you can move the organization very quickly. I think it's sort of well-known you've reduced your spot exposure in the recent environment. Are you kind of suggesting you could turn the other way quickly as well, and maybe that's something you'd be looking to do if we were in a tighter environment?

It'll shift. It'll shift fast. It'll make your head turn, and if you're not paying attention you'll miss it. It'll shift fast. Yeah.

Okay, thanks Dave.

Yep, thank you.

Our next question comes from the line of Ken Hoexter from Merrill Lynch. Ken your line is now open.

Great, good afternoon Dave and Adam. I just wanted to follow up with you on – you kind of touched on this a little bit, but your thoughts when you were going over the state of the market now. Just want to understand what any more room you have on the utilization. Are there things you can do? Are you seeing any impact from ELDs, maybe you can just talk through that a little bit on your kind of utilization of the tractors?

Well, I should probably disclose that it's been long overdue for us to make progress on our utilization. And so this is our second consecutive quarter with some meaningful improvement. We were up I think 1.8% year-over-year in the first quarter. So that's a very healthy clip in the kind of freight environment we've been in. And I say it that way because our competitors in the same space, at least the public folks were comparing against, they've not had similar results to us. In fact, many cases it's been the other way around. So I'm optimistic that we can continue to make progress. I think Adam alluded to that in his estimates. We think we're going to continue to make improvement year-over-year in this kind of an environment. Typically, when we have more loads than trucks in a even stronger freight environment, you theoretically should be able to make even more progress. It's taking a lot of work, a lot of effort, some organizational shift to get to where we are now, but when the market cooperates even more so with us, I do think there's more we can do or maybe better said, we can continue to see progress in future years as we compare against these, what will be tougher comparisons.

Maybe, Dave, just to understand the answer though. Is it specific to kind of lane choosing, better systems optimization? How, I guess, maybe walk us through – is there something changed that you're doing, or is it just kind of nuts and bolts tackling?

Yes. That's the answer. Ken there's not a silver bullet. There are a number of different things we've done. There are talented people that have been involved at the same time to help bring it about, but yeah we use optimization. We have – more consideration goes into the lanes that we compete for to haul business on and to send trucks in the right places and the right ways. And then this is a grind of a business with daily execution. And so getting everybody on the right page on the same page, the right kind of focus and it makes a big difference. And as you know I'm sure, when we measure our miles per truck, this is total trucks. We don't back out the trucks that might not have a driver. So our entire recruiting effort, that group, they feel a responsibility to fill trucks, keep trucks full because that helps too. Now, that's not the factor that's shifted and made the big difference on a year-over-year basis, but they're in there fighting too. So this is an entire organizational effort to be more and more productive and more efficient.

Great. I appreciate the insight. Thanks, guys.

Okay, thanks, Ken.

Your next question comes from the line of Rob Salmon calling from Deutsche Bank. Rob your line is now open.

Great, thanks. Just get a little bit more color in terms of how quickly you can transition from more committed capacity into the spot market. Were you speaking it could happen on a dime, is that once we get through kind of the contracts that were recently signed, or can it happen any faster than what I'm contemplating?

Well, I don't know what you're contemplating, but I think that if you use 2013 as a guide, fourth quarter of 2013 we were able to adjust pretty quickly. And a lot of it comes from the fact that we have a very, very diverse customer base. And so, we do a little bit with many, many, many, many large companies. And so we don't find ourselves massively committed to a handful of customers that then necessitates all this backhaul just to support that kind of business. So we probably have a little more flexibility just inherently built into our model than most, or maybe than any. And so, we think that we do a decent job of reading the market, and so the combination of seeing where the market is and that kind of flexibility allows us to make some adjustments. And do so in a way that doesn't leave our customers high and dry, it just affects the daily decisions that we make when we go out and accept loads and move loads. So I don't know how to explain the way it works maybe any more simply than that, but there's great flexibility, and we can go from single digits non-committed to double digit non-committed relatively quickly, and then over a little bit more time, expand that even more which is what we did from fourth quarter of 2013 to fourth quarter of 2014 and then back down again for fourth quarter of 2015. So that's just part of how we try to run the business.

I thought you were saying you could go from like 5% to 20% (44:21) quickly. But it sounds like there would be a steer (44:24) stepped progression, and then kind of when you get through bid season you could step it up more if you were more optimistic about the market.

