Echo Global Logistics, Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Third Quarter 2018 Conference 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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Chief Financial Officer, Kyle Sauers. Sir, you may begin.

[Kyle Sauers:]

Thank you, and thank you for joining us today to discuss our third 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. I'm once again very pleased with the results of the quarter driven by strong execution from our people and the utilization of our proprietary technology suite. We again broke all of our previous records in terms of gross revenue, net revenue, EBITDA and earnings per share. As you know, the freight market has been exceptionally tight over the last 12 months. That condition has benefited our results, as July was one of our biggest months we've seen in terms of both demand and constrained capacity. However, subsequent to July, the market has softened a bit and spot prices have been moving downward. Having said that, truckload rates remain very high by historic standards and many of the key drivers that impacts truckload capacity, namely the driver shortage and new regulations, are likely to persist. During our call today, we'll walk you through what we see for the remainder of 2018, but first let's take a closer look at our results for the third quarter. Revenue grew by 27% during the quarter. This marks the seven straight quarters of sequential organic revenue growth, something that we last accomplished six years ago when we were one quarter of our current size. Net revenue margin improved both year-over-year and sequentially for the entire business with margins improving in both our Transactional and truckload business, despite the headwinds from higher fuel costs. Adjusted EBITDA increased by 68% from the prior year period to $28.2 million. We grew net revenue faster than operating costs, once again driving strong operating margin expansion. Non-GAAP EPS improved by 105% to $0.55 per share. Our investments in technology and automation have continued to pay off as we have improved the productivity of our sales force, allowing us to grow both our top-line and net revenue at a faster pace than our operating expenses. Our employees continue to work very hard on behalf of our shippers and carriers, providing tremendous value, which shows up in the results. Congratulations to everyone here at Echo for your excellent contributions to this success. I now want to turn the call over to Dave, who will discuss our Q3 results in more detail.

[David B. Menzel:]

Thanks, Doug. I also want to thank everyone at Echo, as you've continued to do a great job, serving our clients and carriers and our Q3 results are a direct reflection of your execution. Service has been outstanding and that has enabled us to – that has enabled our business volumes to remain healthy despite the slight shifting in market conditions that has occurred late in the quarter. Slide 4 highlights our revenue by mode. Our truckload business continues to perform well. In Q3, total revenue was $446 million, an increase by 28% over the prior year. Truckload volume grew 5% in Q3 and our revenue per shipment was up by 22% year-over-year. Revenue per shipment was up 30% in July and 10% in September. The decline in rate growth is due to the comps getting tougher and spot rates escalated dramatically in September 2017. Our contract business mix increased to 47% of total truckload volume, up from the 42% level discussed last quarter. This mix shift is natural given the softening that occurred throughout the quarter. We also had strong results in our LTL business. Total revenue was $166 million, representing a 23% increase over the prior year. Increases in both rates and volume drove this increase. Our LTL shipment volume was up 9% in Q3 and revenue per shipment was up 12%. Average weight per LTL shipment rose 7% year-over-year. So that was a contributing factor to the rate increase. Turning to slide 5, our Transactional revenue of $510 million grew 27% due to the strong performance in all of our modes of transportation. Sales head count increased by 5%, which translates to 82 additional sales people over this time a year ago. These additions were the result of the execution of our hiring plans and lower attrition. We believe the lower turnover rate is a direct result of improvements in our hiring, career development and operational support plans implemented in the beginning of the year. Sales productivity has also improved as Transactional revenue per sales rep increased a healthy 24% in Q3. Our Managed Transportation revenue was $134 million in Q3, reflecting an increase of 24% over the prior year. This increase was driven by new business and higher rates. We signed new accounts in Q3 that are estimated to deliver about $18 million in annual revenue when fully implemented. Turning to slide 6, our net revenue margin increased by 23 basis points to 17.2% in Q3. This increase was driven by an expansion in truckload margin of 92 basis points, offset by a decline in LTL margin of 142 basis points. Truckload margin expansion was driven primarily by an improvement in our contract margin, which was up year-over-year and sequentially. This improvement has to be expected in periods of price decline. And in Q3, it was offset by a very modest decline in spot margins. The truckload billing rate per shipment was up 21% in Q3 and our truckload carrier cost per shipment increased 20% when compared to the prior year. The decline in LTL net revenue margin was driven by increased line haul and fuel costs. I'd like to now turn it over to Kyle to review the operating cost and profitability.

