Echo Global Logistics, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session, and our instructions will be given at that time. As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Kyle Sauers, Chief Financial Officer. Sir, you may begin.

[Kyle Sauers:]

Thank you. And thank you for joining us today to discuss our first quarter 2018 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 the 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.

[Douglas R. Waggoner:]

Thanks and good afternoon, everyone. We're very pleased with our results for the first quarter, and it looks like it will be an exciting year in the freight markets. Our results this quarter and all the external data point to a continued robust freight environment for the foreseeable future. A lot of people ask us how this environment compares to what we saw in 2014. Here's what we see is different. Demand appears to be stronger and more sustained, supply has been impacted by regulations that have taken real capacity out of the market, and the ability to add capacity is significantly handicapped by the shortage of drivers. Even more important is how Echo has evolved over the last four years. We've added substantial freight and brokerage talent to our leadership ranks, our sales and operations teams are much more experienced and our volume and truckload has increased four times what it was at the end of 2013, significantly improving our access to capacity and buying options. Lastly, our technology has improved dramatically. The ability of our platform to capture capacity in the marketplace and dynamically match it with shipper needs makes us a highly valuable asset to both carriers and shippers. We are tightly integrated with shippers and carriers when appropriate and continue to focus on visibility and automation. All of this improves service levels and allows us to capture larger share of both shipper volumes and carrier capacity. Now let me take you through some of the highlights from our first quarter beginning on slide 3. Revenue grew by 39% during the quarter, which is our highest organic growth rate since 2010. Gross margin was flat in our Transactional Brokerage business on a year-over-year basis with the decline in overall margin entirely attributable to the rising cost of fuel and the growth of our Managed Transportation business. Adjusted EBITDA increased by 120% from the prior year period to $22 million. Non-GAAP EPS improved by 346% to $0.40 per share, and I'm excited and proud to point out that our revenue, adjusted EBITDA and non-GAAP EPS are all new Echo records. We talked a lot about our technology and capabilities, but this sort of success doesn't happen without fantastic employees and strong relationships with shippers and carriers. As usual, the Echo employees worked very hard to provide great service and I want to congratulate and thank all of you on a wonderful quarter. I now want to turn the call over to Dave who will discuss our Q1 results in more detail.

[David B. Menzel:]

