Echo Global Logistics, Inc.
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Kyle Sauers, Chief Financial Officer. Sir, you may begin.

[Kyle Sauers:]

Thank you. And thank you for joining us today to discuss to discuss our second quarter 2015 earnings. Hosting the call are Doug Waggoner, Chairman and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We've posted presentation slides to our website that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site, echo.com. During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We will also be discussing certain non-GAAP financial measures. The reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release and supplemental 8-K filings, both of which are also posted on our website. With that, I'm pleased to turn the call over to Doug Waggoner, who is calling in from the road today.

[Douglas R. Waggoner:]

Thanks, Kyle, and good afternoon, everyone. After recently celebrating our 10-year anniversary, it's been a historic quarter for Echo Global Logistics. We announced and closed the acquisition of Command Transportation, one of the premier truckload brokerages in North America, effectively doubling our truckload volume and capacity. We enjoyed a fantastic response to our capital raise, brining in approximately $400 million through the issuance of common stock and convertible debt. We also put into place a $200 million ABL facility and this capital raise enabled us to fund our acquisition and provide additional liquidity to enable continued growth and execution of our strategy. The additional leverage we've added to our capital structure is modest when considering our strong cash flow generation and optimizes our capital structure to add shareholder value. We enjoyed strong organic year-over-year shipment volume growth even in a weaker spot market environment and during the quarter with arguably the hardest year-over-year comps in Echo's history. We were again recognized by the readers of Inbound Logistics Magazine as a top 3PL, moving from eighth place two years ago to fourth place last year and up to the second spot this year. I want to take this opportunity to thank all of our employees for their dedication to serve our clients, and our carriers to provide the needed capacity for us to deliver, and our clients that took the time to participate in Inbound Logistics Annual Survey. We're all very proud of this accomplishment. Now, I'll take you through a few of the key financial highlights from our second quarter, which includes the results of Command acquisition from the beginning of June. Revenue grew 22% to $372 million. Our revenue growth rate excluding the acquisition of Command was 7% as strong organic truckload growth was offset by lower pricing. Net revenue grew to $70 million, up by 30%. Our net revenue margin increased by 123 basis points, while our mode mix continues to shift towards truckload, a traditionally lower-margin service offering, which is now 61% of total revenue, up from 51% in Q2 of 2014. Non-GAAP EBITDA grew by 30% to $16.8 million. Kyle will talk further about our changes to non-GAAP calculations in light of the Command acquisition and our recent capital raise later in our prepared remarks. I now want to give you an update on the status of the Command integration. Consistent with our communications over the past few months, we believe that we'll create significant value as we fully integrate the operations of Command, and I'm pleased to tell you that we're off to a great start. The first step in this process is to begin to work together and know their cultures to engage our people to deliver to our clients and our carriers. Our management teams are working very closely together, and we've begun to combine operations in advance of the technology integration where it makes sense. We've started to cross-sell Echo services, and we'll continue to see a great opportunity to improve our value proposition for our clients through the strength of our multimodal offering. Our technology teams are already integrated and working together in our Chicago office, and we remained very excited about the power of the Command truckload application when combined with Echo's LTL and managed transportation capabilities. As we indicated on the road, the proximity of Command, the quality of the individuals on their team, and our experience with our 19 prior acquisitions and the similarity of our respective business models will enable us to fully and effectively integrate our businesses to create a powerful market competitor. I now want to turn the call over to Dave, who will discuss our Q2 results in more detail.

[David B. Menzel:]

Thanks, Doug. As Doug mentioned all of our results presented include one month of Command as we closed the acquisition on June 1st. Turning to slide four, we've broken down our revenue growth by mode. Our truckload revenue grew 42% to $228 million in Q2 on a year-over-year basis. The acquisition of Command added 27% growth over the prior year, meaning that the historical Echo truckload growth rate was 15%. Echo's historically growth – without Command, that is – was driven by a 30% increase in shipment volumes and was offset by an 11% decrease in revenue per shipment. The decrease in revenue per shipment was primarily driven by lower fuel cost. Command's volumes were relatively flat year-over-year, which is consistent with our expectation given the current market conditions and their primary focus which is leveraging their access to capacity in the middle market and on spot market opportunities with larger shippers. In fact, the entire team at Command has been fantastic to work with, and I can tell you that the energy and commitment to their clients and carriers has been unwavering. We mentioned we had very little customer overlap when we announced the acquisition, but in the cases where we do, the customer feedback has been very positive about both organizations and the opportunity to provide additional capacity and services when we integrate our offerings. Turning to LTL, our revenue increased to $119 million in Q2 2015, reflecting a 7% increase over the prior year. Volume was up 9% year-over-year, and revenue per shipment was down 2%. This decline in revenue per shipment was the result of line haul rate increases, which were offset by lower fuel prices. Intermodal revenue was down 7% at $18 million for the quarter. However, intermodal volume was up 3%, indicating pricing declines consistent with what we've seen in the truckload market. Turning to page five, we break out revenue by client type. And as you can see, our transactional revenue grew by 30% on a year-over-year basis, totaling $295 million in Q2 2015. Transactional revenue was up 10% year-over-year when we exclude the impact of the Command acquisition. And that's despite the impact of a softer market, lower fuel, and lower truckload rates. The acquisition of Command significantly increased the size of our sales organization. As you know, we've been investing in our sales and sourcing teams, and excluding the impact of the Command acquisition, our sales force grew by 198 people over Q2 last year. When considering the acquisition, our transactional sales force grew by 659 people on a year-over-year basis, totaling 1,687 at quarter end. The softer market and its impact on truckload rates, lower fuel, and the continued investment in growing our sales organization were all contributors to a 7% year-over-year decline in transactional revenue per sales rep. Our managed transportation revenue declined 2% to $76 million in Q2 2015. Recall that on our last quarterly call, we indicated that we had recently re-signed a large customer to a new contract with a fee-based structure, with the result being lower gross revenue with no meaningful change in our net revenue or profitability. This revised contract, along with the impact of lower fuel rates, accounts for the decline during the quarter. While we don't break out net revenue for managed transportation, I will point out that our net revenue growth on a year-over-year basis was up 14%, indicating a healthy growth and our continued success retaining our accounts and winning new business. In fact, our renewal rate was 96% in the quarter, so that's a great job by our managed transportation teams for continuing to go the extra mile for our clients to deliver the service they expect when making the decision to outsource their transportation management with Echo. Slide six breaks down our net revenue and highlights mode and client mix. Our net revenue margin results from pricing changes in the marketplace, as well as our mix of business from the various modes that we provide and the mix of business by client type. In Q2, we delivered $69.5 million, up 30% for the same period last year. Our net revenue margin was up 123 basis points year-over-year at 18.7%. This improvement in net revenue margin came along with a substantial change in our business mix. Doug highlighted truckload and intermodal revenue represented 66% of the total revenue compared to 59% in the same period last year. Both Echo and Command truckload operations saw year-over-year improvements in truckload net revenue margins. In fact, Echo's historical truckload margin improved by 118 basis points on a year-over-year basis. These improved margins partially attributable to lower fuel prices and the loose capacity environment and comes despite the weak softer spot market. On the LTL side, our margin modestly declined by 36 basis points. I'd now like to turn it back over to Kyle to review the details of our financial performance.

