Echo Global Logistics, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference Mr. Doug Waggoner, Chief Executive Officer. Sir, please go ahead.

[Kyle Sauers:]

This is Kyle Sauers. Thank you. Thanks for joining us today to discuss our second quarter 2017 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. 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. The second quarter was a reminder that things can change quickly in the Truckload spot market. Both pricing and demand picked up in June, helping to accelerate our growth rate as the quarter moved on. At the time of our Q1 call, we discussed total revenue growth through the first few weeks of April at around 3%. We ended up the second quarter with year-over-year revenue growth of 6%, reflecting the implementation of some new Managed Transportation wins, rising prices and improved growth later in the quarter. Now, let's move to Slide 3, where I will give more specifics on our second quarter results. Revenue was up 6% compared with the same quarter last year at $470 million. Our transactional business grew slightly, which was in part due to intentionally pricing less aggressively on committed freight in the first two quarters of 2017. This had the effect of slowing volume growth, but mitigating the pressure on net revenue margin. In June, when the market tightened up, we saw more spot market volumes at better net revenue margins, so the quarter was a blend of those various factors. Managed Transportation was again a highlight of the quarter, growing over 20%. Net revenue was $81.6 million, which was down 4% over the prior year, and up 10% sequentially. The year-over-year decline in net revenue was the result of margin decrease of 183 basis points, reflecting a difficult year-over-year comparable and primarily driven by the Truckload portion of our business. Non-GAAP EBITDA declined by 24% to $14 million. GAAP fully diluted loss was $0.01 per share compared to GAAP fully diluted earnings of $0.07 per share in the prior year period. Non-GAAP fully diluted earnings per share were $0.18 per share. We ended the quarter right at the midpoint of our guidance for both revenue and G&A spend. Margins declined sequentially from the first quarter, which is seasonally typical, but we're providing high levels of service to our shippers and paying carriers fairly to help ensure that we're maximizing our margins. I now want to turn the call over to Dave, who will discuss our Q2 results with more detail.

[David B. Menzel:]

Thanks, Doug. To kick it off, I want to thank all of our clients, who voted for us in the recent Inbound Logistics' annual survey of 3PLs as we achieved an incredible honor to be voted number one 3PL by the shippers in the survey. Our people worked very hard every day to exceed our clients' expectations, and we understand the incredible demands our clients are facing as they manage their supply chain. To do this effectively, we must cultivate our relationships with our carriers to ensure capacity for our clients. We strive every day to be easy to do business with and we want to simplify transportation management for all of our stakeholders. Taking a look at Q2, we saw an acceleration of our revenue growth in our primary modes of transportation, truckload and LTL. In fact, we achieved record revenue in truckload LTL and in Managed Transportation in the second quarter, something we're very proud of. Take a look at Slide 4 in the investor presentation, where those results are highlighted. In truckload, our revenue increased by 5% to $315 million in the second quarter. This year-over-year increase was a result of an increase in rates of approximately 7%, so truckload volume declined by 1%. The modest volume decline is mainly attributable to the overall market and our strategy to be a bit less aggressive in this environment. Doug mentioned previously and it was said on our last earnings calls, we've been anticipating that supply and demand dynamics would start to turn sometime in the second half of 2017. While it's extremely difficult to predict the exact timing of such market changes, our belief in this thesis causes us to be a bit more cautious when pricing contractual truckload over the last couple of quarters. Lack of spot market business and the consistency of route guide compliance that we've seen over the last 12 months drove many of the market participants to get fairly aggressively – fairly aggressive, I should say, to either maintain or expand their volume. We believe following this strategy was not in the best interest of all of our stakeholders. As a result, we're a bit more selective in areas that we wanted to play and we focus on areas that were the most beneficial to our carriers and opportunities that leverage our network. This strategy helps to protect net revenue margin squeeze, but obviously haircuts volume growth in periods of light demand. Turning to LTL, our revenue was up 10% on a year-over-year basis, totaling $130 million. LTL volume grew 5% during the quarter and LTL revenue shipment was up 5%. Our LTL growth has been driven by success in both our brokerage market as well as through our Managed Transportation business. On the Intermodal side, our revenue was down 7% at $18 million for the quarter, due to lower volume, partially offset by higher revenue per shipment. Slide 5 breaks out the revenue by customer type. Our transactional revenue, which represents 79% of our total revenue, increased by 3% year-over-year, totaling $371 million in Q2 2017. Our transactional revenue grew at a faster rate in the second half of the quarter as we saw the market tighten. Our sales force totaled 1,671 people, which included 280 agents and 1,391 employees. Sales force is up by 17 people year-over-year, all of which were on the client-facing side of the business. This head count is reflective of our brokerage sales organization, including commission sales and carrier sales reps, sales people in training and brokerage operation support that work hand-in-hand with our sales people. Our Managed Transportation business continued to grow, up 21% year-over-year to $99 million in revenue in Q2. This success was driven by a combination of factors. First and foremost has been our renewal rates, which was again in the mid-90% range in Q2. This client satisfaction, along with the efforts of our sales organization, has led to a consistent track record of closing new business. In Q2, we added an additional 12 new accounts, which represents an estimated $18 million of new business for Echo that we'll implement later this year. We're cultivating a great pipeline of additional opportunities and are optimistic about our ability to continue to grow our Managed Transportation business. Slide 6 highlights our net revenue and our net revenue margin. As you can see, our net revenue was down 4%, despite the increase in total revenue. This decline was due to the decline in our net revenue margin, which in turn was primarily due to the truckload net revenue margin of – the decline in net revenue margin of 258 basis points. Our truckload buy rates were up 10% year-over-year, inclusive of fuel, and our sell rates were up 7%. This was a relatively steep acceleration in rates as the market tightened considerably in late May and continued in June. On the LTL side, net revenue margin declined by 71 basis points over the prior year. Increased fuel prices and the implementation of new Managed Transportation clients are the primary factors in the modest deterioration of LTL net revenue margin. I'd now like to turn it over to Kyle to review the 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. Commission expense was $24.7 million in the second quarter of 2017, decreasing 2% year-over-year. Commission expense was 30.3% of net revenue, which represents a 70 basis point increase from the second quarter of 2016. Non-GAAP G&A was $42.8 million in the second quarter of 2017, up 3% from the second quarter of 2016. Depreciation expense was $4.4 million in the second quarter of 2017, increasing 22% year-over-year. The increase was primarily a result of our headquarters expansion in Chicago and then other technology infrastructure upgrades. Cash interest expense was $1.7 million during the second quarter of 2017. It was up 2.5% from the year-ago period. And our non-GAAP effective income tax rate was 37.1% for the second quarter of 2017. As Doug mentioned, non-GAAP fully diluted EPS was $0.18, decreasing 34% from the second quarter of 2016. And the primary differences between our GAAP and non-GAAP EPS in the second quarter of 2017, our $3.6 million of amortization intangibles from acquisitions, $2.0 million of noncash interest expense and $2.4 million of stock comp expense. Moving to Slide 8, we have cash flow and balance sheet data. In the second quarter of 2017, we had free cash flow of $5.8 million and operating cash flow of $11.3 million. Capital expenditures totaled $5.5 million in the quarter. We ended the quarter with $20 million in cash, $268 million of accounts receivable and nothing drawn down on our $200 million ABL facility. We have been and continue to be in full compliance with all the covenants related to our borrowing facility. During the quarter, we used $10 million to repurchase 524,000 shares of our common stock at an average price of $19.07. Now, I'm going to take you through guidance for Q3 and the back half of the year. We've updated our full-year revenue guidance to $1.76 billion to $1.82 billion. Given our first half results, this leads to revenue expectations of $875 million to $935 million for the second half of the year. We expect revenue in the third quarter to be $455 million to $485 million. We continue to expect commission expense in the range of 29.5% to 30.5% of net revenue for both the third quarter and the back half of the year. G&A costs are expected to be $83 million to $87 million in the back half, and between $42 million to $44 (11

