Echo Global Logistics, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Fourth Quarter 2016 Earnings 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 is being recorded. I would like to introduce your host for today's conference Mr. Kyle Sauers, Chief Financial Officer. You may begin.

[Kyle Sauers:]

Thank you, and thank you for joining us today to discuss our fourth quarter and full-year 2016 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 have posted presentation slides to our website that accompany management's prepared remarks and these slides can be accessed in the Investor Relations section of our site, echo.com. During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We will also be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release we issued earlier today and Form 8-K we filed earlier today. With that, I'm pleased to turn the call over to Doug Waggoner.

[Douglas R. Waggoner:]

Thanks, and good afternoon, everyone. As we mentioned on our third quarter earnings call, we fully integrated the operations of Echo and Command in mid-October. And at the time of our call, the systems were fully operational and our people were learning and executing the new processes necessarily to take full advantage of the truckload technology and the know-how we acquired with Command. Truckload growth has slowed somewhat throughout the quarter as our people adapted to the new systems. We'll dig in to those results as we go through this call, but at the same time I want to reflect back on some of our major accomplishments last year. 2016 was a very busy year here at Echo. We brought two world-class transportation companies together, both physically and technologically. We have greatly enhanced our truckload technology platform, invested in our technology infrastructure and facilities to handle significant future growth, and organized our teams in the best way to bring continued high levels of service to both shippers and carriers. I'd like to take a moment to thank all of our employees who have worked very hard to provide top-notch service to our shippers and carriers, and to continue to elevate the Echo brand in the marketplace. Our employees are adapting well to the new system and the changes to our operating procedures, all while continuing to satisfy our clients and carriers. At the same time, our sales and operations people have lost some productivity. We believe this is a short-term setback and its natural outcome of a change of this magnitude. The loss of productivity results in less time selling and more time focusing on processes and delivering services for existing customers and less opportunity to drive new business. Fortunately, momentum is building and our people are gaining proficiency with our new systems and process. Truckload brokerage requires speed of operation. We are confident we are seeing that we will continue to see productivity gains resulting in market share gains as we progress into 2017. As we've talked about throughout the year, 2016 was relatively soft market from a demand perspective. Volume growth was a bit harder to come by as the economy has been soft. Additionally, the market tightened midyear and that, combined with the relatively competitive environment, pressured our net revenue margin. Despite all this, we delivered solid growth for the year and I'll highlight the details. Revenue grew 13.5% to over $1.7 billion. Net revenue grew by 9.8% to $319 million. Net revenue margin declined from 19.2% to 18.6%. Truckload revenue grew by over 20%. Managed Transportation revenue grew by 11.6%. G&A spend, net of integration costs, increased less than 1% from our second half 2015 post-Command run-rate, and non-GAAP EBITDA net of integration costs grew by 3% to $72.2 million. Now let's move to slide 3, where I will give more specifics on our fourth quarter results. Revenue was flat as compared with the same quarter last year of $407 million. As I mentioned, productivity was reduced by our integration, which primarily impacted our truckload results. Net revenue was $71.7 million, declining 10.5%. Our net revenue margin decreased by 205 basis points on a challenging year-over-year comp and a continued reflection of the difficult part of the truck brokerage cycle. Sequentially, margin was actually up a few basis points, which is an encouraging sign, and non-GAAP EBITDA declined by 51% to $9.1 million. After adjusting for integration costs of $3.4 million during the quarter, non-GAAP EBITDA would have been $12.6 million. GAAP fully diluted earnings were $0.10 loss per share compared to a $0.06 earnings per share in the prior-year period. Non-GAAP fully diluted earnings per share were $0.07 or $0.14 per share after excluding the integration costs. While we came in at the low end of our revenue guidance, we were able to control our G&A spend, coming in slightly below the low end of our guidance range for the quarter. I am excited to report that we've also seen progress towards our goal of $200 million to $300 million of revenue synergy. In fact, we've already closed over $40 million of new Managed Transportation business that is being implemented or will be coming online in the next few months. This is very encouraging, and we're excited about how the pipeline of new opportunities continues to build. This is all new contractual Managed Transportation business driven by the former Command sales reps that have either expanded relationships with existing customers or landed multi-modal opportunities with new customers. And now I want to turn the call over to Dave, who will discuss our fourth quarter results in more detail.

