Echo Global Logistics, Inc.
Q4 2017 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Kyle Sauers, Chief Financial Officer. Sir, the floor is yours.
- Kyle Sauers:
- Thank you. And thank you for joining us today to discuss our fourth quarter and full year 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. And these slides can be accessed in the Investor Relations section of our site, echo.com. During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We will also be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release we issued earlier today and Form 8-K we filed earlier today. With that, I'm pleased to turn the call over to Doug Waggoner.
- Douglas R. Waggoner:
- Thanks, and good afternoon, everyone. This may well be one of the most unpredictable and quickly changing freight environments that many of us have ever experienced. We have truckload rates that have escalated quickly in the last couple of quarters and we continue to debate about how much of those rate increases are because of new regulations, driver shortages, economic demand or weather disruptions. There's also a debate about whether those factors are fully felt in today's rates, or if they have caused temporary spikes, or whether the increases are just beginning. Throughout our call today, you'll hear us talk about how this wide range of views on market conditions impacts our business and how we are best positioned to benefit as a key supplier of capacity and service for shippers in challenging times while ensuring that we're getting quality freight for our carriers and paying them appropriately for their highly coveted capacity. Amongst all this debate, there are some things we can say with absolute certainty. This was a great quarter for Echo Global Logistics. The fourth quarter continued to build on a lot of the positives that we saw in the back half of the third quarter. Revenue for the quarter was up 35% to $548 million, which is close to $50 million more than the top end of our upwardly revised fourth quarter guidance. We attribute this be to our world-class truckload service offering and the synergies of the combined technology platform and our integrated client and carrier teams. Our people have shown significant truckload productivity improvements. They have become comfortable with leveraging the new technology and processes to improve customer service, strengthen the capacity of our truckload network, and take market share. I'm also excited to update you on the synergies that we have seen from offering LTL and partial truckload to the Command clients and through the signing of managed transportation opportunities. These additional service offerings have generated a synergistic revenue run rate of close to $100 million in the fourth quarter. This $100 million along with our now $1.5 billion truckload run rate means that we have achieved our synergy guidance a year ahead of schedule. I'm very proud of the Echo team for achieving this major milestone with our improved truckload technology and multi-modal product offering, we've created a powerful engine for continued growth. Now, let me take you through some of the major accomplishments from the fourth quarter beginning on slide 3. Revenue grew by 35% during the quarter, and this is our highest organic quarterly growth rate since 2010. Gross margins improved sequentially by 55 basis points, with truckload gross margins improving 146 basis points sequentially and 99 basis points versus the prior-year quarter. Non-GAAP EBITDA increased by 131% from the prior-year period. Non-GAAP EPS improved by 400% to $0.33 per share, which excludes the benefit of the new tax act. We came in 14% over the midpoint of our revenue guidance reflecting the strength of the spot market during the quarter, but more importantly, the ability of our technology and people to bring significant value to shippers and carriers in this environment. I want to take a moment to thank all the Echo employees who worked so hard every day to service our clients and our carriers and for achieving these fantastic results. I now want to turn the call over to Dave, who will discuss our fourth quarter results in more detail.
- David B. Menzel:
- Thanks, Doug. Last time we spoke, the truckload market was very tight, rates had escalated in late August and persisted through October, and our truckload volume was growing. Weather disruptions were the primary factor and while we believe the ELD mandate would be a driving force that would keep capacity tight and rates high, uncertainty remained as to how that would shake out through the end of the year. As it turned out, rates did remain strong throughout the quarter and into the start of 2018. I also want to thank our teams as they've done a great job reacting to these market conditions. Their ability to adjust pricing, manage expectations and source capacity for clients has been tremendous. Let's move on to slide 4. While all modes of transportation have been impacted by tight capacity and rate increases, our truckload business is the most affected in this market. In Q4, we achieved record truckload revenue for the third straight quarter up 38% over the prior year to $380 million. This is the result of an increase in both rates and volume as our revenue per shipment was up 28% and our truckload volume increased by 8%. Our truckload volume actually picked up in the second half of the quarter and was up approximately 10% in both November and December on a