[Kyle Sauers:]

Thanks, Dave. Given the significance of the Command acquisition and our recent capital raise, we've modified the way we're presenting our non-GAAP earnings per share to provide better information around the ongoing operations of our business. We continue to exclude deal cost associated with M&A activity, and in Q2, this includes a onetime cost for the unused term loan commitments associated with the Command acquisition; and we also continue to exclude any changes in contingent consideration payable to sellers of our previous acquisitions. We're now also excluding all the non-cash expense associated with stock compensation programs. The most significant of these is the restricted stock that was issued as part of the Command acquisition. Amortization of intangibles associated with acquisitions are now excluded from non-GAAP presentations as well. And the coupon carry on our recently issued convertible debt is 2.5%; however, GAAP dictates that an additional non-cash charge be taken as interest expense in addition to that coupon payment. In Echo's case, approximately 3.25% incremental above the 2.5% coupon will apply, and so for non-GAAP purposes, we'll be excluding this non-cash charge. At the back of our supporting slide deck, we've provided a historical reconciliation of these non-GAAP items. We believe these adjustments will give investors a better understanding of our operating performance in any given reporting period. On page seven of the supplemental materials, you'll find a summary of our key operating statement line items. Commission expense was $20.4 million in the first quarter, increasing 38% year-over-year. Commission expense was 29.4% of net revenue, representing a 170-basis-point increase from Q2 2014. This increase is the result of our continued shift towards truckload and the addition of Command for a portion of the quarter, which is predominantly truckload as well. Non-GAAP G&A expense was $32.3 million in the second quarter of 2015, up 26% from the second quarter of 2014. The increase is due to continued investments in growing our sales and operational head count, along with the inclusion of G&A from Command. Included in this G&A expenses are approximately $200,000 of integration cost as we begin to bring the two organizations together. Depreciation expense was $3.0 million in the second quarter of 2015, increasing 20% year-over-year. The increase is largely attributable to the added depreciation costs from the Command acquisition. Our effective income tax rate was 35.2% for the second quarter of 2015 compared to 38.2% in the prior year. Non-GAAP EBITDA increased 30% from the second quarter of 2014 to $16.8 million. Non-GAAP net income increased 29% from the second quarter of 2014 to $8.3 million. Non-GAAP fully diluted earnings per share was $0.30, increasing 10% from the second quarter of 2014. GAAP fully diluted EPS was a negative $0.03 in the second quarter of 2015, with the largest portion of the difference attributable to deal costs associated with the Command acquisition. Slide eight contains selected cash flow and balance sheet data. In Q2 2015, we generated $25.2 million in operating cash flow. This was an increase of 208% from the second quarter of 2015 and was the result of higher operating earnings and timing associated with our working capital needs. Capital expenditures totaled $3.8 million in the quarter, a decrease of 7% from the second quarter of 2014. Payments for acquisitions net of cash acquired during the second quarter were $385 million, and this is all related to the acquisition of Command Transportation. We ended the quarter with $58 million in cash and $225 million of accounts receivable, both up significantly after the Command acquisition and the capital raise. At the end of the quarter, we carried a net amount of $27 million outstanding on our new $200 million ABL facility. Non-GAAP fully diluted shares outstanding for the second quarter were 27.7 million, keeping mind that our equity raise closed near the end of April and we issued additional shares in conjunction with the closing of the Command acquisition at the beginning of June. We would expect that number to be approximately 30.7 million shares during the second half of 2015. In light of the Command acquisition and considering continued lower fuel rates and current market conditions, we're updating guidance for the second half of the year. We expect full-year 2015 revenue to be in the range of $1.525 billion to $1.575 billion, with second half revenue of $870 million to $920 million. Through July, our total revenue was up 42% year-over-year with the organic truckload volume up 33%. We expect full-year 2015 commission expenses to be in the range of 29% to 30% of net revenue, with the second half rate between 29.5% and 30.5% of net revenue. Full-year SG&A expenses should be between $136 million and $140 million with the second half falling in the range of $77 million to $81 million. Aside from these amounts, we do expect to incur some onetime costs in connection with the Command integration of $2 million to $4 million in the second half of the year. And we will update you on those costs more specifically on future earnings calls. We expect deprecation expenses to be approximately $6.6 million to $6.8 million in the second half of the year, cash interest expenses of $3.3 million to $3.4 million, and we anticipate a tax rate of 37% to 38%. I'll now turn it back over to Doug.