[David B. Menzel:]

Thanks, Doug. On slide 4, we have a comparison of our results by transportation mode. Starting with truckload, our revenue declined 1% to $275 million in the fourth quarter. This decline was a result of a 1% increase in volume and a 2% decrease in rates. As Doug mentioned, our truckload volume growth has come down from the levels we were running at for the better part of 2016. We mentioned this decline on our last earning call but at the time we had only 11 days post-integration. While we'd hope that the truckload volume would bump back up quickly, they remained relatively consistent throughout the quarter, running volumes very close to 2015 levels. We believe the decline in the growth rate was primarily attributable to our sales and operations teams getting used to the new systems and the adjustments we made to our operating processes to fully integrate Echo and Command, which in turn impacted their productivity. We're very focused on to continue to provide the training were needed and have identified a few quick enhancements that we'll be making to further automate manual processes. Our LTL revenue was up 6% on a year-over-year basis totaling $109 million. LTL volume grew 4% during the quarter. Additionally, we've continued to see strong LTL volume growth in the first five weeks of 2017, so we're very encouraged about our prospects to grow LTL in 2017, both through the traditional Echo sales channels, as well as synergies from the Command sales team. On the intermodal side, our revenue was down 12% at $16 million for the quarter due to lower volume; consistent with prior trends, and the softer truckload market continues to impact this portion of our business. Slide 5 breaks out our revenue by customer type. Transactional revenue declined by 3% year-over-year totaling $329 million in Q4 2016. The primary driver of this decline was softer truckload revenue due to productivity headwinds, partially offset by growth in LTL. We ended the quarter with 1,611 sales reps, including both client and carrier sales. This is a decrease of nine people from a year ago. The decrease was due to a reduction in our carrier sales work force, which is down by 59 people year-over-year, offset by an increase in our client sales organization of 50 people. As previously discussed, the reduction in the carrier team was planned as we anticipated productivity gains out of this group due to the combination of our carrier sales team. We expect to continue to grow our client sales organization in 2017 and this is a key part of our growth strategy, very important as we anticipate a better truckload brokerage market in the coming years. Our transactional revenue per sales rep was down 1% in Q4. Our Managed Transportation business once again had very strong growth. Total revenue was up 12% to $78 million. We're very proud of the business development teams. They brought on another 11 new business wins representing annual revenue of approximately $21 million. Just as exciting, during the new year already, we've signed another $31 million in additional Managed Transportation business. It's a very strong start to 2017. Slide 6 highlights our net revenue and net revenue margin. Our net revenue margin was down 11% year-over-year with margins down 205 basis points versus the prior year and up modestly sequentially. Our truckload net revenue margin declined on a year-over-year basis by 298 basis points. More importantly, our truckload net revenue margins only declined 10 basis points sequentially, indicating that they've stabilized. This is a really important metric given all of the change we're going through and the strong evidence that we'll realize significant synergies from our Command integration, once we've fully adapted to the new systems. When it comes to LTL, the net revenue margin declined by 88 basis points over the prior year and increased 28 basis points sequentially. I'd now like to turn it over to Kyle to talk about some additional details of our financial performance.

[Kyle Sauers:]

Thanks, Dave. On page 7 of the slides, you'll find a summary of our key operating statement line items, and I'm going to highlight a few of those. Commission expense was $21.7 million in the fourth quarter of 2016, decreasing 10% year-over-year. Commission expense was 30.3% of net revenue, representing a 15 basis point increase from the fourth quarter of 2015. Non-GAAP G&A expense was $40.9 million in the fourth quarter of 2016, up 9% from the fourth quarter of 2015. Excluding integration costs related to the Command acquisition, non-GAAP G&A expense would have increased 2% over the prior year to $37.4 million. Depreciation expense was $4.6 million in the fourth quarter of 2016, increasing 35% year-over-year. The expense is primarily the result of our headquarters' expansion in Chicago and other recent technology infrastructure upgrades. Cash interest expense was $1.7 million during the fourth quarter of 2016, which is up 3% from the year ago period. Our non-GAAP effective income tax rate was 36% for the fourth quarter of 2016, after excluding the impact of the Command integration costs. As Doug mentioned, non-GAAP fully diluted earnings per share was $0.07, decreasing 76% from the fourth quarter of 2015, or $0.14, and decreasing 53% after excluding the integration costs. The primary difference between our GAAP and non-GAAP EPS in the fourth quarter of 2016 are $3.9 million of amortization of intangibles from acquisitions, $1.9 million of non-cash interest expense and $2 million of stock compensation expense. Slide 8 contains selected cash flow and balance sheet data. In the fourth quarter of 2016, we had negative free cash flow of $5 million and operating cash flow of $4.6 million. Our operating cash flow was impacted by a higher than normal DSO at the end of the year. As we move customers off of the old Command platform to Echo's billing system, some have taken longer to migrate than others, which has temporarily impacted the timing of receipts. This has begun to catch up in January and we expect the days sales outstanding to return to historical levels soon. Capital expenditures totaled $9.6 million in the quarter. This quarter marked the completion of both our office expansion in Chicago and our technology integration, both of which temporarily increased our capital expenditures. We expect 2017 to return to more normalized levels, and I'll cover that in a moment when I talk about guidance. We ended the quarter with $17 million in cash, $231 of accounts receivable and nothing drawn down on our $200 million ABL facility. We're in full compliance with all covenants related to our borrowing facility. During the quarter, we repurchased 574,000 shares of our common stock at an average price of $22.11 for a total of $12.7 million. As of the end of the year, we have less than $1 million available on our buyback program. Now, I'll take you through our guidance for the full year 2017. We expect total revenue between $1.85 billion and $1.97 billion. We expect year-over-year revenue growth to be greater in the back half of the year as more revenue synergies roll in. And we also expect the rate environment to become more favorable later in the year. Commission expense should be between 29.5% and 30.5% for the full year. G&A costs should be between $165 million and $175 million for the year, with a large portion of the increased costs associated with new sales and operational hires. As mentioned before, having completed our integration of Command during the fourth quarter, there will be no additional integration costs. Depreciation expense should be approximately $19 million to $20 million for the year. CapEx for the year should be between $15 million and $20 million. Cash interest expense should be approximately $6.7 million. We expect our tax rate to be approximately 37.5% for the year on a non-GAAP basis. And then excluded from our non-GAAP calculations, we expect the following in 2017; amortization of approximately $14.3 million, non-cash interest of $8 million and stock compensation expense of $10 million. We expect share count for the year 2017 to approximate 28.8 million shares. So far in 2017, we've seen a reacceleration in our growth relative to the fourth quarter. Our revenue growth has been 2%, while gross margins have also improved slightly from the fourth quarter. We expect revenue for the first quarter to be in the range of $410 million to $430 million. We also expect first quarter G&A to be between $41 million and $42.5 million. As with the full year, this sequential increase is primarily related to new sales and operational hires. I'd now like to turn it back over to Doug.

