Echo Global Logistics, Inc.
Q4 2020 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Thank you for standing by, and welcome to the Echo Global Logistics Fourth Quarter 2020 Earnings Call. At this time all participants' line are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Thank you. And I would now like to hand the conference over to your speaker, Pete Rogers, Chief Financial Officer. Please go ahead.

[Pete Rogers:]

Thank you. And thank you for joining us today to discuss our fourth quarter 2020 earnings. Hosting the call are Doug Waggoner, Chairman of the Board and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Pete Rogers, Chief Financial Officer. We have posted presentation slides to our website that accompany management's prepared remarks. And these slides can be accessed in the Investor Relations section of our website at echo.com. During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We also will be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure – throughout our materials. With that, I am pleased to turn the call over to Doug Waggoner.

[Doug Waggoner:]

Thanks Pete and good afternoon everyone. I appreciate you all joining today. As most of you are acutely aware, freight markets remain very strong throughout Q4, capacity was tight, rates at all-time highs and this backdrop along with another consistent outstanding quarter of execution enabled Echo to achieve record-breaking revenue adjusted gross profit, or formerly net revenue, and adjusted EPS in the fourth quarter of 2020. I'm extremely proud of the amazing execution we saw across the organization and I want to thank all of our people, all of our employees for their hard work and dedication. In addition, all of us at Echo greatly appreciate all of our clients and carriers for putting their trust in Echo to continue to provide brokerage and Managed Transportation services during these challenging times. Before we jump into the quarter, I'd like to step back and comment on the progress we've made over the last five years. As all of you know, our long-term goal is to capture market share and grow profitably. At times, those two goals can somewhat be at odds, especially in a highly competitive industry that has seen new competitors enter the market with a pure growth focus. And in many of these cases, these large digital entrants have been willing to invest significant capital and fund operating losses to achieve that objective. At Echo, we've been delivering value for our clients for over a decade and a half. We remain highly confident in our ability to provide solutions for our clients that blend industry-leading technology and data science with an extremely talented team. Through the proper blend of people, tech and data science and refined business processes, we've created a real sustainable advantage. That advantage has and will continue to enable Echo to grow our top-line while maintaining and growing our profitability.

[Dave Menzel:]

Thanks, Doug. I also want to start off by thanking the entire Echo team for job well done in Q4 and throughout 2020 for that matter. This year, we've seen it all and our people have remained highly committed to serving their clients and carriers despite all of the external factors we've been dealing with all year long. Their dedication to provide an outstanding service during this time speaks to the strength of our culture. And when I talk about our team and their commitment to service that includes all of our team, top to bottom. Everyone at Echo plays a meaningful role in providing our services to clients and carriers. I also want to thank our shippers for continuing to trust Echo to play a meaningful role in providing capacity to keep their supply chains operating at a high level. And I want to thank our carriers for being a part of the Echo network and allowing us to make an efficient utilization of their valuable capacity. Now to Slide 4 and a bit more color on the quarter. Strong freight demand combined with tight capacity where the two themes that dominated Q4. This environment triggered a significant increase in spot freight as routing guides began to break down due to continued escalation of truck rates. As indicated, we delivered another record revenue, truckload revenue of $549 million in Q4, an increase of 56% over the prior year. This was driven by a 20% increase in volume and a 30% increase in revenue per shipment. Truckload rates hit another all-time high in the quarter. Truckload line-haul per mile was up 38% in Q4, so the impact of lower fuel prices is muting some of the rate impact on average shipment value. We saw a continued shift in mix between spot and award business in Q4. Spot truckload freight grew by 44% over the prior year and our primary award grew by 1%. This further shifted our mix of business as spot truckload moved to 52% of the overall truckload freight mix, up from 46% last quarter and 43% a year ago.

[Pete Rogers:]

Thanks, Dave. On Page 7 of the Slide, you'll find a summary of our key operating statement line items. Commission expense was $34.6 million in the fourth quarter of 2020, increasing 29% year-over-year. Commission expense was 30.1% of adjusted gross profit compared to 29.9% for the fourth quarter last year. Non-GAAP G&A expense was $52.9 million in the fourth quarter of 2020, increasing 16.8% from the fourth quarter of 2019. The main drivers of the increased expense were headcount increases and incentive compensation. Depreciation expense was $6.6 million in the fourth quarter of 2020, down from $6.7 million for the same period a year ago. Cash interest expense was $0.8 million during the fourth quarter of 2020 compared to $1.3 million in Q4 of 2019. The decrease is due to our lower amount of outstanding debt. Our non-GAAP effective income tax rate was 25.6% for the fourth quarter of 2020. As Doug mentioned non-GAAP fully diluted EPS was $0.56, increasing from $0.26 in the fourth quarter of 2019. The primary differences between our GAAP and non-GAAP fully diluted EPS in the fourth quarter of 2020 are $2.7 million of amortization of intangibles from acquisitions and $2.1 million of stock compensation expense. Slide 8 contains selected cash flow and balance sheet data. We ended the quarter with $41.3 million in cash on hand and $439 million of accounts receivable, which is the basis for our ABL borrowing base. In Q4, 2020 we had free cash flow of $4 million and operating cash flow of $10.4 million. As a reminder, the biggest impact on our free cash flow is our working capital and the difference between how quickly our customers pay versus how quickly we pay our carriers, so it's usually a source or use of cash when we decline or increase sequentially at the top line.

