Freight Transportation

May 3, 2017 09:00 AM GMT

MORGAN STANLEY & CO. LLC Freight Transportation Ravi Shanker EQUITY ANALYST [email protected] +1 212 761-6350 Truck Stop/TLFI: Diane Huang RESEARCH ASSOCIATE [email protected] +1 212 761-8290 Outperformance Streak Spencer Chernus RESEARCH ASSOCIATE [email protected] +1 212 296-5137 Continues Freight Transportation North America Our TLFI outperformed seasonality for the fourth consecutive IndustryView In-Line update, driven by both demand and supply outperformances. Please see all charts in This Week's Key Charts Our reefer and flatbed indices also outperformed seasonality, Previous Truck Stop Report: Truck Stop/TLSS: marking the second straight TLFI update with each of our Demand and Rate Sentiment Stay Strong vs. three indices outperforming seasonality. Seasonality (26 Apr 2017)

Our TLFI trended flattish sequentially over the past two weeks and outperformed seasonality for the fourth consecutive update. The index is now above 2015 and 2013 levels at this time of the year. Both demand and supply remained strong, outperforming seasonality by ~920 and ~450 bps, respectively. Over the last two updates (i.e. the month of April), our index has increased ~11% compared to a seasonally implied decline of ~21%. April's improvement is consistent with TL mgmt. commentary from 1Q17 earnings, who broadly noted increasing momentum and growing confidence. We will pay close attention to our next few TLFI updates, which typically exhibit strength in May and June. The straight-line forecast has our index ending the year in the ballpark of historical average levels. Here are our main takeaways from this week's update: The demand component of our index increased sequentially, counter- directional, and outperformed seasonality for the fourth consecutive update. Demand outperformed seasonality by ~920 bps, the fourth straight outperformance by more than 550 bps and tied for demand's largest outperformance in magnitude in 2017.

The supply component of our index increased sequentially, directionally consistent, and outperformed seasonality for the fourth consecutive update. Supply increased 140 bps over the past two weeks, outperforming seasonality by ~450 bps. All else equal, we would expect supply to continue to outperform seasonality as the year progresses, as any ELD impact is not captured by seasonality, thus serving as a catalyst for potential supply tightening. Morgan Stanley does and seeks to do business with Other indices: Our reefer index trended flattish sequentially and companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a outperformed seasonality for the fourth consecutive update and our conflict of interest that could affect the objectivity of flatbed index increased sequentially and outperformed seasonality for the Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making second consecutive update. Our flatbed index has increased sequentially in their investment decision. six consecutive updates, consistent with commentary from LSTR mgmt. For analyst certification and other important disclosures, who noted flatbed tightening throughout the first quarter. refer to the Disclosure Section, located at the end of this report.

Truckload Industry Report Summary

Exhibit 1: Truckload Industry Report Summary Latest Release Data Date Truck Data Points YoY % Chg Seq % Chg 3/31/2017 4/5/2017 ACT Class 8 Prelim. Orders 42.3% -0.4% 3/31/2017 4/18/2017 ATA NSA Truck Tonnage 1.2% 14.6% 3/31/2017 4/19/2017 Cass Indices Freight Expenditures 3.0% -1.2% Freight Shipments 0.9% 0.5% Vs. 5/2/2017 5/2/2017 MS Truckload Freight Index Seq. Move Seasonality Dry Van Reefer Flatbed Current 3-Mo. Fwd 4/25/2017 4/25/2017 MS TL Sentiment Survey Seq. Move Seq. Move TL Demand TL Supply TL Rates Source: Morgan Stanley Research

This Week's Key Charts

Exhibit 2: Morgan Stanley Dry Van ONLY Truckload Freight Index 2010 10 2011 9 2012 2006-2016 Average* 8 Through May 2 2013 2014 7 2015 2016 6 2017 5 Straight Line Analysis 4 3 2 1 0 l t t r r r v c y c y g g n p b n n u c c a a p a e e a a o e e a u u u J O O J A J M F M J - D S D N A M A M ------1 3 4 3 8 4 7 0 4 8 5 2 6 4 1 9 2 0 1 2 1 2 1 2 2 1 2 1 2 3

Source: The index measures the incremental demand for Dry-Van Truckload services compared to the incremental supply. When a given reading is above prior years’ level, it means there is more freight demand relative to available capacity. When a given reading is below prior years’ level, it means there is less freight demand relative to capacity. *2006-2016 average trend line excludes financial crisis years of 2008 and 2009; Source: Morgan Stanley Research

Exhibit 3: 2017 Dry Van OVERALL INDEX Seq. % Change Less Exhibit 4: 2017 Dry Van DEMAND Seq. % Change Less Historical Historical Avg. Seq. % Chg. Average Seq. % Chg.