[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 $33.2 million in the third quarter of 2018, increasing 25% year-over-year. Commission expense was 29.8% of net revenue, which is down 69 basis points compared to the third quarter of last year. Non-GAAP G&A expense was $49.9 million in the third quarter of 2018, up 15% from the third quarter of 2017. Depreciation expense was $6 million in the third quarter of 2018, up from $4.6 million in the year ago period. Cash interest expense was $1.6 million during the third quarter of 2018 compared to $1.7 million in the year ago period. Our non-GAAP effective income tax rate was 25.2% for the third quarter of 2018. As Doug mentioned, non-GAAP fully diluted EPS was $0.55, increasing from $0.27 in the third quarter last year. The primary differences between our GAAP and non-GAAP fully diluted EPS in the third quarter of 2018 are $3.3 million of amortization of intangibles from acquisitions, $2.2 million of non-cash interest expense, $2.4 million of stock comp expense and $300,000 of deal costs related to the FMP acquisition that we announced in July. Slide 8 contains selected cash flow and balance sheet data. In the third quarter of 2018, we had free cash flow of $22.1 million and operating cash flow of $28.3 million. Capital expenditures totaled $6.3 million in the quarter compared to $5.2 million in the prior year. We ended the quarter with $60.5 million in cash and $385 million of accounts receivable. We also filed an 8-K today, announcing the amendment of our ABL facility that increased the size of the borrowing facility to $350 million from the previous $200 million facility. We also extended the maturity of this facility to five years from now and also improved some of the economics of the facility itself. This new facility, along with our current cash balance and continued free cash flow, gives us the ability to repay our $230 million convertible debt, which comes due in May of 2020, to continue to pursue our M&A strategy and to execute on our repurchase authorization as appropriate. Regarding our buyback authorization, we did not repurchase any of our common stock during the quarter and we have approximately $30 million remaining on our repurchase authorization as of the end of the quarter. Now, I'll take a moment to walk through our guidance for the fourth quarter and the remainder of the year. In the third quarter, we came in near the high end of our revenue expectations while improving margins and keeping operating costs in check. As we talked about on this call, while we've seen the market softened slightly subsequent to July, demand is still good and the market's very tight relative to historical standards. We're raising our full year guidance by $20 million at the mid-point, bringing it to a range of $2.425 billion to $2.465 billion. Our revenue guidance for the fourth quarter is $570 million to $610 million or 4% to 11% top-line growth. Our October daily revenue growth has been 8%, which is a combination of growth in volume and revenue per load in both truckload and LTL. Our gross margin through the first three weeks of October has improved slightly from the third quarter. With regards to other guidance, we expect the following; commission expense to be around 30.5% for the fourth quarter; G&A costs to be between $46.5 million and $49.5 million for the fourth quarter and $194 million to $197 million for the full year, the mid-point of which is down $1.5 million from our previous guidance. Depreciation is estimated to be about $24 million for the full year and $6.6 million in Q4. Cash interest should be approximately $6.7 million for the full year and $1.8 million for Q4. And we expect our quarterly tax rate to be approximately 25% for the fourth quarter. Also, our share count should be approximately 28.4 million shares in the fourth quarter. Excluded from our non-GAAP calculations in the full year and fourth quarter, we should have amortization of approximately $13 million and $3.3 million, non-cash interest of about $8.5 million and $2.2 million, and stock compensation expense of about $9.4 million and $2.3 million. So with that, I'd like to now turn it back over to Doug.

[Douglas R. Waggoner:]

Thanks, Kyle. To wrap it up, this is another strong quarter for Echo and we're very pleased with the results. We delivered just over $111 million in net revenue, up by $24.5 million from the prior year. We delivered $28.2 million in adjusted EBITDA, up by over $11 million from the prior year. This represents 47% incremental EBITDA and is strong evidence of our ability to not only grow the top line but also improve the bottom line over time. As we continue to invest in automating our services, we have recognized the growing importance of driving efficient digital execution across everything we do, but to support that execution with a team of dedicated people who understand transportation. Our value proposition today is a combination of three critical elements. First is our access to capacity across multiple modes of transportation. Our network density and relationships with carriers is fundamental to our ability to deliver great service at a competitive price. Second, is our people. We have a tenured and motivated workforce. Our people are organized and dedicated teams around our clients and our carriers. They know their business and how to maximize capacity for shippers and freight for carriers. They are engaged and expert at handling exceptions. They go the extra mile every day to deliver unparalleled service. And third is our technology. Our technology is, in fact, a digital freight marketplace. We are connected to thousands of clients and carriers. We exchange data regarding capacity, rates, shipment status and settlement documents. All of this is done with varying levels of manual intervention and we continue to automate and digitize everything we can. At the same time, we have skilled people interpreting the data and taking action when needed. Of our over 800,000 shipments processed during the quarter, the vast majority were tendered to us electronically. We received tracking updates via automated interaction points with carriers, received relevant documents related to invoicing and proof of delivery with minimal human intervention. And all of this information is assessable to our clients online. At the same time, there's more we can do. We continue to invest in our client portal EchoShip and our carrier portal and mobile platform EchoDrive. We expect to see greater adoption over the next 12 months of both of these platforms as both shippers and carriers will want to improve points of automation, access pricing and have access to increased shipment visibility. We also continue to work on our proprietary platform to improve processes and back office efficiencies, as well as to increase the application and integration of our data science and analytics. At the end of the day, it's the technology that is tying together our thousands of clients, carriers and employees to execute thousands of shipments per day with a very high level of service. That concludes our prepared remarks. And at this time, we'll open it up for questions.

[Operator:]

Thank you. And our first question comes from Jack Atkins from Stephens, Inc. Your line is now open.

[Jack Atkins:]

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

[Douglas R. Waggoner:]

Hi, Jack. Thanks.

[Jack Atkins:]

So, Doug or Dave, I guess this first one's for you. I think, Doug, your comments in the opening statement were fairly interesting around maybe seeing a little bit of market softening over the last couple of months, I guess, certainly since July. Could you maybe expand on that for a minute in terms of what do you think is driving that? Is that from demand? Is that from maybe supply coming into the market? And how do you see the next six months or so playing out as we move through peak season? Any sort of read on how peak season is trending so far, I think, would be pretty helpful as well.

