Echo Global Logistics, Inc.
Q4 2019 Earnings Call Transcript

Published: 6 Feb 2020

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the Echo Global Logistics’ Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions]I would now hand the conference over to the Chief Financial Officer, Mr. Kyle Sauers. Please go ahead.

[Kyle Sauers:]

Thank you. And thank you for joining us today to discuss our fourth quarter and full year 2019 earnings. Hosting us in the call are Doug Waggoner, Chairman and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, 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 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. Well, it won't be a surprise to many of you to hear me say what a difference a year makes. The cyclical nature of the freight business has been rearing its ugly head throughout 2019 and Q4 was not an exception. The continuation of the excess capacity, the soft spot market continued throughout Q4. Despite these conditions, I'm proud of our execution, our ability to drive high levels of client and carrier satisfaction, our deployment of new technology and the continued commitment of all of our employees and how that translates into strong relationships that make Echo even better.On a year-over-year basis many of our key metrics are flat or down. The main driver of that is more about the robust environment in 2018, followed by a period of softer economic demand and probably, more importantly excess truckload capacity. While absolute volumes remain a bit soft, volume trends are improving and in fact have shown a decent upswing late in December and accelerating in January.Now on Slide 3 I'll highlight some of our Q4 results. Total revenue was $532 million, representing an 8.8% decrease from last year. Net revenue was $89.7 million, representing a 12.4% decrease from last year.Adjusted EBITDA was $17.5 million, representing a 31.5% decrease from the prior year. And non-GAAP fully diluted EPS was $0.26, compared to $0.47 in the year ago period.Years ago, I added a slide to our investor deck that I've used many times to talk about the nature of the freight cycle. To oversimplify, carrier rates tend to move faster than shipper rates. So depending on where we are in the cycle, our net revenue margin can either expand or contract depending on which direction rates are moving. 2018 was a unique year because rates moved up very quickly. Capacity was hard to come by, shippers were forced into the spot market and both contract and spot rates rose quickly.In response to this phenomenon shippers pursued shoring up their contract strategies with the hopes of avoiding the spot market in 2019 and carriers added capacity. This basically flipped the market and we were left with a freight environment that is much more imbalance. And imbalance means less spot business. This balanced market typically put some downward pressure on net revenue margin. We saw some of that in Q4 and are likely to see a bit more in the first half of 2020. This is the nature of the freight cycle.Our strength in the market remains to be our unique combination of technology, talented people with strong client, and carrier relationships and our carrier network, which includes our scale and domestic transportation. We continue to make significant progress rolling out new elements to our technology platform and applying data science to improve our business. Over the past few months, we've continued that trend by enabling our carrier partners access to available loads online and via our mobile apps and we enabled truckload quoting via EchoShip.We continue to provide enhanced automation across the business through our Echo accelerator platform, which includes a state-of-the-art technical architecture, proprietary code and algorithms that empower and optimize process and workflow. We also continued to integrate certain third party data sources and technology utilities for those features that make more sense to buy rather than to build. Together these advancements are positioning Echo to make significant productivity gains over the next few years. We are confident when the market flips again. We will see strong growth that drives incremental operating leverage resulting from these technological innovations.And now I'd like to turn it over to Dave to go into more detail on our performance.

[Dave Menzel:]