Thanks, Doug. Slide 4 highlights revenue by mode. In Q1, we delivered strong growth across all of our major modes of transportation. On our last earnings call on February, we talked about the ELD mandate tightening capacity in a January that was unseasonably strong. In February, capacity loosened a bit as demand slowed due to normal seasonality. However, this loosening so to speak was relative to the January strength. In February and throughout March truckload rates remained approximately 30% higher than the same period in the prior year. So in the big picture, the overall market remains incredibly tight. As Doug mentioned, our teams are doing a fantastic job working with both clients and carriers to utilize our network and capacity strategically to improve execution in light of the current environment. Truckload was impacted most by tightened capacity. In the first quarter we delivered record truckload revenue for the fourth straight quarter up 43% over the prior year to $400 million. This is the result of an increase in both rates and volume as our revenue per shipment was up 33% and our truckload volume increased by 7%. As I mentioned, truckload rates dropped after their peak in January. Conversely, our truckload volume increased on a per day basis as the quarter progressed. Truckload shipments per day were up just over 4% in January and over 9% in March. Our LTL business was also a strong performer. We achieved record LTL revenue for the fourth straight quarter totaling $147 million and up 29% from the prior year. This increase was driven by a 14% increase in volume and a 13% increase in revenue per shipment. The increase in revenue per shipment was due to a combination of heavier weight per shipment, increased line haul rates and higher fuel costs. The majority of our volume growth was driven by our Managed Transportation business. Intermodal revenue is included in other revenue and we saw an uptick in this mode as revenue grew by 23% in the quarter totaling $19 million. This increase was the result of a 9% increase in volume and a 13% increase in rates. Our volume gains are being driven by over-the-road conversions due to a tightened truck market. Slide 5 highlights our revenue by customer type. And Transactional revenue, accounts for 79% of our total revenue, increased by 36% over the prior year totaling a record $453 million in Q1. Total sales count was 1,684 at the end of the quarter, which was up by 41 people over prior year and 43 people sequentially. We had a strong hiring quarter, but also enjoyed our second consecutive quarter of sales attrition under 30%. The primary driver of our Transactional revenue growth was productivity, as Transactional revenue per client sales rep increased by 36%. Our Managed Transportation business also delivered another great result. Revenue grew 50% compared to last year to a record $124 million. We signed new business with approximately $26 million of annual freight spend. Rising transportation costs driven by tight capacity has impacted our Managed Transportation clients, consistent with the impacts felt by many companies throughout the U.S. Our teams have done a fantastic job working with our clients to mitigate the impact of these rising costs, leveraging data and technology to better manage their supply chain. Our teams are working directly with our customers to highlight best practices to improve execution, which yields tangible benefits to both our shippers and carriers. Slide 6 highlights our net revenue growth of 34%, which was driven by both volume and pricing. Our Transactional margin was flat year-over-year while our Managed Transportation margin was down 258 basis points. This is consistent with the year-over-year declines we discussed over the past few quarters driven by the larger deals driving top line growth. Further, our margin was impacted by an estimated 50 basis points due to the increased price of fuel. We've discussed the impact of changing fuel costs in great detail in the past, so I won't rehash all of that today other than to say that, in general, fuel is a pass-through cost, but the timing and specific tie-in to rates on the buy and sell side varies by mode and by customer type. This may result in short-term lags in synchronizing buy and sell rates as fuel prices fluctuate. Overall, our truckload net revenue margin improved by 40 basis points over the prior year despite the fuel impact. Our truckload buy rates were up 32% year-over-year, inclusive of fuel, and our sell rates were up 33%. This improvement in margin is primarily due to a continuation in the increase in spot business driven by the current market conditions. Our spot market volumes grew to 60% of truckload during the quarter, up from 58% during the fourth quarter. The spot and contract mix within our truckload business naturally ebbs and flows based on market conditions. Larger truckload shippers typically run a bid process to establish rates and a routing guide. The peak season for this process tends to run from about November to March, but may depend based on the needs of the shippers. We saw these bid cycles run a little bit later this year, we believe, in part due to the higher rates that persisted at the end of Q4 and early into Q1. But those processes are now wrapping up, and most of the newly re-priced awards are going into effect. In early April, we experienced a modest uptick in our award business as a percentage of the total, which was to be expected. At the same time, the produce season seems to be off to a late start due to the cold weather. So, to-date, we've not seen the capacity disruption that coincides with this springtime cycle. Our LTL net revenue margin declined by 218 basis points over the prior year due to the large Managed Transportation deals I discussed earlier. Transactional LTL margin was relatively consistent with both prior year and prior quarter. Truckload and intermodal together represented approximately 73% of our total business or about 154 basis points of mix shift. This increase also modestly contributed to overall margin decline. I'd like to now turn it over to Kyle to review the details of our financial performance.

[Kyle Sauers:]

Thanks, Dave. On page 7 of the slide, you'll find a summary of our key operating statement line items. Commission expense was $30.2 million in the first quarter of 2018, increasing 35% year-over-year. Commission expense was 30.2% of net revenue, compared to 30% in the same quarter last year. Non-GAAP G&A expense was $47.8 million in the first quarter of 2018, up 13% from the first quarter of 2017. Depreciation expense was $5.7 million, up from $4.5 million in the year-ago period. Cash interest expense was $1.7 million during the first quarter, which was flat with the year ago. Our non-GAAP effective income tax rate was 24.5% for the first quarter of 2018. As Doug mentioned, non-GAAP fully diluted earnings per share were $0.40, increasing from $0.09 in the first quarter of 2017. And the primary differences between our GAAP and non-GAAP fully diluted EPS in the first quarter of 2018 are $3.2 million of amortization of intangibles from acquisitions, $2.1 million of non-cash interest expense, and $2.5 million of stock compensation expense. Slide 8 contains cash flow and balance sheet data. In the first quarter, we had free cash flow of $10.1 million and operating cash flow of $17.7 million. Capital expenditures totaled $7.6 million in the quarter, which was an increase of $3.6 million over the prior year and is primarily related to internally developed software. We ended the quarter with $32.6 million in cash, $346 million of accounts receivable and nothing drawn down on our $200 million ABL Facility. And we continue to be in full compliance with all of our covenants related to that borrowing facility. We didn't purchase any of our common stock during the quarter and have approximately $30 million remaining on our repurchase authorization. Now, I'll take a moment to walk through our guidance for the second quarter and the remainder of the year. We outperformed our own expectations quite nicely in the first quarter. And based on our continued strong execution in a strong market, we're raising our full-year revenue guidance by $125 million at the midpoint, bringing it to a range of $2.25 billion to $2.4 billion. We're also initiating revenue guidance for the second quarter of $580 million to $620 million, or 23% to 32% top line growth. Our April daily revenue growth has continued to be strong and it's up 34% over the prior year. That growth continues to be spread broadly across both truckload and LTL, as well as Transactional and Managed Transportation. Our gross margin so far in April has been right around 17%. In addition to the impacts of increasing fuel prices and larger MT account wins that David mentioned earlier, it's also quite typical that our Transactional truckload margins are lower in the second quarter and third quarter than they are in the first quarter. With regards to other guidance, we expect the following

