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Edited Transcript of ECHO earnings conference call or presentation 24-Jul-19 9:00pm GMT

Q2 2019 Echo Global Logistics Inc Earnings Call

CHICAGO Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Echo Global Logistics Inc earnings conference call or presentation Wednesday, July 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Menzel

Echo Global Logistics, Inc. - President & COO

* Douglas R. Waggoner

Echo Global Logistics, Inc. - Chairman & CEO

* Kyle L. Sauers

Echo Global Logistics, Inc. - CFO & Secretary

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Christyne McGarvey

Morgan Stanley, Research Division - Research Associate

* David Pearce Campbell

Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* J. Bruce Chan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Matthew Young

Morningstar Inc., Research Division - Equity Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Mr. Kyle Sauers, Chief Financial Officer. Sir, you may begin.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [2]

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Thank you, and thank you for joining us today to discuss our second quarter 2019 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'll 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.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [3]

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Thanks, Kyle. Good afternoon, everyone. Our teams executed well this quarter in a more challenging freight market. Continued investments in our technology platform and the flexibility of our operating model demonstrated our ability to post solid financial results in an environment with lower volumes and significant truckload pricing headwinds.

Relative to last year at this time, there is less demand for capacity, and that, coupled with an oversupply of trucks, means there's little to no spot freight and all truckload prices have come down dramatically. While we are far from the peak conditions we saw a year ago, there are many things that keep us excited about where we are headed.

We continue to expand with our larger truckload shippers and are winning more contract freight to partially offset the loss of spot market freight versus a year ago.

Our Managed Transportation offering continues to resonate with shippers, and we had another nice quarter of new customer wins. We're seeing our technology create value for both our shippers and our carriers. As we continue, technology will increase the efficiency of our internal freight marketplace for all participants, including shippers and carriers, as well as Echo sales, operations and back office team members.

Our updated guidance has us reducing costs on a year-over-year basis even as we add to our sales and technology teams. The market is not working on our favor like it was in 2018, but I've never been more excited about the pace of our technology evolution and our position in the market.

Now I'll highlight some of the Q2 results. Total revenue was $554 million, representing a 12.8% decrease from last year. Net revenue was $100.6 million, representing a 5.8% decrease from last year. Adjusted EBITDA was $23.1 million, representing a 5.4% decrease from the prior year. And non-GAAP fully diluted EPS was $0.42 compared to $0.46 in the year ago period.

Now I'd like to turn it over to Dave, to go into more detail on our performance.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [4]

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Thanks, Doug. Before I dive straight into our results, I'd like to highlight a few key themes that continue to play out in 2019. First, the truckload spot market continues to be very soft, rates are down, and spot opportunities are much lower than last year.

Number two, the truckload contract market is very competitive, as you'd expect in a soft market, but despite the high level of competition, we're gaining share in this important component of the market.

Number three, truckload pricing remained relatively flat on a monthly basis throughout the quarter, but the year-over-year decline accelerated due to escalating rates in 2018.

And number four, we're investing in rolling out technology to drive further automation into our platform, and we believe these investments will continue to drive lower cost through higher productivity over the next several years.

I'll get into more specifics on these themes as we walk through our quarterly results, but first I want to thank our clients for their support in Inbound Logistics' Annual Shipper Survey, where we were awarded the #1 3PL for the third year in a row. We're very proud of this recognition as our entire organization has a strong commitment to exceed expectations for our clients and for our carriers. And I want to thank all of our employees for the hard work that they've executed over the last year to help us earn that recognition.

Now let's take a look at our results by mode as shown on Slide 4. In Q2, total truckload revenue was $362 million and decreased by 18% over the prior year. The majority of the revenue decline was due to lower rates. Truckload volume was down 7% year-over-year and our revenue per shipment was down 12%. Consistent with the first quarter, the volume decline was entirely attributable to our spot business as primary award volume increased by 9% in Q2. The decrease in rates is consistent with the change in market and conditions and a decline in the cost of capital -- of capacity.

To state the obvious, our industry is really showing how volatile and cyclical it can be. The current environment is about 180 degrees from where we were a year ago. Our response to this rapid change has been to be more aggressive in our pursuit of contract business. This sounds simple, but in execution, it's important that we remain strategic with our clients and remain positioned to exceed their service expectations.