[Douglas R. Waggoner:]

Thanks, Kyle. To summarize, we're very proud of our results. We closed a transformational acquisition, drove organic growth in a soft market, expanded our net revenue margin while significantly increasing our truckload mix and kicked off a very exciting integration with Command. Even more exciting is our prospect for future growth as we continue to enhance our offering to investments in technology and our people and through the integration of Command. This integration will drive a powerful truckload networks to a large carrier base, increased lane density, and experienced people who will all enable us to add significant value to our shippers and carriers. We continue to believe the synergy of this acquisition will be significant. Our people are really excited about the future, and that tells us a lot. Our clients and carriers have told us that they're as excited as well. And it's great to report that we've had no client or carrier disruption after closing and communicating this deal. In addition, we've brought in new talent. Paul Loeb present on our board is already adding value. The Command leadership teams are quality people that bring significant industry experience to our collective management. Additionally, we recently brought on new technology leadership. I'm excited to announce that we've hired Tim Kutz as our new Chief Information Officer. Tim is a great leader with relevant experience to help Echo take its technology strategy to the next level. Tim's most recent experience was to lead the implementation and merger strategy of Veritiv, a $9 billion combination of Unisource and Xpedx. All of these facts give me confidence in our long-term plan, and we're well-positioned to continue to grow and emerge as a powerful leader in this large market. Given this, I'm excited to update you on our long-term targets. You will recall that the 2017 targets that we issued last summer included plans for $2 billion in revenue and $100 million of non-GAAP EBITDA. We are already well ahead of plan toward these targets, and as such, we're issuing new 2018 targets of $3 billion in revenue and non-GAAP EBITDA of $150 million. Embedded in these targets are annual organic revenue growth rates of 10% to 12%, annual revenue synergies from the Command integration of $200 million to $300 million by 2018, and an additional $200 million to $300 million of new acquisition revenue. The EBITDA target reflects continued productivity improvements of our sales force and leverage over our corporate infrastructure. It also includes some modest compression in gross margins over time, as we continue to grow our truckload revenue mix. And at this time, I'd like to open it up for questions.

[Operator:]

Thank you. Our first question comes from Tom Albrecht with BB&T. Your line is open.

[Thomas S. Albrecht:]

Hey guys, congratulations on a good start here with Echo. Kyle, I guess this question is for you. I mean basically, when I look at the quarter, I love everything above the line and I kind of get your explanations for what you're excluding, but I guess I'm a little leery of that, given my conservative nature. Historically, you've excluded acquisition-related cost and contingent consideration payouts. We get that, but I mean you've added a bunch more stuff in there. I mean two other categories, and it made a major difference to the bottom line. And I'm just – why not just treat this quarter like the stock compensation expenses more of a onetime, it was higher than normal as opposed to completely redoing the way you're going to present the bottom line?

[Kyle Sauers:]

Sure, Tom, thanks for the question, and certainly understand your point. The problem is there's not just a onetime cost that we're talking about. That difference in the interest expense to non-cash expense related to the convertible through the lifetime of the five years of that convertible note, the stock comp expense, the majority of that – that's over one year, so it will be an expense over the next four quarters. So we feel like that's the best way to give consistent results that portray our operating performance over that time period. It's also why we put in our deck the historical impact of pulling that out.

[Thomas S. Albrecht:]

So on the amortization, the $2.3 million, given the timing of the deal in the quarter, will that be a higher figure for the third quarter?

[Kyle Sauers:]

It will be a higher figure for the third quarter. In total, it'll be somewhere near $9.1 million in the second half of the year for total amortization, which includes our previous acquisitions and the Command acquisition.

[Thomas S. Albrecht:]

And then stock compensation expense – do you have an approximate second half figure as well?

[Kyle Sauers:]

Yeah. That will be right around $9.5 million.

[Thomas S. Albrecht:]

Okay. And then I guess – I mean I will just have to think about that. But just in terms of freight in general, I get that Command is much more tied to the spot market. The fact that there – I think you said maybe it was staved, but the revenues were flattish, is that also a function of just you're integrating, you're meeting together, and so maybe you're not able to grow that top line as much temporarily?

[David B. Menzel:]

Tom, a couple of things, just as a point of clarification. First off, in terms of the prepared remarks, I mentioned that the volume was relatively flat year-over-year, so I didn't talk about top-line revenue.

[Thomas S. Albrecht:]

Okay.