per-day basis. As everyone knows, capacity was very tight and the load to truck ratio skyrocketed throughout the quarter. Our team did a great job of growing volume and adding to our truckload customer base in such a tight market by leveraging one of our competitive strengths, access to capacity. So we look at the data, it's a bit difficult to dissect how much of this is truly overall market demand and how much is driven by tight supply due in part from the impact of the ELD mandate. Our belief is that the economy was strong and that was a factor, but at the same time, the ELD mandate did in fact constrain supply due to less available hours and changing dynamics in terms of the pricing of certain types of freight. In short to medium haul, not only did we see incremental increases in rates, but we also saw an increase in transit times, which is one good example of how things have changed. Bottom line, the market is in the process of adapting to the impact of tighter measurement and compliance to the hours of service rules and this is impacting both shipper and carrier behaviors. So the market is strong and capacity is tight, and in this environment – this is the environment where our value proposition is very important to shippers. We also believe much of our current success is driven by synergies we are achieving from the integration plan our people work so hard to accomplish. Huge thank you to everyone from our technology, training, client and carrier sales, client operations and back office staff that got us to this point. Our truckload business isn't the only driver of our success, as we also achieved record LTL revenue for the third straight quarter totaling $141 million and up 30% from the prior year. This increase was driven by a 17% increase in volume and an 11% increase in revenue per shipment. Our volume growth came both from transactional and managed transportation clients. Like truckload, volume accelerated in the second half of the quarter. From a rate perspective, we experienced a greater rate increase in our managed transportation business, which was correlated to both higher pricing and freight mix. We appreciate our partnership with the LTL carriers as they are critical to our success in this mode. Just like in truckload, we continue to strive to develop programs that complement our carriers' growth strategies and provide freight that balances their networks and enables profitable growth. Slide 5 highlights our revenue by customer type. Transactional revenue, which accounts for 79% of our total, increased by 32% over the prior year, totaling a record $433 million in Q4 of 2017. Total sales head count was 1,641 at the end of the quarter, which was up by 30 people or 2% over the prior year. We did less hiring in the fourth quarter, which is typical, but we also had our lowest attrition rate in several years. The biggest driver of our transactional revenue growth was productivity, as transactional revenue per client sales rep surged by 30% in Q4. Our managed transportation business delivered another solid quarter. Revenue grew 47% over the prior year to a record of $114 million. We also signed new business with approximately $29 million of annual freight spend. These new accounts will implement and go live in the coming months. Additionally, our Q4 renewal rate was 92%, another strong result. I want to recognize our managed transportation team for doing an amazing job, working with our clients and helping them manage through this tough time, and it's thanks to those efforts that we're able to deliver these results. Slide 6 highlights our net revenue growth of 34%, which was driven by both volume and pricing, as our net revenue margin was flat compared to the prior year. We were pleased with the increase of 55 basis points sequentially. On the transactional or brokerage side of the business, our net revenue margin was up 52 basis points year-over-year and was at its highest level in the last six quarters. This expansion was driven primarily by our truckload business. Our managed transportation net revenue margin was down 195 basis points. As I've discussed throughout the year, this decline is due to larger LTL-centric managed transportation deals. These clients, due to their larger size, typically have a higher degree of automation. So while the net revenue margin profile is below our historical average, there is a lower cost to operate this business. In fact, many transactions in this category are low to no touch, which is a great example of our ability to leverage technology which will ultimately improve our operating margin. Overall, our truckload net revenue margin improved by 76 basis points over the prior year and improved 119 basis points sequentially. Our truckload buy rates were up 22% year-over-year inclusive of fuel and our sell rates were up 23%. This improvement in margin is primarily due to the increase in spot business driven by the current market conditions and our ability to deliver capacity as we utilize our deep carrier base and technology, allowing our people to find solutions that meet both the needs of our clients and carriers. Our LTL net revenue margin declined by 181 basis points over the prior year due to the large managed transportation deals I discussed earlier. Transactional LTL net revenue margin was 6 basis points up year-over-year, so quite steady on that front. I'd like to turn it over to Kyle now to review the details of our financial performance.
