Echo Global Logistics, Inc.
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded for replay purposes. It is my pleasure to hand the conference over to Mr. Kyle Sauers, Chief Financial Officer. Sir, you may begin.

[Kyle Sauers:]

Thank you. And thank you for joining us today to discuss our third 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.

[Doug Waggoner:]

Thanks and good afternoon everyone. As all of you know a lot has changed since our last quarterly call. In July we indicated that we were starting to see signs of life in both pricing and demand in the Truckload market. And at the time, which was early in the third quarter, our revenue pre day was up 4.5%. I’m happy to report that we ended the quarter with revenue up 12.5% on a per day basis and 10.7% overall, which tells you that there was a significant amount of acceleration during the quarter. As has been widely reported, spot market volumes and pricing had been improving ahead of the hurricanes. And those events only introduced additional disruption and dislocation into the equation. Since then rates and spot market opportunities remained at much higher levels than at any recent time in our business. This has been a lot of challenges for shippers, which gives us both opportunity to separate ourselves from our competition by using our leading technology, an extensive carrier network to offer capacity, where others can’t. In an environment with more uncertainty and disruption, we were able to take on additional volumes from existing clients and win new clients due to our ability to solve problems. As we have seen in the past, this sets us up well to be a key long-term provider of capacity to these clients. As I mentioned a few months ago, we saw the benefits of these capabilities accelerate later in the quarter and in fact we have seen a jump in our total revenue per day of 29% through the first three weeks of October. Let's move on to Slide 3, I will give you some specifics on our third quarter results. We achieved record revenue totalling $510 million in the third quarter, reflecting a 11% increase over the prior year. The growth was achieved by strong execution in both our transactional and Managed Transportation businesses. Our transactional business was driven in the second of the quarter by a dramatic change in market conditions. As we talked about in our last couple of calls, we have been less aggressive during the last bid season as we had anticipated tightening capacity and raising prices during 2017. This strategy has worked out well for our bottom line. Limiting margin compression in our truckload brokerage has also allowed us more flexibility to utilize capacity and take advantage of spot market opportunities which has accelerated our growth. Net revenue was $86.7 million, which was up 7% from the prior year, and up 6% sequentially. The year-over-year increase in net revenue was the result of increased top line revenue, offset by a margin decrease of 56 basis points. Non-GAAP EBITDA was up 1% on a year-over-year basis and up 19% sequentially at $16.8 million. GAAP fully diluted earning were $0.09 per share, compared to GAAP fully diluted earnings of $0.08 per share in the prior year period. Non-GAAP fully diluted earnings per share were $0.27 per share, compared to $0.25 per share in the prior year period. We came in 8% over the midpoint of our revenue guidance for the quarter and within the guidance offered for our operating expenses. I think this is clear evidence of a couple of things. First, the market changed quickly during the quarter and Echo’s model technology and network effect allowed us to take advantage of it. Second, we did so without having to sequentially increase our operating cost significantly. Further evidence that there is strong leverage in our operating model through efficiencies, technology and better market conditions. I’m also encouraged that our gross margins improved near the end of the quarter and have remained higher during the first few weeks of October. I now want to turn the call over to Dave, who will discuss our Q3 results in more detail.

[Dave Menzel:]

