Echo Global Logistics, Inc.
Q1 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Kyle Sauers, Chief Financial Officer. Please go ahead.

[Kyle Sauers:]

Thank you, and thank you for joining us today to discuss our first quarter 2019 earnings. Hosting the call are Doug Waggoner, Chairman and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We've 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 site, 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 will also be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release we issued earlier today and Form 8-K we filed earlier today. With that, I'm pleased to turn the call over to Doug Waggoner.

[Doug Waggoner:]

Thanks, and good afternoon, everyone. I am again quite pleased with our performance this quarter, as a softer freight market created a headwind from the incredible growth numbers we posted in 2018. However, our ability to improve net revenue margin and control costs enabled us to continue to generate adjusted EBITDA consistent with Q1 2018 in peak conditions. Our positive results this quarter confirm what many of you already know about our business model. We continue to win with our Managed Transportation offering, which is compelling to multimodal shippers of all sizes. Yet again, we produced a great quarter of new customer's signings. When truckload spot market rates declined our mix shifts towards more contractual business, both because that is what we can provide more value to shippers and also because there are less spot market opportunities available; three thus in turn impacts our revenue in both brokerage and Managed Transportation, as our revenue per load declines. However, this is offset as it was this quarter with a better net revenue margins as our digital platform and carrier network density allows us to quickly find the right loads for carriers and lower our purchase transportation costs in the dynamic environment. At the same time, our size and scale now allow us to gain leverage over the infrastructure we put in place, and moderate our variable costs in an environment like Q1 where top line growth is harder to come by due to lower truckload rates, diminished spot market freight from our routing guides and tougher year-over-year comparables. We continue to invest on our digital strategy and it's important that I remind you that everything Echo does is centered around our technology. As we've talked about in the past, our employees, clients and carriers are all interacting on a common platform that enables efficient execution across all of our modes of transportation. Over the last year, we've talked about innovations in our shipper portal EchoShip our carrier portal, and driver app EchoDrive, and more recently our new technology architecture called EchoAccelerator. EchoAccelerator is a framework that enables us to deploy features quickly across multiple platforms. And last week, we announced the addition of our Private Load Board accessible to our core carriers to search and bid on available freight. This capability is available to carriers through our portal and to drivers through our mobile app. Feedback on this launch has been fantastic and this enables one more way for carriers to quickly find freight matches in our network. Over time, this will increase our capacity and in turn lead to an even stronger value proposition for our shippers. I'm really excited about the new technology and the progress we are making and at the same time, I have confidence that our people, processes and technology available right now provide a significant differentiator in terms of our ability to deliver value in the marketplace today. Now, I'll highlight some of our Q1 results. Total revenue is $538 million representing a 6.8% decrease over last year. Net revenue was $98.8 million, representing a 1.2% decrease over last year. Adjusted EBITDA was $21.7 million representing a 1.4% decrease over the prior year. And non-GAAP fully diluted EPS was $0.38 representing a 4.4% decrease over the prior year. Now, I'd like to turn it over to Dave to go into more detail on our performance.

[Dave Menzel:]