- Kyle Sauers:
- Thanks, Dave. On page 7 of the slides, you'll find a summary of the key operating statement line items. Commission expense was $29.5 million in the fourth quarter of 2017, which increased 36% year-over-year. Commission expense was 30.7% of net revenue compared to 30.3% in the same quarter last year. Non-GAAP G&A expense was $45.7 million in the fourth quarter of 2017, which is up 12% from the fourth quarter of last year. Depreciation expense was $5.1 million in the fourth quarter of 2017, up from $4.6 million in the year-ago period. Cash interest expense was $1.7 million during the fourth quarter of 2017, which was flat with the year-ago period. Our non-GAAP effective income tax rate was 36.1% for the fourth quarter of 2017. That includes the impact of the recent tax reform, which I will discuss in a moment. As Doug mentioned, our non-GAAP fully diluted earnings per share were $0.33, increasing from $0.07 in the fourth quarter of 2016. And then the primary differences between our GAAP and non-GAAP EPS in the fourth quarter are $3.5 million of amortization of intangibles from acquisitions, $2.1 million of non-cash interest expense, $400,000 of contingent consideration and $1.9 million of stock compensation expense. We also excluded the gain of $8.9 million from revaluing our deferred tax assets and liabilities, which was the result of the recently passed tax reform. If we move to slide 8, it contains cash flow and balance sheet data. In the fourth quarter of 2017, we had free cash flow of $1.5 million and operating cash flow of $7.5 million. Capital expenditures totaled $6 million in the quarter, and this spend was a decrease of $3.6 million compared to the fourth quarter of last year due to the office expansion in Chicago that took place last year. We ended the quarter with $23.5 million in cash, $310 million in accounts receivable and nothing drawn down on our $200 million ABL Facility. And we continue to be in full compliance with all covenants related to our borrowing facility. We did not repurchase any of our common stock during the quarter. And we have approximately $30 million remaining on our repurchase authorization. Now, I'd like to take you through our guidance for the full year 2018 and the first quarter as well. So first off, January has continued many of the themes we saw during the fourth quarter with revenue continuing to grow through the combination of rate increases and volume growth. Thus far during the quarter, we have seen top line revenue growth of 37% with contributions from all parts of the business. Our team has continued to manage this dynamic environment well and thus far gross margins have held relatively consistent with the just closed fourth quarter. As Doug and Dave have highlighted, there are many different variables at play in this current market and we've represented a range of potential outcomes in our guidance. We expect full year revenue to be in the range of $2.1 billion to $2.3 billion and Q1 revenue to be between $510 million and $550 million. With regards to other guidance, we expect commission expense to be in the range of 30.5% to 31.5% of net revenue for both the full year and for the first quarter. We expect G&A cost to be between $187 million and $197 million for the full year, and between $44 million and $48 million for the first quarter. Depreciation is estimated to be about $24 million for the full year and $5.7 million in the first quarter. Cash interest should be approximately $6.8 million for the full year and $1.7 million for the first quarter. And then, post tax reform, our estimate for our 2018 tax rate is approximately 25.5%. Then excluded from our non-GAAP calculations in the full year and first quarter, we should have amortization of approximately $12.9 million and then $3.3 million in Q1, non-cash interests of about $8.5 million and $2.1 million in the first quarter, and then stock compensation expense of about $9.5 million and $2.8 million in Q1. And now, I'd like to turn it back over to Doug.
- Douglas R. Waggoner:
- Thanks, Kyle. It was certainly an exciting quarter with the peak season, disruptive weather and the ELD implementation. At the same time, it felt like the economy continued to improve. All these factors combined to create a very tight market for transportation capacity. We've been saying for a long time that this inflection point would occur in late 2017 or 2018, and here it is. These are favorable market conditions for Echo. We assist our clients in finding multi-modal capacity at the right price and we hope our carriers to optimize their networks and yield. Looking forward, the future is always hard to predict, especially when it comes to the macro environment. But here is what we do know. January and February are traditionally the slowest months of the year and right now the market is not as tight as Q4, but it's still tight. As Kyle pointed out, our Q1 quarter-to-date year-over-year revenue growth is 37%, and it's been encouraging to see these growth rates persist beyond the holiday season. With our integration work behind us, Echo is firing on all cylinders. Enhancements to our technology and automation are making us more efficient and productive, and our teams are executing very well. Combining this with higher prices and improved margins, we're starting to see an improvement in operating leverage. In the fourth quarter, our net revenue increased 34% year-over-year while at the same time our EBITDA improved 131%, and our EPS improved 400%. In fact, the incremental EBITDA margin of our current quarter outperformance compared – the high end of our guidance range was 43%. This demonstrates the inherent leverage in our business model. If I look ahead and think about the strategies we need to continue to deploy to ensure our competitive position is enhanced in the years to come, I believe that it comes down to two critical ingredients
- Operator:
- Yes, sir. Our first question comes from Jack Atkins with Stephens. Your line is now open.
- Jack Atkins:
- Hey, guys, good afternoon and congratulations on a great quarter.
- Douglas R. Waggoner:
- Hi, Jack.
- Jack Atkins:
- So, Doug, I guess, if I could start off just sort of asking you sort of big picture to sort of help us think through how you're contemplating this year. Obviously, great fourth quarter, first quarter is off to a good start in January. The guidance for the first quarter seems to imply maybe things slowed down a little bit just given how hot they have been. So I'm just sort of curious how you're thinking about as we go into April and this first half peak and the full ELD implementation or – not implementation, but more enforcement I guess on April 1, and then sort of just if you could walk us through your thinking for the second half of the year, I'd be curious to hear that as well.
- Douglas R. Waggoner:
- Well, sure. We've had a very strong January. That continued in the first few days of February. And I would say, the last few days we've seen the market loosen up a little bit. So that gives us a little pause to question how the rest of the quarter will play out. When we start thinking towards April, of course, we have the ELD enforcement and we tend to think that most carriers are trying to comply with hours of service and most carriers have ELDs installed. So we're not entirely sure how much additional pressure enforcement will create, but we also know that occurs at the same time as produce season, and kind of a nominal seasonal pickup in business levels. So we would expect capacity and prices to continue to have pressure. And then, of course, when we get to the last two quarters, we start to come up against some tougher comps that we enjoyed over the last two quarters.