[Douglas R. Waggoner:]

Thanks, Kyle. In conclusion, Echo had another great quarter, and as they say, the company is firing on all cylinders. We have strong revenue growth and are demonstrating operating leverage. In fact, our incremental EBITDA margin as a percentage of net revenue was 47%. We've had outstanding growth in truckload and done a good job protecting our margins in a very volatile market. Our LTL revenue grew a double-digit rate for the fourth consecutive quarter. Our Managed Transportation business had remarkable growth of 50% year-over-year. Our hiring is ratcheting up and our turnover is on the decline. Employee morale has never been better. We have a strong and very strategic technology pipeline. And we remain active in our M&A efforts and have a number of potential opportunities that we are reviewing. It's an exciting time to be in at Echo and the market conditions would seem destined to provide a favorable atmosphere for the foreseeable future. Before I sign off, I just want to give a shout-out to all the Echo employees that are listening in today. It's due to your hard work and dedication that we're able to report these types of positive results. And with that, it concludes our prepared remarks. And at this time, we'll open it up for questions.

[Operator:]

Thank you, sir. And our first question will come from the line of Jack Atkins with Stephens. Your line is now open.

[Jack Atkins:]

Hey, guys. Good afternoon and congratulations on a great first quarter.

[Douglas R. Waggoner:]

Thanks, Jack.

[Kyle Sauers:]

Thanks, Jack.

[Jack Atkins:]

Doug, let me start – I guess this question is either for you or Dave, but you've talked about the capacity environment in your opening comments. It definitely sounds like things are still very tight with a robust spot market out there, but you mentioned a later start to produce season than you would normally expect to see. We had full enforcement of ELDs on April 1. So I'm just curious if you could maybe comment on sort of what you're seeing out there from a capacity environment perspective right now, and how are you seeing things maybe evolve a little bit given that we're maybe nine months into the inflection in the cycle from last year? And are you seeing some of your capacity, some of your fleets that you work with maybe adding a truck or two? Just sort of curious what you're seeing out there from a capacity perspective?

[David B. Menzel:]

So, Jack, this is Dave. I'll give my feedback on this, and if Doug wants to add a little color, he will. I think that one of the things that we saw obviously is last year end of Q3, early Q4, things tightened up dramatically, coming up weather and into the ELD December date and pretty significant disruption that caused a large increase in rates. And then, that continued, even escalated in January. And I think that when we were on the call last time in February, we were all kind of speculating whether the April enforcement date that happen to coincide with the typical start in the produce season would cause another wave, call it, of disruption. And what I would say is that we haven't really seen that. That, obviously, pricing has remained high, but relatively steady through March and April. We have not seen, I would say, significant carriers either falling off the map or adding too much capacity. I mean, we're working with smaller carriers primarily, so I wouldn't say that I've seen a lot of those smaller-type carriers adding trucks or adding capacity. I think probably in large part due to the difficulty retaining drivers. And produce started off at a slow start. So, I think that we're still kind of – as we look forward, we would anticipate it remaining tight. It could spike up again when we see more disruption hit the marketplace on the produce side. But to date, we haven't really seen that. And we did not see, I think, from our angle a meaningful impact in terms of the capacity situation when the enforcement date went into effect. Now, it's early, but we haven't seen anything significant on that front.