25% 2017 Dry Van TLFI Seq % Change - Hist. Avg. YTD Avg. 30% 2017 Dry Van TLFI Demand Seq % Change - Hist. Avg. YTD Avg. Outperform s %

s 15% Outperform % .

20% e . q L . q e

. e g S

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Underperform D . r

s -20% i Underperform g 7

D -35%

H h 1 7 0 C 1 2

0 -45% -30% 2 2 4 6 8 1012141618 2 4 6 8 1012141618 Week Week Source: Morgan Stanley Research Source: Morgan Stanley Research

3 Exhibit 5: Hist. Avg. Seq. % Dry Van SUPPLY Chg. Less 2017 Seq. % Exhibit 6: NA Class 8 Truck Orders Lag Our TLFI by 3 Months (R^2 Chg. ~0.40)

30% Hist. Avg. - 2017 Dry Van TLFI Supply Seq % Change YTD Avg. 60,000 NA Class 8 Net Orders (LHS) TLFI (RHS) 12 l a % t

. Outperform n n 20% 50,000 10 q e a e m V

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S -30% 0 0 9 4 9 4 3 8 3 1 6 1 6 3 8 3 2 7 2 0 5 0 5 9 0 0 1 0 0 1 0 0 1 0 0 1 1 0 0 1 0 0 1 1 ------2 4 6 8 1012141618 - - - t t t t r r r c c c n n n n b b b g g g g c c c c p p p e e e e e e u u u u u u u u O O O O A A A J F J F J F J

Week D D D A A A A Source: Morgan Stanley Research Source: ACT, Morgan Stanley Research

Exhibit 7: Morgan Stanley Reefer Truckload Freight Index Exhibit 8: Morgan Stanley Flatbed Truckload Freight Index

Source: Morgan Stanley Research; *2006-2016 average trend line excludes financial crisis years of 2008 and Source: Morgan Stanley Research; *2006-2016 average trend line excludes financial crisis years of 2008 and 2009 2009

ACT NA Total Class 8 Net Orders, Builds & Retail Sales Trends

Exhibit 9: NA Total Cl. 8 Net Orders Long-Term Trends

Source: ACT, Morgan Stanley Research

Exhibit 10: LTM NA Total Cl. 8 Net Orders Exhibit 11: Prelim. Cl. 8 Net Orders vs. 12M Mov. Avg.

Source: ACT, Morgan Stanley Research Source: ACT, Morgan Stanley Research

Exhibit 12: NA Total Cl. 8 Builds Long-Term Trends Exhibit 13: NA Total Cl. 8 Retail Sales Long-Term Trends

Source: ACT, Morgan Stanley Research Source: ACT, Morgan Stanley Research

ATA NSA Truck Tonnage Index Trends & Straight-Line Forecast

Exhibit 14: Straight-Line Forecast for Monthly YoY % Change in NSA Truck Tonnage Index

Source: ATA, Morgan Stanley Research; Note: We have adjusted February 2012 data due to the extra workday resulting from leap year

Exhibit 15: Sequential Change in NSA Tonnage Index Exhibit 16: Straight-Line Forecast for LTM NSA Tonnage Index

Source: ATA, Morgan Stanley Research; Note: Based on data from 1985 onwards; We have adjusted February Source: ATA, Morgan Stanley Research; Note: We have adjusted February data due to the extra workday data due to the extra workday resulting from leap year resulting from leap year

Exhibit 17: NSA Tonnage Index Long-Term Trends Exhibit 18: Acceleration in LTM NSA Tonnage Index

Source: ATA, Morgan Stanley Research; Note: We have adjusted February data due to the extra workday Source: ATA, Morgan Stanley Research; Note: +1/-1 St. Dev. lines based on data from 1985 onwards; We have resulting from leap year adjusted February data due to the extra workday resulting from leap year

Cass Shipment Index Trends & Straight-Line Forecast

Exhibit 19: Straight-Line Forecast for Monthly YoY % Change in Cass Shipment Index 8% 90% Confidence Interval 6% Avg 3.5% 1.9% 4% 90% Confidence Interval 2.7% 1.9% 2% -0.5% 0.8% 0.1% 3.2% 0% -1.1% 1.3% -1.2% -1.5% 0.9% 1.3% -2% -2.6% -1.5% -5.0% -4% -5.8% -2.6% -3.1% -4.3% -3.2% -6% -5.2% -4.9% -8% -10% -12% Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17