[Douglas R. Waggoner:]

Thanks, Kyle. Last quarter, I indicated we would address our long-term guidance this summer. So, I'd like to take this opportunity to make a couple of key points. First, given our growth rate through the first half of this year, much of which has been influenced by external market conditions, we're taking our 2018 target off the table. We remain committed to growing organically at a rate that exceeds the overall market. We believe that our top-line growth rate will exceed 10% over the next five years. However, the ability to time market cycles over two or three years has proven to be quite challenging, so we will focus more on the controllable objectives. In our Managed Transportation business, we will continue to take share by serving our customers and utilizing our sales organization to identify, cultivate and ultimately close new business. Our truckload business remains a core driver of our overall results. Growth has been challenging for us here as of late, partly due to the market and our pricing strategy and partly due to our integration of Command. While that integration work is largely behind us, we do have to continue to focus on process improvements to blend our business together. When we look at this, we can see another six months where our truckload growth is primarily driven by rates, which we expect to increase, but our internal focus will be less about volume gains and more about managing our margins and leveraging our capacity in ways to benefit both our shippers and our carriers. As this model gets fully ingrained operationally, we will then expect to realize the synergy of our $1 billion truckload brokerage business. In addition, continued automation and optimization through investments in technology, analytics and machine learning will enable us to drive higher growth rate than the overall market. On the LTL side, we're a well-established market leader. We have excellent partnerships with our LTL carriers and have demonstrated small penetration with small to midsized shippers through our brokerage business. Furthermore, we continue to penetrate larger shippers through our Managed Transportation business. All said, we expect to see double-digit top-line growth over the next five years, but recognize the next six months may come in under that long-term goal. More important than the top line growth is our net revenue growth because that is the more fundamental driver of our profitability and our ability to grow earnings. We are not giving long-term guidance on this number as in many cases it is influenced by changes in supply and demand, the competitive environment and the degree of automation in our business. We intend to remain mindful of how our strategy influences net revenue margin, and utilize data and analytics to ensure that we're optimizing to add value to both carriers and clients and our shareholders as well. We also intend on improving our operating leverage over time. This may not be immediate, as we continue to make investments in technology, analytics and people, but we're confident that these investments will improve our productivity and increase our competitiveness over time. The specific amount of leverage improvement will depend on the net revenue margins, and will fluctuate over the next five years. Lastly, I want to remind everyone that our prior long-term guidance included anticipated acquisition impacts. We are pulling this off the table as it is difficult to predict both the timing and the size of future deals. We will continue to look for strategic opportunities, as we have in the past, to utilize M&A to augment our growth and we'll update longer term implications of deals once they've been completed. As Dave indicated, I also want to thank our employees for working hard every day to simplify transportation management for our clients and carriers. I'm proud of the progress that we've made, both in terms of our reputation with shippers and carriers and our prominence as a top 3PL in the domestic transportation market. And with that, I'd like to open it up to questions.