Thanks Doug. Going into Q3 we knew that market conditions were tightening, but demand was not materially accelerating. We believe that the pending ELD deadlines will likely serve as the additional catalyst that would disrupted tight market. That’s been the subject of lots of debate and speculation all year long. The disruption caused by the storms in late August and September accelerated the disruption that we had anticipated. With an already tight market the demand for relief in the impacted areas combined with the shift in supply chains resulting from plant and port closures was enough to send low to truck ratios to their highest level since 2014. In these conditions the services we provide to both shippers and carriers become even more valuable. And we prove that our technology, carrier network and our talented workforce were able to deliver on our value proposition in the marketplace. I’m particularly proud of the way our teams reacted to the rapidly changing environment. And I want to thank our employees for working with our clients and our carriers to meet the challenges that they faced and continue to face with the tightening of capacity and rising prices. Our truck loads business was the most notably impacted by the change in the markets, so let’s turn to Slide 4 to review those results. In Q3 we achieved record truck load revenue totalling $347 million, up 11% over the prior year. This increase was the result of an increase in rates of about 14% as our truck load volume declined by 3%. As you might expect, we experienced significant volume increase as the quarter progressed. In fact, on a per day basis, our year-over-year volume was down 5% in July and was up 3% in September. This illustrates the dramatic impact of the recent tightening of capacity and our ability to execute in this environment. We broke another record in our LTL business, delivering $136 million in revenue in Q3, up 13% over the prior year. This increase was driven by a 6% increase in volume and 7% increase in rates. And was due to success in both brokerage and managed transportation. Our LTL capabilities remain an important component of our value proposition to small and midsized shippers and our brokerage business. And we continue to utilize that capability to differentiate ECHO from the broader market. Our technology enables us to leverage the capability up market in our Managed Transportation business and we continue to utilize that advantage to grow our Managed Transportation client base. Slide 5 highlights our revenue by customer type. Transactional revenue, which makes up 79% of our increased by 8% over the prior year, totalling $401 million in Q3. As Doug mentioned earlier, our Transactional revenue growth accelerated throughout the quarter as we saw the market tighten significantly. Total headcount in our sales organization was 1,679 at the end of the quarter, up 45 FPEs or 3%. This modest increase is a result of our continued investment in our growing sales organization. Transactional revenue progress was up 6% in Q3. We continue to be very pleased with the consistent performance of our Managed Transportation business, which grew by 24% over the prior year, achieving a another record revenue of $108 million. In addition to our delivered revenue, we had a strong quarter in terms of new business signings, with seven new accounts and an estimated $25 million of freight spend to be implemented over the coming months. This brings our total new contracts signings to $93 million year-to-date, which is a record in terms of signed business to the first nine months of the year. We continue to see great opportunities to grow this portion of our business. Turning to our net revenue, Slide 6 highlights our growth of 7% resulting from revenue growth and offset by 56 basis points of margin compression. This margin compression was much less than we experienced over the past four quarters, came from both our Truckload and our LTL business. On the Truckload side our net revenue margin was down 45 basis points again lower compression compared to recent trends. In fact, our Truckload margin was flat sequentially, which is quite positive in our view, given the dramatic increase in rates. This is a great example of strong execution by the people, is reacting too quickly to such changes in the market is always a big challenge. In addition, it also highlights the power of our Truckload technology that is enabling our people to respond to market changes with speed and confidence. Our Truckload buy rates for the full quarter were up 15% year-over-year, inclusive of fuel and our sell rates were up 14%. On the LTL side, net revenue margin declined by 90 basis points over the prior year. The primary factor for this decrease was our strong growth in LTL within our Managed Transportation business, which tends to carry our little margin than our LTL brokerage business. In fact our transactional LTL margin slightly increased in Q3. I like to turn it back over to Kyle to talk about the 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 $26.5 million in the third quarter of 2017, increasing 11% year-over-year. Commission expense was 30.5% of net revenue during the quarter. Non-GAAP G&A expense was $43.5 million in the third quarter of 2017, up 8% from the third quarter of 2016. Depreciation expense was $4.6 million in the third quarter of 2017, which was relatively flat with the year ago period. Cash interest expense was $1.7 million during the third quarter of 2017, also flat with the year ago period. Our non-GAAP effective income tax rate was 30.3% for the third quarter of 2017, with a non-recurring tax benefits during the quarter that accounted for approximately a $0.02 benefit from our normal tax rate. As Doug mentioned non-GAAP fully diluted EPS was $0.27, increasing from $0.25 in the third quarter of 2016. The primary differences between our GAAP and non-GAAP EPS in the second quarter of 2017 are $3.6 million of amortization of intangibles from acquisitions, $2.0 million in non-cash interest expense, $300,000 of contingent consideration expense and $2.0 million a stock compensation expense. Slide 8 contains cash flow and balance sheet data. In the third quarter of 2017 we had free cash flow of $10.6 million and operating cash flow of $15.8 million. Capital expenditures were $5.2 million in the quarter. We ended the quarter with $21 million in cash, $296 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 of the covenants related to our borrowing facility. Also during the quarter we used $9.8 million to repurchase 675,000 shares of our common stock at an average price of $14.54. Dough highlighted in his opening comments that our fourth quarter has started off very strong. In fact our top line growth was 29% to the first three weeks of the quarter. In addition we have seen a modest improvement in net revenue margin in early October, another positive sign of our ability to keep up with the rapidly changing market. In light of these trends we are updating our full year revenue guidance to $1.855 billion to $1.895 billion, and raising Q4 for guidance to $460 million to $500 million. With regards to other guidance we expect commission expense to be in the range of 30.0% to 31.0% of net revenue for the fourth quarter. G&A costs to be between $41.5 million and $43.5 million for the fourth quarter, which is $170 million to $172 million for the full year. And I think it’s think it's meaningful to point out that at the midpoints of our revenue and G&A guidance, we will increase our gross revenue by $90 million in the second half of the year, versus the first half, while only increasing our G&A by $1 million. Depreciation is estimated to be about $5.4 million in the fourth quarter and $18.8 million for the full year. Cash interest should be approximately $1.7 million for the fourth quarter and $6.7 million for the full year. And we expect our ongoing annual tax rate to remain around 37.5%. Excluded from our non-GAAP calculations in the fourth quarter, we should have amortization of approximately $3.5 million, non-cash interest of $2.1 million and stock compensation expense of about $2.1 million. Our share count should be around 27.6 million. As we usually do we plan to give 2018 guidance during our next call when we report fourth quarter earnings. Having said that, in our last call Doug talked about our expectations for top line growth to exceed 10% over the next five years and we're confident in our ability to achieve that type of growth in 2018. In addition, we expect to be able to achieve that growth while increasing our G&A at a pace slower than our top line growth. I would now like to turn it back over to Doug.

[Doug Waggoner:]