It would be a step up, but even the ability to double or triple your exposure in a very short amount of time is – you'll see the impact of that, which is what happens (44:49).

And Dave, where do we end off in the second quarter in terms of committed?

We don't share that other than what I just alluded to, single digit percentage.

Okay. Thanks so much for the time.

You bet, thanks.

Your next question comes from the line of Ravi Shanker from Morgan Stanley. Ravi, your line is now open.

Thanks, good afternoon, guys.

Hi good afternoon.

Hey, I want to ask you a longer term, big picture question here. So the last few days have been kind of pretty important for the truck sector delivering (45:25) new truck technologies. First with Tesla and today Daimler announcing electric trucks, and also several new developments the last few weeks have (45:33) trucks. So can you just talk to us about what are you doing behind the scenes to prepare for these technologies? And I'm talking about more than the driver assistance systems that you mentioned are going into all your trucks already.

Okay, yeah, well, we read I think a lot of those same headlines that you do. We have some discussions from time to time from some of these players. Clearly, in order to do some of these things, maybe not the electric truck, but as much as maybe what you're talking about on where I think you're headed on the technology for – whether it be the driver assist or autonomous, whatever they want to be called, we're very interested and we stay very close to understand. I think there's massive, massive amounts of data that have to be collected in order for those things to reach a level of safety and comfort to be ready for the primetime market. In the meanwhile, I would say what we do and what we're doing to prepare is we're putting more and more technology of course into the truck, whether it's the accident mitigation and anti-rollover and external event recorders and other devices that gather all kinds of data that can be very sensitive and tell when different events are happening with the truck and whether it makes sense for that to be happening giving its GPS location. And so I know that those might look and feel like baby steps compared to some of the ads we see or things we read about. But those small things I just mentioned are actually only really adopted and used by a very small percentage of the two million trucks on the road. And so we're part of, I would say, a very small fraction of the trucks on the road that are actually leveraging some of the proven technology that we can use today that can have a dramatic impact on safety. And when we look at it, when we realize that the return is there and the investment is worthwhile and effective on safety, I mean, of course, we quickly come to the conclusion that if it's good enough for our company, for us to invest money in it, really the whole industry should have it. Because we have a responsibility as an industry to improve our safety every single year and to take advantage of every opportunity and every technology that's out there that would do that. So, what I would say, Ravi, is we are in real life practical application. We are trying to stay at the far cutting edge of what's out there and proven and available and that only whets our appetite for being cutting edge for other technologies to come. Hope that answers your question.

Got it. Got it. It does, but just as a quick follow-up, so are you seeing tangible cost savings from those baby steps, either in insurance or fuel or any of the other buckets? And is there any way you can kind of help us understand what that could be over time?

I would say yes, we're seeing tangible, but they take time because of all those technologies I laid out, we don't have all of those technologies in 100% of our trucks. And some of our trucks only have one or two. Before long, all of our trucks will have the automated manual transmission. We've been spec'ing that now on new trucks for some time. And that is definitely a fuel saver, and I think there's safety benefit that goes with it, as well. And so, hard for me to quantify what all of that is. Certainly, it's partially offset in the depreciation number we have that continues to go up. But our early testing on all of the technologies we've done have yielded a very good return for us. So, I think over time let us digest these in our entire fleet and have some more under our belt and then we might be willing to talk about some of the returns from that technology. But it works.

Great. Thank you so much. Very helpful.

Thank you.

Your next question comes from the line of Brandon Oglenski from Barclays. Brandon, your line is now open. .

Hey, guys, good afternoon. Thanks for taking my question. So, Dave, you guys have focused a lot on the non-asset segment and I think, Adam, you mentioned that you exited the sourcing business. So, could you just talk to us about the core performance in brokerage, Dave, and where you see profitability going in the near term and longer term for that segment?