[Operator:]

Thank you. Our first question comes from Bascome Majors with Susquehanna. Your line is open. Please go ahead.

[Bascome Majors:]

Yes, guys. Thanks for getting me on here. Just wanted to ask a little bit about the longer-term guidance update that you just threw out there. It feels like the message, at least in the short term, is that it's a challenging market to grow like we used to. We're going to focus on optimizing things internally, improving margins and returns. And not necessarily focus on the top line maybe as much as we had. Am I paraphrasing sort of the message here well or appropriately? And as you look – in your conversations with the board as you kind of made these decisions, I'm curious if there's a need or an opportunity to maybe change some of the longer-term compensation structures or any other incentives as we look over the next five years. Thanks.

[Douglas R. Waggoner:]

Well, you know it's a cyclical business and I would say that we've been in an elongated cycle as compared with more normal cycles. We just completed our largest acquisition and integration of that acquisition ever, so that it comes with a little bit of disruption to our typical business. But I think we've been running a tight ship. We've been thoughtful about how we price in a volatile marketplace. And we know that there are plenty of opportunities for growth in this market. If you look at our market share in truckload or even LTL, there's plenty of opportunity to grow. So, we want to do it thoughtfully with good healthy margins. And then we'll see operating leverage that will get better over time as we scale the business.

[Bascome Majors:]

Okay. And I mean the longer-term incentives, I mean, is there any change to that thought process from the board conversations?

[Douglas R. Waggoner:]

No, we've not had those conversations.

[Bascome Majors:]

All right. And just one more from me. Kyle, can you help us, kind of, as you unpack this and I know it's not something you typically guide, but a wide range will be fine. Do you have a sense of what the free cash flow generation power of the business is going to be this year, and if you expect that to be fairly stable next year, when you put everything together?

[Kyle Sauers:]

So, as you pointed out, we don't give guidance on free cash flow. But I'd point out we've had roughly $16 million of free cash flow this year, during the first half of the year our non-GAAP EBITDA of about $24 million. So, I think, that's within the reasonable historical range. If you take out 2016, where we had some outsized capital investments. And obviously, we'll have quarters with timing differences like we have this year already and the growth rate in a given quarter obviously has an impact on our working capital needs. But nothing's really changed about the way we operate the business that would impact our ability to generate cash in that same way.

[Bascome Majors:]

Got it. Thank you for the time.

[Kyle Sauers:]

Thanks, Bascome.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

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

[Jack Atkins:]

Hey, guys. Good afternoon. Thanks for taking my questions.

[Douglas R. Waggoner:]

Hi, Jack.

[Jack Atkins:]

So, I guess, Doug or Dave, just to sort of start off here, I mean, you referenced this strengthening market in late May and June. I'm curious if you could just sort of comment about how truckload volumes trended through the quarter? And I'm just a little bit curious why this strengthening spot market that we've been hearing about repeatedly for the last six to eight weeks, why that's not yielding, I guess, an acceleration of volume growth going into the third quarter versus what seems like a deceleration, if I look at your guidance?

[David B. Menzel:]

It's pretty -- Jack, I'll take that. So, the per day volume growth has been relatively consistent throughout the quarter. We saw, across the entire business, a slight acceleration in May and June. But when I isolate the truckload side, it was pretty consistent. But I would say this that the rates changed pretty dramatically, beginning in late May and certainly persisting into June. And to some extent, some of those rate changes were, in fact, driven by a hotter spot market, so to speak. And so, the big driver that we saw, as we moved throughout the quarter, was in fact that rate change. And that's persisted for the first half of July, but it's cooled off just a little bit, as we moved into July. But on the volume side, it's remained pretty consistent. So, I think this was a lot of disruption in the marketplace that created opportunities and created capacity squeezes. But going back to Roadcheck and mid-June, Memorial Day and Fourth of July holidays created a significant amount of disruption. But when you average it all out, we didn't see quite the same amount of volume uptick that we might have expected given that disruption.

[Jack Atkins:]

Oh, okay. Okay, I got you. I guess, Doug, when I think about, sort of your comments in the press release and the comments in the call around the model being positioned for a tidy market overall, I guess, in some ways, it seems like we've had that, although I guess it hasn't translated into volume growth. But I'm just sort of curious, as you think about, sort of how the model is positioned going forward in 2018 and beyond, what do you really need to see from the overall market to really drive the leverage I think a lot of us really see and believe that there is in this model?