[David B. Menzel:]

Hey, Jack. This is Dave. I'll give this one a shot and if Doug wants to add a little color to it, he certainly will, but a couple of points there, Jack. I think that there's a couple of things that we've noticed. Number one was that June and July were just a pretty steep peak in terms of demand, rates, capacity constraints, et cetera. And so, on the one hand, it feels like we've had a little softening, a little softening on the pricing side that's occurred subsequent to those peaks. But at the same time, the pricing remains relatively, if not, as high as anything that we've seen on a historic level. So there's a bit of a softening that I think is just relative to where we were in June and July. That's the first thing. And then, I think the second piece of the puzzle is because we had such a large – a big demand bump, a big pricing bump that happened last year around the time of the hurricanes and really the end of August, but really kicked into gear into September, that also shows up in a lot of numbers because the year-over-year increases are now getting pegged against – in September that is, against tougher comps or higher pricing type environment. So I think that on the one hand, there's been a bit of softness from that perspective, but if we look at the volumes per day in August and September, they continue to be relatively strong. We saw a nice per day increase in September. It's hard to tell that the peak season has changed a little bit, if there were some acceleration that happened in June and July, if we've got something more to come here due to tariffs, et cetera. But hopefully that gives you a little more color on what we're seeing in the marketplace.

[Jack Atkins:]

David, it does and I appreciate that. And I guess kind of thinking forward here over the next couple of quarters, there's obviously a lot of concern in the market around sort of what the future holds for not just the freight cycle but, I guess, the broader macro cycle as well. And I would just be curious to get your thoughts on a couple of things here. First, I mean, Doug, you mentioned in your prepared remarks that you think that this underlying strength can persist for some time to come. I guess, could you maybe expand on sort of what do you think is driving that, or I guess, what gives you the confidence behind that? And then, I've got a follow up question about how you think the model performs if the cycle were to maybe slowdown some?

[Douglas R. Waggoner:]

Yeah. I'll start with that and maybe let David or Kyle jump in. I mean, first of all, the shippers that we talk to seem to feel pretty bullish on their business. So we don't get any sense that demand is changing. The economic indicators seem relatively strong. And on the supply side, the larger carriers that we talk to, despite all the chatter about Class A truck orders, do not seem to be adding capacity. They're either adding to their dedicated fleet operations or they're replacing aging equipment. What's unknown is whether the smaller operators are adding one or two trucks here and there. And if enough of them do that, that could add up to some real capacity. So we don't really have a handle on that at this point. But – so, supply, I think, still has an artificial limit to it based on the driver shortage, and demand, as far as we can see, the economy is still strong other than some of this noise introduced by the trade tariffs and whatnot. We don't really have a read whether this is just a temporary glitch or a start of a trend.

[Jack Atkins:]

Okay, got you. And then just kind of following up on that and, Kyle, to bring you into the conversation as well, I would just be curious to get the thoughts that you guys might have in terms of what you all are doing to sort of position Echo to maybe seek better than market growth, certainly if we were to see a turn in the cycle. If things were to deteriorate similar to what we saw in 2016, I guess, how do you guys think or how are you positioning the company to sort of take share and outperform during the next Great Recession? I know 2016 was challenging because of the integration of Command, but would just be curious to kind of get your sense for how you're preparing the company for a more challenging freight backdrop.

[David B. Menzel:]

Yeah. I'll jump in on that one a little bit, Jack. There is a couple of things that I think are really important. One is our continued focus on excellent service, which positions us in great shape with shippers, enables us to take market share, enables us to expand share of wallet with our current customers. And so, throughout the last 24 months, if you will, we've been very, very focused on delivering that kind of service. And we think that that's one fundamental key way that we're going to be able to continue to grow. We continue to invest in both technology and people. We're adding sales head count. We're improving productivity. We're automating different pieces of our puzzle. So we think that as the market changes, we'll be able to continue to drive improvements in productivity and effectiveness of all of our people. And the third thing is that our model's diversified. I mean, we've got a multimodal business that touches a lot of different parts. And so, we've got, obviously, in our brokerage or Transactional business, both truckload and LTL, but we've also got a growing Managed Transportation business. So I think that all of those elements considered well position us to take advantage of whatever market conditions exist. Now, having said that, the market is a driver and it may affect volumes and margins, and we've been through 10 years of those cycles and they're pretty well documented. And so, we stay focused on the long-term and build the business around long-term success and understand that we've got to manage through the different cycles that the economy might go through.

[Jack Atkins:]

Okay, great. Dave, Doug, Kyle, thanks again for the time.

[Douglas R. Waggoner:]

Thanks, Jack.

[Operator:]

Thank you. And our next question comes from Jason Seidl from Cowen. Your line is now open.

[Jason Seidl:]

Thank you, operator. Hey, gentlemen, a couple of quick ones. When you were going over some of the numbers, you mentioned revenue per shipment and how it trended, up 30% in July and then up 10% in September. I believe you said that that was partially due to just a tougher year-over-year comps. Do you have so far what it's up in October?

[David B. Menzel:]

I do. It's up roughly 4% on the truckload side in October.

[Jason Seidl:]

Okay. 4% in truckload. All right.

[David B. Menzel:]

Yeah, and pretty flat really sequentially August, September, October. No material change I'd say from that perspective. It's more about the comps than it is about changes in revenue per shipment in the current – the last three months.

[Jason Seidl:]

And I know with the softness of your contracts now a little bit more percentage of business. But how should we think about how your gross margin should be trending, if we still see softness in spot? Should we expect that sequentially to continue to expand from where it is now or is this about the right level to think about gross margins would appear?