Yeah. That business continues to do really well. And volumes are a big thing that we look at, of course, because you can only do so much about fuel and a rate market that is kind of rolled over like it did, particularly in that spot load board world. And so if we are – if we've got 28.4% more orders from customers year-over-year, we know that in the right kind of environment that's going to generate a pretty healthy amount of revenue improvement. So, we continue to go hard there. I think that it's maybe not always appreciated or understood how efficient we really are. I mean, we do not enjoy the kind of gross margins that the full-time exclusive professional non-asset brokers have been doing it for many decades do. And yet we end up with an operating ratio that is not far off from where they end up. And so, long term we feel like our cost per transaction can be very, very competitive. So that's a business that we continue to be very excited about. I wouldn't be distracted by the agricultural sourcing business we've pulled out of. I mean, if we would've felt like that was a strategic alignment to help us in brokerage, we would have – we would still be – we would still have it and still be doing it, but we didn't. So, I wouldn't view that as really terribly connected to the brokerage effort.

Okay, thank you.

Thanks, Brandon.

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

Good afternoon. I wanted to get your thoughts. I don't know if you covered this already, but I wanted to see if could you offer some perspective on, I guess this would be from the brokerage side, but I mean you work with small carriers and I think coming into the year we said, well, maybe those – there'll be some attrition of smaller carriers related to ELD, maybe some of that will happen this year. So, I guess maybe the broader topic is ELD and how you think that will play out and whether perhaps from the brokerage side you've seen any evidence that some of that attrition has begun to take place.

Yeah. I don't have the best data, so I'll just disclose that I'm going off of what limited anecdotal information I've heard. But it's not my sense that there are very many trucking companies that have leftover ELDs at this point. I think what's happened is they have simply – they're putting it off. I mean, I don't know if it's procrastinating or just underestimating. I think it has more to do with they're just totally overwhelmed with the current market and in survival mode in many cases, just given the kind of declines in their revenue that they've had to take. And some of the surveys that I've read of small carriers, I mean it's amazing how few have tested, have any ELDs. And what's even more alarming is how many don't think it's going to have a negative impact on their business. And all can I say is we've been there, done that and the effects are draconian and it takes a while to kind of learn life in that new world, and you never fully recover. So, I think the industry is maybe still in denial, maybe still a little naive to the impacts of it. So I think that the capacity that we've seen leave has been largely over market dynamics, and I think it's going to get worse. I think it's a challenging plight when you bought a 4-year-old truck for $60,000 a year ago, and today it's worth 20% less, or give or take. And by the way, your customers, or the brokers that you rely on, are paying you down 5% to 10%, and you didn't have 5 points to 10 points on your OR to give up, and so you've got a truck that is way underwater and you can't really afford to pay it anyway. And I mean it's starting to look like housing in Phoenix, Arizona, back in 2009 for the used equipment guys. So, they're in a difficult spot, and it's not like a 2% or 3% bump in pricing is going to solve their problems. Their problems are much bigger than that. And I think that that largely has stolen the show from the ELD concerns. So, the ELD is still in the second act. They haven't gone into intermission yet. So that will be a bigger topic as we get a little bit closer I think, but again, that's more my opinion and based on anecdotal evidence and a few surveys.

So does that potentially mean it's more of a 2018 issue with ELDs, and it's more look at the normal cycle and at the kicker to the cycle in 2018, or would you still think this'll happen sometime in 2017?

Yeah I think it's 2017. I think a year from now we'll be talking a lot about ELDs, and I think when we're within the 12 month range, that's when there'll with be a lot of ELDs. And part of that'll come because I think a lot of shippers and their bids that aren't effective – very few of the bids that we do in the bid season are effective before December of that year. So these bids aren't going to be effective until sometime in early to late spring typically. And so they're going to – you're going to have a year-round commitment they're looking for and they're going to want some assurance that ELDs are not going to be a problem. And so, the wake up calls will probably start for carriers come bid season, I think is when it starts. The big question will be how do the large non-asset based brokers handle it. Are they going to make assurances that their carriers are ELD compliant in order to win committed business or not? That all remains to be seen and I think that will largely – more so than even enforcement, law enforcement of the new regulation, I think it'll be driven more so by customers wanting assurance and by most likely insurance companies who want to know that you have compliant fleets. They'll probably be a little more invasive in making sure that one who represents that they are really are, whereas a customer probably wouldn't go that far, so.

Right. Okay.

So I hope that answers your question, Tom. And we still have five people in the queue and we are out of time because of – because I don't answer with yes or no apparently, so.

Thanks for the perspective, Dave. I appreciate it.

Okay, thanks, Tom.

So, Julie, I think that's going to conclude our call. Thanks everybody for joining our call this afternoon. Take care.

That concludes the conference call. You may now disconnect.