[Doug Waggoner:]

Thanks, Pete. Well 2020 was quite the year in just above every respect. For Echo, it was an opportunity to demonstrate our value to shippers, to carriers, and to shareholders, and we believe that we delivered. Over the past five years, our capabilities have continued to grow as our technologies enabled our people and helped us to scale the business effectively. As we look ahead, we see enormous possibility to use 2020 as a springboard for Echo. So I'd like to point out the top three . We will drive continued productivity gains, both internally for our reps and externally for our clients through the implementation of technology and data science road maps. And there are five core elements to strengthen our digital marketplace. The first element is API connectivity. By continuing to roll out our API connectivity with shippers, third-party ERP software, and carriers, we're presented with more opportunities to quote on more loads and this certainly has volume growth implications with larger shippers, but it's worth noting that these are touch list transactions and this obviously boost our productivity. The second element is automated pricing. With automated pricing powered by our algorithms, we can drive effective API quoting. And this capability allows our clients and teams to quickly adapt to changing market conditions so we can optimize for volume and margin. I think we demonstrated these capabilities very well in 2020. Algorithms are also guide our client and carrier reps to optimize buy and sell prices in real-time. And we're also able to use these capabilities to evaluate and respond to truckload RFPs when submitting our bids on contractual lanes. And again, we haven't nearly reached our potential here yet and have significant more value to drive as we further leverage our technology. The third element is EchoDrive adoption. EchoDrive will continue to grow and will automate the relationship with many carriers that have here before been handled manually. This ease of doing business for them will cause them to make more of their capacity available to Echo as they optimize their own networks. Again, our data science and algorithms will automate pricing in many cases, driving further efficiencies for all parties. The fourth element is EchoShip adoption. EchoShip will continue to receive enhancements, making it the industry-leading self-service portal for multimodal transportation. This is especially attractive to SMB shippers and our Managed Transportation clients. And then finally the fifth element of our digital marketplace is internally facing technology and data science. We've always been a leader and pioneer in the use of technology and data to support our in-house teams. We will continue to improve our workflows and reduce the number of clicks, the process transactions, and we will also eliminate waste and rework. We will guide the behavior of our employees to make thousands of decisions each day that optimize our business. Well, the second opportunity is our Managed Transportation business, where we see strong momentum in the ability to grow further in this business through, first, continued investment in technologies with improved reporting and analytics, so clients can visualize and optimize their supply chains. Through our ability to provide cost savings of on their transportation, and through our execution capabilities allowing them to provide better service to their clients and finally, our ability to take this offering up-market by offering new capabilities that are attractive to larger shippers. And then finally the third opportunity is to continue leveraging the strong and powerful culture at Echo that allows us to connect with shippers and carriers and build those relationships into win-win partnership. And for as much as we talk about technology and data science, we also know that this business has a huge people component, relationships matter and I believe that we are among the best when it comes to cultivating those relationships. We will continue to invest in our people by hiring the best and brightest and then providing them with ongoing training and career development. Our focus on diversity and giving back to the community is important to our people and makes Echo a place that people want to work. Our value system that we call the Echo Way has five simple tenants that drive everything that we do and act as a beacon for how we operate. I'll review them quickly. One, better is the only option; two, carry the load together; three, work hard and hustle; four, do what's right; and five, bring your own and I would challenge you to ask any Echo employed to recite those and I think they'll do it. Finally, as Pete highlighted, we continue to strengthen our balance sheet. Utilizing our free cash flow to smartly executed acquisition strategy. This was the hallmark of our success through 2015 and while we've been more of an opportunistic buyer over the past few years, we intend to escalate our efforts in this area over the next five years. And with that, that concludes our prepared remarks. And at this time, I'd like to open up the call for questions.

[Operator:]

And your first question from Jack Atkins of Stephens. Your line is now open.

[Jack Atkins:]

Okay, great. Thank you. Good afternoon, guys and congratulations on a great quarter.

[Doug Waggoner:]

Thanks, Jack.

[Dave Menzel:]

Thanks Jack.

[Jack Atkins:]

So I guess, maybe if can just start, and I don't know who wants to take this, so I'll just throw it out there. With just the macro assumptions behind the revenue guidance obviously, first quarter starting out very strong, the second quarter comp is fairly easy. I mean, it seems like you guys are may be expecting some conservatism or maybe you're kind of guiding some conservatism around the second half of the year because it's just hard to have a lot of visibility at this point. But can you maybe walk us through sort of how you're expecting the year to play out from a top line perspective that kind of brackets that revenue guidance, just so we can get to understand how you think things are going to sort of unfold from here?