Source: Cass Freight Index, Morgan Stanley Research

Exhibit 20: Sequential Change in Cass Shipment Index Exhibit 21: Straight-Line Forecast for LTM Cass Shipment Index YoY % Change in Cass Shipment Index 4% (Rolling 12-Month Avg ) 3% 90% Confidence Interval 2% Avg 1% 90% Confidence Interval 0% -1% -2% -3% -4% -5%

Source: Cass Freight Index, Morgan Stanley Research

Exhibit 22: Cass Shipment Index Long-Term Trends Exhibit 23: Acceleration in LTM Cass Shipment Index

Source: Cass Freight Index, Morgan Stanley Research

Cass Expenditure Index Trends & Straight-Line Forecast

Exhibit 24: Straight-Line Forecast for Monthly YoY % Change in Cass Expenditure Index

Source: Cass Freight Index, Morgan Stanley Research

Exhibit 25: Sequential Change in Cass Expenditure Index Exhibit 26: Straight-Line Forecast for LTM Cass Expenditure Index

10%

-5% Current Average -10% +/- 1 Std.

Source: Cass Freight Index, Morgan Stanley Research Source: Cass Freight Index, Morgan Stanley Research

Exhibit 27: Cass Expenditure Index Long-Term Trends Exhibit 28: Acceleration in LTM Cass Expenditure Index

Source: Cass Freight Index, Morgan Stanley Research Source: Company data, Morgan Stanley Research

Internet Truckstop

Exhibit 29: Market Demand Index Long-Term Trends Exhibit 30: Van Rate ex. Fuel Long-Term Trends 20% YoY % Change 1.6 15% Internet Truckstop Dry Van Rate per Mile (ex. FS) 12 per. Mov. Avg. (Internet Truckstop Dry Van 10% Rate per Mile (ex. FS)) 1.5 5% 0% 1.4 -5% -10% 1.3 -15% -20% 1.2

Source: Source: Morgan Stanley Research, Internet Truckstop, Bloomberg; Note: ITS uses a 30-day average posted rate to Carriers for the top 39k lanes and also includes temperature controlled and flatbed equipment in van rate ex. fuel Source: Morgan Stanley Research, Internet Truckstop, Bloomberg; Note: ITS developed a new methodology in Nov. 2015 and restated data back to January 2014; we calculate monthly demand as the average of weekly Internet Truckstop data points

DAT Trendline Rates

Exhibit 31: National Average Spot Van Rates ex. Fuel Surcharge Exhibit 32: National Average Contract Van Rates ex. Fuel Surcharge

Source: Morgan Stanley Research, DAT Solutions (www.dat.com/resources/trendlines); Note: DAT sources Source: DAT Solutions, Morgan Stanley Research from over $24 B in transactions and 65k lanes

Exhibit 33: National Average Spot Reefer Rates ex. Fuel Surcharge Exhibit 34: National Average Contract Reefer Rates ex. Fuel Surcharge $2.20 2008 2009 2010 2011 2012 l

a 2013 2014 2015 2016 2017 u t c a

r $2.00 t n o C s

e t e a g $1.80 R a r

r e e v f A e

l e a R

n $1.60 o i t a N

A $1.40 D

$1.20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

10 Exhibit 35: National Average Spot Flatbed Rates ex. Fuel Surcharge Exhibit 36: National Average Contract Flatbed Rates ex. Fuel Surcharge

Source: DAT Solutions, Morgan Stanley Research

11 DAT Contract vs. Spot Rate Spread Trends

Exhibit 37: Van Rate Spread (Contract - Spot) Exhibit 38: Reefer Rate Spread (Contract - Spot)

$0.40 ) t

o $0.35 p S -

t $0.30 c a r

t $0.25 n o C

( $0.20

d a

e $0.15 r p S $0.10 e t a

R $0.05

n a

V $0.00 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: DAT Solutions, Morgan Stanley Research

Exhibit 39: Flatbed Rate Spread (Contract - Spot)

Source: DAT Solutions, Morgan Stanley Research

12 DAT TL Rates Long-Term Trends

Exhibit 40: Van Spot Rate ex. FS Long-term Trend Exhibit 41: Van Contract Rate ex. FS Long-term Trend

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

Exhibit 42: Reefer Spot Rate ex. FS Long-term Trend Exhibit 43: Reefer Contract Rate ex. FS Long-term Trend

25% YoY % Change (LHS) $2.00 20% Reefer Spot Pricing $1.90 12 per. Mov. Avg. (Reefer Spot Pricing) 15% $1.80 10% $1.70 5% $1.60 0% $1.50 -5% $1.40 -10% $1.30 -15% $1.20