[David B. Menzel:]

So the second piece I would highlight is I don't think that the integration has had any impact on the June results or the quarter results; certainly nothing material. As you know, Command has positioned themselves kind of in two primary areas. One, with middle market companies very similar to Echo, and so they've got a substantial amount of revenue that they get from middle market customers; and then with larger customers that tend to run routing guides and bid processes. Their position's been a little more focused on the spot market opportunities. So in that case, they had a quite a bubble in 2014 with the larger clients. And so that spot, the softer spot market, has definitely resulted in flatter volume numbers for Command, which we expected. That was consistent. I mean one of the things that we think is meaningful is that they've been able to really replace some of that volume with penetrating the middle market at the same time. So their results were as expected. I think as we continue to integrate the businesses over the next 6 to 12 months, we'll be able to kind of optimize the value and the benefits of both of our approaches to drive continued growth.

[Thomas S. Albrecht:]

And then last question and I'll jump back in the queue. I just want to make sure I heard. For the month of July, at the consolidated level, did you say revenues were up 42% and volumes were up 33% or was that just truckload?

[David B. Menzel:]

So we said that in total, the revenue was up 42%. So you've got that perfectly correct. And then on the volume side, we just gave a kind of a specific organic volume number. So the organic volume truckload only was up 33%, to give you some indication of the market share wins that we're having and the growth in the core truckload part of our business.

[Thomas S. Albrecht:]

Okay. Thank you.

[David B. Menzel:]

Thank you.

[Kyle Sauers:]

Thanks, Tom.

[Operator:]

Thank you. Our next question comes from Jack Atkins of Stephens. Your line is open.

[Jack Atkins:]

Good afternoon, guys. Thanks for the time. So I guess, if we could just start here for a moment and look at the FY2015 guidance for a second, could you maybe talk about the puts and takes behind that? What are you assuming in terms of just underlying sort of organic revenue from the legacy Echo in there, and then maybe what's assumed for the acquisition?

[Kyle Sauers:]

Sure. So it turns into about maybe a 7%, 8% organic growth rate for Echo at the midpoint of the range and flat to a little down for Command in the second half of the year, or for the full year – I'm sorry, Jack.

[Jack Atkins:]

Okay. Okay. So we take that Command number that we got when you guys announced the acquisition and sort of think about 50% of that. That's what you guys are baking into the guidance?

[Kyle Sauers:]

Well, no. So the number you had for Command that we'd have reported to-date was for 2014. And Dave's commented earlier their volumes have been flat, but rates have been down, and obviously there's a fuel impact as well.

[Jack Atkins:]

Okay.

[Kyle Sauers:]

So it would be a little bit lower than that.

[Jack Atkins:]

Okay. Okay. And when we think about the organic revenue growth rate for Echo that's assumed to the new guidance, just – again, so I'm just trying to compare apples-to-apples, how does that compare with what was assumed to the prior guidance? Is that the same, better, worse? Just trying to understand what's happening with the freight environment and sort of your outlook for the remainder of the year there.

[Kyle Sauers:]

Yeah, absolutely. So as I mentioned, that guidance at the midpoint probably represents about a 7% growth rate for Echo, the historical Echo business over 2014, which is in the neighborhood of $50 million below the bottom end of that previous guidance that we'd given. And that's a result of the weaker spot market, and fuel and lower rates.

[Jack Atkins:]

Okay. Okay, Kyle. Thank you for that detail. When we think about the stock compensation expense in the quarter, I know it's going to be a sort of four-quarter vesting, but how much of that year-over-year growth in stock compensation expense is tied to the restricted stock payment to the Command folks?

[David B. Menzel:]

Roughly all of it, probably on a quarter-over-quarter basis. So – yeah.

[Kyle Sauers:]

Yeah, most of that increase quarter-over-quarter is related to Command. But then, as I mentioned, just to help you out to do a little more math, the expectation is that that would be about $9.5 million in total for the second half of the year.

[Jack Atkins:]

Okay, okay.

[David B. Menzel:]

Just...

[Jack Atkins:]

Yeah. I'm sorry.

[David B. Menzel:]

I was just going to clarify also, and we talked about this on the road, is that a substantial portion of that stock compensation was actually funded by – through the – considered kind of part of the purchase price of Command and funded by the sellers. However, since it went directly to employees for retention purposes, the accounting treatment for that is that we're recording that expense as stock compensation expense. So it's a little bit of an unusual type item and is another part of the rationale for kind of taking it out of the non-GAAP calculations.

[Jack Atkins:]

Okay, okay, makes sense. And then last question for me, just sort of bigger picture. It sounds like when we compare your outlook today is in terms of just the underlying market. Things seem to be a little bit, maybe a little bit more challenging than they were three months ago. Could you maybe talk about what's driving that and what you guys are seeing and hearing in the economy?

[David B. Menzel:]

Well, I think that...

[Douglas R. Waggoner:]

Well, Jack...

[David B. Menzel:]

Go ahead, Doug.

[Douglas R. Waggoner:]

I was just going to say, I think that the supply/demand dynamics have been pretty much in equilibrium, which reduces the amount spot business that's available. It's hard to forecast the second half of the year, but there's nothing that excites us. We still think longer term there's a looming driver shortage when the economy gets better, which actually benefits our spot business. So really, that's kind of the color.

[Jack Atkins:]

Okay. Okay, makes sense. Thanks again.