Thanks Kyle. First, I'd like to thank everyone on the Echo team for an outstanding performance amidst a tumultuous market conditions. Your hard work and long hours delivered value to our clients, to our carriers and to our shareholders. Looking back prior to this quarter, we endured difficult market conditions with an anemic macroeconomic environment that drove lackluster volume growth and declining prices over a two-year span. We simultaneously digested the largest of our 20 acquisitions and worked through the typical distractions that come from transformational M&A. With that behind us, we have new and improved technology, plus we've doubled the scale of our Truckload brokerage operations. The third quarter felt like an inflection point, one that we've been talking about and predicting for several quarters now. Even though the weather was clearly a catalyst for volatile market conditions, the market will slowly but surely starting to tighten prior to the hurricanes. As we look for we believe tight conditions will continue to exist and may possibly be exacerbated by the ELD mandate. We believe these anticipated market conditions will be ideal for the Echo business model and that we can efficiently source capacity for clients when capacity is difficult to come by. I believe that our conservative pricing strategy on contract rate that we discussed on our last two earnings calls while limiting volume growth in the short term was the right call as we are well-positioned for tight markets with abundant spot market opportunities. Meanwhile we continue to refine and improve our long-term strategy, which includes both go-to-market components that fuel growth, as well as operating efficiency components. We continue to believe that we play in a large and growing market with many compelling growth opportunities. Our position in that market is strong and we intend on investing in the areas we believe will help us to continue to capture share this dynamic market. Good strategy equal parts of knowing what to work on and what to not get distracted by, in other words focus. We believe we have a great go forward strategy that encompasses both where to play and how to play, which means we're focused on the markets we want to serve, how to segment those markets and how to deploy our sales channels against those segments. We intend to be extremely customer-focused while at the same time be the carriers’ first choice in non-asset business partners. All this will be done through our industry-leading technology platform that will continue to drive more operating efficiency, while bringing a tighter technological link to our clients and our carriers. We also continue to believe in M&A as a key part of our growth plans. For the foreseeable future we will be focused on the tuck-in strategy that has served the so well in the past. Tuck-in acquisitions can be done surgically so as to complement our business, while being immediately, financially accretive and relatively low risk. Our strategy and business development team have an active pipeline that their working on. Our strategy also celebrates the value relationships in our business, which are important in the cultivation of both clients and carriers. Relationships help us to build the very large marketplace that we operate today and yet that marketplace is the perfect playground to introduce new technology powered by algorithms that improve the service and experience for clients and carriers. Just as important new technology coupled with various forms of AI can dramatically improve our internal processes and operational efficiencies. We are working diligently on these technology and analytics that will ultimately improve the client and carrier experience and drive operating leverage in our business. In summary, we're excited about our future and I want to thank again all of our employees for their execution in this very dynamic market. With that this concludes our prepared remarks and at this time I’ll open it up for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question will come from Jack Atkins with Stephens, please proceed.

[Jack Atkins:]

Hey guys good afternoon. And congratulations on a nice quarter here.

[Doug Waggoner:]

Hi Jack, thanks.

[Jack Atkins:]

So Doug let me start off with asking you just sort of if you could sort of step back and help us sort of think through how you're looking at this market playing out over the course of peak season in the fourth quarter here? And then going into the ELD mandate implementation, which is towards the end of the year. Certainly with gross revenue accelerating here sequentially even and if I think about your comps from 4Q 2016 correctly your comp should be getting easier as you move through the quarter. Just help us think through that and how you think these market dynamics play out? And how you think all that is going to impact things as we move into end of this year and into early next year?

[Doug Waggoner:]

Right, so as we said earlier in the call, we’ve had 29% growth in revenue up-to-date in October. And that's result of all the conditions that we've talked about. We do think that over time that the impact from the weather wears off to some degree. But that being said, as we sit here today it remains tight. And as I mentioned DLD mandate there's a lot of opinions on that in terms of how it phases in, in terms of capacity restrictions. But the fact remains is that the average miles per day that a driver can drive is going to be in the neighborhood of 450 miles to 500 miles per day, which is probably somewhat less than what we've seen historically. So I think that the mileage that the national network can put out on a daily basis is going to decline. I do believe there will be some fallout in the small operators that can't economically survive with fewer miles. And capacity will get tight and rates will go up. So how that all phases in is not certain to me, but I think it's certain that we're going to see the impact of DLDs as early as December and certainly by April of next year.

[Jack Atkins:]

Okay, that makes sense. I think I guess kind of looking forward as you think about 2018, you guys, I think, were very careful. And I think that's sort of – proved out to be very prudent, kind of going into this 2017 contract and bid season, given what you saw in terms of how the market could shape up. Sort of the way like you thought. I guess going into 2018, how are you guys thinking about conceptually your preferred mix of contract versus spot. Maybe if you could remind just to sort of where that stands today and sort how are you thinking about your appetite for taking on more contractual business going into next year or do you want to be more spot exposed?

[Doug Waggoner:]

Well we respond to these RFPs. We have a pretty sophisticated placing algorithm that helps us to kind of ascertaining current market conditions, as well as where we think that we're headed. So we rely a lot on those analytics to help us respond to those RFPs. And so I don't want to talk a lot about what we're thinking the future looks like, I’m happy to talk about the past. But Dave can give a little bit more color on how we manage that process.

[Dave Menzel:]

Sure. Jack we talked about this in fact, I think, couple of quarters that our contract business is in the low-to-mid 40s in terms of the percentage of our overall Truckload business. And we don't look at it to predict what percentage of mix is going to be, what instead we do is look at any specific client situation obviously and try to figure out where do we add the most value, what are the clients’ needs and to the extent that results in the ability to grow that contract business, we pursue that. So I think the ultimate question on what that mix looks like is going to be how much competition there is on the rate side probably going into 2018. I think everybody that's in this market today does believe that rates are heading north into 2018. So that's going to be a big factor. And then the second factor will be how disruptive and how displaced does the capacity remain in 2018. And that's going to drive the spot market business. So ultimately that mix is something that's going to be the result of those conditions, which is hard for us to sit here today and forecast. So we don't look at it in that same way.

[Jack Atkins:]

Okay. That makes sense Dave. Last question I’ll turn it back over your efforts improving margins of October relative to, I think, the third quarter average, are you referencing sequential improvement, or year-over-year improvement, or maybe you’re talking about both? Just some clarity on that particular item would be helpful I think.

[Dave Menzel:]

Yes Jack so we’re referring to a little bit of sequential improvements over the full third quarter.

[Jack Atkins:]

Okay. That makes sense. That makes sense, okay. Thanks again and I’ll turn it over.

[Doug Waggoner:]

Thanks Jack.

[Operator:]

Thank you. Our next question will come from the like of Jason Seidl with Cowen. Please proceed.