Thanks, Doug. As Doug mentioned, last few months have been much different environment than what we were a year ago. Capacity is relatively loose and overall demand has been muted. This has resulted in a softer truckload spot market, which impacts both our volume and our rates. Despite this headwind, we continue to have a lot of success. We achieved volume growth in three key areas of our business in Q1 contractual, truckload, LTL and Managed Transportation. Our people continue to do a fantastic job serving our clients and our carriers and the technology we are deploying enables us to improve service and drive efficiencies in the way we interact with our partners. Additionally, our business model is protected as our technology and data science enables us to rapidly adapt to pricing changes in the market. Slide 4 highlights our revenue by mode. In Q1, total truckload revenue was $354 million and decreased by 11.5% over the prior year. Truckload volume was down 4.4% year-over-year and our revenue per shipment was down 7.5%. The volume decline was entirely attributable to our spot business as primary award volume or contract volume increased by double digits in Q1. The decrease in rates is consistent with the change in market conditions and has declined in the cost of capacity. The biggest change in shipper rates was also due to the spot market. The spot rates have steadily softened over the last six months. During the quarter, our contract business represented 49% of our total truckload volume as compared to 40% a year ago. Again this mix shift is a combination of a softer spot market and our success in the contract business. Last quarter, we talked about our contract business cycles and the status of the results during the bid season. The bid season refers to the time of the year many shippers refresh their routing guide and the largest percentage of bids typically concluded between the months of February and April. Having said that bids are happening year around, some are annual in nature, some have shorter windows for special projects. We're very pleased with our results with our major truckload clients and the addition of new clients. From an award perspective, we expect to see continued increase in volume, associated with primary awards and we're well positioned to continue to grow this portion of our business in 2019. As Doug mentioned earlier, we recently enhanced our carrier-facing web portal and driver app to include access to our open load board. Access to view, search and bid on freight is enabled for carriers included in our preferred programs and we're receiving great reception to these capabilities. The reception is translating into search activity, offers and bookings and we believe this will enable us to accelerate the growth of our network, make it easier for carriers to do business with Echo and find freight that matches their needs. Turning to LTL, we generated total revenue of $155 million, 5% growth over the prior year. Increases in both rates and volume drove this performance. Our LTL shipment volume was up 2% in Q1 and revenue per shipment was up 3%. Our EchoShip platform continues to gain traction with our small to midsize LTL shippers. Turning to slide 5. Our transactional revenue of $412 million declined 9%, driven primarily from the decrease in truckload revenue and partially offset by the increase in LTL revenue. Our Managed Transportation revenue was $126 million in Q1, an increase of 1.6% over last year. The quarterly revenue growth was impacted by lower truckload rates as Managed Transportation shipment volume was up by 6% in Q1. We had another strong quarter from new business wins perspective with $33 million of new freight spend landed during the quarter. Turning to slide 6. Our net revenue margin increased by 104 basis points year-over-year to 18.4%. This increase was due to an increase in our truckload net revenue margin of 159 basis points and a decrease in the LTL net revenue margin by 68 basis points. The increase in truckload net revenue margin is due to carrier rates falling a bit faster than shipper rates. This is typically the case in periods with rapid decrease in rates. Specifically, we had a decrease in the negative margin impact from loss loads as the market spike in 2000 -- Q1 2018 drove a higher level of loss loads from contract commitments than we had in Q1 2019. I'd like to now turn it over to Kyle to review additional Q1 financial details and outlook.

[Kyle Sauers:]

Thanks Dave. On page seven of the slides, you'll find a summary of our key operating statement line items. Commission expense was $30 million in the first quarter of 2019, decreasing 1% year-over-year and commission expense was 30.4% of net revenue which was up 17 basis points compared to the first quarter last year. Non-GAAP G&A expense was $47.1 million in the first quarter down 1% from the year ago first quarter of 2018. And while we continue to make investments by adding to our sales and technology teams that benefit us down the road those costs were offset by the benefits of automation throughout the organization as well as lower incentive compensation cost. Depreciation expense was $6.3 million in the first quarter of 2019, up from $5.7 million in the year ago period and this increase in depreciation is associated with the increase in our continued investments in our technology platform. Cash interest expense was $1.4 million, during the first quarter of 2019 compared to $1.7 million in the year ago period and the decrease is due to the repurchase of a portion of our outstanding convertible debt. Our non-GAAP effective income tax rate was 24.9% for the first quarter of 2019. And as Doug mentioned, non-GAAP fully diluted earnings per share was $0.38, decreasing from $0.40 in the first quarter of 2018. And then the primary differences between our GAAP and non-GAAP fully diluted earnings per share in the first quarter are $3.2 million of amortization of intangibles from acquisitions, $2 million of non-cash interest expense and $2.8 million of stock compensation expense. Slide 8 contains selected cash flow and balance sheet data. In the first quarter of 2019, we had free cash flow of $17.7 million and operating cash flow of $24.1 million. This brings our trailing 12 months free cash flow to $78 million. Capital expenditures totaled $6.4 million during the quarter. We ended the quarter with $37.6 million in cash and $335 million in accounts receivable. And at the end of the quarter, we had nothing drawn on our $350 million ABL facility. During the quarter, we also purchased 452,000 shares of our stock for $10.6 million, or an average of $23.50 a share and then we also repurchased $7.9 million face value of our convertible debt for $7.8 million. And as of the end of the quarter, we have approximately $15 million available on our repurchase authorization. So, now, I'll take a moment to walk through our guidance for the second quarter and updates for the full year 2019, which we've highlighted on slide 9. Revenue for the first 15 business days of the quarter was down 12% over last year on a per day basis and we've seen our net revenue margin hold steady during the first part of April, keeping relatively consistent with our first quarter rate of 18.4%. The end of March and early April were unseasonably slow and we haven't yet seen the seasonal pickup in spot rates. However, as Dave mentioned, the contract season has played out quite well for us. And given all these current trends, we expect Q2 revenue to be in the range of $560 million to $600 million. And for the full year, we now expect revenue in the range of $2.3 billion to $2.5 billion. With regards to other guidance, we expect the following. Commission expense to be between 30.5% and 31% for the second quarter and full year; G&A to be between $47.5 million and $50.5 million for the second quarter and $193 million to $203 million for the full year, which is down $2 million from the previous midpoint; depreciation is estimated to be $6.9 million for the second quarter and $27 million for the full year; and CapEx is still estimated to be in the range of $27 million to $30 million for the full year; cash interest, we expect approximately $1.4 million for the second quarter and $5.5 million for the full year. We anticipate our share count to be approximately 27.4 million shares for the remainder of the year and we continue to expect our quarterly tax rate to be approximately 25% for the second quarter and for the full year. Excluded from the non-GAAP calculations in the second quarter and full year, we expect amortization of approximately $3 million and $11.8 million, non-cash interest of $1.8 million and $7.5 million and stock compensation expense of $2.6 million and $10.5 million. So now I'd like to turn the call back over to Doug.

