2016 us economic & transportation industry...

Industrial Research

March 15, 2016

2016 US Economic & Transportation Industry Outlook

Benjamin J. [email protected]

Please refer to Appendix – Important Disclosures and Analyst Certification

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| 2

Key Focal Points

1. Reviewing 2015’s trends: Decelerating growth and transport stock underperformance.

2. Will 2016 be a recession year? A look at what the markets think.

3. Looking to 2016: “It’s always darkest before the dawn.”

4. Transports this cycle: regulatory changes, demographics and technology separate winners from losers.

| 3

A Look Back at 2015: Where Was The

Consumer?

| 4

Transports Were Notable

Underperformers During 2015…

Transports were notable underperformers during 2015, and the underperformance was indiscriminate across subsectors.

Source: FactSet

50

60

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100

110

Jan-15

Feb

-15

Mar-15

Apr-15

May

-15

Jun-15

Jul-1

5

Aug

-15

Sep

-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb

-16

Mar-16

3PL Less-Than-Truckload Truckload Integrators Rails

| 5

...Given Normalizing Capacity

Conditions...

Spot demand was muted, falling below 2013 levels after a weak 4Q15.

Source: Industry data, Baird estimates

-60%

-40%

-20%

0%

20%

40%

60%

80%Wk 1

Wk 14

Wk 27

Wk 40

Sp

ot

Tru

ck D

eman

d:

R

elat

ive

to 2

013'

s A

vera

ge

2013 2014 2015 2016

| 6

...And a Strong USD...

A strong USD correlates with relative underperformance of transport stocks.

Source: FactSet

30

50

70

90

110

130

15065

75

85

95

105

115

125

1986

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1996

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2000

2002

2004

2006

2008

2010

2012

2014

2016

Rel

ativ

e P

erfo

rman

ce

Ind

exed

(Ja

n 1

986=

100)

US

Do

llar

In

dex

(In

vers

e, J

an 1

986=

100)

US Dollar Index (left axis) DJT Relative Performance to S&P 500 (right axis)

Source: Institute for Supply Management, AAR, Baird estimates | 7

...Driving Weaker-Than-Expected

Volumes...Weak US industrial activity and lower crude oil prices/a stronger USD led to below-seasonal volume trends in 2015, particularly in industrial end markets.

(7.5)

(5.0)

(2.5)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

46

48

50

52

54

56

58

60

62

64

2012 2Q 3Q 4Q

2013 2Q 3Q 4Q

2014 2Q 3Q 4Q

2015 2Q 3Q 4Q

2016

Ind

ust

rial

Car

load

s vs

. S

easo

nal

ity

US

IS

M P

MI

US ISM PMI (left axis)2012-Present Industrial Carloads vs. Normal Seasonality (right axis)

Source: Company data, Baird estimates | 8

...And Decelerating Core Pricing Growth.

Weak demand and tough comparisons (after 2014’s positive inflection in pricing growth) led to decelerating pricing growth in 2H15.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2003

2005

2007

2009

2011

2013

2015

Pri

cin

g G

row

th (

%, y

oy)

LTL Pricing IM Pricing TL Pricing Railroad Pricing

| 9

A Look Ahead at 2016

Source: FactSet | 10

2015’s Pressures Remain Risks to Begin

2016Crude’s slide has continued and the USD remains strong – but some important reversals have happened to begin 2016:

Crude’s Weakness US Dollar’s Strength

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

WTI Crude Oil ($/bbl)

65

70

75

80

85

90

95

100

105

110

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

vs. Euro vs. Swiss Franc

vs. Japanese Yen vs. Canadian Dollar

vs. Australian Dollar vs. Chinese Renminbi

Source: Thomson Reuters | 11


2016Taking the long view, this new environment could be with us for a while longer.



2016Current crude oil’s price is more representative of its long-term average than 2005-2014 levels.

$0

$20

$40

$60

$80

$100

$120

$140

$160

1985

1987

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1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

WT

I C

rud

e O

il P

rice

WTI Crude Oil Price

Source: Board of Governors of the Federal Reserve | 13


2016In our view, the USD’s direction in upcoming months will go a long way in determining the sources and direction of trade growth rates.

80

90

100

110

120

130

1973

1976

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1982

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1991

1994

1997

2000

2003

2006

2009

2012

2015

Rea

l Tr

ade

Wei

gh

ted

US

D I

nd

ex

Real Trade Weighted USD Index

A breakout?