[Jack Atkins:]

Okay.

[Douglas R. Waggoner:]

And, Jack, I would just add that some of the truck operators that I've spoken with and it's certainly not a big sample size but anecdotally, they are in fact buying some new equipment due to the new tax laws, but it's entirely being used to replace aging equipment and they're not adding capacity from what I hear.

[Jack Atkins:]

Okay. Okay, interesting. Shifting gears for a minute and just sort of – kind of following up on your comments around bid season. I think one of the comments we hear from shippers, occasionally, is that they are looking to shift more of their volume from brokerage or from the spot market into more of an asset-based solution just given the spike up in spot rates that we saw in the second half of last year. I'm just curious so I asked you guys, are you seeing that show up through bid season, or are you actually winning more bids that you would have expected? Just sort of curious on the early results that you're seeing through bid season and if you are seeing any sort of shift away from the brokerage market by shippers just given what we saw there last year?

[Douglas R. Waggoner:]

Well, I might say it a different way, Jack. I don't think people are necessarily steering away from brokers. I think they are trying to steer away from the spot market where they can. And so, in essence, that's caused a lot of them to re-price their routing guides which just shifts some of the freight from spot to awarded and, of course, we participate in those routing guide. So we continue to benefit from that freight, but I'm not aware of any all-out move to take freight away from the brokers.

[Jack Atkins:]

Okay, that makes sense. I guess I would think it'd be difficult to do that even if they wanted to just given how tight the market is. So I just wanted to follow up on that.

[Douglas R. Waggoner:]

Yeah. I would even say to the contrary that we see a lot of opportunities right now because people aren't servicing the freight. Whether that's another broker or an asset provider, in this type of market condition, there are daily occurrences of shippers calling us in a panic to get their freight moved.

[Jack Atkins:]

Okay, great. Last question, I'll turn it over, is on the LTL market; and your LTL results, very, very strong both in terms of volume and price. In terms of the 14% volume growth that you saw in the first quarter, how would you break that down between opportunity just because of how tight the truckload market is of spillover freight versus market share gains for you guys?

[David B. Menzel:]

I would say the majority of that is market share gains primarily through our Managed Transportation business. I mentioned that that was the primary driver of our volume gains, and we've seen some pretty consistent increase in our LTL business as a result of those wins.

[Jack Atkins:]

Okay. That's great. Guys, thanks again and congratulations on a great quarter.

[Douglas R. Waggoner:]

Thanks, Jack.

[David B. Menzel:]

Thank you, Jack.

[Operator:]

Thank you. And our next question will come from the line of Ravi Shanker with Morgan Stanley. Your line is now open.

[Unknown Speaker:]

Hi. This is actually (23

[Kyle Sauers:]

You're asking what our 2017 April growth was over 2016?

[Unknown Speaker:]

Yes, for April through June.

[Kyle Sauers:]

Yeah. I don't have that number with us.

[Unknown Speaker:]

It's all right. I can call offline.

[Kyle Sauers:]

But I can get that for you later. Yeah.

[Unknown Speaker:]

Yes. So just another follow-up question on margin. So you had an impressive net operating margin, but gross margin came lower than we expected and were actually down versus seasonality of flat to slightly up in the first quarter, sequentially. Can you walk us through that and how we should think about margins moving forward?

[David B. Menzel:]

So I think that – you're breaking up a little bit on that question, and I know you asked about margins going forward. As we've said many, many times in the past, we steer away from trying to predict margins going forward because they're impacted by a lot of different conditions. But back to your original question in terms of the margin profile and the modest decline that we had on a year-over-year basis, there were really two big drivers of decline. One was in our Managed Transportation business, over the past nine months, we've won a lot of new business and we've talked about that over the past few quarters. And some of that business has come in at lower net revenue margins, and that has been a big driver in that decline. Secondly, the impact of rising fuel costs was another kind of headwind, so to speak, on gross margins from a year-over-year comparison basis. Despite those facts, our Transactional truckload margins were up 40 basis points in the quarter, driven predominantly by a slight improvement in mix on the spot business. I mentioned that 60% of our business was spot in Q1 compared to 58% in Q4, so just a modest uptick there. And our LTL Transactional margins remained relatively flat. So that's kind of the explanation for Q1 margins. And I think on a go-forward basis, it's going to depend a lot on market conditions and those are difficult to predict.