[Kyle Sauers:]

Yeah, one thing I'd just comment on to add to that, Jack, is that our guidance that we've given for the second half of the year really assumes no meaningful changes one way or the other in the current market conditions.

[Jack Atkins:]

Okay, makes sense. Thanks again for the time, guys.

[Kyle Sauers:]

Thanks, Jack.

[Douglas R. Waggoner:]

Thanks, Jack.

[Operator:]

Thank you. Our next question comes from Jason Seidl of Cowen & Co. Your line is open.

[Jason H. Seidl:]

Hey, Doug; hey, Kyle; hey, team. Looking at your net margin improvement on the truckload side – I think you said it was 118 basis points. You mentioned it was because of sort of loose capacity and lower fuel. How should we look at that sort of going forward? Is this just a bad base to kind of look off of considering that, hey, diesel's at six-year lows here? And is that expected to just worsen, all things being equal?

[David B. Menzel:]

Well, I think that as we mentioned – the fuel is a big driver there because obviously, as the fuel prices come down, the numerator is shrinking and the margins tend to expand. And so it's hard to predict where fuel's going to go. We've seen, roughly, I think it's four or five consecutive quarters of margin expansion on the truckload side. And so some of that – there's a lot of moving parts that drive the margin, and today, fuel prices is one, but also the economy, the amount of spot freight, and the amount of award freight that's in the mix. So it's difficult to give you kind of an accurate measure of where we think that's going to go over the next year or two, but as we continue to build the network, improve our buying power and position in the marketplace, we're optimistic about our ability to do well on the margin side.

[Jason H. Seidl:]

How do you guys look at that number on an ex-fuel basis?

[David B. Menzel:]

So, in other words, I mean, I think the question is would the margin have changed by 118 basis points without the decline in fuel? I think the answer to that's no. Fuel was a primary driver in the quarter for the margin decline. The primary reason for that is that there was a lot less spot freight in the market. So that would give some pressure against those margins, if not for fuel.

[Jason H. Seidl:]

Okay. That's what I thought. I guess my next line of question is going to turn to sort of revenue synergies going forward. I think you said in your longer-term guidance, you're assuming $200 million to $300 million. Could you sort of walk us through how you're getting to those numbers and sort of what progression should we start to see? Is there an even ramp-up? Is it going to spike? How should we think about that?

[Kyle Sauers:]

Yeah. Sure. I'd be glad to take that. I think in year one, it's going to be a little slow. Until we complete the technology integration, it's a little more difficult to drive that revenue synergy. But let me give you a little more color on the synergy and how we think about it. Combined, the business is roughly $1.2 billion in truckload. And so when we combine the technology and the sourcing and really our truckload networks, we think that's probably the greatest driver of synergies. So that's going to come more in years two and three, when we have more power to kind a cross-sell to our existing customer base with the expanded coverage that we're getting from the acquisition of Command. We mentioned their strength on the Southeast and the East Coast and our strengths on the western – west of the Mississippi. And so when we bring those networks together, we think that we'll see some pretty significant opportunities to enhance our relationship with existing clients, win more spot rate, and grow our customer base. And we saw that when we did the acquisition of Advantage back about two, three years ago. And we've mentioned before that they were Southwest-focused, but as we combined their operations with Echo's we've seen 3x growth in that business over the last couple of years. So that's the first and the biggest piece, like I said, comes in years – by two and three against those long-term targets. The second bigger piece of the puzzle is really the multimodal cross-sell. And the good news is we've already started to make progress against that effort. We've got a handful of accounts in our managed transportation pipeline already that were great opportunities that came from the Command team. Secondly, we've already gone live with kind of volume and partial shipments. And so we've seen a fairly significant amount of load that were starting to move, which is either through just a bigger network that Echo could bring to the table. And so it kind of expanded capabilities of clients, and we'll see a little bit of add in 2015 and more in the 2016. And then on the LTL side, I think that's more of a 2016 and 2017 issue. Again, to really capitalize on our LTL capabilities we'd like to see the technologies integrated. But at the same time, we're already finding ways to leverage our relationships inside the Command customer base.

[Jason H. Seidl:]

That's great color. Thanks, Kyle. I guess, Doug, the last one goes to you, more of an industry question. We've seen obviously a lot of guys get bigger this year with transactions, and then we've seen other people – other large companies like UPS and their recent of Coyote, really sort of get into the marketplace. Is this going to spark even more, I guess, consolidation in the industry as the smaller players start figuring out it's going to be hard to compete going forward?

[Douglas R. Waggoner:]

Well, I think it just goes to show first of all how big the marketplace is. I mean when we looked at our own business combined with Command, we're still less than 3% of the market. And so we think there's huge opportunity. We think that the acquisition that you mentioned highlights the attractiveness of the space. But I also think that you're making a true statement, is there are a lot of smaller brokerages that we find starting to wake up and realize that it takes working capital, it takes technology, and it takes scale to be competitive as the big get bigger. So I think that'll be a factor.

[Jason H. Seidl:]

Okay. Gentlemen, thank you for the time, as always.

[Douglas R. Waggoner:]

Thanks.

[Operator:]

Our next question comes from Tom Wadewitz of UBS. Your line is open.