[Doug Waggoner:]

Thanks, Kyle. To wrap up our prepared remarks, there are three things I would like to highlight. First, the market was soft in Q1, yet we continue to perform at a high level. Produce season has started later than normal, due to the colder weather and we'll see what impact that has on rates and capacity, as the next few months develop. Second, our business model continues to perform well throughout the various parts of the economic cycle. While the growth numbers aren't as high as in 2018, the quality of our business, the satisfaction of our clients and carriers, and the morale and commitment of our people remain at all-time highs. And third, our technology remains a competitive advantage, despite all the noise in investment in our industry. We are launching new capabilities and have confidence in our ability to drive efficiencies, while continuing to improve profitability. We are able to leverage our carrier network strategically, bringing value to both carriers and shippers which remains our value proposition in the marketplace. And that concludes our prepared remarks. And at this time, we'll open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Jack Atkins with Stephens. Your line is now open.

[Jack Atkins:]

Hey, guys. Good afternoon and congratulations on executing really well in the first quarter.

[Doug Waggoner:]

Thanks, Jack.

[Jack Atkins:]

So, I guess, first question for Doug or Dave. I guess, when you think about the first few weeks of the second quarter, could you maybe sort of give us a couple of comments on how things are trending so far? I know, Doug, to your point, it feels like we've had a little bit later start to home and garden season and produce season. Could you just kind of give us a little bit of sense for sort of how net revenue margin trends have been quarter-to-date, from a high-level perspective? And just sort of how the underlying market feels at this point in the quarter?

[Dave Menzel:]

So, Jeff, I'll jump in and give this a little commentary. I think that my perspective would be that things have been a little softer on the spot market side, obviously, throughout the quarter. That's continued I would say into early April first couple of weeks. Rates have continued to just moderate or come down even a little bit, which is pretty unusual. And I think that, we'd probably point to the lack of a produce season through the first -- through the end of March and early April, as being one of the drivers on the rate side. And so, we've seen some small signs that certain areas of the country are kind of starting to heat up just a little bit right now. But to-date, I'd say, the trend through Q1 to some extent persisted. We also had a little bit of a late Easter relative to last year in April. And so -- and think about last week was a bit of a four, four and a half day work week whereas last year it fell right at the end of March. So, another small impact as well.

[Jack Atkins:]

Okay. Got you. Got you. Makes sense. When we think about contract versus spot mix and I think there're a couple of comments during the prepared remarks around the strength that you're seeing in contract relative to spot. Certainly, Echo today is much different than Echo three to five years ago. And I guess as we think about the company moving forward, what's the right mix between spot and contract? Would you anticipate over time that contract mix will just sort of steadily increase as a percentage of the overall truckload business? How should we think about that mix longer term, not trying to hold you to your numbers, just trying to think about the trend there over time?

[Dave Menzel:]

I mean, Jack, that's a tough one to pin down, because it's so dependent on economic cycles and how we fit in the marketplace. I think our strategy is to grow both with big and smaller transactional in nature clients. So for that reason we wouldn't want to suggest that our contract mix is going to necessarily become a greater and greater part of the business, instead we probably suggest that our goal is to grow kind of both areas. Small to midsize companies tend to be more spot and transactional in nature. Your larger companies that are running an annual process obviously have a lot of contract freight. And that's another part of our strategy is to go -- grow that part of the business too. So, we're not very specific in terms of kind of trying to drive specific margins, I think it's -- or specific percentage mix I should say. But instead -- on continuing to use our carrier network strategically so that we can grow profitably in both segments of the market.