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

Exhibit 44: Flatbed Spot Rate ex. FS Long-term Trend Exhibit 45: Flatbed Contract Rate ex. FS Long-term Trend

20% YoY % Change (LHS) $2.00 Flatbed Spot Pricing 15% $1.90 12 per. Mov. Avg. (Flatbed Spot Pricing) $1.80 10% $1.70 5% $1.60 0% $1.50 -5% $1.40 -10% $1.30

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

13 DAT TL Rates ex. Fuel Surcharge Seasonality

Exhibit 46: Sequential Change in Van Spot Rates (ex. FS) Exhibit 47: Sequential Change in Van Contract Rates (ex. FS)

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

Exhibit 48: Sequential Change in Reefer Spot Rates (ex. FS) Exhibit 49: Sequential Change in Reefer Contract Rates (ex. FS)

Source: DAT Solutions, Morgan Stanley Research Source: DAT Solutions, Morgan Stanley Research

14 Exhibit 50: Sequential Change in Flatbed Spot Rates (ex. FS) Exhibit 51: Sequential Change in Flatbed Contract Rates (ex. FS)

8% Current Average 6% +/- 1 Std. Dev. 4%

-2%

-4%

-6%

Source: DAT Solutions, Morgan Stanley Research

MS Truckload Freight Index

Exhibit 52: Morgan Stanley Dry Van ONLY Truckload Freight Index 2010 10 2011 9 2012 2006-2016 Average* 8 Through May 2 2013 2014 7 2015 2016 6 2017 5 Straight Line Analysis 4 3 2 1 0 l t t r r r v c y c y g g n p b n n u c c a a p a e e a a o e e a u u u J O O J A J M F M J - D S D N A M A M ------1 3 4 3 8 4 7 0 4 8 5 2 6 4 1 9 2 0 1 2 1 2 1 2 2 1 2 1 2 3

The index measures the incremental demand for Dry-Van Truckload services compared to the incremental supply. When a given reading is above prior years’ level, it means there is more freight demand relative to available capacity. When a given reading is below prior years’ level, it means there is less freight demand relative to capacity. *2006-2016 average trend line excludes financial crisis years of 2008 and 2009

Exhibit 53: YoY % Change in Public TL Carrier Pricing & Utilization vs. YoY Pt. Chg in TLFI 6 14% 12% r

10% o n f

i 4

8% g e h g 6% n C

a 2 s

4% r h %

e i r C

2% r

a r t e a n 0 0% i y I C - o

r F -2% P c e i

L l r v

T -4% b

a -2 o u - e

-6% r y Year-over-year Point change in TL Freight Index P a - r

-8% e e

-4 Revenue Per Tractor (Excl. Fuel Surcharge) Y

v -10% g o -

Revenue Per Loaded Mile (Excl. Fuel Surcharge) v

r -12% A a

e -6 -14% 6 6 7 8 9 9 0 1 2 2 3 4 5 5 6 7 8 8 9 0 1 1 2 3 4 4 5 6 Y 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 0 0 0 0 0 0 0 0 0 1 1 2 2 2 2 2 2 2 2 2 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 Revenue per Loaded Mile and Revenue Per Tractor calculated as an average sample of public carriers: KNX, JBHT (JBT Div. Only), SWFT, WERN, USAK, MRTN, PTSI, CVTI, and CLDN; Source: Morgan Stanley Research

Dry Van TLFI

Exhibit 54: Morgan Stanley Dry Van Truckload Freight Index

Source: Morgan Stanley Research; *2006-2016 average trend line excludes financial crisis years of 2008 and 2009

Flatbed TLFI

Exhibit 55: Morgan Stanley Flatbed Truckload Freight Index

Source: Morgan Stanley Research; *2006-2016 average trend line excludes financial crisis years of 2008 and 2009

Reefer TLFI

Exhibit 56: Morgan Stanley Reefer Truckload Freight Index

Source: Morgan Stanley Research; *2006-2016 average trend line excludes financial crisis years of 2008 and 2009

Morgan Stanley Truckload Sentiment Survey

Exhibit 57: Current TL Demand, Supply & Rate Sentiment Exhibit 58: 3 Mo. Forward TL Demand, Supply & Rate Sentiment

Response % Pt. Spread (Bullish - Bearish) for TL Demand, Supply and Rates defined as: TL Demand – the % of See Note to the left. Source: Morgan Stanley Research respondents describing demand as “strong” less the % describing demand as “weak”; TL Supply – the % of respondents describing supply as “tight” less the % describing supply as “abundant”; TL Rates – the % of respondents saying TL rates are “Higher” YoY less the % saying TL rates are “Lower” YoY. Source: Morgan Stanley Research