[Douglas R. Waggoner:]

Well, as I mentioned a few minutes ago, I mean, we've been in a market that for the better part of two years has had declining prices. And when the prices fall back in 2015, you saw our margins expand because the buy price was falling faster than the sell price. And then there's a point where the sell price catches up, which we've seen over the last couple of quarters, where the carriers stopped lowering their rates, but the shippers are still looking for lower rates. And that creates the initial margin squeeze, and then, of course, we enter into a period like we saw in June, where, as Dave indicated, pricing went up because capacity got tight. It didn't really affect volumes in the short term, but revenue came up and we maintained our margin. So, it's just been a volatile cycle. We've seen some pricing that we didn't want to participate in and some of the routing guides, so we took a stance that was less aggressive. So, we have to both read the market, try to anticipate where we think the market is going and have a strategy to price in a way that optimizes our margins and maximizes our growth. So we try to read those tea leaves and do the best we can. And I think we're pretty satisfied that we took freight that fit well with our network, but didn't have to sacrifice margins any more than we had to.

[Jack Atkins:]

Got you, got you. Okay. And then, last question for me and I'll turn it over, but realizing this may be a bit of a sensitive question, but it just seems like given the pressure on net revenue dollars that we've been seeing, and sort of, the lackluster revenue growth that sort of developed this year. I mean is there any thought to maybe taking a look at, sort of, the cost structure and maybe sort of taking a sort of – a look at that and saying okay, well maybe we've got a cost structure built for something that's just not developing like we thought, and maybe pare it back a little bit. Because it seems like net revenue is declining $3 million or $4 million on a year-over-year basis, but you're having a much more substantial decline in operating income and EBITDA.

[David B. Menzel:]

Yes, Jack, I'll take a little bit of that. I think that on the one hand we have, in fact, controlled costs on the G&A side. I mean they have gone up because our volume and our revenue have in fact climbed across the entire business. You've seen that success in the Managed Trans. You've seen volume growth on the LTL side. On the truckload side, it's been modest. And there's obviously cycles that are affecting our net revenue margins. So, on the one hand, we are looking at the costs and on the other hand we are investing to grow and to drive growth over the next five years. And some of those investments are in new sales people. We actually – we committed to adding sales people across the organization, which will drive growth in 2018 and beyond. We've added about 67 people from the – net of attrition through the first half of the year, so that's a factor. And we're making investments in technology to drive automation, which we think will drive additional productivity over time. So, we don't want to paint the picture that we don't have a growth opportunity in front of us. I think the reality is – and I think we all recognize it is that the business has been a bit lackluster. June was pretty exciting in terms of there was disruption in the market and our role to help our customers and our carriers manage that disruption started to increase. And at this point, we're not sure how that will persist through the rest of the year, but when we look ahead we do see changes coming. We see this ELD mandate coming. We believe that that will have an additional disruption on capacity. And that's going to create opportunities for us to capitalize on that. And so, we're very confident in the business model and we are cautious about the investments that we make at a time like this. So your point is well taken. And we have cut back some of those hiring objectives in places where it made sense, but we obviously are staffing to service the needs of our customers and the volume growth of the business and we're going to continue to do that.

[Jack Atkins:]

Okay, great. One just quick follow-up on that point, Dave, if I could. The disruption that you saw the market in June, I guess, when I think about a brokerage model, especially one like Echo's that's more levered to transactional business, I guess I would have thought that would have yielded more, more volume growth overall in June, because there's more volume flowing in to the spot market. But I guess am I not thinking about that right? I'm just trying to understand why that didn't necessarily materialize for you.

[David B. Menzel:]

Yes, I think there's a couple factors. One factor is you've got to remember that we have a significant "transactional business." Much of that is with small to midsized companies and some of that is with the larger companies. And I think that our mix of kind of – we'll call it committed pricing to spot market or trans – purely transactional pricing is about 40% to 45% contractual. So, we're not exclusively spot. And we've got a decent mix there. And so, I think that's a factor to consider when thinking about the change. And I think that one month is not enough to create kind of a longer-term trend. I think you've got to give it a little more time to see what persists in the marketplace and how we're able to capitalize on that. I think those are the two main points I'd make on that.

[Jack Atkins:]

Okay, okay. Thanks again for the time this afternoon guys.

[Douglas R. Waggoner:]

Thanks, Jack.

[David B. Menzel:]

Thanks, Jack.

[Operator:]

Thank you. And our next question comes from the line of Allison Landry with Credit Suisse. Your line is open. Please go ahead. Danny C. Schuster - Credit Suisse Securities (USA) LLC Hi. Good afternoon. This is Danny Schuster on for Allison. Thanks for taking our question. Doug, I think at the end of your remarks, you mentioned something about the competitive environment and the degree of automation in the industry is impacting the way that you think about your long-term growth. Could you maybe elaborate on that a little bit and share with us if that's changed at all in the last three to six months compared to how you've been thinking about that before?