[Pete Rogers:]

Sure, I'll take that one to begin with, Jack. And so as you mentioned, obviously, Q1 we gave some stats around that and obviously that's a strong year-over-year comp and then Q2 will have the impact of the pandemic, on a year-over-year basis as well. In the back half of the year I think that some of the volume growth that we've seen in the spot market we anticipate to kind of migrate back to some of that contract rates, and we expect the second half of the year to look similar to what this year look like in terms of a volume perspective and things like that.

[Dave Menzel:]

Yes, I would just – I would just add that, we expect 2021 to continue to be a pretty strong freight environment I think it'd be a bit speculative at this point in time to think about what the rates might look like in the second half of the year because there's still a lot going on in the economy and a lot of moving parts I would say so. But I do – I think that – I think rates will remain relative to historic levels, very high and volumes remain strong just the comps will be a bit tougher in the second half of the year.

[Jack Atkins:]

Sure. No, absolutely. And Dave I mean, as you go through bid season here obviously just kind of going back to Doug's comments in his prepared remarks, you guys have made a lot of investments in this business over the last five years to really position yourself to go after the big sandbox, it is that the U.S. for higher truckload market, so there's a lot of – a lot of space out there for you guys to sort of go ahead and take market share. How are you thinking about the ability to grow your contractual volume not just this year, but multiple years through the cycles come what may with sort of the broader freight markets? I mean, do you feel like you're in a position to really kind of get that growth story really charged up here as we move forward? Just give it all the investments in the platform you've been making?

[Dave Menzel:]

Yes, we do. We feel, like we said, very optimistic about our ability to execute. I think that the – we've been responsive to the desire to continue to grow in a profitable way to leverage our network and not to take the approach of just growth – for growth sake so to speak. So I do think there'll be some impacts of the cycles as there have been in our past, but we're in – our focus is a high service and continue to penetrate both large and mid-market companies. And the opportunity is tremendous for us. And we still represent a very small percentage of the overall market, and we have a lot of confidence in our ability to continue to automate our platform and leverage the people that we have to sustain growth. And that's one of the reasons Doug highlighted the stats over the last five years. And I think we've navigated the cycles. A lot of times, it's easy to get focused on the current quarter at hand and what's the freight cycle that we're in kind of explain that away, but we see a big opportunity over the next five years and we think we're well positioned to capture it.

[Jack Atkins:]

Okay, great. Maybe last question, I'll turn it over. But – and I know there are ebbs and flows as you sort of move through the freight cycle. But, I mean, how are you guys thinking about the progress you've made over the last couple of years around productivity per employee? I know it's something we used to talk about an awful lot on these conference calls years ago, but it certainly feels like with flat headcount, you had almost 20% volume growth in your truckload business in the fourth quarter. How are you – if you could maybe share some thoughts around productivity per employee and do you think you can make even further progress on that in 2021?

[Dave Menzel:]

Yes, I mean, as I mentioned in the prepared remarks, we've had six quarters in a row here with improvements in productivity per employee. And we see that for the next five years there is a tremendous opportunity to continue to improve our productivity and further advance that metric. I do think that freight volumes and our investment in growing sometimes can cause short-term fluctuations in that number. Pete mentioned earlier that we do intend to continue to hire to grow our business; a big part of our business does grow with – especially with SMB clients and our people reaching out to those customers and a lot of people want that point of contact and that's required. So we've got an opportunity to grow. And a lot of times when we add that head count, the benefits of that are 12 to 18 months later. So we – our hiring in the second half of the year was obviously much more significant than in the first half of the year and our hiring plans in 2021 are in fact greater than what we did in 2020. So we will add people to continue to help us grow the business, but we do expect volume growth to exceed headcount growth over the long-term.

[Jack Atkins:]

Okay. Thanks again for the time guys. I'll turn it over.

[Doug Waggoner:]

Thanks, Jack.

[Pete Rogers:]

Thanks, Jack.

[Operator:]

And your next question from Allison Landry of Credit Suisse. Your line is now open.

[Allison Landry:]

Thanks. Good afternoon. So, obviously, there is a lot of talk about the digital platform, and Doug, you spoke a lot about this in your opening comments. But just curious to hear your thoughts on the broader competitive environment and specifically if you're seeing increased rate aggression obviously, Dave, the – I guess question would be surrounding new tech entrant, they get a lot of price, but actually I am sort of more interested in hearing your perspective on competition from traditional asset-based transfer players that are also building out their platforms and rapidly growing scale. So any sort of color and perspective you could provide there would be helpful.

[Doug Waggoner:]

Well, I think that 2020 there was a lot of freight, capacity was tight and so we didn't see as much price gouging as we saw in 2019 for instance. I think it was tough to find capacity and you had to pay for it. And the asset base carriers certainly use the opportunity to increase their rates. Coming into 2021, especially when we look at contractual freight and RFP bids, even if – there probably is a little bit more competition on rates bidding into these contractual lanes because a discount from spot today is still higher than the contract a year ago. So I think that lends itself to people trying to get their place in the routing guides and secure the volume, and it could also mean continuation of spot freight through 2021 if people are over committing. So it's have an interesting time right now Allison. Demand seems like it's continuing to be strong, capacity haven't seen much movement in that and a lot of the RFPs are delayed, so we're kind of waiting to see how that plays out, but we're confident it's going to be a good year for pricing.