Exhibit 59: Latest MS Truckload Sentiment Survey Results

“Negative”, “Neutral” and “Positive” responses or TL Demand, Supply and Rate trends correspond with: the % of respondents describing current and 3 Mo. forward Demand as “Weak”, “Neutral” and “Strong”; the % of respondents describing current and 3 Mo. forward Supply as “Abundant”, “Neutral” and “Tight”; and the % respondents describing current and 3 Mo. forward rates as “Lower”, “Unchanged” and “Higher” vs. a year ago, respectively. Source: Morgan Stanley Research Truck Stop Pulse

Representative commentary provided by respondents between 4/18/17 and 4/25/17:

20 Exhibit 60: MS Truckload Sentiment Survey (TLSS) Respondent Commentary

CARRIERS SHIPPERS BROKERS / OTHER

"As bid awards are completing, carrier commitments are forming and capacity will start to tighten. BCO's who continue to drive their business using spot market pricing or TMS tools that continue to source the lowest "Demand has picked up in last 30 days. Now let's see if "As capacity tightens for flatbeds we have to go further cost carriers will find that that business model does not rates follow suit. Probably still a couple of quarters into the depth chart to find carriers. That means we are pay off in the end. They will be subjected to much out." paying higher rates for the same service 6 months ago." higher transportation cost moving into peak while capacity becomes more scarce. Early year cost savings are short lived, getting product to market will cost a lot more."

"There seems to be a good "feeling" out in the market "Flatbed freight is strong, trucks are tight and rates are at present. It will be interesting to see if "feelings" turn "We'll see late half movement on truckload rates. We'll increasing." into good economic results. This will determine if see the large, 8%+ increases come in 2018." current dynamics continue."

"Capacity has certainly tightened over the last month "Flatbed markets are waking up. Volume and rates up "Truck capacity has tightened up as the Spring push however pricing remains flat. Shippers that are in April. I sure hope the Trump effect turns into the continues. If there is lead time then it is not as bad but, proactive in working with service providers on rates Trump reality over the long haul." last minute loads are expensive to cover." now will see less of a spike in rate increases versus waiting until they can no longer secure capacity."

"Other than some normal regional demand for this time "Shippers are being naïve to the fact that carriers are of year, the market has not tightened up as much I filling out bids trying to win awarded freight as they "Activity is slightly better than last year, but still not expected so far this year. With some of the Trump simultaneously look to the same earmarked capacity good. We are feeling the effects of the ELD in our administration initiatives seeming to be coming later from said bid. Elsewhere where they can get higher fleet." than initially thought, we'll have to see how that paying freight. When capacity tightens the spot market impacts the market." will reflect that."

"Some geographies are seeing tightening flatbed "Demand and capacity still very much in line with one capacity; however, rate pressure has not heated up. "The Q4 momentum and optimism that freight pricing another on van side. Excess demand with flatbed in Other areas still see plentiful capacity. Most of the talk would firm up is dissipating as Q1 reality closed out Midwest." about a capacity crunch has yet to translate into any weak and April is soft at best." significant market disruption."

"First tender accept still 96% or greater weekly. Service "Flatbed market varies widely by region on any given continues to be a challenge. Would like to understand week; Western truck supply abundant, capacity how people will feel about KNX buying SWFT and the tightening east of CO." implications on service. KNX is not a service oriented carrier."

"We have a general view that the carriers are pushing "We manage to keep our contract rates stable, but spot to create the impression of future scarcity with the aim market rates have a lot of pressure on them." to drive up costs. Although ELD's will have some effect it is being exaggerated." "Not as bad as carriers are making it sound." "Capacity remains abundant and rates remain primarily flat. The southeastern U.S. region has shown some tightened capacity."

"ELD mandate in December is the next hurdle. Equipment seems plentiful until then."

Flatbed market fairly balanced. Carriers accepting and asking for more freight."

Source: Morgan Stanley Research; Note: Green = Optimistic, Orange = Neutral, Red = Bearish

Morgan Stanley Truckload Sentiment Survey (Cont'd)

Exhibit 61: What is your appraisal of current TL demand? Exhibit 62: What is your expectation for TL demand in 3 Mo.?

Note: Response % Pt. Spread defined as the % of respondents describing current demand as “strong” less the Note: Response % Pt. Spread defined as the % of respondents expecting forward demand to be “strong” less % of respondents describing current demand as “weak”’ Source: Morgan Stanley Research the % of respondents expecting forward demand to be “weak”; Source: Morgan Stanley Research

Exhibit 63: What is your appraisal of current TL supply? Exhibit 64: What is your expectation for TL supply in 3 Mo.?