[Jason Seidl:]

Thank you, operator. Hey guys couple quick ones from me. Can you talk a little bit more about command and the cross-selling that you are able to achieve in the quarter? Give us an update there.

[Doug Waggoner:]

Sure today we've got about $85 million or so of qualifiable revenue synergies from the CBU business unit formerly Command. And that number continues to grow with their penetration on the LTL and the parcel side. On the Truckload side it's quite difficult for us to evaluate synergies that we might be getting from improved technology platform that we have, as well as newer operating procedures that we think are very effective in terms of operating our Truckload business. So as you know when the market conditions tighten, obviously we've seen a pretty significant spike in revenue in Q3 and to some extent some of that may be due to the synergies we've achieved on the integration with demand, but it's very difficult for us to quantify that piece of the puzzle.

[Jason Seidl:]

Okay. And I’m assuming in the coming quarters you think you'll be able to achieve more. Because I think you’ve originally called out potentially what was $200 million?

[Doug Waggoner:]

Yes exactly. We do believe that we’ll continue to achieve more. The difficult part of that equation is it’s going to be dissecting how much of the Truckload growth is due to the integration versus the more identical components which would be just pure cross sales of LTL, Managed Transportation and other services.

[Jason Seidl:]

Okay. I guess I want to jump tom, Doug the tuck-in comment that you’d mention. Could you talk to us about areas where you think you might need to tuck-in. What might an acquisition look like for Echo in the next call it six to 18 months?

[Doug Waggoner:]

Sure, I think that obviously dry van brokerage or LTL brokerage are interesting, but part of that is the diligence that determines how much overlap there is, because we don't want to create problems with our existing sales organization if there's too much overlap. That being said, there are geographic opportunities like Canada and Mexico that would be interesting. There are a lot of third-party logistics companies that specialize in Managed Transportation, so you're effectively buying a book of business in the sales organization. And then there's also different niches with brokerage that we don't have much penetration in today, such as temperature-controlled and flat bed. So I think we can stay pretty close to our core business and find lots of tuck-in acquisitions, opportunities and we like I said we do have an active pipeline that we continue to work.

[Jason Seidl:]

Okay. My last one, I don’t want to monopolize the call here. You talked a lot about potentially developing new technology and new things that can help the customer experience going forward. It sounds a lot like sort of app-based technology. I'm sure you meant even more that. Could you give us a little more meat on that bone?

[Doug Waggoner:]

Yes I think that we've done a lot of market research in the past and found that one of the things that shippers were looking for in a transportation provider is what I call proactive customer service. In transportation logistics, there's a lot of failure shipments, can be late, they can be damaged or they can be missing cartons. And ultimately a shipper doesn't want to hear about that from their customer at the time of delivery. So we think that using technology being able to do things like predict weather and traffic and understand when a driver is going to show up just allows us to be more proactive in working with the customer on shipments, which can be very important to them and their customers. And we also think that it improves visibility, it improves visibility tools more real time tracking through us having better technology to connect us with our carriers is all part of that equation. And then by segment when we look at larger clients they've got technology needs that are more in the realm of TMS offerings and ERP integration as opposed to the small shippers or even the micro shippers who could be more interested in self-service, online web tools. And so we're looking at that whole spectrum, we have a lot of technology deployed across the spectrum, but we continue to look at ways to enhance that.

[Jason Seidl:]

And is this stuff that you're developing in-house or are you buying – are you outsourcing it sort of buying off the shelf and modifying it for you?

[Doug Waggoner:]

No we develop everything in-house.

[Jason Seidl:]

Okay. Those were my questions, thank you guys for the time as always.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. Our next question will come line of Tom Wadewitz with UBS. Please proceed.

[Tom Wadewitz:]

Tom here good evening. I wanted to see if you could offer a little bit of insight. I’m not sure how much you talked about to kind of comparison October, November, December. But was there much different as you go through months, I mean, I think, you started may be some of the integration last October that might have caused little disruption. But is there much difference in the comparison as you go through the quarter, or is it kind of pretty similar? And I'm just thinking about how the 29% growth in October might look if you go to again November, December.

[Doug Waggoner:]

Yes I think when we look at daily volumes in Q4, on a monthly basis, it was relatively consistent. October was a period where we went through that integration and it was more choppy on a week-to-week basis. But as we progress throughout the quarter, I'd say it was more consistent on that regard.

[Tom Wadewitz:]

Okay, alright, great. How do you I don't Doug or I guess whoever wants to take the questions in. The cycle analogy the best where you would frame the market going into 2018, do you think it will kind of feel like 2014, and maybe the results respond in a similar fashion. I think there’s some sense that maybe this is even a more powerful cycle and labor constraints are significant factors. So maybe it's more like ’04, ’05. If you don't have your results back then to consider. But maybe some thoughts about what the cycle would feel like and whether kind of your results in ’14 will be reasonable analogies to go into next year?

[Doug Waggoner:]

Yes I think that's right. If you look at the current conditions, it's tighter than both 2014 and 2004. So if you assume that the impact of weather lifts up a little bit, you're still in relatively tight conditions. And if you believe like I do that there's an ELD impact and the economy is continuing to show some signs of strength and improvement, that coupled with the driver shortage, I don't see how you can have anything but a tight market in 2018.

[Tom Wadewitz:]

Right, okay. What does that imply for your gross margin in 2018, is it something where you can pass along a higher cost and so the gross margin goes up or is it more like kind of stable gross margin, but the top line is a lot stronger?

[Kyle Sauers:]

It's hard to say because there's pricing pressure on the contractual business that gets offset by spot market business. But then you also have the contractual customers willing to reprice because of what they have to pay on the spot market. So you've got a blend of those two factors.