- Jack Atkins:
- Makes sense. And then when I think about sort of your contractual book of business versus your spot market exposure, if you could sort of update us on sort of how that split is running today. And then sort of help us think through as we go through the contractual sort of bid season here in the first half of the year, what sort of impact do you think that will have on your net revenue margins as sort of those contracts come up for renewal? And do you think that's an area where you can get some relief on, on the net revenue margins side.
- David B. Menzel:
- Jack, this is Dave, a couple of comments on that. Last quarter we talked about our business mix and the split between contractual and spot, mentioned that the contractual business range between 40% and 45% of our overall volume. And we'd also indicated that as the market had changed in August and September, we'd seen higher growth rates in the spot side. And I'd say that just step one as that obviously continued into Q4, and we saw about a 5 point volume-related mix shift on contractual and spot in Q4. So I'd say our contractual business is right – just under 40% or right around 40% of the total and the spot's about 60% in Q4. So – and that's the way it persisted. I don't have the exact measurement in January. But I'd say that's persisted or even increased a little on the spot side in January as well as market conditions remained very tight, there's a lot of spot activity. As we think about the bid season coming up, most companies are in the middle, I would say, right now of going through their bid process. Some are starting to wrap up and it's difficult to project exactly how that mix is going to change. Once all those bids do go live, let's say, between March and May, which is typically the time period, I would say the mix going forward is going to be pretty dependent on how much business does settle in at higher rates. We talked about the re-pricing activity that's been occurring for the last four or five months. And I would say that the majority of our contractual business has in fact been re-priced. There are certainly lanes in that book of business that for whatever reason may be due to length of haul or certain capacity that we have available in the line that hasn't re-priced and may not re-price So I think that as we look forward, we think that the contractual business is going to fully re-price over the course of the next couple of months. Don't anticipate today that it would have significant impact on our margins. I think the wild card, gets back to your first question, which is how rapidly does the pricing environment change. And so to the extent that it increases rapidly, we'd expect to see strong levels of spot activity through the rest of the year, which would either hold or expand the margins. And then to the extent it stabilizes, you'd likely see some stabilization of margins. So that's probably the – that's the outlook that I would say. We're not going to get into the business of trying to predict exactly what those gross margins are going to be because market conditions just change and they are difficult to predict.
- Jack Atkins:
- Okay. It sounds great. One more question, and I'll turn it over. If I remember back to 2014 and 2015, when we saw the spot market really strengthen last time, you guys did a great job expanding your customer count and really take a lot of market share that way. I was just sort of curious how the customer count has been trending. Have you been adding new customers with folks who've been looking for capacity given how tight the overall freight market's been?
- David B. Menzel:
- I'd say, the customer count is kind of modestly up and our sales head count hasn't increased significantly. And actually the increases in our sales head count has been more on the carriers side. So that's been a little bit of a factor. The big numbers in our customer counts tend to be LTL-centric. So when you look at the number of customers that we do business with every quarter, there's a significant amount of small to mid-sized companies that are more LTL-centric. So I would say that anecdotally we feel like that customer counts especially on the truckload side have been increasing through this period of market tightness where we've been able to offer capacity, but in terms of the overall number, it's been kind of more of, what I'll call, a modest increase.
- Jack Atkins:
- Okay, great. Thanks again for the time. Congratulations.
- David B. Menzel:
- Thanks, Jack.
- Douglas R. Waggoner:
- Thanks, Jack.
- Operator:
- Thank you. Our next question comes from Brian Ossenbeck with JPMorgan. Your line is now open.
- Brian P. Ossenbeck:
- Hey. Good evening. Thanks for taking my question.
- Douglas R. Waggoner:
- Hi, Brian.
- Brian P. Ossenbeck:
- All right. David, just want to go back to the ELDs and you gave some good examples about how lanes are changing sometimes and some pricing and some capacity, but what are you seeing just broadly from your carriers? Are you seeing some start to drop out or are you still really not utilizing even the full extent or even a partial percentage of what you have available, just sort of the trends you are seeing in your carrier base would be helpful?
- David B. Menzel:
- Okay, good question. Two points, and we've been looking very carefully at that. I'd say that the number of carriers we're utilizing continues to increase in this environment, which is good, and we have not seen any significant dropouts or changes. I'm sure there there's been probably some and I've heard anecdotal stories. But when we talk to our carrier team and we look at the numbers and big – number of carriers that we're booking loads with et cetera, the number of carriers active in our database, there's been no decline. So we continue to add carriers every week and it has not impacted our carrier base in any negative way to-date.