Note: Response % Pt. Spread defined as the % of respondents describing current supply as “tight” less the % Net Survey Response % Pt. Spread defined as the % of respondents expecting forward supply to be “tight” less of respondents describing current supply as “abundant”; Source: Morgan Stanley Research the % of respondents expecting forward supply to be “abundant”; Source: Morgan Stanley Research

Exhibit 65: How do your current TL rates compare to your rates 1 Exhibit 66: What is your expectation for TL rates 3 months from now? year ago?

Note: Response % Pt. Spread defined as the % of respondents expecting TL rates to be “Higher” 3 Mo. from Note: Response % Pt. Spread defined as the % of respondents saying current TL rates are “Higher” vs. a year now less the % of respondents expecting TL rates to be “Lower” 3 Mo. from now; Source: Morgan Stanley ago less the % of respondents saying current TL rates are “Lower” vs. a year ago; Source: Morgan Stanley Research Research

Latest Morgan Stanley Truckload Sentiment Survey Results

Exhibit 67: What is your appraisal of current TL demand? Exhibit 68: What is your expectation for TL demand in 3 Mo.?

Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17 Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17

Exhibit 69: What is your appraisal of current TL supply? Exhibit 70: What is your expectation for TL supply in 3 Mo.?

Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17 Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17

23 Exhibit 71: How do your current TL rates compare to 1 yr. ago? Exhibit 72: What is your expectation for TL rates in 3 Mo.?

Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17 Source: Morgan Stanley; Note: Survey responses from 4/18/17 and 4/25/17

Historical Morgan Stanley Truckload Sentiment Survey Results

Exhibit 73: What is your appraisal of current TL demand? Exhibit 74: What is your expectation for TL demand in 3 Mo.?

Note: “Negative”, “Neutral” and “Positive” correspond with % of respondents describing current demand as Note: “Negative”, “Neutral” and “Positive” correspond with % of respondents expecting forward demand to be “Weak”, “Neutral” and “Strong”, respectively; Source: Morgan Stanley Research “Weak”, “Neutral” and “Strong”, respectively; Source: Morgan Stanley Research

Exhibit 75: What is your appraisal of current TL supply? Exhibit 76: What is your expectation for TL supply in 3 Mo.?

Note: “Negative”, “Neutral” and “Positive” correspond with % of respondents describing current supply as Note: “Negative”, “Neutral” and “Positive” correspond with % of respondents expecting forward supply to be “Abundant”, “Neutral” and “Tight”, respectively; Source: Morgan Stanley Research “Abundant”, “Neutral” and “Tight”, respectively; Source: Morgan Stanley Research

25 Exhibit 77: What is your appraisal of current TL supply? Exhibit 78: What is your expectation for TL supply in 3 Mo.?

Methodology Implied ACT Forecast

We use ACT’s monthly Seasonal Adjustment factors to gauge the relative strength or weakness of Preliminary Class 8 Net Orders for a given month. SA factors greater than 1 indicate stronger than an average month, and factors below 1 indicate a weaker than average month. We divide the current month’s SA factor by the previous month’s to arrive at the implied sequential % change associated with “normal” seasonality. We multiply the actual Class 8 Net Orders from the previous month (ACT releases actual order data by the middle of the following month) by the sequential % change implied by ACT’s SA factors to arrive at “ACT’s Implied Forecast” for the current month’s Class 8 Net Orders. The table below provides an example of ACT’s SA factors from 2014 and the corresponding implied seq % chg. for each month.

Exhibit 79: ACT SA Factors and Implied Monthly Forecast

Source: ACT, Morgan Stanley Research ATA Truck Tonnage

We rely on the monthly ATA Truck Tonnage for our indicators. The ATA Truck Tonnage tracks monthly truck tonnage volumes with 2000 as the base year, dating back to 1973 (see atabusinesssolutions.com). Cass Indexes

We rely on the monthly Cass Freight Indexes for our indicators. The Cass Freight Index tracks monthly freight expenditures and shipment volumes, using January 1990 as the base point (see cassinfo.com). Truckload Sentiment Survey Methodology

27 In an effort to quantify sentiment, over nearly two years we have sent out a bi-weekly Truckload Sentiment Survey to hundreds of shippers, carriers and other truck industry contacts with a view of on the ground trends. We publish our aggregate survey results on a bi-weekly basis alternating with our TLFI on Tuesdays.