[Douglas R. Waggoner:]

Thanks, Kyle. I'd like to again thank all of our employees for all of the hard work and dedication during the fourth quarter and continuing into the new year. As an organization, we've been through some major changes in the last few months and it's easy to underestimate how impactful those changes can be on each and every employee. One of Echo's corporate values is work hard and hustle, and our team has lived up to this and then some. While our growth came in near the low end of the revenue guidance range, I chalked that up in part to the amount of time and energy spent on our truckload integration. It's important to recognize that we took a long-term approach to the integration of Command going live in a big bang type of approach, which was absolutely necessary in my view to position Echo to operate as a united business and was required to enable the achievement of the synergies of this acquisition. Our goal was to combine our carrier sales organizations utilizing a common technology to increase our truckload scale, lane density capacity and carrier relationships to serve our shippers more fully. The only way to accomplish this objective was to fully integrate, which we did. We're confident this strategy will yield positive results as we adapt to the changes of operating our internal truckload market a little differently and leveraging our people, technology, and processes. Echo has an 11-year track record of organic growth that runs independent of market conditions and showcases our ability to take market share. Nothing about that has changed, aside from the distractions of a major integration, which occupied some of our selling capacity. As we come out the other side of our integration, I'm very excited about the opportunities ahead. We have a diverse business model serving customers with both brokerage and managed services. We do so through varied modes of transportation and we have the much-needed density across our networks. We are seeing continued growth in our LTL mode. We are seeing tremendous success in our Managed Transportation business, and our employees are excited about our increased truckload capacity and the tremendous benefits it will bring to our shippers and carriers as our employees get more comfortable with the new processes and technology. We've also made some great progress towards our synergy goal, having already won over $40 million of additional business by offering new modes and capacity to existing customers, as well as Managed Transportation contracts with legacy Command customers and prospects. Given we are about 18 months since we last updated our long-term targets, I want to take a moment to give everyone an update as to our thinking. While we still believe the targets we set for $3 billion in total revenue and $150 million in EBITDA are achievable, we'll need some help from the external market. In addition, we need to step up our M&A activity as new acquisitions were always a component of our long-term guidance. We intend to more formally update our target this summer when we will have better visibility to the external market conditions. And while our M&A pipeline remains active, at this point, our primary focus is to drive organic growth in our core business. To that end, we continue to develop and enhance our technology. We're already working on improvements to our core system to enable our people to get the full leverage from our technology and to assure that our internal markets operate very efficiently. We are also about to launch new customer- and carrier-facing capabilities to drive further automation and value. And we're combining these technical capabilities with investments in analytics to improve everything that we do. While the current environment continues to be challenging for brokers, spot market transactional growth and gross margin profiles, we know these factors cycle, and we're very well-positioned to capitalize on outsized growth as the market changes. And with that, I'd like to open it up for questions.

[Operator:]

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

[Bascome Majors:]

Yeah, good afternoon. You said earlier that the primary focus for the next six months is driving organic growth in the core business. I was wondering if you could dig in a little more to that. Is that more a function of the attractiveness of the deals you're seeing in the marketplace? Or is it a function of getting your people more productive internally before focusing externally?

[Douglas R. Waggoner:]

Well, let me just clarify that both activities are taking place simultaneously. I think that the M&A market's pretty robust right now, particularly with small brokers. There seems to be, I would say, more sellers than I've seen in a long time. However, that being said, we really want to extract the value out of our acquisition of Command. We really want to extract the synergy. And so we don't want to lose sight of those objectives. We really want to get our people and our processes dialed into the new technology. So the organic growth is the primary objective. However, I would say concurrent with that we've got a healthy M&A pipeline, and we continue to look at deals that would make sense for us.