[Tom Wadewitz:]

Great. Okay. Good results and thank you for the time.

[Kyle Sauers:]

Thank you.

[Doug Waggoner:]

Thanks Tom.

[Operator:]

Thank you. Our next question will come from the line of Ravi Shanker with Morgan Stanley. Please proceed.

[Ravi Shanker:]

Thanks. Good afternoon gentlemen. A couple of follow-ups here. The 29% growth in October so far, can help me understand that. I mean is the hurricane impact over or not? And is that number still reflecting hurricane tightness or is that kind of be the transition from hurricane to ELDs?

[Doug Waggoner:]

So that’s a good question Ravi. I’d say that the market was very – very tight. And then as we approached the end of September even tighter with quarter end close. So it’s hard to say how much of that was disruption in supply chain. They were back up and running, but there was a lot of changes in disruption that effected the capacity. We saw that continue into October for the first half of October. I'd say that maybe sensed it’s like easing. If you noticed some of the public reporting on the pricing it's come down just a little bit, but it still remains quite strong. So whether that's hurricane or a combination of factors. I mean the ELDs have been getting implemented by a lot of carriers throughout the year. So it's not going to be all are knocking on December 2018, that's happening. And the market was tightening in advance of these weather events back in July and August. Demand wasn’t quite as strong, but the capacity side was very tight. So I guess that’s a long answer to your basic question, which is – it’s still very tight, it has come off a little that, but not a lot. So it’s difficult for us as we look ahead to know exactly how much off you might roll back a little bit, but it looks to be continuing to be very strong, very tight capacity.

[Ravi Shanker:]

Doug, very helpful color. Thanks for that. Just a follow-up with something you just said about that the carrier is being compliant. Do you have a sense of what percentage of a carrier base actually are complaint because we have been hearing some shockingly high numbers like 50% sometimes even 80% from the real mom-and-pop fewer than five trucks out there? Do you have a sense of what percentage of your base is ELD complaint at this time?

[Doug Waggoner:]

Yes, it is a tough question. And if anything it would just be a sense, as opposed to a quantifiable answer, I would say those that, we did know – we do know that a lot of the smaller trucking companies and many of the owner operators are waiting to become compliant. So there’s a – there is a high amount of capacity out there that in our view kind of waiting to the 11th hour to get become fully compliant. We have been – as we talk to our carriers, we do see more and more of them getting compliant early starting to roll out ELDs, and so – but to put an actual number on it in terms of the capacity that we use every day would be too much of an instinctual answer versus something I could back up with the data.

[Ravi Shanker:]

Got it. And just lastly, were you able to adjust your spot versus contract mix in the quarter, and also you spoke about next year of this potential for some of your contract customers to renegotiate given whether paying in the spot market, did you see any of that in the third quarter?

[Doug Waggoner:]

I don’t know that I would say that we proactively adjusted it, but the spot market did increase as the quarter progressed and as you would expect was bigger in September. And so our mix did shift throughout the quarter, and we did see more growth on the spot side of our business as the quarter progressed and continuing into October.

[Kyle Sauers:]

There is some repricing.

[Ravi Shanker:]

Okay, great. Thank you.

[Kyle Sauers:]

Thank you.

[Operator:]

Thank you. Our next question will come from line of Bascome Majors with Susquehanna. Please proceed.

[Bascome Majors:]

Yes, just to kind of wrap up your comments on the October gross margin. I believe you said, you saw a slight increase quarter-over-quarter. Is that kind of the point where you’re rising year-over-year or you still kind of in that band where you’re seeing some modest compression year-over-year in the first part of this quarter?

[Kyle Sauers:]

Hey Bascome, this is Kyle. The comment is that we’ve seen some improvement sequentially from the third quarter, but not necessarily on a year-over-year basis. But the trends are good and we’re – our teams are reacting well with the rising prices and working with shippers and we’re encouraged by that the direction of that.

[Bascome Majors:]

Taking that into the account with the efforts you’re making, and some of the easing potentially sequentially in the spot market from the rates you incurred in 3Q. Is there, I mean, is gross margin expansion and possibility for 4Q is a whole?

[Doug Waggoner:]

It’s certainly a possibility. So is the other direction, yes, it’s one of the reasons we don’t guide to that particular metric, because there are a lot of forces working in different directions. I think what I would say is, the way that we’ve reacted to the market changing in Q3 and is early here in Q4 makes us feel really good about our ability to extract the most margin that we can out of the given situation.

[Bascome Majors:]

Okay. Thank you for that. And on the cash flow front, I believe your CapEx guidance for the year was $15 million to $20 million, I’m not sure. Is that range still appropriate today for 2017 and could you give us a thought as where we should preliminarily have our expectations as we move into 2018?

[Doug Waggoner:]

Yes, I think for 2017 we’re probably trending towards the higher end of that $15 million to $20 million. And then in 2018 we’ll give a tighter range when we give rest of our guidance in February. But I think something in the low-20s is reasonable to think about at this point.

[Bascome Majors:]

Okay. And time that all together, I mean if you look at your free cash flow kind of trajectory this year, you averaged about $8 million a quarter in the first half. Last quarter was a little over $10 million, so you’ve seen a nice pick up as you know the bottom line of your business picks up. Yes, we think about the pacing there, saving $10 million a quarter, is that a good starting place to think about 4Q and maybe some additional acceleration into 2018?

[Kyle Sauers:]

Yes, I think one of the things we talked about was kind of relating it to our EBITDA number and as you’ve pointed out, we had over around $26 million in free cash flow so far this year relative to a $41 million EBITDA number and that that same rate of kind of held up in Q3. So I think – I wouldn’t put a wrong number on it, because we haven’t given guidance around profitability for 2018. But I think that sort of cash flow profile relative to your expectations or given expectations for EBITDA next year would be the right way to think about it still.