[David B. Menzel:]

Yeah. I think we'll go back in our history here is, we'd hesitate to give too much projections forward on gross margins. There's just so many moving parts that we get ourselves in trouble if we try to predict that going forward. So I'm just going to – I would say that one of the elements of the business model is that there are different pieces of the business that are all going to work together. As prices change or costs change in certain parts of our business, we might get short-term expansion in different – in other areas. And so those can tend to offset each other, but I just don't want to get too specific on trying to read forward where margins would be. They did slightly, very modestly, kind of tick up sequentially in October, but not enough to project forward too far.

[Jason Seidl:]

Okay. My next one, you mentioned the weight per shipment is up 7% on the LTL side. That seems like a fairly large amount. Could you remind us what it was up in 2Q? And then, why do you think this is the case? Do you think this is just sort of spillover type truckload business?

[David B. Menzel:]

That's a good question. I mean, I didn't catch a part of it. There was a little bit of difficulty hearing you on some of that question. I would say that our – what we've seen is that our average weight per shipment has just kind of over the last five or six quarters just moved up a little bit each quarter. So I think that LTL carriers are focused on their yield, the capacity is very tight. And so, to the extent that shippers can consolidate a little bit more and increase the weight of shipment, it's more attractive freight to the shippers, so we try to help in that regard. But again, it's just been kind of a modest march forward I'd say over the last five or six quarters in terms of weight per shipment.

[Jason Seidl:]

And guys, hopefully, you can hear me. Sticking to the – on the LTL side, if there is a labor action from one of the carriers, which they seem to be having some disputes with their union, would this drive more freight to third-party such as yourselves?

[David B. Menzel:]

I couldn't – I wouldn't – I don't know quite enough about the specific situation, but it doesn't feel like that would be a key driver, but I'm not sure which carrier you're referring to. And so I don't know that that would drive necessarily freight to a 3PL versus whatever other – in the broader scheme of the market, maybe to other carriers that there were service issues, but I'm not going to comment on that.

[Jason Seidl:]

Okay. Fair enough. Gentlemen, thank you for your time as always.

[Douglas R. Waggoner:]

Thank you.

[David B. Menzel:]

Thank you.

[Operator:]

Thank you. And our next question comes from Allison Landry from Credit Suisse. Your line is now open. Allison M. Landry - Credit Suisse Securities (USA) LLC Hi. Good afternoon. I just wanted to ask about the M&A landscape just in light of the fact that valuations have come in a bit. Is there any increased activity that you guys are seeing or does the state of the market make things potentially more attractive?

[Douglas R. Waggoner:]

Well, I think that the prices have been fairly elevated over the last several quarters and there's also been a lot of activity. A lot of people – a lot of sellers, I think, are taking advantage of good market conditions and good valuations. So we've seen a lot of the larger deals, you get financial buyers involved, tend to pay a little bit higher multiples. The smaller deals, we just completed one in July. We continue to look at them and have a pipeline. So I think, if anything, valuations have been elevated. And as a buyer, you have to be cognizant of that, especially if there's a possibility that the market's turning. You don't really want to buy at the peak of the market. So we think that we're a thoughtful and conservative buyer and we look at deals and try to figure out the right valuation for them. Allison M. Landry - Credit Suisse Securities (USA) LLC Okay. So in terms of one of your last comments there, being careful and watching to see what's happening with the market, should we expect at least in the short-term perhaps you guys are active on the buyback front and maybe the deals get pushed out a little bit until the market maybe settles?

[Douglas R. Waggoner:]

No, I wouldn't read into it. I think that we're going to always evaluate the best use of our capital and whether that's buying our stock or buying businesses. And we continue to look at both and we do have an active M&A pipeline, and I think that over the coming quarters, we'll get some things done. Allison M. Landry - Credit Suisse Securities (USA) LLC Okay. And then, in terms of your comments earlier about the digitization of the freight markets, do you think at any point this will require a step up in capital for technology?

[Douglas R. Waggoner:]

We think that if you look at our trend, we've had a gentle upward slope to that investment and we continue to focus on that. We've added head count this year in IT. We've got plenty of infrastructure in place. So we think that the capital investment in IT will increase on a gradual basis. Allison M. Landry - Credit Suisse Securities (USA) LLC Okay. That's very helpful. Thank you.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

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

[Thomas Wadewitz:]

Yeah. Good afternoon. I wanted to ask a bit about how you think your model would respond if the kind of softening or loosening in the spot market continued in 2019. I think we have a lot of data on C.H. Robinson to kind of see how they do historical cycles, but they're a little more 50/50. And I think at least you typically have been less levered to contract. So is that the type of thing where freights go down and you have maybe pressure on how much money you're making in spot? Can you offset that with contract or is that an environment where it's may be tough to grow earnings? Just some kind of broader thoughts on the cycle in your model.

[David B. Menzel:]

Yeah. Tom, one of the key metrics we gave you is that in the current quarter, actually, our contract mix was up a little bit. It was 47%. And as you've seen, we've been growing volume pretty steadily over the last year. And in some cases, that's adding new contract clients or taking a little more share within some of that contract business. So, yeah, we're a little closer to 50/50 probably than – well, we are closer to it. We are three points away, I should say. So, our model does adjust a little bit and there are natural ebbs and flows. I mean, I do think that if the spot market dries up and the markets are a little bit more in balance, it would be kind of a natural evolution as our contract mix would change a little bit. And I think our model would respond quite favorably in those conditions. But by the same token, when the capacity constraints really tighten up, we've got a great execution model on the spot side. So we'll see some natural ebbs and flows in that mix of business, given changes in market conditions. But we're flexible, we don't have a lot of fixed cost, and so that's part of the beauty of the model.