[Jack Atkins:]

Okay. Got it. Got it. One last question for me and I'll hop back in queue. But just going to the announcement last week around or -- maybe I believe before around -- and Doug you referenced in your prepared comments on the carrier app within EchoDrive, obviously that sounds -- it sounds very exciting and we're -- I think certainly you guys are showing your market leadership from a technology perspective. I guess, as you think about the opportunity to sort of do more automated load matching, and correct me if I'm wrong, but that seems sort of that -- trying to get out with that. How do you think about the opportunity to put more volume through that carrier app through EchoDrive over time and sort of move in some ways part of the business towards more automated load matching? Is there a way to kind of think about your goals for that EchoDrive platform over the next several years in terms of the percentage of your loads that are going to be sort of moving through or is that not the right way to think about it?

[Doug Waggoner:]

No, I think that's right, Jack. I mean, we've always had a very automated marketplace for matching trucks and loads that we use internally. And we've applied algorithms to that to make it smarter and more efficient. And now what we're doing is we're exposing a portion of that to our preferred carriers. And so, we believe that it's a more efficient way to match. It gives them kind of the first shot. It freight -- it fits into their network. And the initial feedback has been very favorable. And in fact, we've discovered demand for loads and lanes that we didn't realize existed, which gives us great leads on the sales side of the equation. So, I absolutely think it's going to drive automation of truckload transactions as we expand and get adoption in the future.

[Jack Atkins:]

Okay. And in terms of the ramp for that, I mean how do you view the ramp over time, Doug? Is that something that you would expect to see a pretty meaningful step-up over the next couple of years or do you think it's going to take some more time to sort of make that happen?

[Doug Waggoner:]

Well, no. We're -- I mean, we're aggressively marketing with that the press release last week. We're rolling it out we're creating incentives for carriers to jump on board. We think once they use the technology, they're going to see very -- obviously that it's to their advantage to use it and then it will drive adoption. So, we're kind of in marketing mode now, and we'll see how it goes.

[Jack Atkins:]

Okay.

[Dave Menzel:]

And I think the other thing, Jack, I'd add to that is that as you know we're in constant contact with our network of peers and we collect their capacity in a variety of ways. So, our strategy will be to not only through our apps to be connected with drivers and trucks so that we have location data, we're able to predict on-time performance, make changes and notifications as needed and we're doing that through multiple methods. And then secondly, as we collect capacity and match loads and interact with our carriers, we're going to be able to do that in the most efficient way that our carriers want to do that. And so, we've got all mechanisms in place to communicate with those carriers. And so, I'd see it more as an evolution over time. There's a tremendous amount of our freight obviously that we know where our capacity sits and we know how to match that with our carriers today. And we don't necessarily need a mobile app or other technologies to move that freight. So, I think it's going to evolve as the marketplace evolves and we'll be ready to capture that and able to apply the kind of the advantages that we have which are network density and data science behind the whole thing to drive the evolution of those platforms.

[Jack Atkins:]

Okay, great. That's very exciting to hear. Thanks again for the time.

[Doug Waggoner:]

Thank you, Jack.

[Operator:]

Thank you. And our next question comes from the line of Allison Landry with Credit Suisse. Your line is now open.

[Allison Landry:]

Thanks. Good afternoon. I just wanted to ask in terms of the contract leads that you're seeing so far and the bid season if they are directionally positive neutral or negative?

[Dave Menzel:]

Allison you know that similar question was asked like last quarter and we're talking about what we expect and it's obviously it ranges across different customers for different reasons and different time periods by which they might be putting a bid at. And I think that we had said we were kind of trying to flat to low single-digits three four months ago was kind of what we saw. I'd say we're probably more trending toward flat today than the low to single-digits. There are definitely exceptions on both sides of the equator so to speak. And -- but on average I'd call it a little more neutral from a contract rate to address your question.

[Allison Landry:]

Okay. And then in terms of M&A any change in what you're seeing in terms of the acquisition landscape any sort of niche markets that might be developing or that you may be interested in just curious to hear your thoughts on that. Thanks.

[Doug Waggoner:]

No. Our story remains the same. We're very active and looking at opportunities. We're primarily interested in tuck-ins and adjacent spaces that fit well and are accretive. And so that strategy is unchanged.

[Allison Landry:]

Okay. Thank you, guys.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Tom Wadewitz with UBS. Your line is now open.

[Tom Wadewitz:]

Yes. Good afternoon. Wanted to see if you could offer some thoughts on capacity. I think that conversations with brokers over the last I don't know six months last year, it seems like there's been a faster pace of addition of carriers into your fleet or qualification carriers and providing some kind of read of small carriers adding capacity. Have you seen that reverse or are you still adding a maybe higher pace to normal off carriers into your qualified base?