- Brian P. Ossenbeck:
- Okay, got it. And on the other side of the fence is that the sales reps or the talent obviously had a great quarter in terms of productivity. What do you expect for head count for next year? Is the productivity really market dependent or are you actually seeing some tenure, you mention (29
- David B. Menzel:
- Yeah, good question. A couple of points there. On the head count side, we added 30 people this year, which is probably short of the number we kind of set out to add, which is probably closer to 50 to 100. And as we make plans for next year, we're looking to add about 50 to 100 people on the sales side. So depending on attrition and lots of factors, obviously we'll see how that shakes out. I'd say that our tenure has continued to increase and we do expect that as we continue to mature, we'll continue to see increases in tenure, and those will correlate very nicely to increased productivity. The trends on those fronts continue to be very strong. So I'd say that productivity gains would be the primary driver. And I do think, of course, market conditions are an important factor, and the stronger the market is, the more likely we'd see bigger productivity gains from our sales force.
- Brian P. Ossenbeck:
- And the people, that's a net number, the 50 to 100?
- David B. Menzel:
- Correct.
- Douglas R. Waggoner:
- Yes.
- David B. Menzel:
- Yeah, exactly. Exactly.
- Brian P. Ossenbeck:
- Okay. And just one last quick one on technology, and clearly tax rates came down, companies are investing in different areas. But technology is clearly big for your business and for your company. It sounds like you're going to do some more there this next year. Can you give us a sense in terms of what actually is next, is it more visibility, is it more connectivity, more products? I mean, any sense of what were you actually spending on and even a dollar amount would be helpful. Thank you.
- Douglas R. Waggoner:
- Yeah, Brian, the technology that we're adding incrementally really falls into three buckets. There's one that I would call analytics infrastructure and the second has to do with automation and efficiency and productivity, and the third bucket has to do with both client and carrier-facing technology and ease of doing business.
- Kyle Sauers:
- Yeah. And then maybe I'll jump in on just the dollars there, Brian. We spend a lot on technology. I'll tell you, the incremental spend in 2018, if you look at the mid-point of our G&A guidance, we're talking about G&A increasing $18 million and about 40% of that relates to technology investment and that's in the form of head count or services. And we'd actually expect the amount that we capitalize on the balance sheet as internally developed software to increase as well. So, a lot of investments there, but those are the right investments to be making.
- Brian P. Ossenbeck:
- Okay. Thanks for the time. Appreciate it.
- Douglas R. Waggoner:
- Thank you.
- Operator:
- Thank you. Our next question comes from Bascome Majors with Susquehanna. Your line is now open.
- Bascome Majors:
- Yeah. Thanks for taking my question. I realize you don't guide gross margin, but is there a scenario where it could increase this year? I'm just trying to unpack all the moving parts here and just directionally your thought about it.
- David B. Menzel:
- Well, I would say, for sure. Again, we're not saying that it will or it won't because of the market conditions. But I do think that there is a scenario where it could increase depending on how the year shakes out.
- Kyle Sauers:
- Just a couple of things I'd add there, Bascome, to think about in terms of what impacts the margins. To the extent we grow truckload faster than LTL, that probably has a downward pressure on overall margins all else being equal, and also with our transactional business that generally has a higher gross margin than managed transportation. So I think those are things to think about when we're thinking about where the growth comes from in 2018.
- Bascome Majors:
- Understood. Appreciate that color. And you mentioned capitalized software rising as you make some of these investments. Do you have a consolidated CapEx outlook and any thoughts on free cash flow? Thanks.
- Kyle Sauers:
- Sure. So CapEx in 2017 was about $21 million and a large majority of that was related to internally-developed software. We expect the CapEx number to be somewhere in the range of $22 million to $26 million in 2018. And again, most of that will be internally-developed software. So hopefully that helps on the CapEx piece. On cash flow, there's probably a couple of thoughts there that, without guiding to specific numbers, I think understanding what happened in Q4, our operating free cash flow were definitely affected by the significant growth that we had during the Q4 period. The difference between where our results came in and where our guidance expectations had been probably impacted our cash flow by $10 million to $15 million being tied up in working capital. And as you know, we pay carriers quite a bit faster than we get paid from our shippers and that's particularly true on the truckload side as we pay carriers more quickly, so that when we've got sequential growth that is sizable and particularly when it's in truckload, that ties up more in the working capital. But to the extent you have sequential growth that were to not be quite as large as it was from Q3 to Q4, that abates a little bit. I think the other thing to think about in terms of cash flow and something that could be changing here is just our cash tax rate from tax reform. It could be somewhere around 10%. And this compares to a cash tax rate that was probably around twice that in prior years. So I think those things are probably the two major considerations when comparing to what our cash flow profile has been like over the last several years.