In a competitive market, where others are more focused on growing share regardless of profitability, we've made the conscious decision not to chase market share at all cost. We will lead with service and focus on driving partnerships with our clients and our carriers. Our shippers value this approach. At the same time, we recognized that cost is a critical component to the equation.

Our network and corresponding lane density enable us to consistently secure capacity at rates below the market averages. We're in a great position when the market inevitably shifts as we have expanded many shipper relationships as evidenced by our contract growth, and we remain confident in our ability to tap into spot capacity when our clients require it.

If the market remains soft, soft will continue to steadily grow our contract, truckload, LTL and Managed Transportation business. When the year-over-year comps on the spot business start to ease up, we expect to continue to drive organic volume growth across all key categories of the business.

During the quarter, our primary award business represented 53% of our total as compared to 43% a year ago. Last quarter, we mentioned our launch of available loads in EchoDrive, and I'm very pleased with the reception from the carriers in our network. As a component of our launch strategy, we surveyed our users and found that many of our carriers were also actively utilizing other online tools, not surprising given the evolution of digital capabilities.

We've been pleased that in this recent survey, our users rated EchoDrive as the most preferred above all other competitive portals. This is very exciting as we're just starting to grow our digital interactions with our carrier base, and we've got lots of great ideas about how to advance this offering with both technology and data science.

Turning to LTL, we generated a total of $165 million, 3% growth over the prior year. Increases in both rates and volume drove this performance. Our LTL shipment volume was up 2% in Q1 -- in Q2 and our revenue per shipment was up 1%. Our EchoShip platform continues to gain traction with our small-to-midsized LTL shippers. Similar to EchoDrive, our EchoShip platform is highly rated by our shippers, and we will continue to enhance this platform over time.

Turning to Slide 5, our transactional revenue of $428 million declined 15% driven primarily from the decrease in truckload revenue. Our Managed Transportation revenue was $126 million in Q2, a decrease of 5% over the prior year. The quarterly revenue change was impacted by lower truckload rates as Managed Transportation shipment volume was up 3% in Q2.

We had another strong quarter from a new business win perspective with $32 million of new freight spend landed during the quarter.

Turning to Slide 6, we generated $100.6 million in net revenue and our net revenue margin increased 134 points over the prior year to 18.2%. This increase was due to an increase in truckload margin of 189 basis points and a decrease in LTL of 34 basis points.

The increase in truckload net revenue margin was driven primarily from award business, where we, again, saw a significant decrease in loss loads due to the softening in capacity.

I'd now like to turn it over to Kyle, to review additional Q2 financial details and outlook.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [5]

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Thanks, Dave. On Page 7 of the slides, you'll find a summary of our key operating statement line items. Commission expense was $31.1 million in the second quarter of 2019, decreasing 4% year-over-year. Commission expense was 30.9% of net revenue compared to 30.3% for the second quarter last year. Our non-GAAP G&A expense was $46.5 million in the second quarter, down 7% from the year ago second quarter of 2018. We began added to our sales and technology teams, but we've been able to reduce costs on a year-over-year basis due to continued automation and lower incentive costs.

Depreciation expense was $6.8 million in the second quarter, up from $5.8 million in the year ago period. This increase in depreciation is associated with the increase in our continued investment in technology.

Cash interest expense was $1.3 million during the second quarter compared to $1.6 million in the year ago period. The decrease is due to the repurchase of a portion of our outstanding convertible debt. And our non-GAAP effective income tax rate was 25% for the second quarter of 2019.

As Doug mentioned, non-GAAP fully diluted earnings per share was $0.42 decreasing from $0.46 in the second quarter of 2018, and the primary differences between our GAAP and non-GAAP fully diluted EPS are $3 million of amortization of intangibles, $2.2 million of noncash interest expense and $2.4 million of stock comp expense.

Moving to Slide 8, which contains selected cash flow and balance sheet data. In the second quarter of 2019, we had free cash flow of $20.3 million and operating cash flow of $27.1 million. This brings our trailing 12 months free cash flow to $86.7 million. Capital expenditures totaled $6.8 million in the quarter compared to $5.6 million in the prior year.

We ended the quarter with $16 million in cash and $322 million in accounts receivable. And at the end of the quarter, we had nothing drawn on our $350 million ABL facility.

During the quarter, we repurchased 702,000 shares of our stock for $15.5 million or an average of $22.06 per share. And in addition, we repurchased $26.4 million face value of our convertible debt for $26.1 million.