[Bascome Majors:]

Understood. Can you give us an update on maybe the size, type or valuations that you're seeing in the marketplace and where you want the leverage ratio to be long term? Appreciate the help. Thanks.

[Douglas R. Waggoner:]

Well, I think that our strategy on M&A, after having gone through the big Command deal and we're excited about that, but we're continuing to look at what I would consider tuck-in acquisitions. And as long as they tuck in well and fit well and they adhere to our strategy and can ride on our technology, we're pretty open to the tuck-ins. Got a great record with those. We would also be open to expanding services if we saw something that made sense, but right now like I said we're focused on things that integrate easily, that add to density and scale and market coverage and contribute to the growth. And I'll let Kyle comment on the leverage.

[Kyle Sauers:]

Yeah, Bascome. So I think on the leverage side, we'd be comfortable moving up a little bit from where we are now when we entered into the transaction to do Command, we actually were willing to temporarily move up closer to 4 times leverage. But I think longer term something in the 2.5 to 3 times on an ongoing basis makes sense for us.

[Bascome Majors:]

Thank you for the time.

[Operator:]

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

[Thomas Wadewitz:]

Yeah. Good afternoon. I wanted to ask you a little bit about what's behind the revenue assumptions that you gave us for 2017. Just if you think about how much load growth are you expecting in truckload? What's your view in terms of revenue per load or kind of pricing impact that feeds into that top-line guidance you gave us?

[Kyle Sauers:]

Sure, Tom. So you can imagine we've got a pretty different set of ranges of possible outcomes for the year that drive that guidance range we've given, both for volume and rate growth throughout the year. So without giving specific ranges on the volume growth because that varies across mode and across brokerage versus Managed Trans and through our different sales channels. But specifically with regards to rates kind of the revenue midpoint our expectations include low single-digit rate growth in LTL throughout the year and then on the truckload side assumes low single-digit rate growth. And that's a combination of both contract and spot in the first half of the year and moving up to like a mid-single-digit growth during the second half of the year.

[Thomas Wadewitz:]

Okay. Do you have any early data points on how contract rates are coming through on truckload or not yet?

[David B. Menzel:]

I would say not yet. I mean, it still does continue to be a very competitive market, I would say. We talked a little bit about that last quarter, but for the most part most of – our business is more spot than contract. So we've got probably less data points than others. But most of the bids tend to resolve themselves during Q1, some might even move to Q2, most probably in the tail end of Q1. So I would say that it is competitive. I wouldn't want to give any specifics on the rates, and there's a lot of unresolved activities still at this point.

[Thomas Wadewitz:]

Okay. If I could just give you one more and then hand it off to someone else. I mean, it sounds like there was – you're overall pretty pleased with the integration and with way things going with Command, but also acknowledging that there was lost momentum in terms of the volume growth in the fourth quarter and where people needed to spend some time. How quickly do you think you regained some of that organic growth momentum with the sales force? And how quickly did they move on from the learning things to executing with the full attention in the marketplace? Is that a quarter? Is that a couple of quarters? How do you think about that?

[David B. Menzel:]

It is a very good question. And obviously, we're looking ahead and it's a little hard to predict exactly. But I'd say we're thinking more in the neighborhood of a month or two, so kind of get back to full operating capability within the next couple of months so to speak. You've got to remember that through this integration we've rolled out new technology for every sales and operation person in the company. Everybody was affected whether you're on the historical legacy Echo side or if you're on the Command side, our approach was to take the best of both and put the systems together, which we did accomplish and they're working consistently. But having said that, new processes were introduced because of those changes, which required different levels of decision making, some shifting of responsibilities. And those are the kind of change management factors I would say that slowed down the productivity during the quarter. We're definitely as we look at it and got kind of hands on deck helping our people get through the changes, making any adjustments we need to, and we've seen improvements over the last six weeks already. So we feel very confident that we're on the road here to getting back to kind of full capacity so to speak. And if you'd ask us, I'd say it's within the next couple of months we should get back to a point where that's not a factor.

[Thomas Wadewitz:]

Right. Okay. Thank you for the time.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Jack Atkins from Stephens. Your line is open.

[Jack Atkins:]

Hey, guys. Good evening. Thanks for the time. So I guess, Doug and Dave, this question I guess is for you, this first one. I mean, I guess as you look at 2017 and think about how the year plays out, obviously, you're talking about the second half of the year being a little bit better than the first half of the year due to the synergies coming out of the model and just a little bit more robust brokerage market overall. But I'm just curious if you could maybe from a high level take us through how you're thinking the year plays out, what's going to be driving the improved supply demand dynamics? And when do you think that kicks in? Is there any sort of benefit in there from maybe tightening up capacity related to ELD? Just sort of curious from a high level how you guys see the next four quarters sort of playing out?