Thanks, Doug. As indicated on Slide 4, Q4 truckload revenue was $352 million, which is a decrease of 11% compared to the prior year. The decline was entirely due to lower rates as we experienced a 12% decline in truckload revenue per shipment in the quarter. Truckload volume was up 1%, which is an improving trend over the last several quarters. Our growth in primary award volume continued to be strong as we were up 14% in Q4. Our spot decline of 13% offset the majority of the contract volume gain. Year-over-year spot declines have subsided in January, resulted in further acceleration of our truckload growth early into 2020.Our contract strategy and our relationships with larger shippers continue to be an important component of our growth plan and we feel good about the success we’re having in the marketplace on this front. Our contract to spot mix was 57% contract, 43% spot in Q4, as a reminder of contract was 48% of the total in Q4 2018. The 12% year-over-year decrease in revenue per load reflects the market dynamics, Doug described earlier. One of the lessons we’ve learned over the years is that it doesn’t take much to throw the market out of balance.There are a handful of factors that may drive a market shift in 2020 including the final stage of the ELD mandate, which required the sun setting of the AOBRD devices, the new Federally-mandated Drug and Alcohol Clearinghouse and the skyrocketing insurance rates facing asset based carriers. Lower rates caused by excess capacity has already driven carriers large and small out of the market in 2019 and it’s certainly feasible to believe that the market is setting up for another shift in 2020. We did see carrier rates spike up during the holidays as mid-week Christmas and New Year’s caused the many capacity crunch. Basically the market is pretty fragile even when it’s characterized as imbalance.Shifting gears a bit, I’d like to talk about a few of our automation initiatives impacting our truckload business. As I’ve highlighted previously, the majority of our contract business is awarded based on the results of multi-stage bid processes, and is not quoted on a shipment by shipment basis. Our bid strategy is based on matching our shippers’ needs to our network and finding opportunities to deliver value to both clients and carriers. Once our award has determined, each shipment has tendered electronically and automatically entered into our systems. It’s a highly efficient process and represents a significant portion of our truckload transactions.In Q4, we enabled our transactional truckload quoting through EchoShip, our self-service shipping platform, and we’re now quoting and booking shipments online with a select group of SMB clients. We anticipate a broader scale roll out in the first half of 2020, as well as offering automated truckload quoting via direct connection to larger shippers.We’ve also continued to enhance EchoDrive, our carrier portal and mobile app. In Q4, we enabled our relationship carriers with access to our open board combined with a proactive notification system to alert carriers of loads likely to be desirable in their network. On top of that, we launched a carrier rewards program designed to attract new carriers to our network in the hands of the benefits offered to our partners. These capabilities have been well received and we’re seeing increased activity in terms of EchoDrive usage, mobile downloads, active searches, bulk [ph] offers and bookings.Lastly, we continue to improve electronic tracking compliance. The majority of our loads are receiving location updates and we’re providing access to data online via EchoShip and through direct data exchange with large shipper – shippers were using their visibility solutions.Turning to LTL, we generated total revenue of $159 million in Q4, a decline of 3% compared to the prior year. Our LTL shipment volume was down 2%, while revenue per shipment was down 1%. The decline in LTL volume was due to our Managed Transportation businesses, as we had significant declines from a large retail client, as well as a few other specific – customer specific declines. The transactional business showed volume gains of 3% and we’ve continued to see acceleration in January.Automation on our LTL business is also significant. Over 60% or more than a $100 million of our Q4 LTL business was quoted and booked online. The remainder is through interaction with our salespeople. Over 90% of our shipments were tendered automatically to our carriers via both API and EDI integrations. The majority of our invoices are processed without manual intervention.So on the automation front, excited about our future for two primary reasons. First, we’re applying technology and data science to our shipper and carrier interactions and it’s working, making our people more efficient and enabling us to leverage our network in a profitable way, while we deliver exceptional service. Second, we’re not all the way there yet, which means continued improvements in the capabilities and pricing intelligence will drive further adoption. The anticipated productivity gains over the next several years will be substantial.Turning to Slide 5. Our transactional revenue of $411 million declined 8% driven primarily from the decrease in truckload rates. Our sales productivity as measured by transactional volume over full time sales equivalents improved by 5% in Q4. And I say that knowing we have excess capacity with our existing workforce to continue to grow, and we remain committed to driving ongoing productivity increases as we deploy higher levels of automation. This strategy will benefit our employees, our shippers and our carriers as we continue to drive efficiency and the aggregation of capacity in a complex market.Our Managed Transportation revenue was $120 million in Q4 decrease of 10% over the prior year. Combination of lower truckload rates and the client’s specific business declines are referred to earlier with the primary drivers of the decrease. We had a very successful fourth quarter in terms of new deal closings, as we closed 15 new accounts with anticipated revenue of $50 million on an annualized basis.Our teams continue to do an outstanding job delivering client satisfaction and showing up in our ability to win in the marketplace. We anticipate stronger growth in 2020 as much of this new business will come online and we expect the truckload rates to stabilize and likely increase in the second half of the year.Turning to Slide 6. We generated $89.7 million in net revenue and our net revenue margin was 16.9%, was down 70 basis points compared to the prior year. Our LTL margins were down modestly at eight basis points year-over-year, while our truckload net revenue margin was down 86 basis points. The margin decline in truckload was caused by pricing declines, outpacing cost declines is our revenue per mile was down 13% and our carrier costs per mile declined 12%. Carrier cost per mile had been relatively flat over the last three quarters.I’d like to now turn it over to Kyle to review additional Q4 financial details and forward outlook.