[Bascome Majors:]

Thank you for the time.

[Doug Waggoner:]

Thanks Bascome.

[Operator:]

Thank you. Our next question will come from David Campbell with Thompson, Davis & Company. Please proceed.

[David Campbell:]

Yes, hi. Thanks for taking my question. Was the gross margin effect – any impact from Puerto Rico to become tremendous shortage of trucks and truck drivers in Puerto Rico in October? And I wonder if some of that took capacity away from the United States?

[Doug Waggoner:]

I would – we don’t have any specific information on that David. I would think that that would be a pretty small impact certainly on our business. I hear what you’re saying about potentially drivers heading down there to help out. But I just don’t think that would be material enough number to be a big impact on the drivers that we’ve been experiencing so far this year.

[David Campbell:]

Okay. And as far as the gross margin in October’s concern, help me a little bit the improvement that you saw have seen relative to the third quarter would come from you being able to sell your services at a higher rate than what you’re buying the capacity for. I assume that simplistic what it is?

[Dave Menzel:]

Yes, I think that very simplistically that’s correct, but there’s always on our business when we’ve talked about this a lot over the last two or three years. Different margins that we might get on different kinds of business. And we’ve got a quite a mix of a business as you know we’ve got a LTL business, Managed Transportation business, contractual truckload and spot market truckload. And one of the factors that we are seeing today is that we’ve been getting squeezed on the contractual business through over the last four quarters. We’ve had very significant margin compression all the way up until Q2 2017. So some of that is receding a little bit, it stabilized as we’ve talked about over the past. And then secondly the spot market is much is heating up quite a bit. And so we’ve got generally got higher margins on the spot, and so those are some of the big drivers I think and the improvements we’re seeing in the margin again modest, but slightly improving margins in light of rising prices, which I think is a very kind of favorable outcome.

[David Campbell:]

Yes, your Managed Transportation revenues were actually less than forecast in the quarter. It looks like you may have been focusing on generating the transactional revenue growth more than Managed Transportation or is it some – some of your Managed Transportation clients did less business?

[Doug Waggoner:]

Yes, our Managed Transportation grew, I would say pretty consistent with our expectations 24% growth was the highest we’ve seen and actually probably over eight quarters, 10 quarters, if it was a highest growth rate in a while and it was record revenue in the Managed Transportation side. One of the things you’ve mentioned is there tends to be a delay on implementation and a lot of the Managed Transportation. So I would not say that we focus more on one segment or the other, it’s just more about the – in the Managed Transportation side. We’ve got a smaller group of clients and we’re going ebb and flow little bit with the market, with those customers. Generally speaking there are more fixed pricing arrangements there was on the transactional side we deal with many, many more customers and a little more the market volatility might drive that business either up or down more aggressively. So I’d say those are the factors not a matter of focus on one versus the other.

[David Campbell:]

And in the market growth mergers and acquisitions and acquiring new – acquiring some companies to add your portfolio won’t they to be more expensive when business is stronger, won’t they be hard to find when the business is a lot stronger than then it was earlier this year or last year?

[Doug Waggoner:]

Dave, as you know there’s lots and lots of small brokers in our space barriers to entry or not that difficult. What is difficult is for those small brokers to really scale up to scale in the space and be competitive with the big guys takes a lot of working capital, it takes a lot of technology, it takes a lot of know-how. So we actually think that there’s a lot of opportunities for good small companies that by virtue of being smaller and having as a lower growth profile will have lower EBITDA multiples. But companies that probably can’t grow much beyond their current size based on those capital constraints. So we think it’s a good opportunity to find companies that are like that to find owners that want to take some chips off the table and be part of Echo, that’s been our formula in the past and it’s worked very well.

[David Campbell:]

Okay, thank you much. It’s a good quarter.

[Doug Waggoner:]

Thanks David.

[Operator:]

Thank you. Our next question will come from the line of Kevin Steinke with Barrington Research. Please proceed.

[Kevin Steinke:]

Good afternoon. So there’s been a lot of discussion on the call about the sequential improvement in gross margin you’ve seen thus far in October and the factors driving that. So just wondering you’ve mentioned that you’re pleased with your ability to get margin and how you’re buying it. Can you attribute any of that to your integration with command and their technology, because I think that was part of the benefit that you hope to get out of command, it was just kind of your ability to buy and get margin.

[Doug Waggoner:]

Kevin, it’s a good question. And we – in the prepared remarks, we referred to the technology and our team’s ability to execute, and I definitely strongly believe that that the execution that we did experience has a lot to do with the integration with command and the investments that we made over the past couple of years both in terms of integrating technology and improving our internal processes to utilize capacity in a kind of a real time basis from our carriers and match that with our customers needs. And so well it’s difficult for us to quantify, as I mentioned how much, we definitely believe that the integration that we did and the technology that we have today, which are all of direct result of that acquisition contributed to our ability to perform well in these market conditions.

[Kevin Steinke:]

Okay, that’s helpful. And then historically the company has done well in terms of gaining share in market conditions like this where there’s a lot of disruption, you’ve executed well for your clients in these types of markets in the past. So just if you have any sense that you feel like you’re gaining some momentum here in terms of shared gains in this – the tight market or if you can even pin that down in any fashion?