And as at the end of the quarter, we have approximately $23 million available on our repurchase authorization.

Now I'll take a moment to walk through our guidance for the third quarter and the remainder of the year, which we've highlighted on Slide 9. Revenue during the last 2 weeks was down 19% on a per day basis compared to last year. Our net revenue margins during the second quarter decreased as we progress through -- throughout Q2, which is a typical seasonal pattern as we've talked about before.

Margins during the last 2 weeks have been in the mid- to high 17% range. So given all these current trends, we expect Q3 revenue to be in the range of $530 million to $570 million, and for the full year we expect revenue in the range of $2.1 billion to $2.25 billion.

With regards to other guidance, we expect the following. Commission expense to be between 30.5% and 31% for the third quarter and the full year, G&A costs to be between $45.5 million and $47.5 million for the third quarter, and $185 million and $191 million for the full year, which is down $10 million from the previous midpoint.

Depreciation is estimated to be at about $7 million for the third quarter and $27 million for the full year. CapEx is still estimated to be $27 million to $30 million for the year. Cash interest of approximately $1.3 million for the third quarter and $5.3 million for the full year. And we continue to expect our quarterly tax rate to be approximately 25% for the third quarter and for the full year.

We also anticipate our share count to be approximately 26.6 million shares for the remainder of the year. Excluded from our non-GAAP calculations in the third quarter and full year, we expect amortization of approximately $2.8 million and $11.8 million, noncash interest of $1.6 million and $7.4 million and stock compensation expense of about $2.6 million and $10.4 million.

I'd now like to turn the call back over to Doug.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [6]

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Thanks, Kyle. There is no escaping the fact that we compete in a cyclical industry and the market has changed from the tight capacity and escalating rate environment of early to mid-2018. An important aspect of how we run the business is to make adjustments in different phases of the cycle. When the market starts to soften, we anticipate there will be less spot freight available, so we know we will need to win more primary lanes in order to maintain volumes. And of course, we need to take a balanced approach between pricing to win more lanes and maintaining our net revenue margins.

We also have to look around the corner and think about where we will be when the market tightens up again and therefore how much risk do we want to take. All in all, I think, we've proven over time that we do a very good job of trying to find the right balance on this approach.

We understand that these cycles come and go, and we continue to invest and build for the long term. Most of this investment today is in the technology and data science, and the payback will come through automation, optimization and reduced SG&A costs.

I remain very optimistic in our future, as we have an amazing set of capabilities to compete and win in any market and our people are experienced and talented. Our carrier base is of very high quality and our network has scale and our technology enables efficient execution, and we are aggressively advancing this platform through EchoAccelerator.

We do continue to think about and work on tuck-in M&A as an additional growth driver. We've assembled a good pipeline of opportunities, and we believe that valuations have become more reasonable.

M&A has been a key part of our strategy in the past and provides a catalyst for organic growth as we assimilate the acquired business onto the Echo platform and then expand their capabilities.

Finally, our client satisfaction and carrier satisfaction is very high. I want to thank our clients for voting Echo as the #1 3PL in Inbound Logistics' Annual Survey, and we're excited about our 3P. We plan to keep it rolling.

So with that, I'd like to thank everybody and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Allison Landry of Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [2]

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I was wondering if you could maybe parse out how much of the net revenue margin expansion that you've seen in the last couple of quarters is due to more efficient buying of capacity versus favorable buy/sell spreads and maybe the optics of lower gross revenues? And then if you could maybe comment on the sequential deceleration you're seeing in the net revenues. Is that primarily due to the narrowing of the buy, the sell spreads so far in Q3?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [3]

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So 2 questions there. In terms of the first question, Allison, which was -- which is, I think that the net revenue expansion is primarily the result of a typical cycle that we've seen play out in the freight business for a long time, which is, when rates are moving downward, they tend to move a little bit more quickly with the carriers than they do with the shippers. And so there's -- so that's one part of the equation.

The second part of the equation, as I mentioned in my prepared remarks, is that, especially in our award business, because of the change in freight environment, we've pretty significantly reduced the amount of negative loads, which is negative margin, which creates some margin expansion for us on the award side because there's just less loss business there.