[Thomas Wadewitz:]

Yes. Good afternoon. Wanted to – maybe I can follow-up a little bit on the question that Jason was just asking you. So in terms of competitive dynamic, do you think that – I guess we saw Freightquote with C.H. Robinson, and I know – you know they were, I suppose, a bigger competitor in the LTL side, but they've been bigger there for a little while, and then you had kind of the recently announced deal with Coyote and UPS. Do you think that combining with those companies that will make those guys tougher competitors? Will it change things over time, maybe seeing that with kind of Freightquote and CH? Or do you think it doesn't really have an effect and how you compete with those guys going forward?

[Douglas R. Waggoner:]

Well, I don't think it's a real factor. I mean we competed with Freightquote before they were purchased by C.H. Robinson, and they were a tough competitor of ours then and we continue to compete against them now. So nothing's really changed. It's the same number of players in the marketplace. With the case Coyote, they were a great truckload broker. And we competed against them every single day, but also competed against hundreds of other brokers big and small. So I think the consolidation doesn't really change the dynamics for Echo, now that we're at scale and we're making a penetration in the marketplace. And we're not seeing new entrants in the market per se; we're just seeing the big getting bigger, and that includes Echo.

[Thomas Wadewitz:]

Right, okay. What about – I think you said that you think supply and demand are pretty balanced. I guess if I think about the market, let's say 2012, 2013, it was – truckload was a relatively balanced market. And then obviously, 2014 was more activity, much, much better market, and so forth. If we stay in a more balanced market for a while, do you think that will increase the competitive pressure as we saw in 2012 and 2013? Or do you think that that's unlikely that we go back to a market that kind of seemed to be more pressure on gross margin as we had those in 2012 and 2013?

[Douglas R. Waggoner:]

Well, we've been improving our truckload margins over the last number of quarters kind of through thick and thin. Part of it's just been Echo getting better at truckload and executing better, getting to scale. I think Command is a company that's got demonstrated great margins in the space. We think part of it's about execution. It's true that in the tighter markets, you'll see margin opportunity like you saw in the first half of 2014, which gives us a tough comp today. But I think about – in coming quarters, the economy at some point is going to get stronger. We know there's a driver shortage today. We hear the ads for drivers every single day, so I think there's going to be pressure on capacity at some point, but we feel pretty good about this market. We're competitive. We're growing. We're getting good margins. And so I would kind of look for more of the same in the short term.

[Thomas Wadewitz:]

Yeah. Well, it's good news you get a lot if you've been focused on internally, and a lot of opportunity, and regardless of the market you're in. Just one last one. What's the mix of kind of combined Command and Echo in truckload? What mix do you end up with in second half in terms of how much is spot and how much is contracts?

[David B. Menzel:]

So, as we've said in the past, Echo's business was probably about 75% spot, 25% contract. There's a few shades of grey in the measurement of those specific metrics. And on the Command side, they were probably closer to 10%, but we don't have a super-accurate number there because they weren't necessarily tracking every load, whether it was spot or award. So that's a bit of a guesstimate. So, obviously, when we combine those two businesses together, we're looking at some kind of a blending probably in the neighborhood of 15% to 20% currently. Now as we continue to go through the bid season and think about 2016, that may change a little bit, but that's probably a kind of a fair assessment of where it might be in the second half of 2015.

[Thomas Wadewitz:]

Right, okay, great. Thank you for the time.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. Our next question comes from John Mims of FBR Capital Management. Your line is open.

[John R. Mims:]

Hey, great. Thanks. Good evening, guys. So Doug, let me ask you on the long-term guidance, the numbers. And I know that they're somewhat approximations, but it's a 5% gross EBITDA margin for 2018, and in this quarter you did 4.5%. And I haven't gone through all of the numbers Kyle put out for the full year of 2015 yet, but I would imagine the 2015 gross EBITDA margin would be somewhere between 4.5% and 5%, somewhat close to 5%. So how do you think about longer-term margin improvement, EBITDA margin improvement over the next several years post Command, as you continue to integrate as you continue to grow based on relative to what you're putting out in guidance?

[Kyle Sauers:]

John, this is Kyle. I'll take that one. So I think we do expect to continue to get leverage over the corporate infrastructure and have our people continue to become more productive as the tenure grows, as we've seen throughout Echo's history. I think one of the things you're seeing there is that we do expect some compression in our gross margin percentage over that time period, as we continue to grow truckload to a bigger portion of the mix. So we'd expect the EBITDA margins as a percentage of net revenue to continue to expand throughout that period, but not as much as it would expand compared to gross revenue.

[John R. Mims:]

Okay. That's helpful. And then, Dave, what did you say the total growth of head count was or agents was combined with Command?

[David B. Menzel:]

So, let me see here. The total sales head count which includes both client sales and on the carrier side. We went from 1,028 people at the end of Q2 2014 and then at the end of Q2 2015 we had 1,687 people. So that's a growth of 659 people across both organizations obviously including the acquisition of Command.

[John R. Mims:]

Okay. And then what is the combined? Now that everybody's in-house, what does that do to your average tenure?

[David B. Menzel:]

So the – Echo's average tenure was around – I don't have the actual calculation on the combined in front of me. But Echo's was about 21.5 months on the sales side, and that's just the employee sales side. So that kind of excludes your – any outside agents that, as you know, the 278 agents in those head count numbers. So it excludes that. It's more of an employee metric. The Command tenure was about 30 months or so, maybe just under 30, 29, 28. So somewhere in the middle there is where we're at today.

[John R. Mims:]

Okay. And then with – post integration, should we expect any slowdown in the classes of new people you're bringing in, or are you still going to grow your organic sales force as aggressively as you have the last couple years?