- Bascome Majors:
- Thank you for the time.
- Douglas R. Waggoner:
- Thank you.
- Operator:
- Thank you. Our next question comes from Ravi Shanker from Morgan Stanley. Your line is now open.
- Spencer Todd Chernus:
- Hey, guys, it's actually Spencer Chernus here on for Ravi. Thank you for taking the question. Just because we're following up on your revenue guidance for the full year 2018, first quarter obviously very, very strong, but it does imply some deceleration in terms of year-over-year throughout the year. And I'm just wondering if that's more a factor of comps getting more difficult or just lack of visibility or something else. And then secondly, if you could also provide the revenue per day comps for the first quarter of 2017 just trying to figure out what the 37% is comping against? Thanks.
- Kyle Sauers:
- Hey, Spencer, I'll talk about the revenue guidance and just some of the thought that went into that. So obviously, there has been significant increase in truckload pricing in recent months and likely some months to come. So for our guidance, we presume that those rates will be up significantly year-over-year during the early part of the year, obviously, evidenced by our Q1 guidance as you pointed out. And it'll become less of an impact on a year-over-year basis later in the year and then probably particularly in Q4 in terms of what we have built into our guidance. From a volume standpoint, we expect to be improving our truckload volumes somewhere in the single-digit range throughout the year. Obviously, the – as kind of Dave and Doug both alluded to the results of the current bid season and the state of the spot market are obvious inputs into what that ultimate volume growth ends up being. And then we also expect rates to continue to rise on a year-over-year basis in LTL and also to improve our volumes in LTL. And then the other thing I would point out is that the growth out of our managed transportation business would probably more closely approximate our long-term targets of 10%-plus growth versus the outsized growth that we have this year. So I think those are things that we thought about, and I think will give you a little read on how we see the year playing out without giving any specific revenue guidance for the quarters beyond Q1.
- David B. Menzel:
- I'm not sure I totally followed your question on the Q1 2017 component, could you just repeat that one for me, please?
- Spencer Todd Chernus:
- Yeah, definitely. So, I'm just curious as to what your revenue, how it trended per each month, January through March, in the first quarter 2017?
- David B. Menzel:
- Oh, got you. Yeah, I apologize. I don't have that stat in front of me. We've got to get back to you. I can't remember. Sure we disclosed it on that call, so we can dig that back up for you. I know that revenue was up on an overall basis about 2.5% in Q1 2017. So I can't recall how it changed month-to-month last year.
- Spencer Todd Chernus:
- Fair enough. And just one more quick one if I can, more bigger picture in terms of M&A. I know you recently took it on your targets, but you said it's not necessarily off the table. So I'm just kind of wondering where we are at there and maybe specifically if there is a particular vertical or mode of transportation that you would target.
- Douglas R. Waggoner:
- Yeah. What I would say about M&A is that we are currently working an active pipeline of tuck-in acquisitions.
- Spencer Todd Chernus:
- Awesome. Thank you.
- Douglas R. Waggoner:
- Thank you.
- Operator:
- Thank you. Our next question comes from Jason Seidl with Cowen and Company. Your line is now open.
- Jason Seidl:
- Thank you, operator. Hey, Doug. Hey, Kyle. I want to go back to the cash flow questions because obviously with your guidance and your CapEx, you're going to generate more this year than you did last year. Just want to talk about maybe usage. Have you guys thought about tipping into the buyback again or is that something given the stock run that you're going to just be more, I don't know, I guess, targeted on, if you will.
- Kyle Sauers:
- Yeah. Thanks, Jason. So obviously, we're always evaluating the use of the cash. We did not buy back any stock during the fourth quarter. I don't want to necessarily – because we don't have a programmatic and systematic buyback plan, I don't want to necessarily suggest what we'd be doing in the quarter or the year. We do have $30 million available under that buyback plan and that can be for both stock or the convertible debt. And I think the other key uses of – of increasing cash flow would be for M&A activity that Doug just commented on that we've got a lot of different opportunities we're looking at. And then also, in little less than two-and-a-half years, the convertible will be coming due, so making sure that we've got plenty of flexibility to manage that as well.
- Jason Seidl:
- Makes sense. On the M&A front, have you seen the multiples trend over the course of, let's say, 2017 and early 2018?
- Douglas R. Waggoner:
- In the conversations that we have, they seem – I would characterize it as fairly stable and fair multiples. Nothing that pops up that would indicate a trend.
- Jason Seidl:
- All right. And as we're looking – switching gears here a bit, and as we're looking to model out 2018, you talk obviously that your managed transportation business is going to have lower, if you will, gross margins based upon just the profile of the business. But should we expect a bump-up maybe in the third quarter, because we would assume that spot prices are going to be down a little bit on a year-over-year basis and any pricing that you get is going to be predicated off the tight market now, is third quarter going to look a little bit better or is that just going to be an anomaly on a year-over-year basis?