[Doug Waggoner:]

Yes. One of the comments I made in the remarks was that on the truckload side of our business, which is the most obviously impacted by these market conditions. And we think quite an acceleration in our year-over-year growth, which I think indicates exactly what you just said Kevin, back in July our year-over-year volume growth was actually down 5%. In September it was up 3% and up even more than that in October so far. So it’s a great point these market conditions do in fact favor our ability to leverage our carrier network and the scale that we have. And we believe it does help us to achieve market share gains because access to small and mid-sized carriers as more and more important for shippers and we’ve got the capabilities to do that.

[Kyle Sauers:]

And one more thing Kevin, I mean in these times, there’s lot of shippers they find themselves in a bind and they’re looking for some help. And sometimes that’s a new opportunity for us. And if we do a good job for them and bail them out of that bind, they can become a regular customer on a go forward basis. So it also opens some new doors for us.

[Kevin Steinke:]

Okay, that’s very helpful. And then just lastly, on the commission expense it was get the high end of range just in terms of percentage of net revenue and then you’ve brought up that percentage of net revenue guidance a little bit in the fourth quarter there. So I – just any color on what’s going on there or would you’ve been consider that meaningful?

[Doug Waggoner:]

Yes, Kevin, so it did increase just a little bit sequentially near the high end of that range that that we’ve been giving. So we didn’t increase that range of 30% to 31% for the full fourth quarter. It’s really it’s a factor of sales channel from – where the business was coming from and mode mix what sort of modes, particular customer to shipping and making up that revenue. So it’s going to fluctuate from quarter-to-quarter, so we did just update that to make sure we’re – we feel like we’re near the middle.

[Kevin Steinke:]

Okay, perfect. Thanks for taking the questions.

[Doug Waggoner:]

Thanks Kevin.

[Kyle Sauers:]

Thank you.

[Operator:]

Thank you. Our next questions will come from the line of Brian Ossenbeck with JP Morgan. Please proceed.

[Brian Ossenbeck:]

Hi, thanks. Good evening. Hello, can you hear me?

[Doug Waggoner:]

Yup.

[Brian Ossenbeck:]

Okay. Just want to ask the question on – I guess two parts on labor and talent. With all the other startups that we see have there in the space, have you seen any material talent dream to the competition where people leaving to start their own thing. And then if you can also just talk about the transactional revenue progress that you’ve mentioned, it sounds like up 6% is a pretty good mark, put to some context is how that’s calculated and where that’s trended and used to give like the average tenure of the salesperson, which was the older you more experience you get them where you can generate sort of thing kind of put some context around this too.

[Doug Waggoner:]

Sure, I think on the first part of your question in terms of just talent retention, et cetera. I’d say over the last four, five, six months we have not seen any significant anything unusual or any significant attrition to the startups et cetera. So we feel good about the morale of the team and the opportunity, I think that they feel good about the opportunity ahead and where we’re going. So that’s been quite positive for us I would say. Our actual attrition rate on the sales side was I think around 30% in the quarter, which was on the low end of what we have been experiencing kind of bouncing around between 30% and 40%, so that was – that’s another positive sign. And I think that in terms of the revenue per rep and the average, that’s what we’re looking at there’s our brokerage or transactional revenue, which was just over $400 million over our sales force, which we disclosed 1669 – 1679 people I believe at the end which includes quite sales, carrier sales and transactional operational support folks that’s a number that’s not just client sales people that what we call the whole sales force if you will. And a big driver that’s obviously the market conditions, the revenue growth that we experienced in the quarter drove a lot of that, I don’t have the average tenure in front of me, I don’t know that it’s changed materially from where it was, a year ago or even last quarter. So I wouldn’t point to that as a big driver, I’d probably point more of the kind of market conditions and then maybe combined with the market conditions. And we talked a lot about our ability to execute. We’ve gone through a lot of training on new systems et cetera. So it’s another factor would be our people, our sales folks ability to actually execute on our systems and processes in a dynamically changing market is another positive sign.

[Brian Ossenbeck:]

Okay. Thank kind of ties into the second question which is, if I’m – maybe I’m thinking about incorrectly, but it seems like in a market where you have a lot of volatility and decent amount of spot exposure, I would have thought that the sequential revenue, net revenue margins would have been up a bit more and they mentioned if they were flattened as a good thing considering big change in the market and buy rates went up more than some rates. So I guess maybe one way to ask you, it was this so kind of lingering, could you’ve done a little bit better if you had a bit more time in training with the reps and with the system or is it more a function of how the contracts were structured and rolling off and on throughout the quarter?

[Doug Waggoner:]

I guess it’s probably more a fact of the timing of everything. I think if you look at what was happening and we’re having some margin compression continuing in July and into August, because rates were rising as we’ve talked about last quarter. We’ve been experienced in the margin compression, but because it was kind of a lackluster demand environment it was – we won’t see a lot of spot even though might have been increasing not as dramatic and I think that it was difficult to adjust prices in that environment. And then in reality the storms serve this kind of a catalyst that enabled more price adjustments and more spot business, because the capacity was very, very tight and was more expensive. So we saw that in September. And while we saw an increase in spot business and we did – we saw spot business carries a little higher margin and typically than contract. We got also remember half our business or so could probably be tied up in Managed Transportation and LTL another mode since not all truckload, so that that may be a factor in terms of what you actually see in terms of the volatility. And then as Kyle of mentioned October is kind of a continuation of that September trend.

[Brian Ossenbeck:]

Okay, that seems at least – if I’m hearing you correctly, it sounds fair to assume that you’re not talking about exactly where you would be spot to contract in TL for the next bid cycle or just kind of market impact dependent. But based on the business strategy put in place to be the very conservative on contracts and be even more spot exposure to the future, it sounds like you’ll be able to maybe see a bit more leverage of this sort of play out in another year’s time all else equal?