[David B. Menzel:]

We're going to still grow them aggressively. I would say that normally, we do have a little bit of a slowdown in Q4 as you know, because that's just the time that we don't necessarily add a lot of people. So we'll probably see some reasonable classes coming in here in Q3 and – but in Q4 it will slow down. As we get further along with the integration, we'll re-evaluate the hiring plans for 2016. We'll obviously give you guys some guidance on that when we have more specificity around those plans, but we do intend to continue to expand and grow.

[John R. Mims:]

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

[David B. Menzel:]

Thank you, John.

[Douglas R. Waggoner:]

Thanks.

[Operator:]

Our next question comes from David Campbell of Thompson, Davis & Company. Your line is open.

[David P. Campbell:]

Hi, thanks for taking my question. Dave, you mentioned the employee count at the end of June. I just was trying to bring my – up to date or your sales employees and sales agents and total employees at the end of June. Can – do you have any number?

[David B. Menzel:]

Yeah, sure. Happy to do that. So I mentioned the sales head count was 1,687 people. The agents within that head count were 278. So that brings our sales head count to 1,409 people. Total employees was 2,430, and that's highlighted on our earnings release as well.

[David P. Campbell:]

How much? I'm sorry. Total employees were?

[David B. Menzel:]

2,430.

[David P. Campbell:]

In total. Okay.

[David B. Menzel:]

In total. Yes.

[David P. Campbell:]

And that was the end of June?

[David B. Menzel:]

Correct, that was the end of June.

[David P. Campbell:]

That would be – that would increase somewhat – your plans would increase that in the third quarter, particularly the sales employees, I guess right? That would – particularly that would go up?

[David B. Menzel:]

That's correct. Its typically does go up in the third quarter.

[David P. Campbell:]

Right, right. Okay. And the target for this year – you're not giving out any target for this year, but the G&A as a percentage of net revenues should continue to decrease?

[Kyle Sauers:]

Well to that, we did – we actually did give out a target, David. For the second half of the year, we expect G&A to be between $77 million and $81 million, exclusive of any onetime integration cost due to the Command integration.

[David P. Campbell:]

So that's a non-GAAP number right?

[Kyle Sauers:]

Correct.

[David P. Campbell:]

$77 million to $81 million in the last six months?

[Kyle Sauers:]

That's correct, yeah.

[David P. Campbell:]

Okay. Okay, great. That's all I have. Thank you very much.

[Kyle Sauers:]

Thanks, David

[Douglas R. Waggoner:]

Thanks, David.

[Operator:]

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

[Kevin M. Steinke:]

Good afternoon. I wanted ask specifically about the technology integration with Command, if you've been able to set a specific timeframe for getting that done and what are the next steps there and what sort of decisions have been made about how that's going to be done.

[Douglas R. Waggoner:]

Well, Kevin, yeah, we've got a lot of work going on that. We've also brought in some outside help to get us through it quickly and effectively. We're targeting one year to have the technology integration completed.

[Kevin M. Steinke:]

Okay, good. That's helpful. And the 2018 targets that you set, looks like you're separating out organic growth from the revenue synergies from Command, although I guess if we combine the two, you should be growing organically faster than 10% to 12% over the next few years. Is that the right way to think about it?

[Kyle Sauers:]

Yeah. Kevin, this is Kyle. I think that is the right way to think about it. We wanted to call out the growth that we'd expect to see on that base set of business and then also be able to comment on a range of synergies that we'd expect to see when we bring those businesses together. But yes, you could certainly describe that as organic growth higher than that 10% to 12% once you add in those synergies.

[Kevin M. Steinke:]

Okay, perfect. And lastly, Kyle, have you been able to identify the kind of the final annual amortization expense specific to Command?

[Kyle Sauers:]

Yes, I've mentioned that in the second half of the year, we'd expect roughly $9 million to $9.1 million of amortization in total. The Command amortization for the second half of the year, you can expect to be around $6.7 million in that range.

[Kevin M. Steinke:]

Okay, perfect. Thanks for taking my questions.

[Kyle Sauers:]

Thanks, Kevin.

[Douglas R. Waggoner:]

Thanks, Kevin.

[Operator:]

Thank you. Our next question comes from Matt Young of Morningstar. Your line is open.

[Matthew J. Young:]

Good afternoon, guys. Thanks. It sounds like you still plan on investing in the sales force, but I also know you plan on reviewing your head count needs as the integration progresses. But does Command change at all your previous strategy of needing the boost to sourcing personnel given that it has a larger mix of head count on that front?

[David B. Menzel:]

It does potentially change that. I think that's one of the key issues that we'll be looking at in 2016. And we've already – we would expect that our head count additions might be a little geared more on the client side than over the past of the couple of years. They've been – certainly, with Echo as a standalone business, we've done a lot more investing on the sourcing side of the business to build up our truckload sourcing capabilities. So it's a good question, and I think that we'll get more specific about that next year. But I do see the potential to do some shifting. Potentially the hiring plans might be slightly lower to given the synergies we'll get on the sourcing side.

[Matthew J. Young:]

Okay. That makes sense. And then just one other question on the stock comp. I'm not sure I fully understood it, but I think you mentioned $9.5 million run rate in the back half of the year. Would that kind of a run rate come down next year since that's elevated because of the Command deal at this point? Is that amortized through?

[Kyle Sauers:]

Yeah. It will stay in that elevated range through the first half of next year, and then it would come down relatively significantly.