[Unknown Speaker:]

Got it. Thank you.

[Operator:]

Thank you. And our next question will come from the line of Kevin Steinke with Barrington Research. Your line is now open.

[Kevin Mark Steinke:]

Good afternoon. So you mentioned that the market capacity was particularly strong and tight in January and then loosened up a bit in February. At the same time, though, you talked about your truckload volume growth improving as the quarter moved on. So just trying to get a sense as to why that volume might have improved as you moved throughout the quarter. Do you think that's a function of improving internal execution on your part?

[David B. Menzel:]

Yeah. I would think that there's a couple – it's difficult to break it down, but I think the January numbers were, to some extent, and the spike that we saw was a supply side driven spike, more so than a demand side driven spike. And so, there was more spot business. And I think it was because on the supply side, there was just a tightened capacity. And then, as the quarter progressed, I'd say our own execution and success in the marketplace would be what I would drub the margin or the volume gains for Echo, just ongoing execution, and getting the benefit of our salespeople and leveraging our capacity and being able to pick up new business as the quarter progressed. In some cases, new award business starting to come online, but I don't – I wouldn't say that was a big driver at all in Q1; might have more of an impact in Q2.

[Kevin Mark Steinke:]

Okay. And also you talked about good hiring to start the year; attrition also lower. Any sense as to what's going on there? Is it kind of the strength of the market, attracting people and retaining them or anything you're doing internally to drive those results and your sales force hiring and attrition?

[David B. Menzel:]

I think that on the retention and attrition dynamic, a lot has been happening. Number one, the market conditions are better. It does help a lot and it'd be difficult to say that. But also people having to work hard and deal with more difficult situations, so you know there's some kind of pros and cons to the tough market that we're in. But it's obviously been a good market for Echo overall. But the more important thing I think has been our ability to really fully integrate the Command acquisition to reorganize our sales organization as one team and provide just a better kind of mentoring and teamwork environment for our salespeople. So we feel – Doug mentioned the highlights that morale is very high. We feel very good about the way we've kind of completed the process of the integration through the course of the end of Q4 and into to Q1. And we feel like our teams have got the right kind of organization to help our people be successful. That combined with a stronger market, I think, does fuel the lower attrition rates. And I think from a hiring perspective, the thing we lean on a lot is the culture here at Echo and the environment that we have. And so, we've got a very attractive place for younger people to come in and to make a career, and our recruiting teams and our salespeople are doing a great job working with college graduates and new recruits to bring them into the company.

[Kevin Mark Steinke:]

Okay, great. Lastly here, Kyle, I think last quarter you talked about perhaps Managed Transportation revenue growth perhaps moderating a bit in 2018 relative to last year. Obviously, you started off the year really strong in Managed Transportation revenue growth. Is the expectation that that still might moderate a bit as we move forward, and what would be the resulting impact on gross margin and also the commission expense as a percentage of net revenue?

[Kyle Sauers:]

Kevin, good question. Obviously that, our expectations there are built into that guidance we gave for revenue for the rest of the year and the commission rates. But we do expect that growth rate to be a little lower as we go throughout the year. We had some really nice wins that David referenced, and we talked about in the past that we are starting to cycle through those implementation dates. So I'd expect to see that Managed Transportation top line revenue growth slow down a little bit here in Q2, Q3 and then into Q4, probably a little bit each quarter. We just don't expect to see that great 40% to 50% growth that we've had over the last two quarters for the rest of this year. On the commission side and the margin side, to your point, Managed Transportation typically has a lower gross margin and a little bit lower commission expense. So to the extent – all else being equal, to the extent we're growing our Transactional business faster than Managed Transportation later in the year, that could have a positive impact on margins. Again, hard to predict. As David mentioned, an offset to that or a counter to that would be truckload typically has lower margins than LTL. So, where the growth comes from at a greater pace in the back half of the year between those modes could also impact our margins.

[Kevin Mark Steinke:]

Okay. Great, that's helpful. Thanks for taking the questions.