[Dave Menzel:]

I would say two questions there I think Tom. In terms of the carriers added into our network I would say it's been a kind of consistent pace over the last six months of number of new carriers getting added all the time as the network changes just a little bit and we grow and we utilize different carriers for different clients and for different freights. So, that pace has remained pretty consistent. In terms of the carrier capacity question we mentioned this I think earlier. We've done a small survey. We this goes back about four, six months ago and the feedback we were getting from our carriers mid-2018 which was probably the last time we refreshed that data was that a lot of the small to midsized carriers were in fact adding some capacity. And so haven't refreshed that data. And I would think that that's definitely slowed given the current freight environment but we haven't gone back to carriers and really refreshed that data. But I do think some capacity was added certainly the small to mid throughout 2018 when the market was as hard as it was.

[Tom Wadewitz:]

Okay, great. With respect to the your internal load board and your I guess offering it to your premier carriers how do you get paid on that business or how is that maybe different from how you would get paid on a load that's booked through let's say the conventional means? Is there a difference in what comes to Echo is on the revenue side is it simply a productivity gain for you that you can kind of pocket some of the efficiency? How do we think directionally about the impact to your efficiency or to how the revenue comes in?

[Dave Menzel:]

Okay. I think today think of it more on the kind of the capacity side than on the revenue side number one. So, there's absolutely today no real impact on the revenue side relative to the shippers. So, it's really all about finding the capacity with the exception that Doug mentioned you know which is have we recognized that a carrier needs freight in a certain line we may have that data we may be able to go out and find it for them which we do today through other means. So, that'd be just one more source of that kind of data. So, think about it on the capacity side. And initially it doesn't change the way anybody is getting paid and it's really just another vehicle for carriers on their own time when things come available to access our freight and see if there's a match. So, rather than being dependent 100% on kind of human e-mails back and forth or phone calls back and forth, a carrier could find -- they've got excess capacity at 2 PM in the day and if they wanted to do a load search they could find it. So I think over time that will drive improved productivity of our people, because of the less interactions, a little bit more self-serve. And so that's how we see it playing out probably over the next six to 24 months as being a bit more of a productivity gain, a way to add capacity, be a little easier to do business with and attract carriers into the network that are looking for business.

[Tom Wadewitz:]

Is there any sense to how long it takes to ramp that or how bigger piece it could be? I know it's early on, is it like 10% your loads maybe in a year or two years you can book in it or what -- any sense on magnitude of how much could flow through that on the kind of carrier rep and bookings side?

[Dave Menzel:]

I'd say at this stage we won't put a number behind it and we'll give it a little more time for traction. Obviously I don't want to confuse the situation because our current model enables us to source everything that we need. We've got great relationships with the carriers and this is kind of one more vehicle. So I think we need to give it a little more time in the marketplace to see what impact it has on our existing business, which is operating very effectively without it. So I'd say stay tuned a little bit to see what the pace of adoption is in utilization. But we are seeing a lot of search activity and booking loads through the system already. So, really good early signs that there will be some nice adoption and carriers appreciate the ability to access freight in this manner.

[Tom Wadewitz:]

Okay, great. Thanks, Dave. Thank you for the time. Appreciate it.

[Doug Waggoner:]

Thank you.

[Dave Menzel:]

Thanks, Tom.

[Operator:]

Thank you. And our next question comes from the line of Bascome Majors with Susquehanna. Your line is now open.

[Bascome Majors:]

Yes. Thanks for taking my question guys. I know typically for a non-asset broker, the second quarter net revenue margin will be a bit below the first quarter sequentially. And I think you said that it was basically flat so far in April. Is April typically true to that sequential decline? I'm just trying to think of what you've seen so far is a bit seasonally better than normal because the market is a little bit weaker so far on net revenue and margin?

[Kyle Sauers:]

Hey, Bascome this is Kyle. I'll take that one. I think there are what I would say typical seasonal trends. I'm not sure how typical any of the last few years have been, but I think it'd be -- you would normally see your truckload margins compress a little bit throughout the second quarter. I don't want to pinpoint April versus May versus June too exactly. But I think we normally would see some compression in truckload margins in April from the first quarter and you did hear us correctly that we haven't seen that. We've seen our overall margins hold quite nicely. But again you're correct that seasonally margins would often compress in Q2 and Q3 because of a more robust spot market and elevated buy side spot rates.

[Bascome Majors:]

In the -- there's been a number of questions on the contractual bid environment already. I know you said you've been able to grow the volume are pretty pleased with your outcomes. And the bids in competition you can see, how competitive does the non-asset side of that feel when you see other guys in bids? And are you seeing some of the asset base truckload carriers get competitive to keep share despite not having some of the cost advantages you have with the spot market?