[Matthew J. Young:]

Okay. So a good portion of it like you mentioned was onetime in nature, just amortized through over four quarters or so?

[Kyle Sauers:]

Yeah. There's some portion that's a little bit longer, but as we have mentioned it was a $10 million amount that was being amortized or expensed over a one-year period.

[Matthew J. Young:]

Okay. Thanks.

[David B. Menzel:]

Thanks, Matt.

[Douglas R. Waggoner:]

Thanks, Matt.

[Operator:]

Thank you. Our next question comes from Tom Albrecht of BB&T. Your line is open.

[Thomas S. Albrecht:]

Yeah. Hey, guys. Just a couple of follow-ups on the core freight business now. Normally, you give shipment volumes and that's kind of trigger in our model. Just curious if you're able to make that available.

[David B. Menzel:]

Yeah. We can – I think we can make that available. Kyle, why don't you give the numbers? The reason we stopped doing that – and it's okay that it's a trigger – is that with the mode mix changing, you know, the combination of LTL and truckload shipment volumes is getting more and more, so, maybe not be a key metric. So there's no reason we can't give it, but we're just kind of – wanted to be cautious about triggering too much on that as the mode mix continues to shift.

[Thomas S. Albrecht:]

Yeah. And it's always been a little tricky but it's better than nothing. And we do try to capture the change in revenue per load or revenue per shipment, we've guessed, fairly accurately.

[David B. Menzel:]

Yeah. Fair enough.

[Kyle Sauers:]

Yeah, Thomas, the number's 645,000 on the quarter, which is up about 19%.

[Thomas S. Albrecht:]

Okay. And then, I think you also have historically given some things – let me see here – enterprise and transactional client counts.

[David B. Menzel:]

So I think on the managed – or enterprise client counts, we've decided that that metric, as we've gotten bigger and that's a smaller part of our business, just doesn't really make sense to continue to update and disclose. We've signed, I think, 10 new clients in the quarter, so we continue to add clients, high renewals rates. But we decided that was just kind of getting to be extra information that wasn't necessary to the – really driving the financial results. So we have kind of backed off on disclosing that. I think transactional clients were – there's no reason we can't disclose that.

[Kyle Sauers:]

Yeah. Total clients we worked with during the quarter, and now this includes Command as well, is 24,200.

[Thomas S. Albrecht:]

Okay. Okay. Great. Thank you.

[Kyle Sauers:]

Thanks, Tom.

[Operator:]

[Operating Instruction] Our next question comes from Jack Atkins of Stephens. Your line is open.

[Jack Atkins:]

Great thanks guys. Just a couple of quick follow-ups here. On the cash interest expense, Kyle, what was that figure again? Was it $1.5 million a quarter that you're expecting there?

[Kyle Sauers:]

The cash interest expense? Yeah, I'd expect somewhere in the neighborhood of $3.3 million to $3.4 million for the second half of the year.

[Jack Atkins:]

Okay. That's what I had. I just want to make sure. And then on the long-term guidance, could you just kind of go through those buckets again just to make sure everybody has them, 10% to 12 % organic growth. What's the expected revenue from acquisitions and the expected revenue from the synergies?

[Kyle Sauers:]

So, $200 million to $300 million of expected revenue from acquisitions by 2018 and also $200 million to $300 million of expected additional revenue from synergies through the Command integration in addition to the organic revenue of 10% to 12%.

[Jack Atkins:]

Okay. That makes sense. And just kind of going back to an earlier question on operating leverage, I mean getting to that sort of revenue level in 2018, what sort of operating margin is embedded in your EBITDA guidance to get there?

[Kyle Sauers:]

Yeah. We haven't really given a percentage there. As you know, we don't guide to a margin percentage, and that operating leverage is really a factor of the leverage we get over those net revenue dollars. So it's a little harder for me to pinpoint something there without giving a margin percentage. But we do expect that to continue to accelerate. Obviously, that synergistic revenue is very accretive revenue for us, and we'd expect that to have a nice incremental margin impact. So we're excited about that. So hopefully, that's helpful.

[Jack Atkins:]

No, it is, it is. I mean just one last thing. I mean as you think about the 10% to 12% organic growth as well, and even the acquired growth, I mean, I would think that there's – the incremental margins just inherent with the business should be fairly significant, at this point just given all the work you guys, you're going to build your back office. Could you maybe help us think through, what should incremental margins in this business look like in the next several years?

[Kyle Sauers:]

Sure. So, it's obviously going to – it's going to ebb and flow depending on the quarters and the seasons...

[Jack Atkins:]

Of course. Yeah.

[Kyle Sauers:]

...And the timing of when the integration happens and when those revenue synergies come in – I think a good number to use is kind of high 30%s low 40%s as an incremental margin percentage.

[Jack Atkins:]

And that's on net revenue?

[Kyle Sauers:]

Correct.

[Jack Atkins:]

Okay, makes sense. Thanks again for the time.

[Kyle Sauers:]

Thanks Jack.

[Operator:]

Thank you. I'm showing no further questions. I would like to turn the call back to Doug Waggoner for closing remarks.

[Douglas R. Waggoner:]

All right. Well, appreciate everybody joining us today. We feel really good about the business. We're proud of the execution. We are excited about the Command deal. And we look forward to talking to you all in the coming quarter and on the next call. So thanks for joining us.

[Operator:]

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