I think that -- we've looked at our ability to buy at or below market averages and we've consistently performed better than market averages and that hasn't changed dramatically. If anything, it's expanded a little bit over the last 6 months.

So I think that was kind of the second part of your question is how much came from actually just buying better. And so we have seen some improvement there, but it's -- we've pretty consistently done that over the last several years.

And then could you give me a hand with your second question also, I forgot what you (multiple speakers).

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [4]

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I was -- I think Kyle made the comment that in the last few weeks that the net revenue margins have been sort of in the mid -- or the 17 -- sort of like mid-17s to high 17s, and I was just wondering what might be driving that sequential deceleration.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [5]

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So it's interesting. I think that -- in June, we saw a continued -- we saw a little bit of price increase on the carrier side happen in June, persisted a little bit into July. So I think that kind of coming out of the holiday period, we saw some compression of margins. And then as the holidays kind of subsided, we've seen that bounce back a little bit.

So I think it was mainly driven by the market tightening up just a little bit in June and then maybe easing up a little bit as we've kind of gotten into mid-July.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [6]

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Okay. And then Doug, you mentioned in, I think, the last few comments that you made that valuations have come in a bit. So curious if we should take that comment maybe as a signal that you guys are a bit closer to something on the acquisition front than perhaps you've been in the last 3 or 6 months?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [7]

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Well, of course, we can't comment on anything before it's concluded, but the comment was just intended to let you know that we're active in the marketplace. We're having lots of conversations and meetings, and it's our intention to do deals when we find the right deals at the right price.

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Operator [8]

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Our next question comes from Jack Atkins with Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [9]

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Congratulations on executing really well in a tough backdrop out there. So Doug or Dave, let me ask you just sort of when you think about the capacity situation in the broader market, I mean, is there a way to kind of think about how oversupplied or -- I don't think it's undersupplied, but I guess how oversupplied the truckload market is relative to last year?

Would you say, it's like 150, 200, 300 basis points more capacity than there is demand? I'm just trying to help kind of frame up sort of how -- just trying to frame up how much excess capacity there is out there right now?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [10]

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Well, I'll take a stab, Jack. And then maybe Dave wants to jump in too. Back in the heyday of 2018, when the market was super tight and there were not enough drivers and not enough trucks, I sort of forecast and probably told some of you that I thought it was going to last quite a while because I got the sense that trucking companies weren't buying capacity and it was hard to find drivers even if they did.

And as we got into late 2018, markets seemed to soften a little bit. We actually did a carrier survey and we surveyed a number of smaller carriers, and we asked them if they had added any capacity. And in fact, they had added significant capacity. And I don't know if that extends to the larger carriers or not. But I certainly do think that the industry bought a lot more trucks than we realized that they did and so that's manifesting itself now as excess capacity, but it's hard to quantify.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [11]

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Yes. I feel like I'd be taking a shot in the dark to try to actually quantify it, Jack. I mean, we talked about the survey we did. And of course, it was with smaller carriers. It didn't include a lot of large carriers. So it's not representative of the entire market. So it's a little difficult to extrapolate it.

But we saw in the neighborhood of 5% to 10% equipment added in 2018 from selected smaller carriers that chose to respond to our survey, which is quite -- which, as Doug mentioned, is quite a bit. And then if you look at the truckload shipment indexes, they're flat or down a little bit this year; Cass Index, et cetera.

So put those 2 things together and then I see that rates are -- we mentioned that rates were 12% lower in -- year-over-year in Q2. So you've got 10% to 15% price reduction happening overall. So those -- those are the data points I would look to try to answer the question, but I don't know if I could give you a definitive answer.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [12]

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No, that's make sense. I know it's hard to put too fine of a point on it. Let me ask, I guess, the other side of the coin, which is -- are you guys seeing anything in your business on -- over the last couple of months that would lead you to believe that maybe some of the smaller carriers are sort of dropping off and maybe there's some attrition in terms of just the carrier count out there?