[Dave Menzel:]

Yes, I think the answer is quite yes and yes to all of that. I mean, it's always competitive. The nature of a bid process creates a lot of competition, obviously, for freight. And so it's hard to characterize is it more or less competitive than other periods in the past. When freight markets are a bit softer, people tend to -- they need to reflect that right? And so it may feel a little more competitive. I think that by the same nature where you have incumbent relationships and you're able to provide strategic value because you're able to service the business that you have and you've got -- you've positioned your network in the right way that's obviously an advantage in a lot of cases. So in general, I'd say it's a definitely competitive environment. And because it's a little softer, we're all trying to figure out how soft it will be throughout the year and will we see rates elevate again in the second half. So I don't know if that exactly answers your question but that's kind of the feel of it. And I do think the asset players to the extent they have available capacity absolutely they want to -- they love to get in there and utilize that capacity if they could. So that's a factor.

[Bascome Majors:]

Okay. I appreciate that. I think that does answer it. And Kyle just one housekeeping one for you. We’re seeing G&A expenses rise pretty broadly across transports, a lot of that's driven by tax spend. The guide you gave for G&A is still up a little bit year-over-year but it's down a couple of million from what you gave in February. Just trying to see if you could bridge February to today on that line? Thanks.

[Kyle Sauers:]

Sure. So I think as you pointed out at the midpoint of our new G&A range, which would be $198 million that would increase our cost year-over-year about 2%. I think we demonstrated in the first quarter that we're going to continue to grow the sales organization and the technology organization, but expect to get operating efficiencies throughout the back office and operations teams through technology initiatives. And then in particular this year those investments are being offset to some extent by the expected lower incentive comp costs, we have relative to last year. So we saw that impact in Q1 and we'll expect to see that throughout the whole year. But I think just as we relooked at our expected cost for the year, we see it a little bit less than we had back in February when we gave that original guidance.

[Bascome Majors:]

Thank you for the time guys.

[Kyle Sauers:]

Thank you.

[Doug Waggoner:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jason Seidl with Cowen and Company. Your line is now open.

[Adam Kramer:]

Hey, guys. This is Adam on for Jason. I guess, first and maybe this is following up a little bit on the previous question, but we've heard a little bit about aggressive pricing from some of the other brokers out there. What have your – what have been your impressions of the market of the competition? Have you heard about some of your peers maybe being a little bit more aggressive? What do you guys kind of seeing out there maybe especially in the last few weeks?

[Doug Waggoner:]

I think, it's a mixed bag as Dave indicated earlier some of the perspective on whether the pricing is aggressive or not kind of depends on what the basis that you're looking at when it was last negotiated whether or not you're an incumbent. We have seen some aggressive pricing in some of the larger routing guides. Then again, we pick and choose the lanes and the customers that where we want to get traffic and we tend to like to get greater share of wallet, where we're an incumbent we have a good relationship and the customer understands our value. So I think generally, it's been more aggressive as you would expect in these market conditions. But as Dave said, it's always aggressive, it's always competitive and we pick and choose very surgically and we've been happy with how we've performed in this first quarter.

[Adam Kramer:]

Got it. Thank you for that. And maybe just a follow up here as well. I'm not sure – I may have missed you guys saying this earlier, but what's your current contract to spot mix, mix of business between the two? And then second, do you guys anticipate this moving around at all in this coming quarter into 2Q or in the back half?

[Doug Waggoner:]

So our current contract percentage is 49% and sequentially from last quarter it was 48% but it's up from a year ago, when it was 40%.

[Adam Kramer:]

Got it. Thank you for the time.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Stephanie Benjamin with SunTrust. Your line is now open.

[Stephanie Benjamin:]

Hi. Good afternoon. I was hoping you could provide a little bit of more color on the LTL business obviously both positive volume and revenue per shipment growth. So we'd love to hear more about what you're seeing in that environment and just kind of your expectations as we move through the year? Thanks.

[Dave Menzel:]

Thanks, Stephanie. On the LTL side, a couple of things number one the business tends to be a little more steady certainly from a rate perspective and a lot more steady, because they – typically rates are going to change one or two times a year with different carriers. So there's just not anywhere near the kind of volatility that you see in the truckload side from a rate perspective. And then, I think that the LTL business has continued to perform well partially because the truckload markets kind of cooled off and the LTL service has been very good. It has improved since that kind of the peak conditions when it was – when it was so busy last year. So the service has been good from a lot of the carriers most of the carriers and the business is steadier. Secondly we – a big part of our value proposition on LTL is small to mid-market companies and we've driven a tremendous amount of automation in that category through the – through EchoShip and our online portal. So we get pretty significant amount of business that's automated through the EchoShip platform and that's been growing over time as well. So I think it feels healthy and more stable and that's just the nature – a little bit the nature of the business.