Source: Board of Governors of the Federal Reserve, ISM, NBER | 14


2016USD strength tends to bring slowing global growth and global crises.

| 15

Will 2016 Be a Recession Year? What The

Market Is Saying

Source: FactSet, NBER | 16

Will 2016 Be a Recession Year?

S&P 500 (and broader equity markets) showing signs of topping.



S&P 500 (and broader equity markets) showing signs of topping.

Source: Institute of Supply Management, National Bureau of Economic Research | 18


Comparing this cycle to prior cycles, current US ISM PMI conditions do not yet reflect the beginning of a US recession.

-20

-15

-10

-5

0

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7519

80

1983

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1989

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1995

1998

2001

2004

2007

2010

2013

2016

New

Ord

ers

-In

ven

tori

es

US

IS

M P

MI

Recession US ISM PMI New Orders - Inventories



Mid-1980s into the 1990 recession: New Orders less Inventories deteriorated into the beginning of the recession.

-5

0

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15

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25

35

40

45

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65

Jul-85

Jul-86

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New

Ord

ers

-In

ven

tori

es

US

IS

M P

MI




Similar conditions existed entering the 2001 recession...

-5

0

5

10

15

20

25

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40

45

50

55

60

65

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

New

Ord

ers

-In

ven

tori

es

US

IS

M P

MI




…As well as entering the Dec-2007 start of the last recession.

-20

-15

-10

-5

0

5

10

15

20

25

30

25

30

35

40

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70

75

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

New

Ord

ers

-In

ven

tori

es

US

IS

M P

MI




We don’t have the same set-up at the moment.

-10

-5

0

5

10

15

20

35

40

45

50

55

60

65

2011

2012

2013

2014

2015

2016

New

Ord

ers

-In

ven

tori

es

US

IS

M P

MI

US ISM PMI New Orders - Inventories

Source: National Bureau of Economic Research (NBER), FactSet | 23


The US Treasury yield curve is flattening but hasn’t inverted.

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Del

ta i

n Y

ield

(US

10y

r -

US

2yr)

US Recession 10-yr less 2-yr

Source: AAR, FactSet, Institute for Supply Management, Baird estimates | 24


The USD has weakened recently and has not made fresh highs since mid-March 2015, setting up for potential improvement in seasonally adjusted industrial-related volumes in the coming months (relative to well-below seasonal trends during 4Q15).

(7.5)

(5.0)

(2.5)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

46

48

50

52

54

56

58

60

62

64

2014 2Q 3Q 4Q

2015 2Q 3Q 4Q

2016

Ind

ust

rial

Car

load

s vs

. S

easo

nal

ity

US

IS

M P

MI

US ISM PMI (left axis)2014-Present Industrial Carloads vs. Normal Seasonality (right axis)

75

80

85

90

95

100

105

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Ind

ex,

Inve

rse

ICE US Dollar Index



Falling crude oil prices also historically inflate equity valuations...

-100%

-50%

0%

50%

100%10x

12x

14x

16x

18x20

05

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Bre

nt

Cru

de

Oil

Pri

ces

Ch

ang

e, I

nve

rse

(%, y

oy)

S&

P 5

00 N

TM

P/E

S&P 500 NTM PE Brent Crude Oil Prices YoY Change, Adv. 4-mo

Source: Bloomberg, NBER | 26


…And current valuations aren’t unreasonable in the context of the last 25 years (or against recent 1.75% US 10-year Treasury yields).

1990

1992

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1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

10x

14x

18x

22x

26x

30x

S&

P 5

00 N

TM

P/E

US Recession S&P 500 NTM PE

Source: Conference Board, NBER, U.S. Employment and Training Association | 27


Consumer confidence and initial jobless claims are near cycle peaks (but jobless claims in particular are a lagging indicator, and recent readings have weakened).

Source: Bank of America Merrill Lynch, FactSet, FRED, National Bureau of Economic Research (NBER) | 28

2016’s Economic Landscape Reflects A

Late-Cycle US RecoveryWidening yield spreads are reflective of a later-cycle US recovery.

200k

250k

300k

350k

400k

450k

500k

550k

600k

650k

700k

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%19

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Init

ial C

laim

s, S

A (

4-w

k. M

A)

Yie

ld S

pre

ad

US Recession

BofA Merrill Lynch US High Yield Master II OAS

Initial Claims, SA (4-wk. MA)

Source: BAML, ISM | 29

2016’s Economic Landscape Reflects A

Late-Cycle US RecoveryWidening yield spreads also tend to coincide with a weakening US ISM PMI.