[Kyle Sauers:]

Thanks, Dave. On Page 7 of the slides, you’ll find a summary of our key operating statement line items. Commission expense was $26.8 million in the fourth quarter of 2019, decreasing 14% year-over-year. Commission expense was 29.9% of net revenue compared to 30.4% for the fourth quarter of last year.Non-GAAP G&A expense was $45.3 million in the fourth quarter, down 1% from the year-ago fourth quarter of 2018. During the fourth quarter as well as the year, we continued to invest in technology and data science teams, but offset those increased costs with lower headcount throughout the rest of the organization, as we continue to find ways to drive efficiencies through technology.Depreciation expense was $6.7 million in the fourth quarter of 2019, up from $6.2 million in the year-ago period. And the increase in depreciation continues to be associated with our investments in new technology development.Cash interest was $1.3 million during the fourth quarter of 2019 compared to $1.5 million a year ago. The decrease is due to the lower amount outstanding on our convertible debt during the quarter.Our non-GAAP effective income tax rate was 27.5% for the fourth quarter of 2019 and rate was a little higher during the quarter due to evaluation reserve taken against an Illinois State Tax Credit.As Doug mentioned, non-GAAP fully diluted EPS was $0.26, decreasing from $0.47 in the fourth quarter of 2018 and the primary differences between our GAAP and non-GAAP fully diluted EPS in the fourth quarter of 2019 are $2.8 million of amortization of intangibles, $1.6 million of non-cash interest expense and $2.4 million of stock comp expense.Slide 8 contains cash flow and balance sheet data. In the fourth quarter of 2019, we had free cash flow of $10.9 million and operating cash flow of $16 million. Our free cash flow for the full-year was $60.6 million. Capital expenditures totaled $5.1 million in the quarter compared to $4.6 million in the prior year and our CapEx for the full year was about $24 million.We ended the quarter with $34.6 million in cash and $287 million in accounts receivable. And at the end of the quarter, we had nothing drawn on our $350 million ABL Facility. We did repurchase 176,000 shares of our common stock during the quarter for $3.5 million or an average of $20.22 and this leaves us with approximately $20 million still available on our repurchase authorization.So now, I’ll walk you through guidance for the first quarter and the full-year 2020, which we’ve highlighted on Slide 9. But I first want to give a couple of updates on the trends we’ve seen for the month of January.Per day revenue is up 1% over 2019, which is a solid increase from the down 9% that we saw during the fourth quarter. Truckload shipments per day are up 7% again, a strong start to the quarter when compared to the 1% growth we saw in the fourth quarter. And net revenue margins are running at about 16.3% compared to the 16.9% we saw on the fourth quarter.So, now for the guidance for Q1 we expect the following

[Doug Waggoner:]

Thanks, Kyle. I would like to conclude our prepared remarks by acknowledging the hard work, dedication and strong execution from all of the folks on the Echo team. They fought through the trough of the freight cycle by continuing to provide the highest level of service to our clients and carriers. This fact was driven home recently when we achieved the highest ever ratings in our annual client satisfaction survey. We also surveyed our carriers. In addition to continue high marks for being the broker of choice and being easy to do business with, we saw an acceleration and the willingness to adopt technology and I think this plays right into our strategy.Our sales and operational people spend their time engaged in four general activities. The first activity is managing relationships. This includes selling and servicing clients and procuring capacity from our carriers. The technology we can deploy with any given partner depends entirely on their capabilities and/or willingness to interact in an automated fashion. In the absence of that desire or capability, we rely on relationships. To the extent that their adoption accelerates our people can spend less time on administrative activities and more time on the relationships that matter, while managing more relationships and more load volume per Echo FTE.The second activity is pricing and booking freight. This means deciding what price to quote a shipper and simultaneously how much we will have to pay the carrier, inherent in this is the task of matching the right carrier’s capacity at the right buy price with the right shippers load at the right sell price. Historically in our industry this was done via seasoned freight brokers with lots of tribal knowledge. Increasingly over the past few years, we have assisted this process with technology and tools that make our people smarter and bring them up to speed faster. The human interaction that combines relationships with negotiation has been important because it allows us to maximize our net revenue margin in all market conditions.It is telling that some so called digital brokers can't seem to find a path to profitability and would even appear to have negative gross margins. In contrast, I would remind you that Echo has been profitable every year since 2006 when our revenues were $33 million. Looking forward, our newest technology and data science will allow us to conduct business in a much more efficient way. This is a slow, deliberate transition of our business model that is made possible by shipper and carrier willingness to adopt technology and will only improve our profitability.The third area of activity is administrative and includes rate tracking and payment processing. This is an area where we've already made a lot of progress through automation and we are seeing lower costs as a result. We expect continued progress in this area in 2020.Finally, our fourth activity is managing exceptions. As you can imagine, when you move thousands of shipments every day using other people's trucks, things can go wrong. And if you want to provide the highest level of service to your customers, you have to step in and fix them. I believe that our technology roadmap will continue to bring efficiencies to exception management.So in summary, I feel very good about the path that echo is on. We weathered a tough market in 2019 and we're well prepared for what I believe will be a better part of the freight cycle in the second half of 2020. We'd never let up on our strategy, which includes enhancing our technology and I believe that we will be very well positioned to make a lot of hay when the sun shines later this year.And with that, I'd like to open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question is from Jason Seidl with Cowen. Please go ahead. Your line is open.