[Stephanie Benjamin:]

All right. Well, thanks so much for your time.

[Dave Menzel:]

Thank you.

[Doug Waggoner:]

Thank you, Stephanie.

[Operator:]

Thank you. And our next question comes from the line of Bruce Chan with Stifel. Your line is now open.

[Bruce Chan:]

Yes. Good evening gents. We've talked a little bit about the M&A strategy we've talked a little bit about the competitive environment from a cyclical standpoint. And at the risk of beating a dead horse a little bit, I kind of want to ask about the competitive environment from more of a secular viewpoints. We've seen a lot of consolidation recently, we've seen a debut of some new very large competitors in the space as well. And I just want to get your take on how you think that's affecting the market in terms of pricing is that generally good or bad in terms of discipline? And when you view what's happening at the larger end of the market through your lens how do you see Echo's competitive positioning?

[Doug Waggoner:]

Well I think if you look at the larger companies that would be a platform for private equity, you're seeing some pretty robust multiples. And likewise, the tuck-ins that those companies might look at to get to scale tends to bid up the pricing on those companies. When you look at Echo, we've really accomplished what we set out to do with our M&A strategy which was to build scale. We made a number of acquisitions big and small. We integrated them, we put them on our technology platform and we achieved the scale that we desired which allows us to operate efficiently. And at this point to do a large M&A deals with brokerage businesses that look like ours would create a lot of conflict in our sales relationships and our carrier relationships. So that's why probably for us those other companies aren't really as much of a factor as we're looking for things that diversify our offering a little bit but stay pretty close to our core non-asset technology-enabled strategy. So I think the M&A that we're looking at is not necessarily affected by that pricing environment that you're alluding to. We're looking at deals that are additive to Echo in terms of adjacent spaces and leverage our existing relationships and infrastructure and potentially leverage new geographies and niches within transportation.

[Bruce Chan:]

Okay. Great. That's really helpful. And then just a follow-up. I know and Dave you said that as far as the digital look-forward strategy that was still very much in early stages and then you waited to see what the penetration looks like. But when you sit down and have internal discussions about what this platform could look like as a percentage of the Echo portfolio let's say five or 10 years from now, where do you think that goes? I mean is that something that could ultimately be 30% of the business or 50% of the business any kind of ideas there?

[David Menzel:]

Yes, I mean, I think if you paint a long-term picture on it five to 10 years, you'd say over 50% of the business is going to get automated and there's going to be a lot of significant productivity gains over time. And I just think that will be a natural evolution as the platforms evolve and I definitely think it will become a major component. I mean, it's just difficult like to -- sometimes to try to say Hey, how is the platform going to migrate from the current platform that it's on today? Because today we have tremendous integration with all of our partners. Thousands of customers are tendering loads to us everyday through EDI automatically. We're connected automatically with thousands of carriers and we're getting -- we're tendering loads, we're getting tracking updates GPS location data. So it's kind of an evolution of what's already got a tremendous amount of automation in it. So now we say how much of it will turn to mobile in different part -- automate differently over time and will completely. And I think that that will definitely continue to happen over the next five to 10 years. So that's -- Doug wants to add a little to this.

[Doug Waggoner:]

Yes, I think if you look at our strategy both to clients and to carriers, we've always recognized that there is a range of demographics if you will. By that, I mean different levels of sophistication, different levels of technology adoption. And we've always tried to have a strategy that allows us to deploy against that diverse range. And so on the shippers side, we deal with very unsophisticated shippers on one end of the spectrum. On the other end of the spectrum, we do direct ERP integration and nobody touches anything. Likewise with the carriers, we've got the traditional relationships with dispatchers that are still very important. And we also have the no-touch automated direct loads through EDI integration or API integration. So I think what's important is as the marketplace changes, as the marketplace becomes more technology-enabled, more technology savvy, more desirous to use technology, we're going to be well positioned to switch them over.

[Bruce Chan:]

Okay. That's helpful. And I guess ultimately what I am getting at and this certainly isn't a new discussion or new conversation, but as we look at increasing automation in the services that the brokers provide, it seems like there's some degree of -- I don't want to call it commoditization, but in a sense it is commoditization of the service. Doesn't scale then become really a more important factor in terms of your competitive positioning in the marketplace? Do you agree or disagree with that statement?