15

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652%

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2003

2004

2005

2006

2007

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2009

2010

2011

2012

2013

2014

2015

2016

US

IS

M P

MI

Yie

ld S

pre

ad, I

nve

rse

BofA Merrill Lynch US High Yield Master II OAS US ISM PMI

Source: BAML, JP Morgan | 30

Implications for 2016 Freight Demand

Weakening international PMI also coincides with widening yield spreads...

0%

5%

10%

15%

20%

25%32

38

44

50

56

6220

05

2007

2009

2011

2013

2015

Bo

fA U

S H

igh

Yie

ld M

aste

r II

OA

S,

Inve

rse

JPM

Glo

bal

PM

I

JPM Global PMI BofA Merrill Lynch US High Yield Master II OAS

Source: FactSet, JP Morgan | 31


...And a softening US stock market.

-75%

-50%

-25%

0%

25%

50%

32

38

44

50

56

6220

05

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

S&

P 5

00 G

row

th (

%, y

oy)

JPM

Glo

bal

PM

I

JPM Global PMI S&P 500 YoY Change

Source: ATA, ISM | 32


PMI weakness is correlated with declines in ATA trucking index growth...

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-12%

-6%

0%

6%

12%

18%

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30%

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75

1974

1976

1978

1980

1982

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1992

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2000

2002

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2008

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2014

2016

ATA

Tru

ck I

nd

ex G

row

th (

%,

yoy)

US

IS

M P

MI I

nd

ex

US ISM PMI ATA Truck Index, 3-mo. MA, YoY Change

Source: AAR, ISM | 33


...And declines in industrial carload growth.

-45%

-30%

-15%

0%

15%

30%

45%

32

38

44

50

56

62

68

2000

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2002

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2004

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2007

2008

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2011

2012

2013

2014

2015

2016

Rai

l In

du

stri

al C

arlo

ad G

row

th (

%, y

oy)

ISM

PM

I

US ISM PMI Rail Industrial Carload YoY Growth

Source: BAML, NBER, US Census Bureau | 34

Implications for 2016 Freight DemandWidening spreads and US recessions can also trigger inventory destocking, another risk to freight volumes.

0%

3%

6%

9%

12%

15%

18%

21%-20

-15

-10

-5

0

5

10

15

1993

1995

1997

1999

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2007

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2013

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Yie

ld S

pre

ad, I

nve

rse

Ret

ail

Inve

nto

ries

vs.

Sea

son

alit

y

US RecessionRetail Inventory Vs. SeasonalityBofA Merrill Lynch US High Yield Master II OAS

0%

3%

6%

9%

12%

15%

18%

21%-20

-15

-10

-5

0

5

10

15

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Yie

ld S

pre

ad, I

nve

rse

Wh

ole

sale

rs'

Inve

nto

ries

vs.

Sea

son

alit

y

US RecessionWholesaler Inventory Vs. SeasonalityBofA Merrill Lynch US High Yield Master II OAS

0%

3%

6%

9%

12%

15%

18%

21%-20

-15

-10

-5

0

5

10

15

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Yie

ld S

pre

ad, I

nve

rse

Wh

ole

sale

rs'

Inve

nto

ries

vs.

Sea

son

alit

y

US RecessionTotal Business Inventory Vs. SeasonalityBofA Merrill Lynch US High Yield Master II OAS



Consumer discretionary stocks outperformed staples during 2015, but the gap has narrowed to begin 2016.

80

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15020

06

2007

2008

2009

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2012

2013

2014

2015

2016

Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

Consumer Discretionary Consumer Staples



The outperformance of consumer services vs. goods has continued into 2016.

85

95

105

115

125

135

145

15520

06

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

Consumer Services Consumer Goods



Retail stock performance masks clear winners and losers.