[Jason Seidl:]

Thank you, operator, and afternoon gentlemen. Appreciate you guys taking the time. You spent a lot of time explaining automation on this call, and it's much appreciated. Can you give us a sense as we look out how we should view automation? Is this going to be pure productivity? Is this going to be pure productivity? Is this going to be productivity followed by some headcount reductions with increased scalability because you're relying more on automation? Give us a sense of how we should look at that as we move through the years here?

[Dave Menzel:]

Jason I’ll take a stab at that. I think that as we continue to automate many of the processes that Doug kind of highlighted and things that I highlighted, we would anticipate to be able to grow the volume of the business faster than we grow the headcount of the business, simply put. Today, we've got close to 1,600 or so sales and operational people in our business. We would anticipate to grow significantly without too meaningful headcount addition in those areas. So we're not going to quantify kind of short and medium term. I think over the next several years, you'll see our ability to drive improved productivity primarily as measured by volume in the business relative to headcount over time.

[Jason Seidl:]

So we're really looking at increased productivity, which will likely lead to lower costs but increased scalability?

[Dave Menzel:]

Correct.

[Jason Seidl:]

Okay, perfect. And Doug, I appreciate you talking about the cyclical nature of the business because there are many who will argue that some of the past, let's call it, 12 months have been more structural in nature for the brokerage business. Have you really seen any impact from the newer electronic entrants in the marketplace?

[Doug Waggoner:]

We see them in the marketplace, but I don't know that we see anything that we would classify as impacting margins or volumes. I think we attribute everything to the cycle.

[Jason Seidl:]

Okay, that's what I figured. And last one and I'll turn it over to somebody else here. You've mentioned it about the increased insurance rate for some of the truckers. We've heard some skyrocketing numbers up 30%, 40% from some carriers. How is that affecting the brokerage industry? And what should we expect from insurance cost for the brokers going forward?

[Kyle Sauers:]

Yes Jason this is Kyle. We hear the same thing from carriers directly and then from the insurance brokers and insurance carriers that we talk to about the asset-based carriers and those increases. I can't speak for the brokerage community at large necessarily, but I don't think it's impacted the brokerage community at all like it has the asset-based carriers, and it hasn't impacted us in that way. Our insurance costs have not increased in any significant way over the few years.

[Jason Seidl:]

Do you think there is a danger that the brokerage industry might be next for the insurance companies?

[Kyle Sauers:]

I think they assess the industry, and I think they're – it's not a different set of insurance providers that are covering carriers and brokers necessarily. So I think they have a very good grasp of the industry and the risks and thinking about where they need to get their premium and cover their costs and their losses. So I don't know that I can suggest what their plans are for the future, but we haven't heard that from them to date.

[Jason Seidl:]

Okay. Gentlemen I appreciate the time as always.

[Kyle Sauers:]

Thank you, Jason.

[Operator:]

Thank you. Our next question comes from Allison Landry with Credit Suisse. Please go ahead.

[Allison Landry:]

Thanks. Good afternoon. So just wanted to ask another question about the digital freight marketplace. So one or some of your competitors have talked about the level of scale that is required for the digital freight marketplace as being substantially higher relative to traditional brokerage. So just curious to get your thoughts on that and how you think this may impact industry net revenue margins over time.

[Kyle Sauers:]

Well, I think that it does take scale to be a successful broker. Whether you're digital or not, you've got to have depth in a lot of different lanes. You've got to have the right carriers that have backhauls in those lanes. In some cases, you have to have relationships with those carriers because they don't have technology capabilities. In other cases, you can connect with them electronically. So I think scale is important regardless of what your go-to-market strategy is.To the extent that technology brings more velocity and more transparency, I suppose that it can, over time, reduce gross margin somewhat. But I think you've heard a lot of the theme of our call is that we believe, over time, we're going to become more efficient for those same reasons.

[Allison Landry:]

Right, okay. And then could you just tell us what you expect to spend on technology in 2020 in terms of both OpEx and CapEx? And if you could remind us what those figures are for 2019?