[Thomas Wadewitz:]

So would you expect to keep raising that mix of contract? Is that something that you could take up beyond 50%, 55%, 60%, or do you kind of get to 50% and you want to keep it there?

[David B. Menzel:]

I would say it this way is that that could happen, but we don't consciously, and we can't consciously control the mix. We don't go into it to say we've got to be at a certain level because the market conditions play such a big part in that and the demand for the different services play a big part in that. So there's always going to be a combination of those two. If we tried to paint a target, so to speak, for what that mix would look like in 2019, we'd likely be off on that target. So we continue to focus on growing in the right way to leverage our network. We'd love to do more contract business, but we've got to be smart and leverage our network in the right way to expand. And that's what we do every day with customers. And then, when spot market opportunities arise, we want to have the flexibility and the speed to react to those.

[Douglas R. Waggoner:]

I think there's one more factor to think about, too, and that is when we were a smaller broker and predominantly LTL, it's hard to be competitive on the contract business. And so, the spot business that we have tends to be with smaller shippers that don't even run a routing guide. As we get bigger and as you get to scale, it's easier to become more competitive in the routing guides and get awarded more contractual business. So I think you've seen, as we've grown and as we integrated Command and doubled the size of our truckload brokerage, we've naturally grown our contractual share of our business.

[David B. Menzel:]

I'll add one more point to what Doug said, which is just to highlight something we've talked about in prior quarters, which I think is important, is that our spot business is a lot of small to mid-sized Transactional customers. So a lot of times when you're looking at contract and spot rates and you think about larger companies and how much is actually go into the spot market, that's not necessarily reflective of our total Transactional business. A lot of that business, as Doug just highlighted, is coming from small to mid-sized customers that may not even run a routing guide.

[Thomas Wadewitz:]

Okay. Yeah, that's great. Just one further one and I'll hand it off to someone else. Doug, you talked a fair bit about technology. I know that's very important to the brokerage business. What are the kind of one or two things that you're looking to achieve or that are the most important as you continue investing in technology? Is it productivity and less labor intensity? Is it something that kind differentiates you in how you communicate with shippers and the information that you provide to them? Or what do you think the kind of goals or outcomes from the technology that are most important as you look forward to next year?

[Douglas R. Waggoner:]

Well, I think it's three things. One is better service to our clients and better information and real-time visibility and tracking that's becoming increasingly important. Secondly is to optimize our margins and eke out as many basis points of margin as we can either through buying better or selling at the correct price and being market competitive. And thirdly is the productivity of our people. If we can go from X loads per day per rep to 3X, it's got huge ramifications not only on our G&A cost, but it gives us increasing capacity to sell more business.

[Thomas Wadewitz:]

Okay, great.

[Douglas R. Waggoner:]

And then, I guess, I said three points, there's four points. The final one is, as I said in my prepared remarks, the application and the integration of our data science. We have invested a lot in AI and algorithms and it's one thing to do them in the laboratory, but then you've got to embed them in your technology so your employees can use them and be guided by them. And so that's another factor that's important to our technology.

[Thomas Wadewitz:]

Yeah, great. That's very clear. That's helpful. Thank you.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

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

[Bascome Majors:]

Yeah. Good evening. I know you don't want to guide the net revenue margin, but can you just clarify, I believe you said it was up sequentially so far this quarter. And how that compares to your normal October to 3Q seasonality?

[Douglas R. Waggoner:]

Yeah. Bascome, so that is what we said in the prepared remarks. So, through the first three weeks of October, which is obviously that doesn't tell the whole story for the quarter, but they have improved a little bit from where we were in the third quarter at 17.2%. It's not unusual in the market and how the market is playing out and the way rates are shifting has an impact on what happens with our margins, back to why we don't give guidance there necessarily. But it's not unusual to see improvement from Q3 to Q4 in the overall margin profile of our business. And oftentimes, there's not a dramatic shift throughout the fourth quarter in our margins. But again, that's three weeks of data. So we're pleased with the direction that it's heading at the moment.

[Bascome Majors:]

Okay. And taking it back a step, we're not that far removed from you guys having kind of your peak year at least this cycle in that number in the mid-2018 to 2019 range just three or four years ago. I know you've said there are some structural reasons why that may not be replicable. Can you just kind of walk us through the bridge to the kind of marketplace that got you to your prior peak and what maybe better or worse today with respect to gross margins?

[Douglas R. Waggoner:]

Well, maybe I'll start by just kind of the framework that impacts the margins by the mix of some of our business. So, as a general rule, our Transactional brokerage business has higher margin profile than our Managed Transportation business, which is also more highly automated. And then, our LTL brokerage business, I mean LTL margins are typically higher than our truckload margins. So as there's a shift in each of those businesses from one to the other, that'll impact those margins. I'm not sure that I can quantify a bridge from a particular quarter or particular year back to where we are without getting into quite a bit of detail.

[David B. Menzel:]

Yeah. I think if you – just a color. If you go back – I guess if you go back to 2016 or so when margins were – I think they were around 18%, I don't have all these numbers quite at my fingertips right this second, but you had a situation where I think we had a prolonged reduction in pricing. So, as prices were going down continually, our margins kind of just tended to expand. And so I think that if you're in a situation where pricing is kind of constantly going down with the carriers, there's a little lag sometimes in the adjustments, so you get these slight uptick in the margins. And so I don't know that anything has necessarily changed in terms of the environment. Obviously, we've been in a 12-month cycle of prices increasing, but it's been different than prior cycles because there's been a lot of very tight capacity in the spot market business. So I think that the margin performance, if you will, over the last 12 months has been – it's obviously been very favorable. And I think that's part of the reason. But I think to get in an environment where you've got margins kind of constantly going up, and to that level, you'd probably see a more prolonged slow kind of price degradation.