28 Momentum Indicators

We calculate our momentum indicator as the sequential difference (this month minus last month) in the year-over-year growth rate of the annualized data set. This indicator allows us to evaluate the acceleration of year-over-year trends in the data. We examine these trends relative to their historical mean and one standard deviation above and below the mean. We believe this measure is helpful in identifying inflection points in trend growth rates. Below is an example of our momentum indicator charts.

Exhibit 80: Example: Momentum Indicator Chart

Source: Morgan Stanley Research Long-Term Trends

We examine the indexes over the life of the available time series. Our long-term trend charts show the variables on a monthly basis, as well as the twelve-month moving average and the year-over-year change of the monthly data set. Below is an example of our long-term trend charts.

Exhibit 81: Example: Long-Term Trend Chart

Source: Morgan Stanley Research Sequential Change Analysis

Our sequential change analysis examines the sequential growth rate of the index

29 relative to historical trends. We calculate the average sequential change and standard deviation in sequential change for each month of the data set, 1985 to present. While much of the sequential change in the index is a result of seasonality, our analysis allows us to evaluate how current metrics are tracking versus historical sequential changes (effectively accounting for seasonality). The following chart is an example of our sequential change work as included.

Exhibit 82: Example: Sequential Change Chart

Source: Morgan Stanley Research Straight Line Revenue Forecasts

We illustrate potential full-year NSA Truck Tonnage index outcomes using the historical average and standard deviation of one-month sequential changes. Our straight line index chart shows three potential outcomes: (1) The green line illustrates the full-year index outlook on an LTM basis if each month between now and the end of the year grew by one standard deviation above the average monthly sequential change; (2) the blue line illustrates the full-year index outlook on an LTM basis if each month between now and the end of the year grew by the average monthly sequential change; and (3) the red line shows the full-year index outlook on an LTM basis if each month between now and the end of the year grew by one standard deviation below the average monthly sequential change. The sequential change calculations are done using the most recent monthly data and the chart shows the YoY change on an LTM basis. Thus, the final data point, the end of this year, shows the full-year potential YoY change in the index based on each growth rate assumption.

Exhibit 83: Example: Straight Line Index Forecast Chart

Source: Morgan Stanley Research

30 Morgan Stanley is acting as financial advisor to Swift Transportation Company (“Swift”) in relation to its proposed merger with Knight Transportation, Inc. (“Knight”) in an all-stock transaction, as announced on April 10, 2017. The proposed transaction is subject to customary conditions, including the approval of the stockholders of Knight and Swift, as well as regulatory approvals. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Swift has agreed to pay fees to Morgan Stanley for its financial services, including transaction fees that are contingent upon the consummation of the proposed transaction. Please refer to the notes at the end of this report.