[David B. Menzel:]

Jack, I'll give you my view on that. I think over the next probably three to six months or so, we're going to see similar environment. I think that as we approach the summer and produce season hits, the normal capacity will tighten up. And at that point in time, I think we might start to see more rate changes. It's hard to predict, as you guys know, but we see it really changing in the second half of the year. As I mentioned earlier, the first part of the year here, obviously, we've got a lot of nice wins on the Managed Trans side. Those are going to start to go live. We're going to get some momentum back out of our sales organization as we adapt to the new systems and changes. Those will be positive outcomes, but it's still competitive market and pricing is tough. But I think that as the year moves on, we'll start to see more spot opportunities. Capacity will tighten to some extent due to ELD requirements and that'll have an impact on capacity, which in turn will impact rates.

[Douglas R. Waggoner:]

Yeah. I would just add, Jack, that kind of after Thanksgiving in the fourth quarter through the end of the year, capacity did tighten up and there wasn't that much of an economic catalyst underneath it. So I think it's going to be difficult for the industry to add capacity should there be economic pickup. And I think that'll be exacerbated by the ELD. So at some point in time, capacity will become scarce. That's a market that favors us.

[Jack Atkins:]

Makes sense.

[Douglas R. Waggoner:]

We just don't try to predict when that happens.

[Jack Atkins:]

Makes sense. Makes sense. And I guess sort of thinking about the lost productivity, as folks are adapting to the new system, which, again, I think is understandable. But, I mean, is there a way to sort of quantify the revenue that you guys have sort of left on the table, if you will, when you think about this adapting to the new system? I'm just trying to think about as you get back to just the run rate of productivity to where you were maybe in the first three quarters of the year of 2016, what would that imply from a revenue perspective going forward? I mean, I'm just trying to wrap my arms around that.

[David B. Menzel:]

Yeah, I mean, I think it's – Jack, this is Dave. I think that it's hard to be certain in terms of how much impact the market and to really put your finger on it, but I see it as if our truckload growth rates drop between 5% and 7% because of productivity losses.

[Jack Atkins:]

Okay.

[David B. Menzel:]

So when I look at the revenue in the quarter, I feel like that's a reasonable way to look at it in terms of its impact.

[Jack Atkins:]

Okay, Dave, that's helpful. Kyle, last one's for you. When you think about the $4 million sequential increase in G&A from adjusted G&A in the fourth quarter to what you're guiding to, I think roughly the midpoint in the first quarter. Can you sort of bridge us from one to the other? Is that all due to increased head count? Or are there some other moving pieces in there? It just seems like a pretty big step-up sequentially.

[Kyle Sauers:]

Yeah. So it is a big step-up, I recognize that, Jack. So it's primarily related to head count. In fact, we've – if you count next Monday start class, we'll have over 100 new sales and operations people that have started with us this year already. So, obviously, that has a pretty sizeable jump there. We've got our expanded facility here in Chicago that had a Q4 impact, but also increase this year in Q1. But it's really investment in people, and we've talked a few times now also about the Managed Transportation wins that we've had over the last several quarters, which are pretty significant. So we're staffing the operations teams for those as well. And then, every first quarter, we've got our annual merit increases and then also a little additional payroll tax burden that comes in that then burns off after the first quarter.

[Jack Atkins:]

Okay. Okay. Thanks again.

[David B. Menzel:]

Hey, Jack, I'm going to clarify one thing on that estimate. Those numbers would be just based on transactional truckload not the total truckload. Probably if you were just trying to – and we don't disclose the breakout by mode inside that area, but you can get rough sense of order of magnitude, I think, with those kind of numbers.

[Jack Atkins:]

Okay. So that 5% to 7% is just related to the transactional truckloads.

[David B. Menzel:]

Correct.

[Jack Atkins:]

Okay. Thanks, Dave.

[David B. Menzel:]

Yeah.

[Operator:]

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

[Brian P. Ossenbeck:]

Hey, guys. Good evening.

[Douglas R. Waggoner:]

Hi, Brian.

[Brian P. Ossenbeck:]

So a question on the synergies now that everything is live and online and you're working forward in getting some in the door already. It sounds like it's all Managed Trans for the time being. But when you look at the $200 million to $300 million that you're talking about is, are you going to start to see anything from the improved lane densities or anything else on the transactional side? Or are you expecting the majority of this to come on the Managed Trans? Or is it just kind of timing issue? That was the easier sell or these are cross-sell rather. I mean just kind of help explain that. Thank you.

[David B. Menzel:]

Yeah, sure. I mean, I think it's a little bit of everything you just said there. So on the one hand, number one, the majority, if not all, of the revenue synergy, very little of which is actually run through the P&L because it's closed business that's not yet implemented in a large part, is all Managed Trans. We have seen additional growth in kind of what we call partial business, but we didn't quantify that because we've also seen the declines because of the productivity on the truckload side. So, you start to – it's kind of – I don't know if it's a wash, a direct wash, so to speak, but just want to highlight that part. So we've seen some other good cross-selling activities that you could chalk up the synergies, but at this point we want to get the truckload business more back on track. So I think that when we went into this we had an idea that the Managed Trans opportunity might be $50 million or so. We didn't put specific numbers on it. And I'd tell you that today we believe that opportunity is bigger. So that's the first piece of the puzzle. And I think the second piece of the puzzle, the biggest piece of the puzzle that we still believe in is combined truckload network, more lane density, better buying power, our salespeople are able to utilize the capacity that's collected every day by our carrier team, utilize that to expand business with their existing clients, as well as use that effectively in the marketplace to grow the business. So the first step to achieve that synergy is obviously to be integrated and running on a common platform. Step two, I think that we have to highlight now is to make sure that that platform is running as efficiently as possible and everybody's adapted to the new changes and processes. So we may have hoped we'd get more of a head start on that synergy once we went live, but at this point we still very strongly believe that that opportunity is out there, and it's probably the bigger opportunity for the company as we move forward into 2018.