- Kyle Sauers:
- And, Jason, you're referring to the margins in the third quarter?
- Jason Seidl:
- Gross margins, yeah.
- Kyle Sauers:
- Yeah. I think there is – I'll comment and then see if Dave or Doug have any thoughts as well. But I think you've got competing factors there. Because spot rates are rising, you are getting compressed on that contract freight, but then you also have the benefit of additional spot market freight, and having the portion of your truckload portfolio, if you will, be more spot and that's generally at higher margins. So I think there are some offsetting factors there.
- Jason Seidl:
- Okay. Two more quick ones and then I'll turn it over somebody else. In January, did the year start slower for you guys because we've heard from some people that the year – excuse me, like the month started slow and then it picked up? I'm just trying to connect the dots here.
- Douglas R. Waggoner:
- January 2 was kind of slow. After that it picked up...
- Jason Seidl:
- So one bad day.
- Douglas R. Waggoner:
- Yeah. That was about it. It was pretty strong right from the get-go.
- Jason Seidl:
- Okay, fair enough. And the other thing, we hear a lot from investors when talking about the brokerage space, about the fear for some of the new entrants maybe changing the dynamic, if you will. You guys know my opinion and that's a lot further out than some people think. I'm just wondering if you're seeing some of these guys in the marketplace and are they causing any disruption whatsoever, it doesn't look like it from your numbers, but I just figured I'd ask.
- Douglas R. Waggoner:
- No, I would say that we're aware of them at an account or two here and there. But I would just remind you that it's a very, very big market. And that equates to both the numbers of shippers that we can call on and develop relationships with, as well as the carriers. And we also know that the outsourced 3PL transportation market grows at a multiple of the overall transportation market. So I think the data shows the propensity for shippers to outsource more and more to non-asset-based third party. So the market continues to grow. It's a very, very large and fragmented market. Technology is important, but relationships matter, especially with small and unsophisticated shippers and truckers that maybe don't have or utilize technology, and we feel that we do have the technology. We have invested heavily over the last 13 years in technology, and we continue to build on that. And as I mentioned earlier, there's many dimensions to our technology
- Jason Seidl:
- I appreciate the color, guys, and appreciate the time as always.
- Douglas R. Waggoner:
- Thank you.
- Operator:
- Thank you. Our next question comes from Allison Landry with Credit Suisse. Your line is now open. Allison M. Landry - Credit Suisse Securities (USA) LLC Thanks. Good afternoon.
- Douglas R. Waggoner:
- Hi, Allison. Allison M. Landry - Credit Suisse Securities (USA) LLC How should we be thinking about the incremental margins on the expected low to mid-teens revenue growth in 2018? Should we think about the 8%-ish contribution margin that you put up in Q4 as a good proxy or would you expect to generate additional operating leverage given the tight market and what you're seeing in terms of an acceleration in synergies and productivity gains?
- Kyle Sauers:
- Yeah. So without putting too fine of a point on it, we feel like there's a very strong likelihood of operating leverage in 2018. And if you look at the midpoint of the revenue guidance of 13%, G&A is growing at 10% of the midpoint, so obviously we're expecting to grow revenue faster than G&A. It depends a lot on our net revenue margins, as you can imagine. And without guiding to those, it's hard to again pinpoint that exactly. But if we stayed steady with where we were in Q4, that would obviously – on gross margins, that would obviously drive a lot of improvement in the margins as well. I think it's worth noting that the EBITDA margin expansion could be much larger if it wasn't for our continued growth in the investment of our technology initiatives. But that's the right investment for us to be making in the future. I think the other thing I would point back to one of Doug's prepared remarks about our beat in Q4 and the incremental margins on the revenue over the top end of our guidance, so the $48 million are incremental margins on that, we're in the low-40%. So I think there's a lot of opportunity for us. Allison M. Landry - Credit Suisse Securities (USA) LLC Okay. And then in terms of fuel and the impact that it's having on either the Q4 net revenue margin and your guidance for growth, revenue growth in 2018; could you give us a sense of the magnitude of that?
- Kyle Sauers:
- Sure. On the margin impact, it's obviously a little hard to measure. I don't think it was real significant. The revenue impact that we picked up in Q4, because of increased fuel year-over-year was in the neighborhood of $15 million. Some of that would have been built into our guidance probably a little bit, not because the fuel prices continued to rise. And then on the impact on 2018, if fuel doesn't change much from where we are today, it's probably in the neighborhood of 2% of that revenue increase. Allison M. Landry - Credit Suisse Securities (USA) LLC Okay. Got it. Thank you.
- Kyle Sauers:
- Thanks, Allison.