0

100

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100020

06

2007

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2016

Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

Apple Inc Amazon.com Inc Wal-Mart Stores Inc Best Buy Co Inc




0

50

100

150

200

250

300

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400

45020

06

2007

2008

2009

2010

2011

2012

2013

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2015

2016

Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

TJX Companies L Brands IncGap Inc/The Urban Outfitters IncAmerican Eagle Outfitters Inc Abercrombie & Fitch Co




0

50

100

150

200

250

30020

06

2007

2008

2009

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2015

2016

Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

Macy's Inc Nordstrom Inc Kohl's CorpJC Penney Co Inc Sears Holdings Corp Bon-Ton Stores Inc/TheTarget




0

50

100

150

200

250

300

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450

50020

06

2007

2008

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Rel

ativ

e P

erfo

rman

ce t

o S

&P

500

Home Depot Inc/The Lowe's Cos Inc Tractor Supply CoBed Bath & Beyond Inc Staples Inc Williams-Sonoma IncCabela's Inc Ethan Allen Interiors Inc Pier 1 Imports Inc

Source: ATA, Blue Chip Economic Indicators, Federal Reserve, Port data, US Dept. of Commerce, Baird estimates | 41


Preliminary 2016 consumer spending forecasts do not reflect a strengthening consumer demand outlook, either.

-15%

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-5%

0%

5%

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-4%

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0%

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6%

8%

10%

1987

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2007

2009

2011

2013

2015

2017

ATA

In

dex

Gro

wth

(%

, yo

y)

PC

E G

row

th (

%,

yo

y)

Personal Consumption Expenditure Growth ATA Truck Tonnage Index, SA

-30%

-20%

-10%

0%

10%

20%

30%

40%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

US

In

bo

un

d O

F V

olu

mes,

3-m

o.

MA

(%

, yo

y)

PC

E, D

PI

Gro

wth

(%

, yo

y)

Personal Consumption Expenditure Growth, yoyDisposable Personal Income Growth, yoyTotal US Inbound OF Volumes, 3-mo. MA

Source: FactSet, Baird estimates | 42


Risks to industrial and consumer demand set transports up for a continuation of the deceleration in core pricing growth, and we expect a very active 2016 bid season, which should produce core 2016 TL pricing growth of +1-2% yoy.

2005

2006

2007

2008

2009

2010

2011

2012

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2016

-8%

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Co

re C

on

trac

tual

Tru

cklo

ad

Pri

cin

g G

row

th (

%, y

oy)

Tru

cker

s' R

elat

ive

Per

form

ance

vs

. R

uss

ell

2000

Asset-based Truckers - Relative Performance vs. Russell 2000 Index (L)Core Contractual Truckload Pricing Growth (R)

| 43

A Look at Transports Since Deregulation


Perspective on Transports Since Deregulation

The modern transportation industry is defined by four key Eras: 1) Regulation, 2) Growth, 3) Logistics Era 1.0, and 4) Maturity.


Rails Across Eras

Industry deregulation in the ’80s and consolidation in the ’90s allowed for the pricing renaissance and outperformance of the 2000s.


3PLs Across Eras

The commercialization of IT in the mid-’90s set the stage for the next 15 years of massive growth for 3PLs.


TLs Across Eras

Excess capacity in the mid-to-late ’90s led to industry attrition, consolidation, and outperformance in the early-to-mid 2000s.


LTLs Across Eras

Distribution trending towards shorter lead time and quicker delivery requires DCs to be closer to destination points, driving regional carrier share growth.

| 49

What Defines the Maturity Era?

The trade maturity era is characterized by:

1. Structurally slower end-market demand

2. Productivity headwinds

3. Demographic changes

4. Increasing regulation

Source: ATA, Blue Chip Economic Indicators, Federal Reserve, Baird estimates | 50

TL Tonnage Growth Has Slowed...

Truckload volume has experienced structurally slower growth...

-20%

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-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Gro

wth

(%

, yo

y)

ATA Truck Tonnage Growth, 3-mo MA US IP Growth, 3-mo. MA

TL CAGR from July 2006 - Nov 2015: 1.7%

TL CAGR from 1981 - June 2006: 3.2%

Source: ATA, Federal Reserve | 51

…As Has LTL Tonnage Growth...

...As has LTL volume growth, which has shown a volume CAGR of just 0.1% post-2006 freight recession.

-30%

-20%

-10%

0%

10%

20%

30%19

94

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Gro

wth

, 3-

mo

. N

A (

%, y

oy)

LTL Tonnage Growth, 3-mo. MA US IP Growth, 3-mo. MA

LTL CAGR from July 2006 - Dec 2015: 0.1%

LTL CAGR from Jan. 1993 - June 2006: 3.5%

Source: World Bank | 52

...And International Trade Growth

Annualized growth post-2006 has been 5.0% versus the 8.5% 1978-2006 CAGR.