[Kyle Sauers:]

You bet. And one other follow-up just real quick on the question before about our revenue growth rate in April of 2017 versus 2016, it was around 2% compared to the 34% that we're seeing so far this year.

[Operator:]

Thank you. And our next question will come from the line of David Campbell with Thompson Davis & Company. Your line is now open.

[David Pearce Campbell:]

Hi. Thank you for having such a good quarter. That was an excellent example of how well you're doing with leveraging your employees compared to prior years. And the only thing I'm a little concerned about is, first of all, it doesn't look like you're getting a lot of revenue growth seasonally from the first quarter to the second quarter. Normally, you'd think the seasonality of the business would push you up more than what you're suggesting, I think it's about a $23 million increase. It's about 4% compared to the first quarter. And then finally, I'm having a little trouble with the fourth quarter, again, as the seasonality of the business drops you down to a level of revenues that won't – will be comparable to the increases in your costs. So I'm trying to figure out how you're looking at this situation in the second quarter and the whole year.

[Kyle Sauers:]

Sure, David. So we talked about that 34% growth in April, and I think you're referencing our sequential growth from Q1 to Q2. And so when we think about there's really two things, some of which we've kind of talked about. We had a couple of larger Managed Transportation clients that implemented around this time last year. So in terms of year-over-year growth, we don't see that same benefit from that Managed Transportation revenue in Q2 that we did see in Q1, because we're lapping those. And the second piece is we did start to see truckload rates tick up midway through the second quarter last year. So we just want to be mindful of that as a comparable for the guidance for the second quarter. On the fourth quarter, I think you're kind of – it sounds like you're kind of interpolating the remainder of the full-year guidance and you've got a fourth quarter number there. Fourth quarter of last year will likely be a challenging comparable in terms of truckload rates when you look at it relative to the first half of this year. So we're just making sure that we've got a guidance range that takes into account that we had some pretty elevated spot market rates last year and that rates have moved up pretty significantly already this year.

[David Pearce Campbell:]

Right, right, right, right. So is there – and then on the mergers and acquisition business, it must be more difficult to find companies that are a good fit with you, because everybody should be doing a lot better than they did a year ago given the current environment. And now the environment might change, but if it doesn't, it seems like there'd be fewer companies that are maybe looking to merge with anybody. Is that true or is it not a factor?

[Kyle Sauers:]

I would say that it's true that the current market conditions are helping everybody get more healthy. But I would also tell you that we have opportunities that we're looking at. And of course, some people try to sell when things are good. So yeah, we have no trouble finding things to work on.

[David Pearce Campbell:]

Good. Okay. Well, thank you very much. Again, thanks for having such a good quarter.

[Kyle Sauers:]

All right. Thank you, Dave.

[David B. Menzel:]

Thanks, Dave.

[Operator:]

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

[Alex Johnson:]

Good afternoon. It's Alex Johnson on for Tom.

[Kyle Sauers:]

Hey, Alex.

[Douglas R. Waggoner:]

Hi, Alex.

[Alex Johnson:]

Hi. I have a bit of a – I guess this is a housekeeping item. But I wanted to ask Kyle on the tax rate in the first quarter, the 24.5% and I think the guidance for the remaining quarters of the year was 25.5%. So, Kyle, did you mention what the reason was for a slightly lower tax rate in first quarter and what's the possibility that it might be lower in the rest of the year?

[Kyle Sauers:]

Yeah. So I didn't give any real specifics on that, that small difference between Q1 and the expectation for the remainder of the year. I think certainly, we're expecting it to be around that 25.5% for the remaining three quarters. Certainly there's a possibility it'll come in a little different than that, but that's where we're – we've got it pegged here at this point.

[Alex Johnson:]

Okay. Great. Thank you.

[Operator:]

Thank you. And our next question will come from the line of Matt Young with of Morningstar. Your line is now open.

[Matthew Young:]

Good afternoon, guys. If I could, I just wanted to circle back quickly on the gross margins. It sounds like the truckload Transactional margins were flat year-over-year. What was the fuel impact on those? Would they have been up excluding noise from the surcharges?

[David B. Menzel:]

They would have been – yes, I think that we said that they were up 40 basis points year-over-year on the truckload.