[Brian P. Ossenbeck:]

Okay, great. So that I assume you'd need some of the head count to come forward as well as the productivity to come back before you start to realize some of the transactional density-related synergies?

[David B. Menzel:]

Yeah, exactly.

[Brian P. Ossenbeck:]

Okay. So on the cost side, Kyle, I know you mentioned maybe a couple of quarters ago about finding some cost synergies between the two when you're integrating. So just any update if you've seen any potential for that, and also it looked like the integration costs were a bit higher this quarter than what you had previously expected. So just some clarity on what drove that would be helpful as well.

[Kyle Sauers:]

Sure. So on the any additional cost savings, we've fully integrated the businesses. At this point we're always looking for ways to spend money the right way and find places to save money. But related to the integration of the two businesses, nothing more there. And on the integration costs for Q4 being a little bit higher than expected, the difference was primarily related to the costs that were associated with exiting our two ex-Command facilities up in Skokie, Illinois, so that drove most of that increase.

[Brian P. Ossenbeck:]

Okay. And last one. Just any rough idea with the – it sounds like the cash collection cycle is a bit off with the crossover and changing some customers over, but any rough idea of how much you would expect that to come in, in the first quarter? Has it started to reverse itself?

[Kyle Sauers:]

It has started to kind of fix itself here in January. So we'd expect that to get back to normal levels, or at least close to normal levels by the end of the quarter or so.

[Brian P. Ossenbeck:]

Okay. Thanks a lot for your time, guys.

[Kyle Sauers:]

Thanks, Brian.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Allison Landry from Credit Suisse. Your line is open. Danny C. Schuster - Credit Suisse Securities (USA) LLC Hi. Good afternoon. This is Danny Schuster on for Allison. Thank you for taking our question. So was hoping to get some clarification around the synergy number that you've said you've achieved so far. So is the $40 million as of today, or was that as of the end of 4Q?

[David B. Menzel:]

It's actually as of today. Danny C. Schuster - Credit Suisse Securities (USA) LLC Okay.

[David B. Menzel:]

And it's closed business but it's not booked, so to speak. It's not implemented yet, for the most part. Danny C. Schuster - Credit Suisse Securities (USA) LLC Okay.

[David B. Menzel:]

Some is, but the majority is not. Danny C. Schuster - Credit Suisse Securities (USA) LLC Okay. So is it possible to give some sort of sense for what the actual realized synergies were in 4Q?

[David B. Menzel:]

I don't have that number off the top of my head, but I would tell you it's probably less than $1 million. Danny C. Schuster - Credit Suisse Securities (USA) LLC Less than $1 million. Okay.

[David B. Menzel:]

Yeah. Danny C. Schuster - Credit Suisse Securities (USA) LLC All right. So when we think about kind of the $200 million or so of revenue growth this year, should we be thinking about some significant portion of that coming from the revenue synergies that you're achieving right now in booking? Or is it pretty much all coming from organic revenue growth on the underlying Command and Echo businesses?

[David B. Menzel:]

Well, it's a good question, and I'll let Kyle, if he wants to add. But it's a combination. I mean, to some extent, the last couple of quarters we've closed close to $80 million in new business on the Managed Transportation side, and very little of that has been implemented and run through as live today. We're just starting to go live with some of those accounts today. So I think that throughout the course of the year, we'll see some growth driven by a lot of the closings that we've had in the first half of the year; and obviously, a big component of that has been the Command sales force contribution or the synergies. And then I think the second part of the puzzle to get to the growth expectations for 2017 do come from organic growth from the transactional side of the business.

[Kyle Sauers:]

Yeah. And the only thing I would add to that is just that our truckload rate comparables do get a little bit easier after the first quarter here. Just a side note. Danny C. Schuster - Credit Suisse Securities (USA) LLC Right. Okay. So some part of it will just come from truckload rates expanding. Okay. That's very helpful. Thank you for taking our questions.

[Douglas R. Waggoner:]

Thank you.

[Kyle Sauers:]

Thanks, Dan.

[Operator:]

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

[Ravi Shanker:]

Thanks. Good evening, guys. You said you'd give us an update on your long-term progress later this year. There's a lot of evidence that you have these technology companies whether it's Amazon or Uber kind of looking to enter the space, and some of these start-ups ramping up as well. I'm wondering when you think that those guys will start to show up in the marketplace in a meaningful way. And if that has any impact at all on your long-term targets?