-20%

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0%

5%

10%

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25%19

78

1980

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Gro

wth

(%

, yo

y)

Global Export Growth Global GDP Growth

Source: IATA, World Bank, Baird estimates | 53

Global Trade’s Penetration a Driver of Recent

Slowdown in Growth

| 54

Maturity Era






Source: AAR, Company data, Baird estimates | 55

Long-Term Productivity Headwinds Are Real

Trucking has followed a similar trend line since the mid-1990s.

0

20

40

60

80

100

120

0

20

40

60

80

100

120

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

Ind

exed

(19

95=

50)

Ind

exed

(19

81=

100)

Rail Operating Cost Rail Rates TL Rates ($/LM, ex-fuel) TL Costs ($/LM, ex-fuel)

US transportation industry deregulated in early 1980s

Productivity declines/operating cost inflation began in late 1990s for Rails and Truckers alike

Source: ACT Research, BLS, Baird estimates | 56

Long-Term Productivity Headwinds Are Real

Since 2003, large public truckload carriers’ fleet productivity has fallen ~5% due to the cumulative effect of various drivers’ hours-of-service regulations.

Over the same period, US labor productivity has risen ~27%.

60

80

100

120

140

160

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Ind

exed

(19

96 =

100

)

US Labor Productivity: Output/HourTruck Productivity: Miles/TruckTruck Productivity: Loaded Mile/Cost (ex-fuel)

| 57

Maturity Era






Source: BLS, Baird estimates | 58

Rates Need to Rise in Order to Address The

Demographic IssueSince 2000, long-haul truck driver employment has risen ~1%, while US private non-farm employment has risen ~12%.

90

95

100

105

110

115

120

125

130

13519

94

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Ind

exed

(Ja

n 1

994

= 1

00)

US Private Non-Farm Employment Long-Haul Truck Driver Employment

Source: BLS | 59


Demographic IssueTruck driving wage growth has lagged competing jobs and broader US labor wage growth over the past 25 years.

Hourly wage (CAGRs) since 1990:

Construction: 2.5%

Oil & Gas: 3.4%

Repair: 2.6%

US Average: 2.9%

Truck Driver: 1.8%90

110

130

150

170

190

210

230

250

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Ind

exed

(Ja

n 1

991

= 1

00)

Construction Hourly Wage Long-Haul Truck Driver Average Hourly Wage

O&G Extraction Hourly Wage Repair Hourly Wage

US Average Hourly Wage

| 60

Maturity Era






Source: senate.gov, Company data, Baird estimates | 61

Despite the short-term tailwind from the July 2013 HOS modifications being suspended (~2-4% tailwind to productivity among compliant carriers), long-term productivity headwinds are real.

The long-awaited Electronic Logging Device (ELD) mandate was approved on December 10, and is a potential 4-8% headwind to productivity over the next several years.


Regulation Issue

Source: senate.gov, Company data, Baird estimates | 62

And the ELD mandate is just one of a long list of pending/potential regulations that could limit productivity:


Regulation Issue

• Electronic Stability Controls

• Speed Limiters

• Minimum Training Requirements

• OSHA Worker Protection

• Increase in Minimum Insurance

• Safe Harbor

• Drug & Alcohol Database

• Prohibition of Coercion

• Pattern of Violation

• Employee Free Choice

• Safe Food Transportation

• Health Regulations and

Treatments

• Immigration Effects

• Regional Equipment

• Etc.

| 63

The Next Era?

Consolidation

Logistics 2.0

| 64

Industry Consolidation

• 2015 was a year of large deals.

• 11 deals were larger than $100 million during 2015.

• Deals were across subsectors.

Sector Date Acquirer Target

EV

($mln)

EV to

EBITDA

LTL Sep-15 XPO Logistics Con-Way Inc. 3,000$ 5.9x

Freight Forwarding Oct-15 DSV A/S UTI Worldwide 1,350$ 8.4x

Domestic Brokerage Jul-15 UPS Coyote Logistics 1,800$ 18.0x

Parcel Apr-15 FedEx TNT Express 4,800$ 10.3x

Rail Offer only Canadian Pacific Norfolk Southern 29,000$ 7.0x

Source: Armstrong & Associates, Company data, Moody’s, Baird estimates

0

2

4

6

8

10

12

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Annual number of acquisitions over $100 million