[Douglas R. Waggoner:]

No. I think that we've always thought about automation. There are new tools coming available as we speak that we can implement into our business to take human touches out, to make information flow more freely. And so, as we think about that, it takes some of the workload off of sales people, so they can spend more time selling and servicing customers. Likewise, for our carrier reps, they can spend more time securing capacity. So, we think that automation can make our people more productive. We can get more done with less. And there's been a lot of attention in our industry over the last year regarding automation. And we've got a great playground. We've got lots of shippers. We've got lots of carriers. We've got great technology already. And to the extent that new types of technology and new types of analytics and bots and all of the different things that companies are exploring these days become available and frankly, easier to implement, we think we've got a great ready-made marketplace to implement those types of systems. Danny C. Schuster - Credit Suisse Securities (USA) LLC Okay, great. Thanks so much. And just to follow up and switch gears a little bit and maybe follow up on – check-in on Command. I guess are there any more synergies you think there are to be had and wrung out of that integration? Or are you at the point now where you think you've pretty much realized all the synergies there are, and you're moving on to just kind of pure, organic growth from here?

[Douglas R. Waggoner:]

I would say that there are more synergies that we should achieve. We didn't highlight it in the script. And we talked, I think, a little bit about it last quarter. The most tangible of which is the ability to cross-sell Managed Transportation, LTLs, parcels, different modes that are available. And to date, I think we've generated $83 million in annualized business through the cross-selling of those services. So, that's been very, very effective. I think the second piece and what we'd anticipated at the time that we did the deal was our ability to generate additional synergies on our truckload business. And I think partially because of the complexity and the process changes inherent in the integration. And secondly, because market conditions have not been favorable, we've been unable to achieve those synergies to date. And I think that those are ahead of us. I still believe that we'll be able to achieve significant synergies in our truckload operation over time. We've gone through a pretty difficult process of implementing new systems and process adaptation, by which we've substantially complete, but they've taken a bit of a toll on some of our people. And so, we're in a spot now where we are executing well. People understand the operations of the systems that are operating appropriately. And we probably still got opportunities to improve process adaptation. But it – you know, as the market improves, I think we'll be in a position to capitalize some of those truckload synergies as well. The challenging part on that is they're difficult to measure because our truckload business is a combination of a variety of factors as I'm sure you understand. So, it's hard to isolate those and really point to those synergies. And so, at a time like now when our truckload revenues up a modest percentage, it's hard to point to those synergies. But as this market changes and as we continue to move forward, we do believe we can still capitalize on more of that and there's more opportunities for cross-selling activity as well. Danny C. Schuster - Credit Suisse Securities (USA) LLC All right, great. Thank you for the update.

[Operator:]

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

[Thomas Wadewitz:]

Yes, good afternoon. I wanted to follow up a little bit on the last question. I guess the way I thought of some of the synergies that the synergy opportunity was kind of strength in the truckload brokerage of Command and strength in LTL brokerage of Echo, when you put them together. And then you kind of sell more LTL with the legacy Command relationships and so forth. I know that it makes sense to me you'd be careful about too much contract business given that you – the market is competitive. You don't want to get hurt a lot in gross margin. But it seems like there would be some – that wouldn't prevent you from having growth in the LTL side. Would you say is that showing up in the LTL numbers? Or is the growth there kind of less than you would have expected in terms of synergy opportunity from, I guess, that dimension of the cross-selling?

[Douglas R. Waggoner:]

So, it is. I mean I think that – I just mentioned earlier that we've generated about $83 million in annualized business. So definitely a lot of that has been LTL, whether it would be in the form of transactional or managed transportation business. And a big part of that LTL growth and a portion of that LTL growth, I should say, definitely come from the integration and the contributions of some of the folks at Command have been able to cross-sell and penetrate existing relationship. So that has been a factor. It's more than the truckload side that's been slower to come by and like I said earlier, the market conditions and some of the execution around the integration slowed down a bit.

[Thomas Wadewitz:]

Right. Okay. And what about the market environment, aside from the cyclical, do you think that there are, I guess, in terms of the challenges in growing volume, or your approach to the market, has the competitive pressures been different maybe than the prior cycle? Or is that a factor where, I don't know if there kind of new entrants to the market are having an effect? Or if it's just kind of the existing competitors that are just pushing harder for market share? How would you characterize that aside from just the cyclical TL sizing?

[Douglas R. Waggoner:]

Yes. It's a great question. I think that it's difficult to pinpoint, but I'd say it's not as much about new competitors coming in, in some of the headlines that you see about new competitors coming into the space. It's probably more about the extended cycle and its impact on asset-based carriers and brokers alike and folks trying to utilize their equipment and their assets more effectively, and, in essence, driving additional price competition and routing guides, because we haven't seen as much volatility and as much spot business. So, folks are positioning themselves to maintain or grow their market share. We've seen some of the larger shippers in response to 2014 maybe increase their use of dedicated, which has probably had a little bit of an impact, but it's difficult to measure that in the broader market sense. So, I think it's – I attribute it more to kind of an elongated cycle of lackluster demand, which has promoted the reduction of brokerage business in some cases and larger shippers – and just made it a little more kind of price competitive. And I think that when the capacity squeeze happens a little bit, the requirement or the opportunity for us in particular to add value will increase. And so that'll come back in a cycle. So, I'd call it more of an elongated cycle.