[Douglas R. Waggoner:]

Yeah, Ravi. I can't answer the question when they're going to show up in the marketplace. I've seen the announcements. I've seen some activity out there, but here's what I would remind you of. First of all, the size of the market is huge. And I think we all see the data that shows how there's more and more freight going through non-asset 3PLs and brokers and it's growing at a rate faster than the overall transportation market. So even if some startup was to get to a multi-billion dollar status, it's not going to get in the way of the other players continuing to grow. And scale matters you know. To be a good broker, to be a good competitive broker, particularly in truckload, you've got to have lane density. You've got to cover the map. You've got to have depth of suppliers, which are our carriers. And so even though those companies may or may not have the capability to get there quickly, there still is a process to go through to get there where you've got to build it. I would also tell you that there's a lot of small brokers, as you know. And we see them in the M&A market. They're not as competitive with the larger, more sophisticated shippers. And I think that to take market share, that's the place where it's going to be the easiest is from the smaller brokers, many of which are ripe to be acquired as the industry continues to consolidate. I'd also tell you that – what's that?

[Ravi Shanker:]

Go ahead.

[Douglas R. Waggoner:]

And the only other thing I would say is that – so, I acknowledge that those are two quality companies with great brands. They're good technologists, but I can't predict what they're going to do, but I'm very optimistic that it's a big market. It's very fragmented. And we continue to take share regardless of who we're competing against.

[Ravi Shanker:]

Got it. And your commentary on the smaller brokers is a great segue to my next question, which is, I agree with you that they're probably the most vulnerable and the most targeted out there with the new entrants. Do you kind of see that as an opportunity for yourself on the M&A side to go and pick off some of the better ones? Or are you more focused on

[Douglas R. Waggoner:]

No. We've made big investments in technology. We're also supplementing that with investments in applied analytics, and we think the two together can make us a top-quality broker that's very productive and very efficient. And as for the smaller brokers as potential tuck-ins, yeah, I think that is an opportunity for us as long as they tuck in and as long as their specific set of customers and carriers, there's not too much overlap or conflict and that it's manageable. And to the extent that we can put them on our technology platform and do it all at the right multiple, it does make sense. And as I've mentioned earlier, it would appear that at this moment in time, there's more sellers than I've seen in a long time.

[Ravi Shanker:]

Great. Thanks for the update.

[Douglas R. Waggoner:]

Thank you.

[Kyle Sauers:]

Thanks, Ravi

[Operator:]

Thank you. And our next question comes from the line of David Campbell from Thompson & Company (sic) [Thompson, Davis & Company]. Your line is open.

[David Pearce Campbell:]

Yeah. Hi. Thank you very much for taking the question and for the update. Can you give me the number of sales reps including agents at the end of the December quarter, and total employees?

[David B. Menzel:]

Sure. Give me one second. We had, I believe, 1,611 total salespeople in our sales organization and that included 283 agents. So we had – I think the numbers were 710 client focused, 463 carrier focused and 155 sales ops supporting our client salespeople, plus the 283 agents. So that adds up to 1,611. And then, Kyle, maybe total employees, if you include or exclude W-2 employees -

[Kyle Sauers:]

If you include our outside contractors, it's 2,600, Dave.

[David B. Menzel:]

Okay.

[Kyle Sauers:]

Yeah. 2,617.

[David Pearce Campbell:]

So total employees including sales were what?

[Kyle Sauers:]

I'm sorry.

[David B. Menzel:]

It's 2,517.

[Kyle Sauers:]

2,517, David.

[David Pearce Campbell:]

2,525?

[Kyle Sauers:]

No, 2,517. Two-five-one-seven.

[David Pearce Campbell:]

Okay. And you also suggested that in the first quarter, you're going to be adding 100 employees to the company head count. Is that correct?

[David B. Menzel:]

I think we said hiring, so that's more of a hiring number. So there'll be some attrition and the net adds will be less than that.

[Kyle Sauers:]

That was actually a reference to the number of people who will have entered our training classes as of next week. So, part way through the quarter.

[David B. Menzel:]

Got you.

[David Pearce Campbell:]

And all these people are salespeople, or are they also partly employees?

[David B. Menzel:]

80%, 90% of those would be salespeople. There may be a few operational folks to support the growth in the Managed Transportation business.

[David Pearce Campbell:]

Right. That's where you need more people to handle that business, which you said was – the new contracts are equivalent to $30 million of annual revenues.

[David B. Menzel:]

Yeah. And that's just subsequent to the close of the year. So we closed $20 million in Q4 and $30 million in January, basically. So, since the time of the last call, we've closed about $50 million of new business. That's expected to implement throughout 2017. So, yes, we're going to gear up a little bit to support those accounts.

[David Pearce Campbell:]

It won't be a total of $50 million for the year, but it'll be implemented -

[David B. Menzel:]

That's right.

[David Pearce Campbell:]

As it's implemented, it'll add up to $50 million.