I know you guys have a pretty broad base of folks that you work with. I'm just curious if you're maybe seeing on the margin some smaller carriers, given how challenging it is out there, go out of business?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [13]

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I would just say, just what we read about more so than seeing it in the data. It's difficult to see it in the data, because there is a bit of excess capacity. So it's a little -- loads get covered a little more quickly and so there is capacity out there. So it doesn't kind of show itself to us in the data. I read a little bit about carriers that might be closing their doors or small owner operators that logically would go on to do something else that they can make a better living, but haven't seen a lot of that information in the data.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [14]

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Okay. Got you. And I guess, just one last question on that line of thought, but I mean, when we think about the tail end of this year and into early next year, there are some things changing on the regulatory front, whether it's AOBRDs to ELDs, that final conversion happening in December or the Drug and Alcohol Clearinghouse and hair follicle testing. I mean, there is sort of reason to think that we can see some capacity come out over the next 6 months even without attrition from challenging in-market fundamentals.

I would just be curious to get your take on, do you think those regulatory developments are going to maybe help tighten the market up over the next couple of quarters?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [15]

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Jack, it's hard to say. I mean, if you go back to mid-2017 and we were kind of coming out of a market that was in the doldrums, and very quickly we saw, with the 2 hurricanes and the ELDs later in December, we saw a rapid acceleration of tight capacity, and we never saw it coming. So I think it just speaks to the volatility in the transportation capacity market and the difficulty you have in predicting that.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [16]

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Understood. One last question and I'll turn it over. Doug, well, you mentioned EchoDrive in your prepared comments. Can you maybe give us a sense, if you could, just around what's -- what the customer feedback on that has been? And is there any sort of way to kind of help us think about the uptake in terms of what you've been able to see and what you're able to drive through that more automated? And I know you guys are already very highly automated but just that particular part of the business that you've been rolling out over the last several months.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [17]

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So Jack, I'll give you a little color on that, if Doug wants to add to it, he will. And then so -- a couple of things. We've -- EchoDrive is our portal and mobile app. We've had it out there for some time. And we've recently just launched some new features, which is making a portion of our load more available to our network carriers. And I'd say, that we've gotten great feedback from our carriers in terms of the ease at which it is to navigate, to utilize and it's an efficient vehicle for carriers to search for freight when trucks free-up and they're looking for load to get covered.

So with our model, which is a relationship model between our carrier sales team and our carriers, we've got a lot of touch points, obviously, happening every day with all of our carriers in our network. And I would say that, right at this point in time, it's one more way, another way for our carriers to access our freight on their own time frame. So it allows 24/7 access.

So if something happens on a weekend or overnight, they can kind of search for freight, make an offer on loads, and we're seeing that activity. We're seeing a lot of searches. We're able to see the data where these searches are happening and think about ways that if we don't have freight that matches that there's capacity out there that we're not tapping into. We're just kind of getting started in terms of how we can utilize that data more effectively.

But overall, I'd say the focus that we've had has been to improve the interaction with the people, the process and the technology. And over time, that will create more and more automated transactions.

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Operator [18]

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Our next question comes from Tom Wadewitz of UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [19]

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I wanted to ask you about the dynamic that seems to be playing out in the market. I guess, we hear a fair bit about pretty aggressive competition among brokers and that contract rates among brokers are down pretty hard. Obviously, we see that in the revenue per load.

At the same time and while there's pressure on the asset carriers, it seems like they're maybe having a little more stickiness in what they got at the end of the contract season, maybe seeing contracts that were down a little bit, rates that weren't down as much. So it seems like there's maybe a little different cycle dynamic than we would think is normal. And I guess, associated with that, you might think there might -- would be more volume flowing to the brokers, but we don't seem to be seeing that.

So I just wondered if you could offer some thoughts on that kind of broker versus asset player dynamic, and whether cheaper broker rates might drive some volume in out of quarter or looking out the next couple of quarters.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [20]

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Yes. I think that the -- because there is some excess capacity out there that number one is, if you poll the shippers, and you look at the routing guides and you'll find all kinds of different scenarios out there. And what the asset -- direct asset coverage is to broker coverage. And among shippers that are going to lean more toward a heavier asset coverage -- say, a 60-40 split or something like that -- the routing guides are working well. So there's less freight kind of coming over on the spot side.

And so because of that, the brokers aren't seeing the spot business maybe that they're used to seeing, and they would compete a little more heavily to get their share of contract business, but they compete with the assets.

So I wouldn't say that there is a significant change other than if somebody wants to drive volume, they're going to probably sharpen their pencil a little bit and compete, and we see that price competition for sure. And that's why for us, we have to compete on price every day. But our -- we focus a lot on the service and our strategic relationships with our shippers. And in that regard, we're able to either hold or expand our market share with those shippers based on the service that we provide and the commitment that we can give them through different parts of the cycle.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [21]

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Right. Okay. What about -- thinking about cycles, I guess, the most recent one might -- I think, more recent might offer a better framework for thinking about how the cycles play out.