[Allison Landry:]

Okay. And then just on the route guide, you just mentioned that I'm not sure if you sort of gave the specific number for Q4, but maybe if you could share that and relative to Q3, and sort of speak to how that may have progressed during the quarter and how that trended in January? Thank you.

[Dave Menzel:]

Yes, Allison, we don't talk about exactly the depth of the routing guide. What we would say is what's obvious from the numbers a little bit is that the award business growth rate slowed a bit because of the extremely high rates in the market to some extent and so that drove a lot of spot market. So inherent in that number is definitely the idea that across the board shippers faced situations where primary award tenders were – acceptance rates were down, and so freight was flipping over – flipping down the routing guide as you say, and into the spot market for a big part, but we don't have specific measurements regarding that depth of routing guide.

[Allison Landry:]

Okay. Thank you, guys, so much your times.

[Doug Waggoner:]

Thank you.

[Dave Menzel:]

Thank you.

[Operator:]

And for the next question from Bruce Chan of Stifel. Your line is now open.

[Bruce Chan:]

Yes. Good evening, gents. And I apologize if I missed this earlier. I'd actually dropped the call for a little bit there, but you talked about, Doug, the bid cycle, maybe getting pushed out a little bit some of the RFPs getting delayed. How should we think about that in terms of the gross margin as we move through the year? And is that business just kind of moving into the transactional spot bucket? Gens, are you there?

[Dave Menzel:]

Can you hear us, Bruce, now?

[Bruce Chan:]

Yes, I can hear you. Wasn't sure if that was just me?

[Dave Menzel:]

No, we're not sure either. So, fair enough. I think that Doug was – I'll just jump in a little bit and say that, I think that we probably just got a one or two month delay from the normal cycle. My anticipation would be that shippers are kind of waiting to see where rates settle into, obviously rates were very high in Q4 and so that resulted in a slow down a little bit. And more – two things happened, shippers slowed down the bid cycle, we had less bid submitted in Q4 than historically, and less bids awarded in Q4 than historically, and more bids of shorter duration. So, I think, it's probably just going to push it out a few months and speculating on the margin. Probably, there's too many moving parts to get for me to go too deep on that point.

[Bruce Chan:]

Okay, that's fair. And then just touching on a comment that you made earlier. You talked about some early restocking, driving a lot of activity, especially towards the end of the year. What's your sense for where customer inventory levels are now? I mean, I don't know – I know you don't have tremendous visibility into that. But what's your sense of where inventories are right now and how much more restocking there is to do?

[Dave Menzel:]

What Doug may have a better sense than I do, but Bruce that's hard for me to say, I think that it seems like freight demand remains strong, e-commerce remains strong. We're in the kind of a slowdown period here in January and February. So I would guess that it's catching up, but I don't have specific metrics to point to on that front.

[Doug Waggoner:]

Yes, I can't really add metrics just anecdotally. I know some industries like steel are backed up on their supply chains. Clearly, there is a lot of ships at the ports that are waiting to get in. That's obviously pent-up demand that we haven't even seen yet. But by and large, our existing customers seem to be doing fine and shipping like normal.

[Bruce Chan:]

Great. And then just one final one here on the M&A front. I mean, your balance sheet now is probably in a better place than it's been in a long time. I just wanted to get your take on whether there is any renewed appetite or any change in appetite for acquisitions?

[Doug Waggoner:]

No. As I mentioned in my prepared remarks, we've been fairly deliberate and very selective, but as we've been saying, we continue to be interested. We continue to look at opportunity – hello. Can you hear me, Bruce?

[Bruce Chan:]

I got you. Yes.

[Doug Waggoner:]

Okay. We seem to be dropping off and we're not – we're texting with the operator trying to figure this out, but our phone system looks like its fine so.

[Bruce Chan:]

Okay. Well, I guess, we need to pay our phone bill here then, but I appreciate the time...

[Doug Waggoner:]

Yes, okay. What else do you have for us, Bruce?

[Bruce Chan:]

I'm all set here. Thanks for the time.

[Doug Waggoner:]

Okay, thank you.

[Operator:]

And your next question from Tom Wadewitz from UBS. The audio line is now open.

[Tom Wadewitz:]

Yes, good afternoon. I wanted to – Doug, you gave us a lot of perspective on what you guys are doing with technology, which is really helpful. So thank you for that and some numbers too, so I apologize if I missed these. But, I guess, how would you think about like the percent of loads? I am just talking about the truckload side not LTL; I know that's more automated. But how would you think about like the percent of loads that might be automated on the shipper side and then maybe automated on both sides? And I don't know if you – you're talking specific numbers, but maybe directionally kind of where you are at today and where you think that can get to in the future given that aggressive investments you have in technology?