[David B. Menzel:]

I would just add that in about a two-week window, in June, we saw market conditions spike and a frenzied activity to find capacity that probably exceeded what we saw in 2014. So I think the significance of that is just that it doesn't take much disruption in this market with the current asset capacity that exists to really change the dynamics. And that's one of the reasons that we're cautious because there is extreme volatility. And so, when we look forward to things like ELDs and other disruptors, let alone macroeconomic improvement, you know, we think the day will come where brokers are back in the group.

[Thomas Wadewitz:]

Okay. I appreciate that. That's all helpful. Maybe one just last one kind of to make sure I understand some of your comments. So, the current strategy would you think the results are kind of flattish year-over-year volumes maybe the next several quarters, but allowing maybe stability from a sequential basis in gross margin. Is that – am I understanding your commentary correctly? Or is it different from that?

[David B. Menzel:]

I think that's a fair kind of a high-level characterization. We're not predicting exactly where the margins are going to end up because just like in the past, a variety of things can happen and they're difficult to pinpoint. So, we didn't go so far as to try to give guidance. We did, of course, give you an indication of where we were mid – through July. And kind of interestingly, margins did pretty much maintain during that big rate increase that we saw in June. So, I think it's a reasonable assumption to think that that's kind of the picture we see right now. I think that both volume and margins as we progress throughout the year may turn out a bit different. Things heat up. We could see more volume growth. And so, we're trying to give you a clear reflection of the trend we're seeing today and through July, but not quite going too far to predict what's exactly going to happen over the next five or six months because market conditions do change pretty quick, as Doug just highlighted. And so, we're going to have to keep a close eye on that.

[Thomas Wadewitz:]

Right, right. Okay, all right that makes sense. Thank you for the time.

[David B. Menzel:]

Sure, Tom.

[Douglas R. Waggoner:]

Sure.

[Operator:]

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

[Spencer Todd Chernus:]

Hey, guys. Thanks for taking the questions. It's actually Spencer Chernus on for Ravi here. I just wanted to touch briefly on the fiscal year 2017 revenue guidance update. In the second quarter, you guys kind of came in right at the midpoint of guidance. And on the last call you mentioned that the outlook for the second half of the year was for mid-single digit rate increases. And I guess I'm just wondering what's kind of changed in your thinking in the outlook being that the former guidance implied low double-digit revenue growth in the second half and now it kind of implies low to mid single-digit revenue growth? Doug, if you can just unpack that that would be great. Thanks.

[Douglas R. Waggoner:]

I think the primary thing is there's two factors that we see. Number one was the volume has been pretty steady, number one. So, we haven't seen quite as much acceleration probably through the back half of the quarter in volume that we might have expected. We're still not sure where that's going to end up as we look through the next six months. So that's probably cooled a little bit. And the second factor that we have to consider is that while rates spiked in June, we have seen them come back down not to the point of where they were say April, May, but they've come back down a little bit late in July. So, Kyle indicated that our growth rate through the first 20 some odd days in July was 4.5%. So, we're using that data to kind of look forward and taking the best snapshot that we have today as to where we're at. And so, I think that that's what we're trying to do is use the data that we have that's available to us based on the volume we've seen through midpoint of July as well as rates kind of moving back a bit. Now, I don't know if they'll stabilize where they are today or if they'll come back a little bit more, or if they may spike again. So that's kind of the wild card as we see it as we look ahead for the second half of the year.

[Spencer Todd Chernus:]

Got it, very helpful. And then maybe just as a follow up to some of the former questions and to that as well. With the ELD mandate coming in the fourth quarter, how the anticipated capacity kick-out in the market maybe its spot rates spike kind of like we saw in June and your margin reaction in June? I think you said they held up pretty well. Can we expect that if there is an anticipated quick pick up in margins I mean in a spot pricing in the fourth quarter that your margins could hold up?

[Douglas R. Waggoner:]

I just think it depends on the adoption, whether it happens with a big bang or whether it dwindles in over time as independent owner-operators test the market to see what they can get away with. So, we really – that's not in our crystal ball. I guess my personal opinion is there will be some impact. We've done surveys and such. And I guess maybe the read on the surveys is that it'll roll in rather than come in with a bang. But I think ultimately, the ELDs will have some impact on capacity. And as we saw in July, just the mere factors of the DOT Roadcheck, late produce season, the end of month, end of quarter, end of holiday were probably more about supply disruption than they were increased demand. So, I think any kind of supply disruption will have a similar effect.

[Spencer Todd Chernus:]

Very helpful. Thank you for that.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. Thank you. And our next question comes from the line of Jamie Clement with Macquarie. Your line is open, please go ahead. James Clement - Macquarie Capital (USA), Inc. Gentlemen, good afternoon, and thanks a lot in advance for taking my questions.

[Douglas R. Waggoner:]

Hi, Jamie.

[David B. Menzel:]

Hello. James Clement - Macquarie Capital (USA), Inc. Hey, I just wanted to be clear. So I just wanted to be clear. You all were saying that through July your net revenue margin has held fairly consistent with June, not the average of the second quarter, right? Is that what you're saying?

[Douglas R. Waggoner:]

We're saying with the full Q2. James Clement - Macquarie Capital (USA), Inc. The full Q2, okay.