So looking at 2015 and '16 when freight was weaker, do you -- could you offer maybe some thoughts on how this -- the current cycle, whether you think it's pretty similar, that maybe 2019 is kind of similar to '15 and might play out with some further weakness next year in contract? Or what do you think is kind of maybe the same or different versus the prior down cycle in freight?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [22]

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Well for us, it's a lot different because in that period of time that you referenced, we were going through a major integration of a large acquisition. So that was a pretty big distraction for us, integrating the culture and the technology of the Command acquisition at the same time that we had a soft market. And we got through that, and we were well positioned for the market turn when saw it in late '17.

So I think that this, if you want to call it, trough, doesn't feel as bad to us as the '15-'16 trough did, because I think we're better equipped to deal with it. And I also don't think that the market has gone down that far. I think it's just accentuated because 2018 was such -- almost a bubble year in terms of pricing, and we've got somewhat of a reversion to the mean.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [23]

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Right. Yes. Okay, that makes sense. I mean, it definitely seems like you're in different spot and your system is working well in terms of some of the expense coming down.

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Operator [24]

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Our next question comes from Jason Seidl of Cowen & Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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We've heard some mixed things from the railroad about the anticipation in peak season. What's you're Managed Transportation business telling you to expect in the upcoming peak?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [26]

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Well, I don't think that in that part of the cycle -- we're not seeing any significant inventory buildup in relation to the peak right now. Our Managed Transportation business is more industrial than it is retail. So maybe we wouldn't see it quite as much because of that factor. But I would say, it's been steady, but haven't seen a significant -- any significant movement toward the peak at this point.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27]

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Okay. Fair enough. And Doug, getting back to talking a little bit about acquisitions, could you walk us through what you're looking to add or what you think Echo might be missing that you might be able to go out there in the marketplace and provide your customers with?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [28]

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Sure. Well, we've always been pretty true to our strategy, which is staying close to our core of our business: non-asset, value-added, technology-enabled. If you look at our coverage, we've got pretty good density now on dry van brokerage. We've got the great LTL brokerage coverage. We've got a Managed Transportation business, which has traditionally catered to smaller shippers with lower freight under management spends.

So I think the ability to add to that is a big opportunity and go upmarket. So we could look at Managed Transportation type companies. We could look at niches and brokerage that are geographical in nature like Mexico and Canada. We could look at niches like temperature controlled or flatbed or tanker. So there's a lot of niches that are complementary to what we do.

And if we bought another LTL or dry van brokerage, we'd have to be mindful of how much customer overlap there is and carrier overlap and think through if that makes sense and do the math, but there are still even opportunities there just because of the size of the market and the value of some of those relationships. So it continues to be a target-rich environment.

We took a couple of years off after we acquired Command and for us that was a transformational deal. It really positioned us well for the 2018 market. And we were able to make a lot of hay last year. And we were on hiatus from M&A, but I think that's all washed through the pipe now and we're ready to get back on the horse.

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Operator [29]

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Our next question comes from Bascome Majors of Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [30]

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I just wanted to walk through some of the dynamics impacting the second half. You talked a little bit about the net revenue margin into the third quarter. Kind of tying things together with the top line outlook that you've given, it feels like net revenue, if you're able to continue expanding in a weaker market on the margin front, could be down somewhere between mid- to high single digits, maybe even low double digits in the second half as a whole, that's a really wide range.

Understanding that you don't want to necessarily guide something too precisely, but are we in the ballpark there about a reasonable range of outcomes as we recalibrate our expectations?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [31]

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So Bascome, I want to make sure I'm understanding your question. You're asking about a range of expectations for our net revenue dollars in the back half and how that would compare to last year's back half.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [32]

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Correct.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [33]

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Yes. I think I would probably stop short of giving guidance on that because we don't guide on margins. We did -- we talked about the last couple of weeks here starting off July, where margins are in the mid- to high 17%. We feel like our ability to buy better than the market benefits us as the market changes.