[Douglas R. Waggoner:]

One other thing I would add to that, Bascome, that I think is helpful. When you went from 2014 to 2015 and into early 2016, there was a pretty dramatic drop in fuel and that has a result of optically improving our margins. So even in a situation where the gross profit dollars per load on a given load may have been exactly the same, our margins would have looked like they were improving because you were pulling revenue out of the top line with fuel costs going down. We've actually had the opposite situation happening in recent quarters and we didn't highlight it on this call, but we have kind of an estimated headwind of 60 basis points or 70 basis points in this quarter from the effect of fuel, which we were able to offset through execution and technology to a large extent. So that's another factor that impacts that margin percentage pretty significantly when fuel rates change quickly.

[Bascome Majors:]

Thanks, guys. I appreciate the detail there.

[Douglas R. Waggoner:]

Thanks, Bascome.

[Operator:]

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

[Jizong Bruce Chan:]

Yes. Good evening, gents. Just want to clarify a point that you made in the prepared remarks I think you talked about EchoPortal and EchoDrive and the fact that you're looking for greater adoption of those tools over the next 12 months. And I'm sort of wondering what's the current penetration now of those platforms within the overall business. I don't know if that's something that you measure in terms of percentage of total transactions or how you would benchmark that versus year end?

[David B. Menzel:]

Yeah. I'll give you a little color on that, Bruce. On the EchoShip, which is primarily our LTL platform today, 40% or so of our business is getting executed online, whether it's through EchoShip or EchoTrak. EchoShip's kind of the next-generation of EchoTrak and we've got it engineered to go farther. So pretty significant online transaction capability on the LTL side. Of course, obviously, on the Managed Trans side we use some of the same tools, but most of the business is all automated there. And then, in terms of EchoDrive, right now, the primary – we've got – most of our relationship carriers are utilizing it, but a lot of the sourcing activity that we do today is still based on the relationships that we have and utilizing our internal system to run a marketplace. So I wouldn't say that on EchoDrive, we're utilizing it in that way, but I think that would increase over the next year or two as the market changes a little bit. So right now, we've got most of our relationship carriers up and running. They utilize the systems and we'll continue to roll out new functionality for the truckload carriers over time.

[Jizong Bruce Chan:]

Okay, great. That color is definitely helpful. And then, you also talked about some of your proprietary platform rollout and back office processing, or back office processes, I should say. If you had to kind of peg an inning that you're in right now in terms of that rollout, where would you say you are?

[Douglas R. Waggoner:]

It's a never ending process, Bruce. The thing about technology is your appetite is always bigger than your grocery bill. So the more we build, the more ideas we get, the more excited our people get. We have requests from customers. Of course, we look at the competitive landscape to see what the features are that are interesting and competitive. And so it's really just a continuous process.

[Jizong Bruce Chan:]

Okay, great. And then, one final question here. C.H. regularly talks about routing guide depth in terms of trying to get a handle on how tight the market is and given your build out and kind of that Managed Transportation side of the business. Have you seen any material changes in terms of routing guide depth and how kind of deep or shallow we are in regard to that metric?

[David B. Menzel:]

No, we wouldn't – I wouldn't say that we've seen a lot of it. I think anecdotally, things are – as the markets softened a bit, rates have come down a little bit. Certainly that it's not going to deep down the routing guide today as it would have been three months ago. That's for sure. Our Managed Transportation business is more of small to mid-sized companies. So it's kind of quite a mix of LTL and truckload within that part of our business and a small subset of that's running our routing guides.

[Jizong Bruce Chan:]

Okay. All right. Thanks. I appreciate the time.

[David B. Menzel:]

Yeah.

[Douglas R. Waggoner:]

Thanks, Bruce.

[Operator:]

Thank you. And our next question comes from David Campbell from Thompson Davis & Company. Your line is now open.

[David Pearce Campbell:]

Yeah. Hi, everybody. Thank you for taking my question. Most of my questions have been answered, but, Kyle, I do want to focus on your comments, I think, unless I heard you wrong. You said that the G&A in the fourth quarter would be in the range of, I think, $46 million to $50 million – $46 million to $49 million, which would be less than the third quarter. So I was wondering is that because you're planning to operate the company with fewer employees or something else going on to reduce that number.

[Kyle Sauers:]

Yeah. Dave, thanks. So the range that we talked about was $46.5 million to $49.5 million. So, $48 million at the midpoint, which is slightly down from the third quarter sequentially. I think one thing to point out there is that Q3 for us is generally a bigger quarter than Q4 historically, and given our guidance this year as well, that'll be the case. So that can impact incentive compensation within the quarter or sequentially from Q3 to Q4. So that'd be one of the key (47

[David Pearce Campbell:]

So say it's $48 million in the fourth quarter, that level is sustainable with adjusting for higher volumes, of course, but that's nothing – there's nothing non-recurring in there in the expense.

[Kyle Sauers:]

No, nothing that I would note. There's obviously always some non-recurring costs, but nothing to point out necessarily. In terms of sustaining that forward, we're not giving 2019 guidance on this call. And I think as you probably remember, we oftentimes will see a step up in the first quarter in our G&A costs because that's when we go through our annual merit review process, have new rates for our insurance programs, for our employees and all that. So I wouldn't want to necessarily comment on sequentially going forward into Q1, but nothing notable to point out on any recurring costs or pickups or anything in Q4.