[Dave Menzel:]

Yes, Tom, we've talked about this a few quarters ago. And the way we look at it is on the – when you think about our contract business, the majority of those loads are automated in terms of – we've got a pricing arrangement with our client, the shipper, and they are tendered to us through an integrated fashion. And in general that we may have somebody reviewing that tender, but for the most part that shipment is automated on the front end and so that's anywhere from 50% to 60% of our business. And on the spot side, the majority of the shipments are still quoted with a person and through a load board and we've got tools that enable our people to do that. And so, I think the opportunity on the truckload side is to go from an environment where say 60% of our shipments today, give or take, are automated on the front-end to 80% or something like that over time. There's still going to be a component of manual work and that would probably preclude getting to 100% anytime soon. So it's hard to put a timeframe on that, but I think over the next three years or so, maybe a fair timeline to say, you could get to 80% on the shipper side. And not to say that you couldn't get there faster, but you're still trying to manage profitability and expectations. And so I think that we are kind of letting that evolution occur as it occurs naturally rather than kind of forcing it in certain cases, I would say. And then on the carrier side, I think there's a huge opportunity to do more. Today, for Echo, it's still a very small percentage of our freight is actually booked without some form of manual intervention and confirmation, if you will. And I mentioned on the call that we had a 500% increase in bookings resulted from EchoDrive offers. Actually, the majority of our carriers are on an EchoDrive. They're making inbound offers on our load board, and we are negotiating and accepting those offers. So I think we can go to an environment over time where a majority of our truckload shipments are touchless, but that may take five years. And so, we don't have a definitive timeline on that because again we're letting that evolution occurred kind of naturally and as our capabilities – our capabilities are there, but we're just going to let it migrate forward.

[Tom Wadewitz:]

Right, okay, that's helpful. And then one kind of broader question as well. I guess, we've seen, obviously, over a couple of years ago some of the digital freight brokers, if you will, that had traction with app downloads and building some business in the market, some of it certainly price driven. We've seen, I think, more recently the asset – number of the big asset players trying to leverage their trailer fleets to do I think power only is one of the terms. And so, how do you think about the winning models? And how you think things evolve over the next couple of years? And just how those competitive pressures develop? I don't know if – Doug, if you can offer some thoughts on some of the different approaches to the market?

[Doug Waggoner:]

Sure. Well, I think, first and foremost shippers care about service because what we're talking about is getting their products to their clients. And so that's kind of the price of admission, and then they want to deal with partners that are easy to do business with. The more sophisticated shippers definitely want to automate. There is more and more API relationships and they want a fair price. So I think that having the technology and the capability are table stakes, but you also have to have a great service product. And if you can combine those two things, it's a huge market and there is going to be all the freights that you want to grow the business.

[Tom Wadewitz:]

Right, so plenty of room for the different approaches to do well over time, it sounds like.

[Doug Waggoner:]

Well, I mean, if somebody wants to buy share, that's fine. It's a huge market and they can't buy it all. And so we see business all the time that we don't think is priced correctly, and we choose not to participate. And there is other business that we think where our service and our execution is valued and we price it fairly and we win it. And I think we're just going to continue to have a very thoughtful strategy about the business that we go after and how we price it and the service that we offer in exchange and that's been a winning strategy. So I don't think the market is changing all that fast. And if there is predatory pricing out there, they'll get what they get. There is plenty of other freight leftover.

[Dave Menzel:]

And Tom, I'll add that I think there is a tremendous amount of fragmentation and the capacity pool out there. And so to kind of dovetail off what Doug saying that I do think there is room for lots of different models and that in any combination of those models. So I can see we're providing power-only solutions and having a trailer pool can provide advantages in certain segments, but the market is really, really big and it depends on your specific network and how valuable that resource might be to the network you're serving. So I think there is room for different models out there, and we'll continue to see that.

[Tom Wadewitz:]

Great. Okay, thanks for the time.

[Doug Waggoner:]

Thanks, Tom.

[Operator:]

And your next question from Bascome Majors of Susquehanna. Your line is now open.

[Bascome Majors:]

Yes, thanks for taking my question. It's certainly been impressive and how this market is pretty continually strengthened from the last couple of quarters. I'm curious if you could give us a look at how things are trending into January. And then more specifically is, as most of your business really just performing seasonally, the volume pricing anyway you want to slice it at a very high level and stable there or are certain parts still perhaps outperforming what you would expect given the calendar or certain parts starting to underperform? If you could just slice it and dice it, so you get a little more fidelity to how things are trending that would be helpful. Thanks.

[Dave Menzel:]

Yes, I would say Bascome the larger accounts are probably Fortune call it 2,000, 2,500 something like that, performing a little bit stronger, so I won't slice it and dice it by industry, but I'll say that the – those are performing maybe better and the SMB is more making a comeback. So we have seen care – customer counts down more so in the SMB market, that makes up depending on where you slice it, I mean, a big part of our business is SMB, about 35% of our business is coming from companies that are less than $25 million in revenue, so we've got a big SMB component to what we do. And the growth rate is likely to be higher in that part of the business going forward as the economy – as things reopen more fully and business has come back a little bit, but we'll have to see how that plays out. So I do think it's – the only way I would probably slice it up is that the larger segment seem to be a little stronger, but we have seen obviously a good comeback if you will throughout the year on the SMB side.