[Kyle Sauers:]

Sure. So for 2019, we were around $23 million, and we expect CapEx in 2020 to be in the $25 million to $27 million range.

[Allison Landry:]

Okay. Is that all for technology? Or can you sort of parse that out what that specific piece is?

[Kyle Sauers:]

Sure. Sorry, Allison. So I think that is primarily going to be technology. If you look at 2019 and the expectations for 2020, we really don't have expenses or CapEx that we need to make for building out facilities and we're a technology and people business, we have the facilities and the infrastructure to continue to build the business and have plenty of space for our people. So really all the CapEx is related to is technology. Probably in the neighborhood of 70% to 75% is in internally developed software or other software that comes from our partner providers. And the rest of it is primarily related to infrastructure and hardware refresh.

[Allison Landry:]

Okay. And then just one quick one. What do you think drove the upswing in volumes in late December and the acceleration in January? I think you may be mentioned there was something to do with the comparisons, but I'm just hoping you could – excuse me – could clarify that.

[Doug Waggoner:]

Yes. We didn't talk a lot about the comparables, but that is a factor. The comparables start to get a little bit easier, especially on the spot side. So I think that what we've got is on the one hand, continued success on the contract side of the business, and we're seeing kind of double-digit growth on that front. And we're starting to run into a little bit of a better and easier comp, call it, on the spot side, so the growth rates are improving there. It's not as much of a deterrent against the overall growth rate of the business. And I think that's kind of – we haven't seen a fall off in any way of volumes, but I'd say that's probably the bigger impact on the year-over-year growth rates.

[Allison Landry:]

Okay, that’s helpful. Thank you guys.

[Dave Menzel:]

Thank you, Allison.

[Operator:]

Thank you. Our next question is from Bascome Majors with Susquehanna. Please go ahead.

[Bascome Majors:]

Yes, thanks for taking my question. Can we talk a little bit about the typical seasonality in your net revenue margins? I know 4Q to 1Q is usually a bit of lift on a weaker market and cheaper cost capacity. Clearly, the way this market has turned out has pressured that relationship for you and your competitors that have already reported here. But the January number you put out there, trying to kind of walk that for, does it feel like things have started to stabilize after some of the volatility you saw in December, in January and within the first quarter, does the end of the quarter tend to be tighter than the beginning?

[Dave Menzel:]

Yes. Okay. Good. Couple thoughts I have on that question. Good question. Typically, all things being equal, you do, I think you’ve kind of described it correctly. You tend to see a little margin expansion in January, February, and the little contraction, call it March through the summer months, as volume picks up, new contracts go live, and you can get a little contraction due to the contract business going live with new rates, things of that nature. Now, the thing that I think is, makes this a really hard, hard question and hard to model sometimes is, what’s going to be more powerful, the typical seasonality of the business or the actual longer term freight cycle?I think in this case, what I think, we’ve said and what we see is that the freight cycle might outweigh some of those normal patterns of seasonality and that we’ve got compressed margins in January resulting from being in a balanced market for maybe a bit longer period of time. Last three quarters really, rates haven’t moved a whole lot, either on the bill rate side or the cost side.So, you’re in a balanced market a little bit. We are having success on the contract side of the business. So, we’ve got some of that business coming online as well. So that’s putting some pressure on margins. And we would – the spot market hasn’t moved a lot. So, I think what we see is that as we move through, look, we always caveat to say, we’re not forecasting margins going forward because we’ve learned we can’t do it very well, so we’re not going to try to do it. But the – if you were saying like, what we see happening here is probably continued contraction or certainly a little lower than last year’s level and then we’re in more of a, hey, let’s see what happens when the summer hits? What happens to the spot market? What happens to capacity? What rates are just in, which ones aren’t? So, I think that, I think in the near term we expect a little bit of compression and then we’ll see what happens as the year rolls on.

[Kyle Sauers:]

Bascome to add to that, a little bit of context for you. You remember back in October, we were on our last call; we talked about running kind of in the low 17%. We ended up at 16.9%, kind of indicates that margins were a little bit lower in November, December than they were earlier in October. And that same pressure kind of continued into January as you’ve seen. But our margins just to break it down even a little bit further, they were a little better in the back half of January so far than they were in the first half. Probably a reflection of what you would’ve seen in the spot rates in the industry where spot rates were a little bit higher early January. So, that put a little bit of a pressure on the contract rate. So, just hope that adds a little bit of context as well.

[Bascome Majors:]

So, as we’re diagnosing kind of what’s putting incremental pressure on that particular number, it sounds like it’s much more about the cost of capacity than it is incremental rebidding of contractual pricing at this point, is that fair?