[David B. Menzel:]

Exactly right.

[David Pearce Campbell:]

Okay, great. Thank you very much.

[David B. Menzel:]

Thank you.

[Kyle Sauers:]

Thanks, David.

[Douglas R. Waggoner:]

Thanks, David.

[Operator:]

Thank you. And our next question comes from the line of Kevin Steinke from Barrington Research. Your line is open.

[Kevin Mark Steinke:]

Good afternoon. So just wanted to ask about your comment about stabilization in truckload net revenue margins that you saw sequentially in the fourth quarter. And also, I believe you said net revenue margins were up slightly thus far in January. So, I mean, is that just you think market related, or is there anything you can do internally, or that you've been able to do internally to kind of stabilize that?

[David B. Menzel:]

Yeah, it's a good question, Kevin. I mean, I think that one of the big benefits of the acquisition of Command was their business model and the way their sourcing organization works. And we would hope to achieve those benefits right away, but it is going to take time for the systems to adapt and for the processes to really take hold. And so, on the one hand, I'd love to say that our internal execution is getting a little better, and it might be. And it's hard to put your finger on how much might be market versus normal seasonality. But what we saw was, I would say, our low margin point was in September on the truckload side of the business, and we saw some very modest improvements over the last four months. So consistent. Now, obviously, as we get into January, I'm talking about sequential data, so the capacity does tend to loosen up a little bit in January. So we would hope to see a little bit of an improvement there normally. But it does give us some confidence that the model is beginning to take hold, that people are getting more comfortable with the execution of the model. And obviously, it's either stabilized or slightly improving. Now, as always, we're very cautious about getting too far ahead of ourselves with respect to the margins in the business because there's oftentimes uncontrollable factors that can impact the achievement of those goals. But so far, definitely a nice stabilization on the truckload side after we saw that pretty dramatic drop-off in June and July, which caused both Q3 and Q4 margins to be well down sequentially, or year-over-year compared to last year.

[Kevin Mark Steinke:]

Okay. Fair enough. That's helpful. And then I was also wondering how you factored fuel prices into the 2017 outlook.

[Kyle Sauers:]

Yeah, Kevin, I'll take that one. So fuel has moved up a little bit in recent quarters. So we'd get a minor tailwind from fuel in 2017 if fuel rates stay where they are today throughout the year. I don't have exact numbers in front of me. It's not terribly material. But we do get a little bit of benefit there. We're calling that we don't expect to necessarily make any margin dollars on that fuel, that it's generally a pass-through in the way we think about it.

[Kevin Mark Steinke:]

Right. Okay. Fair enough. So you basically just factored in stable pricing from where it is now?

[Kyle Sauers:]

Yeah. We're definitely careful about trying to predict what's going to happen with diesel prices. So we generally model forward-looking guidance to our own models and forecasts based on a steady state of fuel.

[Kevin Mark Steinke:]

Got it. And just lastly, I think I might have missed it. I just wanted to make sure what you said about sales commission expense for 2017. Did you say 29.5% to 30.5% of net revenue?

[Kyle Sauers:]

That is what I said, you're correct.

[Kevin Mark Steinke:]

All right. Got it. Thanks for confirming it and thanks for taking the questions.

[Kyle Sauers:]

Thanks a lot, Kevin.

[Douglas R. Waggoner:]

Thanks, Kevin.

[Operator:]

Thank you. And our next question comes from the line of Matt Young from Morningstar. Your line is open.

[Matthew Young:]

Good afternoon. Thanks for squeezing me in. Just a quick follow-up on the last question. Wonder if you're seeing any opportunities to combine freight spend with truckload carriers now that your databases are more integrated, the Command and Echo databases. And any reason to think that that could move the needle in terms of lowering buy rates aside from market factors?

[David B. Menzel:]

Well, I think the answer is yes, absolutely. I mean, that's a big part of the driver of that truckload synergy. I think because of just the integration and all the process changes haven't seen it yet and that's probably why our productivity is down a bit in the last quarter. So I think that that's on the horizon, but we are seeing – and this drives productivity a little bit, too, but we are seeing, I mentioned this on the last call, about 20% of the Echo freight historically was booked by Command reps and vice versa, Command and Echo. So you're seeing a little change in the carriers that are used and little more optimization of backhaul opportunities because of the additional capacity and the bigger network that we have, but because it's not running quite as efficiently as possible today there may be other offsets in there, places where we were using a carrier and that capacity shifted somewhere else. So I think as things stabilize over the next couple of months, we'll begin to see some of that buying power help us in the marketplace.

[Matthew Young:]

That's good color. Thanks. That's all I had.

[Kyle Sauers:]

Thanks, Matt.

[David B. Menzel:]

Thanks, Matt.

[Operator:]

Thank you. At this time I'm showing no further questions in the queue. I would like to turn the call back over to Doug Waggoner for closing remarks.

[Douglas R. Waggoner:]

All right. Well, that's all we have for today. I thank you for joining us and we will be talking to you in the next quarter.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.