[David Pearce Campbell:]

Okay. Thank you very much.

[Kyle Sauers:]

Thank you.

[Douglas R. Waggoner:]

Thanks, David.

[Operator:]

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

[Brian P. Ossenbeck:]

Yeah. Thanks. Good evening. Just wanted to go back, Kyle, to the discussion on the credit side with the convertible on the financing. Just looking at the amendment that was filed today, it looks like you can expand that by a bit like you said, but the rates are still floating a number of different benchmarks. So just curious to see what the strategy would be with refinancing it, if you would put it under this structure or if you look to do something which is more fixed in rate? Or how would you think about moving that forward from what we see here being expanded today with the credit facility to – if that's the final home or if there's something else you have in mind?

[Kyle Sauers:]

Yeah. And Brian, I just want to make sure I'm getting your question correctly. You're talking about – you're referring to the convert in the strategy there relative to this new ABL facility that has a longer term and a bigger size. Is that correct?

[Brian P. Ossenbeck:]

Correct.

[Kyle Sauers:]

Okay, great. Yes. So I think I don't want to forecast necessarily the exact plan. I think we want to remain flexible and continue to assess the market and what makes the most sense for us. What this does do is gives us great flexibility to be able to have a facility in place that would allow us to borrow enough to take care of that obligation in May of 2020. The previous ABL had a maturity date that would come due before the convert. So it didn't give us as much flexibility. But I think you're right that there are a lot of different options and different ways that we can approach taking out that convert, but I wouldn't tell you that we've indicated our exact plans there yet.

[Brian P. Ossenbeck:]

Okay, great. Thanks for clarifying that. And then just one, Dave, I guess, for you, maybe if you can just touch on the trends in Managed Transportation. I think you've highlighted a few things throughout the call. But just talk about the business, the demand, margin profile, what type of customers, what types of freight that you're seeing in that business and how you think it's positioned into the end of the year?

[David B. Menzel:]

Sure. I think that we've had – thanks for the question, I mean, tremendous success doing two things in our Managed Transportation business, which is sticking with our bread and butter and adding kind of what I'll call small to mid-sized customers quarter-after-quarter where our offering is fantastic fit for what they need, which is multimodal. It's combination LTL, intermodal, truckload, utilizing our TMS to integrate with their systems and providing kind of seamless connectivity with the carriers. And we would expect to continue to be able to penetrate and grow that. And at the same time, over the last couple of years, we've been talking about kind of going upmarket and adding capabilities to help us manage larger shippers. We've seen a lot of success with that over the past couple of years. That's a little slower sales cycle, obviously. And so, I think we're going to see a continuation of those trends. We feel really good about the positioning. The business mix is a little tilted toward LTLs within our Managed Transportation offering, but we continue to execute on the truckload side as well. So the outlook looks very positive in that regard.

[Brian P. Ossenbeck:]

Okay, great. How much of the business is with small shippers right now and have you been able to onboard any bigger accounts recently or is that really a longer sales cycle like you mentioned?

[David B. Menzel:]

It's a longer sales cycle, but I mean we've definitely – last year, we added $100 million in new business, and I think this year, we're at about $75 million in new business. So we've been definitely increasing the average size of the shippers that we've been adding and have had success with some larger companies as well as smaller companies. So I wouldn't want to be overly specific in terms of the size of each, but I'd say that on average the deal size has gone up a bit. And, we're having good success across both segments, but, like, in terms of much larger deals, you are correct, longer sales cycles, and so they can sometimes come and go.

[Douglas R. Waggoner:]

I would just add that these deals are typically three-year contracts and the renewal rate and the revenue retention is over 95%.

[Brian P. Ossenbeck:]

Right. Okay. And is there anything you need to do on the platform for a larger account on this type of business? Is what you have scalable? It sounds like it's highly automated. I guess is there anything that those types of accounts or shippers are wanting to see from Echo before you might be able to sign up more of them or is that not a problem that the offering breadth and depth. Is that where it needs to be for the larger accounts?

[David B. Menzel:]

Yeah. I think there's always small pieces of things we'd like to add that help in specific situations, but the offering is very solid in terms of going upmarket. We've got some good large customers, with just very, very high degree of automation between their core ERP systems and our transportation management system. So we're very capable with the functionality that we have going upmarket. And at the same time, like in all parts of a business that's got a heavy technology focus, we continue to have good ideas or come up, again, find customers that have certain unique needs that we can make improvements on. So that's an ongoing process, but I'd say, in terms of overall functionality, we're in very good shape.

[Brian P. Ossenbeck:]

All right. Thanks a lot for the time. Appreciate it.

[David B. Menzel:]

Yeah. Thank you.

[Douglas R. Waggoner:]

Thanks, Brian.

[Operator:]

Thank you. Our next question comes from Kevin Steinke from Barrington Research. Your line is now open.

[Kevin Mark Steinke:]

Afternoon. Just following up on the discussion on Managed Transportation there. I recall that part of the story with Command was that you were seeing leads from former Command sales people to maybe convert some of their clients to a Managed Transportation offering. So just wondering if that's still maybe part of the pipeline or part of the opportunity you're seeing in Managed Transportation.