Source: Company data, Baird estimates | 65

In Our View, Carriers and Brokers With

Scale

$15 bln

$1.5 bln

$150 mln

$15 mln

$1.5 mln

$0.15 mln

Dynamics this cycle

Bro

ker/

carr

ier

Tra

nsp

ort

atio

n S

pen

d

(lo

gar

ith

mic

ally

pro

po

rtio

nal

)

*Pressures to shippers operating private

fleets (rising equipment costs, capital

scarcity , driver regulations) leading to

elevated inquiries about outsourcing

management to dedicated fleet operators

*Core carrier concept among shippers

highlights credible concerns about access

to reliable capacity

*Carriers with scale strategically

positioned to protect margins and expand

service offering

*Small carriers/indiv idual owner-operators

facing numerous headwinds, limiting

capacity adds

*Pressures to small carriers/owner-

operators (~80% of TL market) limit

available capacity base

*Coupled with slower end-market

growth and increasing competition,

expect gross margin pressure for

brokers lacking scale

*Constraints to capacity base

similarly pressures gross margins

*But, brokers filling need

(exception/emergency freight) or

niche (specialized equipment) in

position to deliver value,

particularly among small/medium-

sized shippers

Dedicated Irregular Route/For-Hire Scheduled Exception

Exception

"Asset-based" "Non-asset based"

Dedicated Irregular Route/For-Hire Scheduled

LSTR

CHRW

RRTSHUBG

ECHO

JBHT SWFTWERN

KNXHTLD

R

| 66

The “Dawn”: Healthy Pricing, Industry

ConsolidationReduced productivity and increased attrition from demographics and regulation should drive healthier long-term pricing fundamentals and further industry consolidation.

0

2

4

6

8

10

12

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Annual number of acquisitions over $100 million

?

Source: Armstrong & Associates, Company data, Baird estimates

?

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2003

2005

2007

2009

2011

2013

2015

Pri

cin

g G

row

th (

%, yo

y)

LTL Pricing IM Pricing TL Pricing Railroad Pricing

| 67

Three Key Focal Points

1. 2015: The year of decelerating growth and transport stock underperformance.

2. 2016: “It’s always darkest before the dawn.”

3. A new era of transportation is upon us; successful models will deal with the challenges facing the industry, including:• Regulations• Demographics• Technology

| 68

Appendix – Important Disclosures and

Analyst Certification

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Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over thenext 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) -Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.

Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety.Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A -Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include:moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situationsappropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheetleverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situationsappropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictableearnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility andunknown competitive challenges.

Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 monthsbut there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective reviewof fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine thevalue of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts.Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target andrecommendation is provided in the text of our most recent research report.

| 69

Distribution of Investment Ratings. As of February 29, 2016, Baird U.S. Equity Research covered 711 companies, with 51% ratedOutperform/Buy, 48% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 15% of Outperform/Buy-rated and5% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed orco-managed a public offering of securities for these companies in the past 12 months.

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Disclaimers

Baird prohibits analysts from owning stock in companies they cover.This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect ourjudgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannotguarantee the accuracy.

| 70

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Copyright 2016 Robert W. Baird & Co. Incorporated

Other Disclosures

The information and rating included in this report represent the Analyst’s long-term (12 month) view as described above. The researchanalyst(s) named in this report may at times, discuss, at the request of our clients, including Robert W. Baird & Co. salespersons and traders,or may have discussed in this report, certain trading strategies based on catalysts or events that may have a near-term impact on the marketprice of the equity securities discussed in this report. These trading strategies may differ from the analysts’ published price target or rating forsuch securities. Any such trading strategies are distinct from and do not affect the analysts’ fundamental long-term (12 month) rating for suchsecurities, as described above. In addition, Robert W. Baird & Co. Incorporated and/or its affiliates (Baird) may provide to certain clientsadditional or research supplemental products or services, such as outlooks, commentaries and other detailed analyses, which focus oncovered stocks, companies, industries or sectors. Not all clients who receive our standard company-specific research reports are eligible toreceive these additional or supplemental products or services. Baird determines in its sole discretion the clients who will receive additional orsupplemental products or services, in light of various factors including the size and scope of the client relationships. These additional orsupplemental products or services may feature different analytical or research techniques and information than are contained in Baird’sstandard research reports. Any ratings and recommendations contained in such additional or research supplemental products are consistentwith the Analyst’s long-term ratings and recommendations contained in more broadly disseminated standard research reports.

| 71

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