31 Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Ravi Shanker. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Spencer Chernus - Union Pacific Corp.(common or preferred stock). As of March 31, 2017, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Canadian Pacific Railway Ltd., Swift Transportation, Union Pacific Corp., XPO Logistics, Inc.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of CSX Corporation, FedEx Corporation, Kansas City Southern, Norfolk Southern Corp., Schneider National Inc., Union Pacific Corp., United Parcel Service. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from CSX Corporation, FedEx Corporation, Genesee & Wyoming Inc., Kansas City Southern, Norfolk Southern Corp., Schneider National Inc., Union Pacific Corp., United Parcel Service, XPO Logistics, Inc.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from ArcBest Corp, C.H. Robinson Worldwide Inc., Canadian National Railway Co., Canadian Pacific Railway Ltd., CSX Corporation, Echo Global Logistics Inc, FedEx Corporation, Genesee & Wyoming Inc., Heartland Express Inc., Hub Group Inc, J.B. Hunt Transport Services Inc., Kansas City Southern, Knight Transportation Inc., Landstar System Inc, Norfolk Southern Corp., Old Dominion Freight Line Inc, Saia, Inc., Schneider National Inc., Union Pacific Corp., United Parcel Service, Werner Enterprises, XPO Logistics, Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Canadian Pacific Railway Ltd., CSX Corporation, Echo Global Logistics Inc, Genesee & Wyoming Inc., J.B. Hunt Transport Services Inc., Kansas City Southern, Norfolk Southern Corp., Old Dominion Freight Line Inc, Union Pacific Corp., United Parcel Service, XPO Logistics, Inc.. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: ArcBest Corp, C.H. Robinson Worldwide Inc., Canadian National Railway Co., Canadian Pacific Railway Ltd., CSX Corporation, Echo Global Logistics Inc, FedEx Corporation, Genesee & Wyoming Inc., Heartland Express Inc., Hub Group Inc, J.B. Hunt Transport Services Inc., Kansas City Southern, Knight Transportation Inc., Landstar System Inc, Norfolk Southern Corp., Old Dominion Freight Line Inc, Saia, Inc., Schneider National Inc., Union Pacific Corp., United Parcel Service, Werner Enterprises, XPO Logistics, Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: C.H. Robinson Worldwide Inc., Canadian National Railway Co., Canadian Pacific Railway Ltd., CSX Corporation, Echo Global Logistics Inc, FedEx Corporation, Genesee & Wyoming Inc., J.B. Hunt Transport Services Inc., Kansas City Southern, Norfolk Southern Corp., Old Dominion Freight Line Inc, Union Pacific Corp., United Parcel Service, XPO Logistics, Inc.. An employee, director or consultant of Morgan Stanley is a director of Norfolk Southern Corp.. This person is not a research analyst or a member of a research analyst's household. Morgan Stanley & Co. LLC makes a market in the securities of ArcBest Corp, C.H. Robinson Worldwide Inc., Canadian National Railway Co., Canadian Pacific Railway Ltd., CSX Corporation, Echo Global Logistics Inc, Expeditors International of Washington I, FedEx Corporation, Genesee & Wyoming Inc., Heartland Express Inc., Hub Group Inc, J.B. Hunt Transport Services Inc., Kansas City Southern, Knight Transportation Inc., Landstar System Inc, Norfolk Southern Corp., Old Dominion Freight Line Inc, Saia, Inc., Swift Transportation, Union Pacific Corp., United Parcel Service, Werner Enterprises, XPO Logistics, Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Equity Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. 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32 Global Stock Ratings Distribution (as of April 30, 2017) The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm. For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIAL INVESTMENT SERVICES CLIENTS (MISC) STOCK RATING COUNT % OF COUNT % OF % OF COUNT % OF CATEGORY TOTAL TOTAL IBC RATING TOTAL CATEGORY OTHER MISC Overweight/Buy 1167 36% 297 42% 25% 563 37% Equal-weight/Hold 1403 43% 311 44% 22% 677 45% Not-Rated/Hold 59 2% 8 1% 14% 8 1% Underweight/Sell 624 19% 87 12% 14% 270 18% TOTAL 3,253 703 1518

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of C.H. Robinson Worldwide Inc., Canadian National Railway Co., CSX Corporation, FedEx Corporation, Genesee & Wyoming Inc., Kansas City Southern, Norfolk Southern Corp., Union Pacific Corp., United Parcel Service, XPO Logistics, Inc.. Morgan Stanley Research policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the sector, or the market that may have a material impact on the research views or opinions stated therein. 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INDUSTRY COVERAGE: FREIGHT TRANSPORTATION

COMPANY (TICKER) RATING (AS OF) PRICE* (05/02/2017)

Ravi Shanker ArcBest Corp (ARCB.O) E (10/06/2011) $26.65 C.H. Robinson Worldwide Inc. (CHRW.O) U (06/09/2013) $72.72 Canadian National Railway Co. (CNR.TO) O (02/23/2016) C$101.34 Canadian Pacific Railway Ltd. (CP.TO) O (06/03/2016) C$213.24 CSX Corporation (CSX.O) E (01/19/2017) $51.49 Echo Global Logistics Inc (ECHO.O) O (07/16/2012) $20.05 Expeditors International of Washington I (EXPD.O) E (02/25/2015) $54.04 FedEx Corporation (FDX.N) E (06/20/2013) $189.03 Genesee & Wyoming Inc. (GWR.N) E (02/23/2016) $64.75 Heartland Express Inc. (HTLD.O) U (05/06/2011) $20.00 Hub Group Inc (HUBG.O) E (07/16/2012) $39.05 J.B. Hunt Transport Services Inc. (JBHT.O) E (05/06/2011) $89.65 Kansas City Southern (KSU.N) E (02/23/2016) $89.94 Knight Transportation Inc. (KNX.N) ++ $34.25 Landstar System Inc (LSTR.O) U (02/23/2016) $85.40 Norfolk Southern Corp. (NSC.N) U (06/03/2016) $118.24 Old Dominion Freight Line Inc (ODFL.O) O (10/06/2011) $88.34 Saia, Inc. (SAIA.O) U (02/23/2016) $46.60 Schneider National Inc. (SNDR.N) O (05/01/2017) $19.17 Swift Transportation (SWFT.N) ++ $24.38 Union Pacific Corp. (UNP.N) O (06/03/2016) $111.09 United Parcel Service (UPS.N) U (02/23/2016) $106.92 Werner Enterprises (WERN.O) O (02/23/2016) $27.25 XPO Logistics, Inc. (XPO.N) O (11/16/2015) $50.17

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.