[Doug Waggoner:]

I agree because if you think about transactions per person the more automation, the more willing our partners carriers and shippers are willing to automate, the more transactions we can do per person. I think it's that simple.

[Bruce Chan:]

All right thanks.

[Operator:]

Thank you. And our next question comes from the line of Brian Ossenbeck with JPMorgan. Your line is now open.

[Brian Ossenbeck:]

Hey guys. Good evening.

[Doug Waggoner:]

Hi, Brian.

[Brian Ossenbeck:]

Just couple questions. Doug, we've talked about the truckload features for a while now. I figure since it's officially launched as of a month or so ago wanted to see what your take on was theoretically interesting large potential size that could be deployed over time, but didn't know if there is anything you've seen happen good, bad and difference since it's been out there for the last couple of weeks or so? And then, what are your expectations of that going forward?

[Doug Waggoner:]

Well, I haven't had a lot of time to spend with it. I'm excited about the concept at least intellectually. I think, we need to see some trading volume and some data to evaluate, how it could or couldn't play into strategy. But again, I think it's a very interesting concept. And we're studying it very closely.

[Brian Ossenbeck:]

Okay. Kyle, for you, on the CapEx investment in IT, I don't know if you could, but maybe just entertain the thought at a higher level, like, what's the breakout of IT spending for, I guess sort of keeping the lights on maintaining the existing systems versus new development, expanding platform, putting out new apps and things of that nature. Is there a way you can break that down of the $15 million to $20 million a year that you spend maybe it's more than that when you had the expense side of it? But I think that would be helpful just to kind of contextualize what's, I guess really growth CapEx versus maintenance?

[Kyle Sauers:]

Yes. Thanks Brian. So without getting too specific on it, I'd say historically when you look at our CapEx it fits into a few different buckets. One would be, kind of, expanding physical infrastructure to grow our people and locations. And the last major initiative there was the expansion of our Chicago headquarters. We don't see a need for significant outlays there for the foreseeable future. We have good capacity to grow our workforce. And then -- so then you get into technology that is the biggest part of our CapEx for this year. And that -- I think you're right we break that down into a few different areas. You've got your maintenance CapEx, that would be kind of hardware technology, network infrastructure kind of in that category. We have other third-party technologies that we will deploy some of which is to run the corporate operations and some is to kind of use best-of-breed-type technologies to integrate with what we're doing with Echo Accelerator. And to the other piece is and the largest piece of that would be our internally developed software, where we are deploying against new initiatives, many of which we talked about on the call today, and developing new products and features for shippers and carriers. So hopefully that helps to kind of break it out in that way.

[Brian Ossenbeck:]

Yes. That does help. And then last one for you Dave. If you could just talk about, the talent pool how hard or maybe it isn't to get people these days in the door from just the hires you get to fill up the base the IT folks that you're putting through all those initiatives that Kyle just mentioned? And then, if you're seeing any competition more so than usual for the experienced brokers within Echo?

[Dave Menzel:]

Yes. I think that two big areas of emphasis for us on the hiring side. One would be the brokers on the sales side. And the majority of the people we bring in or come in we hire direct out of college for their first job. But that's probably about 60% to 70%. We also bring in experienced people to complement that. And I would say that, the environment is a little more competitive these days. Salary costs are going up. The labor -- the workforce is tighter. So, -- but we -- we're having a lot of success. So it's not overly concerning. We're able to for the most part meet our hiring objectives in all the offices that we're trying to staff up, and then generally on plan there's always pockets of places where we might be a little off. But in general, we feel good about that and obviously the culture that we have and the opportunity here is great to attract people. I think the second part of your question on the technology side, yes. I'd say it has been a little bit more challenging. That -- there is a lot of competition for strong technology talent. We're one of those companies that wants to attract talent, Chicago has become a place where there's lots of people trying to build. The fun part about what we're doing though. And I think it's really great in terms of our ability to attract talent is, that we are investing heavily in technology it's a hot area logistics, there's a lot going on. And there's a lot of fun things to work on and to build. And so we're finding a lot of success with that, and marketing that. But at the same time, attracting talent is a key priority for us. And it has become a little more difficult and more competitive in that way.

[Brian Ossenbeck:]

Okay. That’s it for me. Thanks a lot.

[Dave Menzel:]

Thank you.

[Kyle Sauers:]

Thanks.

[Operator:]

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Doug Waggoner, Chairman and Chief Executive Officer for any further remarks.

[Doug Waggoner:]

Yes. I'd just like to thank everybody for joining us today. Appreciate your listening in and hearing our story. And we'll see you next quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. And everyone have a great day.