[Bascome Majors:]

Thank you for that. And perhaps to the longer-term outlook in the view on capital allocation, I mean, you're fortunate in that your business generates a lot of cash relative to the size of your equity base. I mean, the converts gone now, you have a little bit of debt, but it's pretty moderate. You've talked about M&A a little bit earlier. I mean just – what do you do? Are there some opportunities to perhaps co-invest with a larger company and increase the size of the portfolio maybe the more that you could do it all? Just anything creative on capital allocation to use that cash other than the traditional buyback or debt pay down, it would be very, very interesting I think. Thanks.

[Doug Waggoner:]

Yes, well, we think the best ROI on that cash is to make an accretive acquisition, and that would be our top priority, but it's got to be something that's a good strategic fit, that's integrateable, fits with our culture, fits with our strategy. So as I said in the prepared remarks, we are actively engaged in looking at opportunities for M&A because we do think that's the best use of our cash.

[Bascome Majors:]

Thank you.

[Doug Waggoner:]

Thank you.

[Operator:]

And your next question from Brian Ossenbeck of J.P. Morgan. Your line is open.

[Brian Ossenbeck:]

Hi. Thanks. Good afternoon. So I guess, a question for Dave, and you gave some dynamics around the delay in some of the bids and it usually takes a little while for your spot to move back to the contract when you see this sort of market dynamic. So I wanted to ask as two questions. First, do you think there is a chance that this could stay elevated as part of the contract for longer than I guess normal? And then secondly, given what you see how are you thinking about positioning into next year from a spot contract mix? I know a lot of that depends on a number of factors, but you do have some, I would think, flexibility to take a lean in either direction. So thoughts on that would be appreciated.

[Dave Menzel:]

Well, I think, I do think that the spot business could stay strong, stronger for longer than usual. I don't know what usual is any more but cycles have typically, I would have said 18 months to 24 months as a cycle and then we had a whole cycle in 12 months. So – but I do think that the delaying of the bids that – which will delay the going live of new rates in a lot of cases probably keeps the spot market a little stronger for longer than you might normally expect. And I think it's triggered of course because of the significant rise in rates in Q3 and Q4, never stopped. And so just kind of like letting the market kind of settle down a little bit, well it's probably in many shippers mine. So I think that's true. Looking back at our award contract mix, I mean, our goal is to continue to grow. And I think I would sense that we'd see – our award freight mix has been 50% to 60% for the last three years kind of depending on where you're at in the cycle. And so things play out the way it played out in the past. I think you would see in the second half of 2021, the award piece of the business start to grow again at a higher rate and kind of you'd see that mix shift begin to occur. Would it jump up past 60%, probably not, you got – and you got to remember our spot business includes a lot of SMB business. So it's not just kind of traditional Fortune 1,000 Company and their spot business it's just transactional business with lots of SMB clients. So I think that we'll see it tick back up. We don't proactively really target a percentage in a mix because we're just; we're trying to grow profitably in each category. And I think the cycle will dictate how that mix plays out.

[Brian Ossenbeck:]

Okay, great, that's helpful. And I guess, within that prior discussion about bids being delayed. Do you see any real move toward more frequent many bids or tenders or do you think that's really just kind of a sign of where we are in the rating capacity backdrop and we'll probably see back to I guess normal, whatever that is, but maybe few of those before, we're not getting rid of the RFP anytime soon seems like. So wanted to see if there is any sort of lasting change and how freight has bid after this?

[Dave Menzel:]

I think that when, especially when rates are going up, you see a lot more many bids and when rates are going down, I guess in either case, I mean I think back, we see a lot of mini bids. I looked at the number of submissions. It's a pretty significant amount of bid activity that happens in the summer. We always talk about the bid season being kind of late Q4 and into Q1 and maybe bleeding over a little bit in the Q2. But when you look at the numbers, there's bids throughout the year and we always see a lot of mini bids. So that's been a trend that I think has been out there for a while. If rates are going up, shippers need to do a mini bid because settling on a project or new rates, so they're not 100% rely on the spot obviously, but if rates go down, the new projects come up and you're wrestle with honoring the freight commitments that are out there versus peeling something out and doing a mini bids. So I think it is a reality and it's a mechanism that shippers can use to kind of get current rates moving forward. So I think we'll continue to see that activity in whatever the cycle is.

[Brian Ossenbeck:]

Okay. And then last quick one for Doug. Just on the carrier side, I think you mentioned capacity is still pretty tight. Are you anticipating a return? I guess, what have you seen from those carriers signing up to the various platforms? Are you seeing new people sign up? Are you seeing drivers come back as rates come up? What do you seen in the fourth quarter and kind of what are you expecting for the year ahead?

[Doug Waggoner:]

We actually saw an increase in our number of carriers utilized in Q4, up fairly substantially. And so I think that was just due to the tight market and us going deeper into our database to find more carriers. I think it was also a function of our marketing push on EchoDrive and getting carriers signed up where they can find the right loads for their network. So, it's – our activity increase with the number of carriers and we still have a very large portion of our carrier database that's untapped, that's not currently in use. So even though capacity is tight, we have a pretty big pond to fish in.