[David B. Menzel:]

I'd say that that's been one of the drivers that have enabled us to grow as rapidly as we have over the past couple of years. And I mentioned the $100 million plus that we closed last year and on a pace to be at or close to that this year, which is well above the pace we were at in 2015 and prior to the Command acquisition. So I think that that's been a big part of that and that's been all very good and continuing. As we talked about earlier this year, we integrated the entire sales organization. So to be honest, we're not even really measuring that piece of the puzzle in that way any longer. So it'd be difficult for us to kind of try to peel that back and look at it in that way since we really go to market as one company.

[Kevin Mark Steinke:]

Okay. Yeah. Makes sense. Just lastly, 5% truckload shipment volume growth in the third quarter. It sounds like you're continuing to trend at that kind of mid-single-digit rate here thus far in the fourth quarter. So is that rate of truckload shipment volume growth kind of a reasonable expectation in this sort of market that you're in right now?

[David B. Menzel:]

Yeah. I think it probably is given the comps that we're facing. Because, as you recall, last September, things just spiked up quite a bit and our business grew both from a volume and a rate perspective healthily in the fourth quarter. And so the comps are tougher. And so, we would – basically, we're trending in this kind of low single-digit number right now on the truckload side, but longer-term, we would expect markets to ebb and flow and change as the environment changes.

[Kevin Mark Steinke:]

Okay, great. Thank you.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question from Matt Young from Morningstar. Your line is now open.

[Matthew Young:]

Good afternoon, guys. Hey, Dave, I think you mentioned it, but what was the increase in the sell rates versus buy rates on truckload business in the quarter year-over-year?

[David B. Menzel:]

21% and 20%.

[Matthew Young:]

21% and 20%, okay. And that includes fuel, right?

[David B. Menzel:]

It does.

[Matthew Young:]

Okay. And then, you'd mentioned the 60 basis point to 70 basis point headwind on gross margins. I'm assuming that's total, not just truckload?

[Kyle Sauers:]

Yeah, that's across the whole organization, Matt.

[Matthew Young:]

Okay, great. And then, kind of one quick bigger picture question. I know we've talked about it a bunch, but with some of the sequential softening in spot rates and perhaps capacity, do you see maybe an increased risk to contract or awarded pricing going forward, maybe where it signals the shippers they can push back a little bit? Or in reality, are we still in a sufficiently tight market where shippers are just going to be – are going to be willing to pay more and that's going to support it for a while?

[David B. Menzel:]

I think that we'll have to see how the market shakes out over the next three to four months. I mean the shippers, the bigger shippers will be going through bid cycles and they will reflect, in part, the current market conditions as well as all the people – all the carriers' ability to service that freight at those prices. So it's a little hard to project today where we might end up as many of these bids go through their process and complete, but I would say that they'll reflect the market conditions as well as the carriers' desire to lock in rates at given prices.

[Matthew Young:]

And the bulk of bidding on committed business, is that in the spring?

[David B. Menzel:]

Yeah. I mean I'd say the typical season starts about now. The process – a lot of processes are underway. They tend to wrap up – I would say they tend to wrap up in the winter and go live in late winter or early spring, but those seasons, those – the timing of all that changes from year to year. Last year, things got pushed back. It was a little late. The market was pretty crazy. We've seen a little increased activity early in the cycle this year. So that'll move around a little bit year-to-year.

[Matthew Young:]

Got it. Okay. Appreciate it.

[Douglas R. Waggoner:]

Thanks, Matt.

[Operator:]

Thank you. And our next question comes from Ravi Shanker from Morgan Stanley. Your line is now open.

[Shaked Atia:]

Hi. Thank you. This is actually Shaked Atia here for Ravi. Another bigger picture question. Have you seen any changes in the competitive environment in the past quarter, and more specifically, any new tech entrants or existing ones being more aggressive on pricing to get volume?

[Douglas R. Waggoner:]

I would say that as we said in the past, it's always competitive. It's a big space. There's a lot of participants, but it's also a very fragmented space. And I think we've got about a 13 year track record of taking market share and being successful. And as it pertains to the new so-called tech entrants, to be honest, I seem to hear more about that at investor conferences and reading research than I do from our sales people. So it's a big market. It's very fragmented with hundreds of thousands of truckers and millions of shippers and it's an inefficient market and we continue to grow and take market share. And there's a lot of competition and there always has been.

[Shaked Atia:]

Got it. Thank you. And just a quick follow-up on that. Theoretically, even if you're not seeing new tech entrants in your environment, do you think that Echo as a company can provide more value versus those tech entrants in a tight or a loose environment?

[Douglas R. Waggoner:]

Well, first of all, most of the tech entrants are focused on a single mode, which is truckload. We're a more multimodal transportation company. So right there, I think that we're focused on being a complete solution. And then, there's also the aspect of build and they will come. And we've already got a marketplace with a lot of participants that's already automated and we're continuing to automate it further. So I don't lose sleep over it. I think that we live in a world that's continuing to evolve and progress. I think everybody's applying more technology including our shippers and our carriers. And if you want to be relevant, that's the game you have to play and that's where you need to invest money.

[Shaked Atia:]

Got it. Thank you very much for your time.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And I would now like to turn the call back over to Chairman and Chief Executive Officer, Doug Waggoner, for any closing remarks.

[Douglas R. Waggoner:]

Thanks. We're proud of the quarter. We're excited about the future. We continue to think that Echo has got a great offering. We've got a great team and great technology. So, regardless of what the market throws at us, we're going to charge forward and continue to make progress and produce great results. So thanks for joining us today and we'll see you next quarter.

[Operator:]

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