[Douglas R. Waggoner:]

Correct. James Clement - Macquarie Capital (USA), Inc. I don't have my history book in front of me, but isn't it sometimes seasonally normal for the market to loosen a little bit after the Fourth of July? Is that historically been normal? Do I have that right?

[Douglas R. Waggoner:]

Yes, you do. James Clement - Macquarie Capital (USA), Inc. Okay. If one believes that capacity and forget about the spikes, and that kind of thing and I'm not talking about next month or the month after that, but if one believes that capacity should continue to tighten over time, there should be a correlation with pricing improving, right? I mean, I can't foresee a situation where capacity would continue to tighten and pricing not eventually improve. I know there are timing differences there. But would you generally agree with what I just said?

[David B. Menzel:]

Absolutely.

[Douglas R. Waggoner:]

Yes. James Clement - Macquarie Capital (USA), Inc. Okay. All right, guys. Thanks a lot for your time. I appreciate it.

[David B. Menzel:]

Thank you.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of David Campbell with Thompson, Davis & Co. Your line is open, please go ahead.

[David Pearce Campbell:]

Good afternoon, everybody. Thank you for taking my questions. Dave, you mentioned the number of sales agents in the second quarter and I missed it. How many were there?

[David B. Menzel:]

There were 280 sales agents included in the total head count of 1,671 salespeople.

[David Pearce Campbell:]

And where did they come from? Where do these extra sales agents come from – come up from the second quarter? I usually expected them to come with acquisitions of other companies.

[David B. Menzel:]

Those aren't additional. I mean, let me check the year-over-year numbers on those. They're up by only a handful or they might – let me check, it's not a meaningful change.

[David Pearce Campbell:]

I had 250 in the first quarter, maybe it was more than that.

[David B. Menzel:]

Yes, I think it was more than that. I'm looking for that data. I don't have it handy in front of me for Q1.

[David Pearce Campbell:]

That's okay. Let me move on. And you, Dave, you have estimated your Managed Transportation revenues before for the year. I didn't hear any estimates of that this time other than the fact that you're getting $18 million of new business on top of what you already had lined up before the second quarter. So the Managed Transportation revenues should exceed your former estimates.

[David B. Menzel:]

So, David, I don't think we've given specific Managed Transportation growth guidance for the year. I'm not sure if I understood the question exactly. But if you're asking if Managed Transportation with the guidance we've given and what we've said about new contract wins and implementations, if the growth of Managed Transportation will outpace the growth of transactional business, that's absolutely true.

[David Pearce Campbell:]

Yes, all right. I think it may also exceed my former estimates for the third and fourth quarters, but that's okay. And so July, you mentioned the July gross margin. And Kyle, you mentioned the July revenue growth and I missed it.

[Kyle Sauers:]

So, the per-day revenue growth in July through the first couple of weeks has been 4.5%.

[David Pearce Campbell:]

Was 4.5%. And that's down from the – what was it – 6% in June, right?

[Kyle Sauers:]

Yes, it was 6% total top-line growth in June – in Q2.

[David Pearce Campbell:]

In June, in Q2 – oh and 6% was in Q2. Yes. And, Doug, you seem to downplay the role of acquisitions in your long-term plans. Is there something going on in the business that makes acquisition potentially more difficult? Because that certainly was part of your long-term plan to achieve revenues and to build into the size of your company. I know you've added all these costs in G&A and I would think that you'd want to utilize that G&A with acquired revenues as quickly as you could.

[Douglas R. Waggoner:]

Well we continue to look at M&A opportunities. We've got a pipeline that we are working on and meeting with companies. We think that we should be very selective at this point in time. We're very focused on operating the business in a tough environment and optimizing our gross margins and making sure that we service our customers and get growth. So, I would say that's been more of our focus in the last – recent past. But at the same time, we do have an active M&A program and we've got a business development person that's looking at deals and we're meeting with companies all the time.

[David B. Menzel:]

And just to add to that, David. As I think that one of the key messages there was not that we wouldn't do deals per se, but just to take it out of the guidance number so that the timing and size, which, as you might expect is a bit unpredictable. So talk a little bit more about our organic growth strategy, but then as we complete acquisitions, we'll update at that time the implication on our long-term plans.

[David Pearce Campbell:]

So, it's not that there aren't acquisition potential. It's the difficulty of predicting when you'll make them.

[Douglas R. Waggoner:]

Yes, not having it be part of our guidance.

[David Pearce Campbell:]

Right. And it certainly could impact your – whatever – it should impact your 2018 revenues if you make any acquisitions may be...

[Douglas R. Waggoner:]

Absolutely.

[David Pearce Campbell:]

May be a significant help.

[Douglas R. Waggoner:]

That's correct.

[David Pearce Campbell:]

Okay, thank you very much.

[Douglas R. Waggoner:]

Thank you, David.

[Operator:]

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

[Matthew Young:]

Good afternoon, guys. I think you guys mentioned – I think you mentioned that average pricing in terms of sell rates was up 7%. That was with fuel, right?

[Douglas R. Waggoner:]

Correct.

[Matthew Young:]

Includes the fuel.

[Douglas R. Waggoner:]

Yeah.

[Matthew Young:]

I wonder if you could...

[Douglas R. Waggoner:]

Yeah.