[Kyle Sauers:]

Before the fuel...

[David B. Menzel:]

Yeah. Before the fuel they were up...

[Matthew Young:]

You did.

[David B. Menzel:]

They were up 40 basis points. So they would have been up a little bit more really if you think about the impact of fuel as a complete pass through.

[Matthew Young:]

Okay. That's a good move there. And then I think you may have mentioned it, but how did they look sequentially from the fourth to the first quarter?

[David B. Menzel:]

Kyle gave a little statement that overall margin, he didn't talk about specifically on the truckload side. I would say that they've edged down just a little bit consistent with the remarks that I said that our award business has ticked up slightly going into April. Spot business has ticked obviously- that's as a percentage of total, so the spot business correspondently has ticked down a little bit going into April. And so, that would have a bit of a headwind on the margin on the truckload side.

[Matthew Young:]

Okay, that makes sense. Okay, thanks. And then one quick housekeeping question that you're guiding for $9.6 million in stock comp in 2018. I think it's up slightly from years past, should we consider that a normalized run rate longer term?

[Kyle Sauers:]

Yeah. I think at the moment without us forecasting out in the out-years, I think that's reasonable.

[Matthew Young:]

Great. That's all I had. Thanks.

[Kyle Sauers:]

Thank you.

[David B. Menzel:]

Thanks, Matt.

[Operator:]

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

[Bascome Majors:]

Yeah. Thanks for taking my question here. I was hoping you could take or kind of walk us through how you kind of expect the free cash flow of the business to just directionally move through the year. And you had a considerable rise in the cash from ops year-over-year basis here, but CapEx went up a little bit and free cash flow increases a little more modest. As we look forward sequentially maybe and starting with $10 million in the first quarter, I mean, do we think that goes up, down, kind of steady run rate as we get through 2Q and maybe even into 3Q?

[Kyle Sauers:]

Sure, Bascome. So you're right, the free cash flow was impacted by a little bit higher CapEx. And I mentioned, we expect that CapEx to be lower in the remaining three quarters. I think a key is when we grow sequentially fairly rapidly, which we have in the last couple of quarters. It has an impact on our cash flow. It ties up more working capital. I think you'll recall we pay carriers quite faster than we collect from the shippers. I think if we estimate the impact on our cash flow, our free cash flow from where our Q1 results came in compared to the midpoint of our guidance, that probably impacted our free cash flow by $10 million to $15 million, in that we had a little more tied up in working capital because of our outperformance there. So I think, without giving guidance on that, I'd say a lot of it depends on the pace of the growth and where we come in on the guidance for the rest of the year, but I think something like what you saw in Q1 is not unreasonable to expect in future quarters.

[Bascome Majors:]

Right. Well, I appreciate that color. Thank you.

[Kyle Sauers:]

Thanks.

[Operator:]

Thank you. And we have a follow-up question coming from the line of Jack Atkins with Stephens. Your line is now open.

[Jack Atkins:]

Yeah. Thanks, guys. Thanks for taking the follow-up. So just kind of going back to the volume growth for a minute with the acceleration in March versus what you saw in January to get into that 9% level. I mean, is that kind of the right way to think about the volume growth that's sort of underpinning the revenue guidance as we move through the rest of the year? Or, I guess, how would you guys expect that volume growth number to trend as we move through the next couple of quarters?

[David B. Menzel:]

So I think that we typically don't kind of get that granular, but we did mention we – I can't remember if we mentioned, but our truckload volume growth first few weeks of April was around 9%.

[Jack Atkins:]

Okay.

[David B. Menzel:]

So that trend from March has continued early into April. I think whether that continues or accelerates is definitely going to depend on market conditions going into May and June and the impact of produce and how that factors in relative to the prior year. So where we stand today is at this 9% kind of run rate. Don't see any reason per se that that's going to materially change going forward. But having said that, it will depend a bit on the market.

[Jack Atkins:]

Okay. Got you. And then, Doug, you mentioned in your prepared comments around turnover declining, which makes sense given how strong fundamentals are in your business. Could you kind of give us an update on where turnover stands? And from a productivity perspective, I know it's something we used to talk about quite a bit with Echo, I mean, going back two or three years or four years ago. But could you give us an update on sort of the level of productivity at the sales force today and sort of how you think that can trend as we move forward just given with lower levels of turnover?