[Dave Menzel:]

Yes, I mean, I think it’s a little bit of both. I mean to be – I’m not sure how I’d weight those two, but…

[Doug Waggoner:]

Yes, I think the third piece of it, Bascome to throw in that Dave mentioned is, your mix of spot versus contract and when does the spot market come alive a little bit more? What causes that to happen or other participants – the third-party participants in the industry? When do they turn down a little more freight than they have been, which puts things into the spot market.

[Bascome Majors:]

Thank you for your time.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from Bruce Chen with Stifel. Please go ahead. Bruce, please check your mute button.

[Bruce Chen:]

Yes, thank you, operator and gents, good evening and I appreciate the time as always. Another quick one on the digital marketplace. As we understand it, some of the load boards are starting to get involved in that digital marketplace or digital booking, which maybe makes sense and that seems like a somewhat of a natural extension of what they’ve been doing. But trying to understand competitively, what the impact of that is, how do you think about that with regard to your business? Is that a threat for you or is that an opportunity relative to maybe some of the new entrance and how do you weigh that?

[Dave Menzel:]

Yes, I guess, I don’t want to cast too wide of a net, because there could be specific companies that have different strategies that are more long-term. But I think in terms of the digital load boards that have a wider scale adoption, I see that more as an opportunity for us. I mean, there’s many brokers, carriers, and participants in the market utilizing those load boards for a variety of reasons to access freight. In general, while they may provide the ability to book freight through a partner, through an asset provider or a broker online, they’re not in essence likely to try to move that freight, try to recover that freight, if there’s a problem and try to perform all the freight management services that go with it, which is a huge, huge part of what we do is. So, I think it just, it’s kind of an opportunity to extend reach over time and we see it that way more so than we see it as a threat.

[Bruce Chen:]

Okay, great. Appreciate it.

[Operator:]

Thank you. Our next question is from Stephanie Benjamin with SunTrust Robinson Humphrey. Please go ahead.

[Stephanie Benjamin:]

Hi, thank you so much for letting me ask a question.

[Kyle Sauers:]

Hi, Stephanie.

[Stephanie Benjamin:]

I just wanted to touch a little bit on the G&A guidance for the year. I think at the midpoint you’re looking at a nice kind of high single-digit increase year-over-year. So, maybe if you could just speak to drivers of that increase, and as we kind of look forward and kind of start to layer in some of these in technology investments over the last couple of years when we should start to see any kind of leverage or improvements to margin the overall model – overall, especially with the SG&A increases this year?

[Kyle Sauers:]

Sure, Stephanie. So that really the two big drivers of the increase in G&A costs this year, it’s the continued investments in technology and data science. And then the year-over-year headwinds from incentive comp costs compared to a lower year in 2019. So to just give you a little more detail on the tech and the data science, we invested approximately $43 million in technology in 2019 and some of which gets capitalized as we referenced on an earlier question. But we’re increasing that number to around $15 million this year to continue to drive the initiatives we’ve talked about earlier on the call.Most of the rest of the increase in costs is related to the year-over-year headwinds and incentive comp. We have some other kind of typical annual increases, but those are really largely offset by the productivity improvements throughout the business that we referenced. And that’s, even as we intend to grow volumes pretty nicely this year. In terms of how that plays out overtime, I think we’ve commented some already, we see a lot of opportunities for efficiencies throughout the business in the sales side, the operation side and the back office side. So, we would expect to be able to get leverage over those efficiencies and drive increased profitability throughout a cycle. We certainly saw that in a better 2018, a little tougher in 2019, but as we go through a cycle, we expect to get incrementally better.

[Stephanie Benjamin:]

Got it. That’s it for me. Thank you so much.

[Kyle Sauers:]

Thanks, Stephanie.

[Operator:]

Thank you. Our next question comes from Jack Atkins with Stephens. Please go ahead.

[Wade Schaller:]

Hey, afternoon guys. This is Wade on for Jack. Thanks for taking the questions.

[Doug Waggoner:]

Hi, Wade.

[Dave Menzel:]

Hi, Wade.

[Wade Schaller:]

Just was sort of wondering to start, if you could talk about what you’re seeing on the M&A front and sort of give us an idea on what you’re looking for out of an ideal target. I know C.H. just acquired Prime and Hub acquired CaseStack. So with something in the contract logistics or value-add consolidation space makes sense for you guys down the road?

[Doug Waggoner:]

Yes, I think we liked the consolidation business. There’s a lot of synergies with our core competencies. So, I think those are interesting opportunities. There’s still opportunities for us to look at brokerage businesses that can go onto our technology platform and integrate quickly and easily. And then as we want to go outside the guardrails a little bit, there’s opportunities to diversify in warehousing, freight-forwarding other things that are close to what we do, but not exactly what we do.