[Doug Waggoner:]

All else equal, I think that’s fair. Yes, I do.

[Brian Ossenbeck:]

Okay. All right. Last one for me was just on how looking at the other side of ELDs obviously the small carriers of the ones we assume that are going to have the most problems and see the biggest capacity or potentially just disappear altogether. Is that a concern as you look across your carrier base? And now you said you couldn’t quite take who has one or a dozen at this time in terms of percentage. But if you create some volatility on the supply side as well, just wondering if that’s something you’ve seen as people have opted throughout the year or something you expect it might trigger when once people get compliance or start to see the enforcement assuming as starts to happen after the mandate and into the bit of a hard off-the-road date in April.

[Doug Waggoner:]

I think that you know even if there is some fall out, we feel pretty comfortable with our access to capacity. We’ve got tens of thousands of qualified carriers in our database that we can use and in reality in any given quarter we use a fraction of that. So we have additional capacity that we can dip into, and I think that excess capacity were more than offset any people decide to exit the business.

[Brian Ossenbeck:]

Okay. That’s if from me. Thank you.

[Doug Waggoner:]

Thank you.

[Operator:]

Thank you. Our next question comes from line of Matt Young with Morning Star. Please proceed.

[Matt Young:]

Good afternoon guys, thanks. If I had it right in the first half of this year you had more new sales force hires hitting the G&A line versus the commission line relative to the first half of 2016. Wondering if that mix improves in the quarters ahead as new hires become more tenured and would that be where you see some of the positive operating leverage coming from?

[Doug Waggoner:]

So I’ll give a little color on that. We add more – you’re correct and we still have that still through today more of what I’ll call salaried salespeople in the sales force than we had a year ago and that does impact the year-over-year operating leverage calculus. And so that’s been true it still through today, through last quarter so through this quarter. We’ll probably talk more about that when we give our 2018 guidance, because we’ve done a little more refining of our sales strategy and our training strategies in preparation for that. I would anticipate that it’s similar not more, not less necessarily though, because we’ll probably likely continue to hire and build the sales organization, so 2018 would be more of a consistent year-over-year number whereas 2017 we’ve had a higher number in the salary these going to most of the year I would say.

[Matt Young:]

Fair enough. So the mix days it doesn’t change drastically. Then I guess to the next question you mentioned it a second ago, but just wondering how we should think about sales force growth in your head done it. Will you need to ramp that significantly to take advantage of more shipment opportunities, spot opportunities if capacity stays tight or tightens further or can you leverage the headcount you have now plus the growth you expect. I guess, what I’m getting out is, if the environment becomes as attractive as it was in late 2014, 2015, do you really have to even accelerate your sales force growth beyond what you’re expecting to grab that?

[Doug Waggoner:]

Yes, I say yes and yes. We think we can leverage what we’ve got as we automate more we can improve our productivity, Kyle made a comment on just the growth that we’ve seen in the second half of the year relative to our G&A investment, it’s just kind of a good indication that we’ve got the ability to grow. And then yes, because the market conditions are quite favorable. We do want to continue to grow. So I don’t know that it would be material change in our strategy would be a kind of a continuation of a more modest growth in headcount on the sales side in private it more likely of outcomes.

[Matt Young:]

Okay, appreciated. Thank you.

[Operator:]

Thank you. Our next question will come from Jason Seidl with Cowen. Please proceed.

[Jason Seidl:]

Yes, guys one quick follow-ups, I don’t think I heard this asked. In the quarter were you guys able to go back to on some existing contracts that may have been underwater given the run up in spot rate and renegotiate them some sort of out of cycle, and if not is just something that you envision going forward?

[Doug Waggoner:]

Yes, I think its Jason, its quite common. I think that when the market changes dramatically that that shippers we’re entertaining the surge pricing and something has changed in the market. We understand that our carriers aren’t going to be able to meet these commitments. And so there’s definitely instances where shippers wanted to change prices to – maybe to avoid the spot market is a good example. And so we – but it’s very customer by customer, there is other customers that maybe in the regions that they were operating or the pricing that was in place are very comfortable with the rates that they had in place. So it’s very customer specific, but there’s no doubt that when the market changes dramatically as it does, there’s going to be more pricing conversations occurring that would benefit everybody involved and I’d say that that’s an ongoing process and just ebbs and flows of the market changes.

[Jason Seidl:]

So that happened in the quarter, but you can put a percentage around it in terms of what percent of the business did that?

[Doug Waggoner:]

Yes, it’s a fair summary.

[Jason Seidl:]

Okay. Next question, could you remind us how your contractual business reprices on a quarter-by-quarter basis, is one quarter more way to than the other going forward here?

[Doug Waggoner:]

Again when the market changes a lot, there’s a lot that’s happening, and so this is difficult question, I would just say that the propensity for shippers is to have a bid cycle that starts around now may conclude and the first quarter of 2018 might go live between March and May. That’s a typical. I’d say that’s kind of a peak. They do happen all year round was up many bids, there’s lots of activity throughout the year, so it does thread, but in terms of traditionally that that’s when most of the – most new pricing kind of goes into effect in that time period.

[Jason Seidl:]

That’s good color. Guys I appreciate the time again. Thanks.

[Kyle Sauers:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen this concludes our question-and-answer session for today. So now it’s my pleasure to hand the conference back over to Doug Waggoner, Chairman and Chief Executive Officer for some closing comments or remarks. Sir?

[Doug Waggoner:]

Well thank you very much for joining us today. We feel good about the performance in the quarter, it’s a lot of time in the freight markets and we feel like we’re well positioned to ride the wave and we’ll talk to you next quarter. Thanks.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And we can all disconnect. Everybody have a wonderful day.