[David B. Menzel:]

Yeah, I'll jump in and Doug can kind of add a little color. I think that one of things that we've seen is obviously with the strength of the market and the increasing tenure of our sales organization, we've seen some pretty significant productivity gains over the last several quarters. Obviously, the sales organization is slightly drawn, but not anywhere near the magnitude of the top line of our business. And I think that when we look ahead over the next two to three years, I think that we'll continue to mature as an organization and the results of that is that salespeople will get – have more tenure, and we'll see strong correlation between that additional tenure and their ability to drive productivity and results. Now that will ebb and flow as the market strengthens or weakens, so any particular period it's going to have at times probably a more heavy impact from the market. But I think that in terms of sales force productivity, we're nowhere near where we think we can be over the next three to five years. So we're very optimistic about the way that we're bringing in people, training them, using our tools and strengths in the market to help them be successful.

[Jack Atkins:]

Okay, great. Thanks again for the time.

[Operator:]

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

[Brian P. Ossenbeck:]

Hey, guys. Good afternoon. Thanks for taking the question.

[Kyle Sauers:]

Hey, Brian.

[Brian P. Ossenbeck:]

So just kind of the general question on sourcing capacity. Have you found as the market tightens and as the ELD impact rolls in here, if you had to do anything differently to continue to source capacity and get a big rolodex of carriers? But are you trying to do anything different on (45

[David B. Menzel:]

So we constantly try to do things differently and attract carriers into the network. And we've done a lot of work on having our teams focused on bringing in new carriers to the network. We actually did, in fact, grow the number of carriers in our network, and the adds that we had in the quarter. We actually increased our adds of utilized carriers by 45% in the quarter that's new carriers used. So, we've got definitely dedicated activities to attracting carriers into the network and using our technology to match up freight that meets their needs. It's a big ongoing initiative at the company. And given market conditions, definitely kind of redoubling our efforts to focus on that. And when we think about our sales force hiring, a good portion of that is going toward our carrier sales organization that's focused exclusively on developing those relationships. In terms of kind of payment plans and some of the other things that we do to attract carriers to the network and make Echo to be a great partner to work with, we do have attractive terms. So, we pay our carriers very quickly in our – and we continue to do that. So, we haven't made any real changes in our business practices, I'll say, to bring folks into the network, but we certainly leverage our capital availability and our technology to be easy to work with the carriers and continue to focus on ways to improve those things.

[Brian P. Ossenbeck:]

Okay. Thanks, Dave. The 45%, what was that in absolute number?

[David B. Menzel:]

We have 1,600 new hub (46

[Brian P. Ossenbeck:]

Okay. Thank you. And then, just on the shipper side, there are some talk of going to – them going to asset-based solution. But if you've – I wanted to see if you'd seen any of them try to be – the so-called shipper of choice, work with you more constructively on finding what they need if capacity does continue to tighten up. Have you seen anything from the shipper behavior that you've worked with, either on a spot basis or with some of these bids that they progressed?

[Douglas R. Waggoner:]

Yeah. Brian, I actually had some meetings with large shippers that are getting ready to execute their next RFP. And I would say that they're very mindful of the fact that it's a tight market. They might have got stung a little bit in recent quarters and they know that rates are going up and they're trying to be a good partner and work in a win-win environment, so that we don't get hurt and they don't get hurt. And so, I think it's actually a very constructive atmosphere right now and the reality of the market has sunken in and people are trying to pull together and make it work for them.

[Brian P. Ossenbeck:]

Okay, great. Well, that was it for me. Thanks a lot for the time.

[Douglas R. Waggoner:]

Thank you.

[Kyle Sauers:]

Thanks, Brian.

[Operator:]

Thank you. There are no further questions in the queue at this time. So now, I hand the conference back over to Mr. Doug Waggoner, Chairman and Chief Executive Officer, for some closing comments or remarks.

[Douglas R. Waggoner:]

Thank you. I would just like to end the call by thanking everybody for attending this quarter, and we look forward to seeing you next quarter, and/or at a conference or a meeting before that time. Thanks again.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may all disconnect. Everybody, have a wonderful day.