- Operator:
- Thank you. Our next question comes from Kevin Steinke with Barrington Research. Your line is now open.
- Kevin Mark Steinke:
- Good afternoon. So, you mentioned in your prepared remarks that some of the success in the quarter came from the synergies from your integration with the Command technology platform. What you've talked about in the past has kind of been hard to quantify. And also just not as noticeable in a kind of a flat market. But with the market tightening now, are you kind of seeing those synergies from the technology integration that you would have expected at the time of the deal?
- Douglas R. Waggoner:
- Yeah, Kevin, I mean, we'd guided to $200 million to $300 million in synergy. We've been able to quantify $100 million. And I think the performance that we turned in in Q4 demonstrates how we're able to penetrate the truckload market, especially in conditions that favor spot business and the ability to find capacity and leverage our technology and our relationships. And so, I think part of that outsized growth in Q3 and Q4 is attributable to the synergy.
- Kevin Mark Steinke:
- Okay. And then on kind of the quantifiable part of the synergies, the $100 million run rate you cited in terms of the cross-sell of multi-modal solutions and also I guess capturing more managed transportation clients, although, you've reached, I guess you said, your goal a year early, how much opportunity do you see beyond this for additional synergies from those areas?
- Douglas R. Waggoner:
- Well, I think we see a lot of opportunity. I mean, we basically got ex-Command employees that are basically used to selling truckload and now we've given them new tools, new technology, education to sell other modes of transportation. We assist them in leveraging the relationships to close managed transportation deals, and that's how we got the first $100 million and we see a lot of those opportunities still out in front of us.
- Kevin Mark Steinke:
- Okay, sounds great. Thanks for taking the questions.
- Douglas R. Waggoner:
- Thank you.
- Operator:
- Our next question comes from David Campbell with Thompson Davis. Your line is now open.
- David Pearce Campbell:
- Hey. Good afternoon. Thank you for taking my questions. Just wanted to see – Dave Menzel, you mentioned you might add 50 to 100 people to your staff this year. How much of that would be in sales, do you have any estimates for that?
- David B. Menzel:
- Yeah. That head count addition was specific to sales. So our actual head count addition would probably be higher when considering technology and other operations positions, especially on the managed transportation side.
- David Pearce Campbell:
- Okay. So there'd be more people in the corporate office...
- David B. Menzel:
- Correct.
- David Pearce Campbell:
- ...which would go along with your increase in business. But the revenue – the revenue market, the market is so strong on a revenue basis. Wouldn't it be an advantage to ramp up your sales activity, the sales personnel faster so that you could lock up some new relationships given the strong market, or you think you can generate enough new business with 50 to 100 sales people?
- David B. Menzel:
- Yeah. It's a good question. I mean, I think that on the one hand, with the market as strong as it is, our increasing tenure and experience is going to be the primary driver in the current market condition. So while we'll take the market conditions into consideration, there is typically probably at least a one year cycle to getting our sales reps up and productive. So, on a short-term basis, we don't look at it to say, hey, market is very, very strong today, so let's ramp significantly more aggressively. If we think we're understaffed in a particular area, we might take more aggressive action, but that's not the case today. And the second thing that we see coming is that, and Doug mentioned it, we continue to make a lot of investments in the technology side and we see opportunities for continued automation and improvement in productivity from our investments in technology. So we think those investments are going to enable our sales force to do a better job of capturing the opportunity in front of them. And so, we take all of those things into consideration when thinking about the hiring plans for the upcoming 6 to 12 months.
- David Pearce Campbell:
- Okay. And my last question is on the mergers and acquisitions business. With geographic fill-ins, one of the targets for your acquisitions are – is it more related to specific types of industries?
- Douglas R. Waggoner:
- I had trouble hearing you there, David. You said – was it a specific industry...
- David Pearce Campbell:
- With your acquisition targets, are you thinking more filling in geography – geographic niches in the country where you may not have...
- Douglas R. Waggoner:
- Sure.
- David Pearce Campbell:
- ...much business? And the second one would be, would you be focused on – in the industries, new industries or bigger – bigger impact on certain industries?
- Douglas R. Waggoner:
- Yeah. I think our strategy is to stay pretty close to home with the services that we already provide, keeping an eye open towards niche areas, niche modes, niche geographies, interested in managed transportation businesses and probably leery of deals where there's a lot of overlap that could cause conflict with existing employee-customer and employee-carrier relationships.
- Operator:
- Thank you. I am showing no more questions at this time. I would now like to turn the call back to Doug Waggoner for any further remarks.
- Douglas R. Waggoner:
- All right. Well, I want to thank everybody for joining us today. It was a breathtaking quarter in terms of unusual market conditions. I feel like we made the best of them and we're looking forward to a solid 2018, and we'll talk to you next quarter.
- Operator:
- Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.
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