[Brian Ossenbeck:]

Okay. Thanks for your time. I appreciate it.

[Doug Waggoner:]

Thank you.

[Operator:]

And your next question from Ravi Shanker of Morgan Stanley. Your line is now open.

[Christyne McGarvey:]

Hey, guys. Thanks. It's actually Christyne McGarvey on for Ravi. I apologize, I also cut out earlier. So if you discussed this, excuse me, but there is lot of interesting color on Managed Transportation earlier in the call. I was just wondering if we could get a little bit more color on the pipeline as we head into next year. And particular if there's anything you're seeing trend-wise that you call out in terms of customer base or sort of the driving psychology maybe behind some of the wins? And then also the comments about going up-market to larger shippers if you could elaborate a little bit on that as well.

[Dave Menzel:]

Sure. Our Managed Transportation business is primarily focused on – has been focused on SMB customers and we've seen a lot of success, both through referrals of customers and expanding our relationships in places where we've landed business that have parent ownership and other subsidiaries. And so we've got – I think a pretty, a very strong offering, when it comes to multimodal offering, an LTL truckload, intermodal, partial truckload, suite of services into that SMB client base. And this year, as I mentioned earlier, we closed $135 million of new business, that was a record for us and we've got a strong pipeline going into 2021, so we feel really good. And a lot of that business came on – are still coming on board and some of it came on in the second half of the year. So it really sets up nicely for us to have a nice strong 2021 when it comes to the Managed Transportation business. And so because of that focus, our client base has a good mix of LTL and Truckload. And so when we talk about going up-market that means really selling the companies that are going to be more predominantly truckload shippers. And we've got capabilities that we've built over the years to, in essence, fill up-market and serve those larger truckload shippers. That hasn't been our sweet spot over time. And I think that as we continue to grow – we'll continue to grow in that area as well as focusing on the SMB market that we've had success in the past.

[Christyne McGarvey:]

Got it. That's very helpful. Maybe just one quick one is a follow-up to the M&A question earlier. Just say a deal has the kind of makes sense, but just kind of curious what you guys looking for, is it something where you'd be targeting different geographies or technology platform, what is it that you guys are looking for there?

[Doug Waggoner:]

Yes, I mean, we certainly have opportunities that would fit under the description of a tuck-in and when we think about our brokerage tuck-in, the things that might make it interesting would be geographical presence, including Canada, and Mexico. It could be niche specialties like temperature control or flat-bed. And then when we get outside that realm, we're looking at maybe potentially acquisitions in adjacent spaces that are not too far from our non-asset model, but potentially add new capabilities to our portfolio and fit well within our sales channels. We also have interest in data science in analytics companies as well as companies to do Managed Transportation. We've looked at consolidation business, LTL consolidation for big-box retailers. So there's really a lot of areas that can be of interest to us, either in our core business, in technology and data science, or in adjacent spaces.

[Christyne McGarvey:]

Got it. That's very helpful. I appreciate the time. I'll leave it there.

[Doug Waggoner:]

Thank you.

[Operator:]

Your next question from Kevin Steinke from Barrington research. Your line is now open.

[Kevin Steinke:]

Hi. You've touched on this a bit, but what are you seeing or hearing in terms of the ability to carrier – ability of carriers to add capacity in this environment, either through equipment and/or drivers?

[Doug Waggoner:]

Well, they've been – they took a vacation in to – much of 2020 and didn't buy many new Class 8 trucks, the pace of Class 8 truck sales has accelerated in recent months. What's unknown to us is how quickly are they retiring old equipment or are they holding on to that old equipment to gain capacity. And I did see a statistic recently that used truck sales this year are relatively lower mileage vehicles than in past years, so that would almost indicate to me that they're turning the equipment faster and bringing in new equipment, which is obviously got better maintenance cost, better fuel efficiency and is also attractive for recruiting drivers. So I don't know the definite answer to your question, but it would seem that capacity is staying relatively level. I think in part due to the driver shortage and despite the Class 8 truck purchases.

[Kevin Steinke:]

Okay, thanks. That's all I had.

[Doug Waggoner:]

Thank you.

[Operator:]

The next question is from Stephanie Benjamin of Truist. Your line is now open.

[Stephanie Benjamin:]

Hi everybody.

[Doug Waggoner:]

Hi, Stephanie.

[Stephanie Benjamin:]

Most of the questions have been answered here but I was hoping you talk a little bit about what you're seeing on the LTL side of your business? A nice acceleration from 3Q to 4Q. But is this just a function of maybe some of your more industrial-focused companies kind of reaccelerating from the pandemic. Are you seeing any e-commerce benefits? Just anything on the LTL business would be helpful. Thanks.

[Dave Menzel:]

Yes, I think the primary driver and it's tight everywhere. So you're seeing a lot of overflow business and but our primary growth was across all sectors but mainly in the Managed Trans side.

[Stephanie Benjamin:]

Got it. That's really helpful. Thanks.

[Doug Waggoner:]

Thank you.

[Dave Menzel:]

Thanks.