[Wade Schaller:]

Okay. That makes sense. And then just one quick follow-up, sort of as we look out to the second half of 2020, it seems to be setting up for a pretty different market than where we are today. So, just wondering how you guys are approaching bid season and what your appetite is to start to take on additional contract freight at fixed rates at this point in the cycle?

[Dave Menzel:]

Yes, I mean, I think that – I think your points valid in terms of there’s a good chance that the market will change as the year goes on. As we’ve gone through the year though, we’ve recognized that the value of scale and density and we want to continue to grow our relationships with shippers. So, we’re approaching the bid season. I think with intelligent mindset of trying to, as we always do in essence understand the characteristics of our client’s freight and look at our network and try to find good fits and strategic fits. That makes sense. And we’ve been able to do that with a kind of a service first mentality.And what as I mentioned in the prepared remarks, you’ve seen our contract business grow double digits for the second half of the year. Our mix is 57% contract today, so it is a growing part of our business. Yes, it’s possible that we’ll see some margin pressure if the market changes dramatically in the back half of 2020. But at the same time, typically that pressure gets offset with an influx of spot business. That helps us kind of manage that cycle. It’s part of the attractiveness of the business model that we do have is that there’s a few counterbalancing effects and as you might expect, our LTL and Managed Trans business, which is significant base that we have is typically not affected by that same dynamic.

[Wade Schaller:]

All right. That’s it for me. Thanks guys.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jeff Kauffman with Loop Capital Markets.

[Jeff Kauffman:]

Hey, thank you very much. Hello everybody. So, I just – a lot of questions have been asked already. I just wanted to ask some details here. You spoke Kyle about the non-GAAP tax rate, because your forecast is non-GAAP. Do you know how that translates into a GAAP tax rate? Should I take that at face value?

[Kyle Sauers:]

Yes, I don’t have that in front of me, the GAAP tax rate. I can get that to you.

[Jeff Kauffman:]

All right. I'll round back with you. So on the G&A side, you mentioned that it’s a smaller increase now, but a larger increase on a percent of net revenue basis as we go through the year. Is that a function of anything going on within G&A or is that a function more of the declining net revenue margin that you were speaking about?

[Kyle Sauers:]

Jeff, I missed the first part of your question. Was it in relation to the G&A?

[Jeff Kauffman:]

If I look at the G&A and take the midpoint on the cost increase, and I’m going to throw the stock compensation in there, because I want to look at it on a GAAP basis. It seems like it’s increasing on a percent of net revenue basis as we go through the year. Is there anything happening in G&A causing that or is that more a function as you were talking about the net revenue margins coming down just because of the market?

[Kyle Sauers:]

And you’re referring to 2020 or you referring to 2019?

[Jeff Kauffman:]

2020.

[Kyle Sauers:]

Okay. So, I think hard for me to compare it to the net revenue numbers, because we haven’t guided to a net revenue number or a gross margin percentage. Maybe it’s that you are extrapolating out the current margin. I think, we talked about the continued investments that we plan to make in technology and data science that’s driving those increases. So, I think that’s important. I think if, when we think about how the market might play out for the year, as we’ve talked about, the different things shifting and the pressures on the cost of capacity that are likely to come. I think, we’re expecting that net revenue would grow throughout the year from where we would be in Q1 or where we were in Q4. But I’m not sure how to answer without having some sort of guidance out there for net revenue as a percentage.

[Jeff Kauffman:]

Okay. Well, it couldn’t hurt to ask, right? And thank you for clarifying about the use of the credit line for the convertible notes on the interest guidance that was very helpful. Outside of some of the January trends you spoke about and getting back to, I think Jason’s question about cyclical versus secular, how does the cycle feel relative to say the last couple many cycles that we’ve had to endure, the last one being just a few years ago. It feels like the correction in spot and contractual revenues happen faster this cycle. Maybe I’m wrong, but it sounds to me like you’re feeling the process is healing and you’re seeing some cyclical green shoots.

[Doug Waggoner:]

Yes, I think that’s right. This is Doug. I – if I had to find a comparable time frame, I would probably look at the last part of 2016, in the first part of 2017. I think the conditions feel pretty similar to that.

[Dave Menzel:]

And the only thing I would add is, and it’s obvious was 2018 was such a dramatic increase and with such a hot call it or tight capacity and…

[Doug Waggoner:]

Catalyst…

[Dave Menzel:]

Catalyst prices rose really quickly and pretty quickly we found ourselves in a world of excess capacity. And so I feel like that the change was a little more dramatic in this cycle, and so as it runs its course, it starts to look and feel a little bit more normal.