[Matthew Young:]

Provide some color on if you've seen any – I'm sure there would be some differences there in the delta between the changes in spot contractual or committed rates or maybe perhaps committed was down and spot was up. Is there a divergence there in that average of sales?

[Douglas R. Waggoner:]

Yes, you know, we'd be giving you qualitative information because we don't measure that specific factor so. Our contract rates are probably up a little bit and our spot rates are certainly up a little bit more. So that'd be a fair characterization. But beyond that, we wouldn't have that specific data.

[Matthew Young:]

And your renewals on contracts, are they pretty spread out throughout the year as opposed to having a first half bidding season for that?

[Douglas R. Waggoner:]

Well, you know, when you just talk about renewals on the truckload side and the committed pricing versus the managed trans, they would – they spread out throughout the year, but there's definitely a high propensity that renew or go live with new bids typically in the -- I would say March to May timeframe, is a pretty – probably the peak. But there's a – but it is year-round. But I would definitely say the peak is in that period of time.

[Matthew Young:]

So, to some degree if it stays relatively tight in the quarters ahead, you might have to wait a while before you can renew -- get some of the stronger pricing on the contractual business, correct?

[David B. Menzel:]

Yes, that's fair. That's fair. It depends on circumstances, but in a lot of cases, once that's set, you generally have a year cycle. But like I said there's a lot of times there's many bids and different things that are happening all the time. So there's a lot of changes that do occur. But as a general statement, you're correct about what you're thinking, Matt.

[Matthew Young:]

Got it. And then, I think you mentioned that – hinted that the routing guide businesses is fairly competitive in the first quarter. I think I've heard that elsewhere. Is that mostly coming from competing with asset-based truckers? To some degree I would think there's a limited number of brokers capable of handling that business, given the network scale that you need. Are you seeing more asset-like providers get into that niche?

[David B. Menzel:]

I wouldn't say more. I mean, I think it's a little bit of everything, Matt. I mean you know the small – there are definitely – and this has always been true. The smaller brokers that may have a niche or a regional presence would continue to compete for that part of the business and it varies from customer to customer. I mean some customers might boil down their – the participants down to 25 carriers and brokers in a routing guide. And there might be another one that has 150 or 200. So, it's going to vary from account to account. And it's going to be a mix of asset-based providers as well as non-asset or asset-light third parties.

[Matthew Young:]

Okay, all right. That's all I had. Thank you.

[Douglas R. Waggoner:]

Thank you.

[David B. Menzel:]

Thanks, Matt.

[Operator:]

Thank you. And our next question comes from the line of Jason Seidl with Cowen. Your line is open. Please go ahead.

[Matthew Frankel:]

Hey, guys. It's Matt Frankel for Jason. How are you?

[Douglas R. Waggoner:]

Hey, Matt.

[David B. Menzel:]

Hi, Matt.

[Matthew Frankel:]

Two quick things, one related to the acquisitions. I know you took the 2018 guidance off the table. And it sounds like things have changed in the way you're thinking about it. But specifically related to what you're looking at, does – what's gone on with Command in the integration process that leads you to want to diversify the business any further from where it is today? Does it make you say, we need to do something smaller potentially if we're going to look to acquire over the next year or two? How does it change the way you think?

[Douglas R. Waggoner:]

Well, I don't think it has changed how we think. I mean, we bought the Command business because they were a premier truckload broker. We felt that they had good technology that was supplemental to our technology, similar architecture. So, it was fairly easy to integrate. We believe that density and scale matter. They don't matter so much in this market, but in a tight market they matter a lot. And we've already said that we believe the market will turn at some point. We just can't predict when. We've talked about the Command synergy. I believe the guidance was around $200 million. We're nine months into it. We've already got $83 million of it. And that doesn't really include any of the benefits of the truckload network. So, we've done all of that with LTL and Managed Transportation. And so, coming back to the M&A strategies, I think we continue to believe that it's a huge market, lots of fragmentation and plenty of opportunities for us to grow without really diversifying into other areas of business. So, we're going to stay pretty focused on LTL, truckload, multimodal brokerage, as well as our Managed Transportation product. And we think we can have great growth with those offerings.

[Matthew Frankel:]

Okay. Thank you and then one last thing. Can you just remind us what the operating profit margins are on the Transportation Management – the Managed Transportation versus the transactional business?

[David B. Menzel:]

So, Matt, we don't give specific margins on those two different parts of the business because we don't give net revenue by type of customer classification. I think generally the way we've explained in the past is usually margins are a little higher on transactional business than they are on – your gross margins, than they are on Managed Transportation. But Managed Transportation, as you might imagine when you have all of their business, is going to be a little more operationally efficient. So, it turns out to be relatively similar, probably, at the operating margin line.

[Matthew Frankel:]

Got it. Thanks, guys.

[Douglas R. Waggoner:]

Thank you.

[Operator:]

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Doug Waggoner for any closing remarks.

[Douglas R. Waggoner:]

All right. Well, I'd just like to thank everybody for joining us today to listen to our second quarter results and we look forward to talking with you next quarter.

[Operator:]

Ladies and gentlemen...

[Douglas R. Waggoner:]

Thank you.

[Operator:]

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