[Operator:]

Your next question from David Campbell of Thompson Davis & Company. Your line is now open.

[David Campbell:]

Hi, Dough, Dave, and Pete I just wanted to ask if you had any opinion about the sale of the LTL business from UPS, whether that sale will be there add to your potential for new business or whether it be a problem when the new manager of the UBS business being more aggressive than UPS. Certainly...

[Dave Menzel:]

Got you.

[David Campbell:]

UPS couldn't do anything with it for 10 years.

[Dave Menzel:]

Yes. I think that from our perspective, it won't have an impact on our business. I can't really comment on management team for UPS Freight has – is moving over. So I don't see any significant change from our perspective.

[David Campbell:]

So you think these like that UPS sale was a good thing for UPS or do you have any opinion on that?

[Dave Menzel:]

Yes. I would not have a strong opinion on it for UPS. I know that they – obviously they think it's a good thing and a win-win for all parties. So we would just take that for what it's worth.

[David Campbell:]

And they sold it for less than they bought it for 10 years ago. I would call out of a pretty bad investment. They shouldn't have done in the first place. But, and also I wanted to see if you had any thought about the impact of the new President and a new Administration, eagerness to raise taxes on you and on people and whether that would have any impact on your business. Or weather you just can't do much about that because they haven't announced that yet but that's what they want to do. Have any opinion on the policy?

[Doug Waggoner:]

Well, David, it looking in the short-term, if there is additional stimulus dollars that go into the consumers' pockets, I would expect that that would be good for the freight industry. It seems to be the case in 2020 when the stimulus hit. Next thing I would look to is regulations that affect trucking, whether it's hours of service or drug-testing, some of the things that we've been dealing with for the last year or two, I think we all know the impact that some of those regulations have on capacity, so that could be an impact. And then, beyond that, it's probably above my pay grade to know what the political ramifications on the economy are going to be, but those are the two that are obvious to me.

[David Campbell:]

Yes. Well, they want to raise your corporate tax rate from I guess you're paying 25% now, it sounds like it could go to 30% if they do what they want to do. Anyway, thanks for the questions. One last one fast, quick one. I don't think if there is an impact on you but it might, the Chinese New Year starting much later this year than last year. Have you ever noticed any impact from those dates changing around every year?

[Doug Waggoner:]

Well, sometimes there is an impact on the import freight coming into the West Coast, but this year we're already backed up with ships in the ports of Long Beach and LA. And so I would assume that in any impact would get absorbed by the backlog.

[David Campbell:]

Okay, thanks for that. Thanks for all the questions. Actually, thanks for the answers.

[Doug Waggoner:]

Thank you, Dave.

[Operator:]

And your last question from Matt Young of Morningstar. Your line is now open.

[Matt Young:]

Thanks, guys. Good afternoon. I know there's macro uncertainty here and a lot of moving parts, including mix, but do you think it's safe to say that the overall contract rate strength you're seeing could be sufficient to keep push or keep the gross margin percentage up overall in 2021? If I have it right, you're already at 15.9% in January. So I'm trying to looks positive in terms of catching up to buy rates here at this point?

[Dave Menzel:]

Yes. I think if you look at historic cycles when you've got a situation where rates are really high, you tend to see three to four quarters of positive margin. I think this is a bit unique because of the extremely high rates and the fact that the bid cycles are deferred. So I think the first half of the year is probably get a little better chance of having the positive margin in the second half. But the reason we don't give specific guidance is because it's too hard to really predict.

[Matt Young:]

Thanks there. And I'm just wondering if it also it's possible to shed some color on your general exposure and mix in terms of retail versus industrial end market shippers and perhaps maybe what that might look like before the pandemic or the 2019 slowdown. I guess what I'm wondering here is a potential for an incremental growth can should manufacturing industrial end market see some recovery this year?

[Dave Menzel:]

Yes, I think so. I think that – we're going to be more manufacturing and industrial and retail. Our retail business tends to be more into grocery and Big-Box kind of retail, but on the – not necessarily produce but beverages and such. So, I think to the extent that we have a strong industrial recovery that would – that could be a positive for us given our mix.

[Matt Young:]

Any sense of the numbers there, I mean is it like 60-40 Industrial?

[Dave Menzel:]

The retail piece is probably closer to 20, but when you get then it doesn't mean everything else is industrial, or would we would classify it that way. So I'd have to peel that apart. There is a lot of distribution in there and other things.

[Matt Young:]

Okay. That's all I had, thanks Dave.

[Dave Menzel:]

Yes, okay. Thank you.

[Operator:]

And there are no further questions at this time. And I would like to turn it back to you, Mr. Doug Waggoner.

[Doug Waggoner:]

Just – we went a little bit over but we wanted to make sure everybody got a chance to get their questions answered. So thanks for joining us. A big shout out to all the Echo employees that I know listen to the call and great job in 2020. Thanks for our clients and our carriers, and thanks to our shareholders. We'll talk to you next quarter.

[Operator:]

Ladies and gentlemen this concludes today's conference. Thank you everyone for participating. You may now disconnect.