[Jeff Kauffman:]

Okay. Well that's all my questions. Thank you.

[Doug Waggoner:]

Thank you, Jeff.

[Operator:]

Thank you. Our next question comes from Kevin Steinke with Barrington Research. Please go ahead.

[Kevin Steinke:]

Hey, good afternoon. Just wanted to ask about your sales force hiring plans for 2020, in light of, it sounds like an expectation that the market is going to improve as the year progresses?

[Doug Waggoner:]

Yes, Kevin, we – our hiring plans will look a lot like 2019, which means that internally we're kind of estimating that our sales headcount remains pretty static throughout the year. Obviously, it may be up or down depending on attrition and the timing to bring in some new classes and things of that nature. So we'll still, we're still going to proceed and bring in significant amount of new folks, but not to the point where we would anticipate growing the headcount by say 100 or 125 people like we've foreshadowed in the past.

[Kevin Steinke:]

Okay, that's helpful. And then the second question for me; in terms of the revenue guidance for 2020, the range top to bottom implies 3% to 12% growth. Maybe just touch on the factors that you're thinking about when you think about the bottom-end to the top-end of that range. I mean, is this kind of maybe allow the market plays out? That's going to be the difference in where you could potentially end up in that range?

[Doug Waggoner:]

Yes, it’s a good question, Kevin. I think it's a combination of, like you say how the market plays out. What sort of volumes are available in the spot market and then what happens with rates. So, I think as you say that full year guidance, points you to about a 7.5% growth at the midpoint, which clearly indicates our expectation for acceleration and growth after the first quarter. Since our first quarter guidance is 2% at the midpoint, the year-over-year comps get quite a bit easier on the revenue per load metric and truck low starting in Q2 and so kind of all in basis, we could depending on where rates go from here in the spot market, we can see – actually see an increase in revenue per load sometime in the second quarter. And the midpoint of the range, we're thinking about a kind of mid- to high-single-digit growth in shipments for the full year.

[Kevin Steinke:]

Okay. That's very helpful. Thanks for taking the questions.

[Doug Waggoner:]

Thanks Kevin.

[Operator:]

Thank you. And our last question comes from David Campbell with Thompson, Davis & Company. Please go ahead.

[David Campbell:]

Yes. Hi, thanks for taking my question. I doubt that there's any impact, but just wanted to make sure, what about the virus in China, whether you've seen any impact on you manufacturing shipments or whether you expect any to be – have any impact in the first quarter?

[Doug Waggoner:]

No. David, we really haven't seen anything. Obviously there's all the chatter in the news and seen a lot of the research reports put out by the analysts, but we haven't heard from our shippers or our carriers anything that's impacting them or this impacting us.

[David Campbell:]

Yes. I mean, is that or maybe your manufacturing base of your business? Is that a significant part of your business or is it that primarily another business?

[Doug Waggoner:]

We do have a lot of manufacturing and industrial type products that we haul, but to the extent that we're predominantly a North American transportation company. Even though some of it might originate in the Pacific rim, by the time we get our hands on it, it's sitting in a U.S. warehouse somewhere. So we don't really have a lot of exposure to the import market directly, it tends to be more indirectly and like I said, we haven't heard from any of our customers to ship those types of products that their inventories are being impacted.

[David Campbell:]

Again, Kyle, you said the first quarter gross – first quarter margin was 16.3%. Is that what you said for the first quarter?

[Kyle Sauers:]

Just to clarify that, that's what the margin – the gross margin is through January. We didn't give a specific expectation for the full quarter though.

[David Campbell:]

You didn't estimate that, okay?

[Kyle Sauers:]

Correct. Yes, we didn't – just a reminder, we don't give the guidance on the gross margin, but it is running around 16.3% for January.

[David Campbell:]

All right. Okay. Okay. Thank you very much. That's all my questions.

[Kyle Sauers:]

Thanks, David.

[Doug Waggoner:]

Thanks, David.

[Operator:]

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Doug Waggoner, Chairman and CEO for his final remarks.

[Doug Waggoner:]

Thanks for joining us today. I'm pleased with how we're executing in a tough market and as we indicated in this call we anticipate things will get better sometime in 2020 and we will have done our work and be prepared to make the most of it. So thanks for joining us and we'll talk to you next quarter.

[Operator:]

And with that, ladies and gentlemen we thank you for participating in today's conference. You may now disconnect.