I think the other thing I'd highlight is, and we talked about this one before, but it's not unusual that Q2 and Q3 are lower-margin quarters than Q1 and Q4 kind of seasonally because of truckload demand. But I don't want to go too much further than that in terms of predicting where the margins are going to be in the back half of the year and how that would relate to the back half from last year.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [34]

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Understood. Let me ask an operating expense question. If net revenue is down appreciably in the second half, is that incorporated in your updated operating expense and G&A guidance? And can you talk kind of functionally the leverage you have to pull?

I imagine incentive comp is one piece that gets you between the low and the high end and -- but anything else you'd like to throw out there and kind of where those things stand today in the budget that you've laid out?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [35]

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Sure. So obviously, the most obvious place that costs would be impacted if margins move -- gross margins move up or down is through the commission line, which is a fairly consistent percentage of net revenue.

In terms of what's built into the G&A guidance for the back half of the year, the remainder of the year, it does -- it takes into account different scenarios, which is why we have that range. I think we feel good about how we've been able to bring costs down from our original expectations. But we've also brought the revenue guidance down from our original expectations.

So at the midpoint, we'd now expect to decrease costs year-over-year by 3% or so even with adding to the sales and technology teams and investing there, like we have through -- throughout different freight cycles in the past. So I think the -- it does flow through in the incentive compensation as you talk about, and that's all built into that guidance that we have.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [36]

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And last one, forgive me if I missed it, did you give an indication on CapEx? And if you didn't, will you give that for this year and maybe something early as far as next year based on what we know today?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [37]

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Yes. So we still expect to be somewhere in the $27 million to $30 million range for CapEx for this year. And I would probably expect that, that might move up modestly next year as kind of an initial guidepost before we give guidance for next year.

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Operator [38]

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Our next question comes from Ravi Shanker of Morgan Stanley.

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Christyne McGarvey, Morgan Stanley, Research Division - Research Associate [39]

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This is Christyne on for Ravi Shanker. Just you've made a number of comments in regards to technology and what you guys are doing on that front. But I'd be curious to hear your perspective on what you're seeing in terms of patterns from some of the other digital freight brokers in terms of what they're going after, whether it certain types of lanes or certain types of customers, and how that relates to your own competitive moats around your technology product or the type of customers that -- or lanes that you're serving? If you could just give a little bit color on that front?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [40]

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Well, we're no expert on the competition that's in startup mode. But we've seen some evidence that they're going after the larger shippers with big routing guides. And also appears to be more regional lanes in nature. So we notice it, but it's a huge market so don't necessarily feel affected by it.

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Operator [41]

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Our next question comes from Stephanie Benjamin of SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [42]

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I just wanted to follow up a little bit. I know we talked a lot about just capacity in the market. But I wanted to hear a little more about your commentary around just overall less freight, if maybe you could dig into that in terms if you're seeing any specific industry? Or if it's more just a later start to any seasonal patterns? Or kind of expectations going forward, if you're seeing any changes would be helpful.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [43]

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Yes. I'll give a little color on it and then, Doug, you can add to it. In our larger shippers, it manifests itself more in the lack of spot market freight that we see, which would probably make sense to you because our contract business has grown and our spot business is down quite a bit.

But included in our spot business is also a significant amount of SMB customers. And when we look across our SMB customer base, we have seen -- and this is in -- these are customers that we've retained and believe that we've retained our share with, but we've seen more decliners than growers. And I think that that's a good indication just the overall shipment volumes were kind of down across the industry.

And it's difficult for us to point to inventory levels or tariffs or GDP, industrial production stats to say -- to correlate it, but I would say that, when you get down into this SMB category, you tend to see more decliners than gainers.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [44]

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Yes. I would just add 2 things. One, recall that we tend to be more industrial in our customer base, and I've noticed lately there is some weakness in manufacturing.

And then the second point is the noise around the tariffs, we don't really have a grasp on how that's affecting freight although when you talk to a lot of shippers, it all affects -- it affects all of them in some way or another and how they react to it varies quite a bit. So I believe that there is some impact on freight flows based on concerns about tariffs, but it's, I think, impossible to really clarify that story.

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Operator [45]

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Our next question comes from Matt Young of Morningstar.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [46]

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In terms of pricing, comparisons are obviously at play here. But it sounds like the bidding backdrop has become much more competitive in recent quarters. Are you noting any specific providers becoming aggressive or perhaps irrational with the pricing to grab share? And if so, have you noted that coming more from maybe traditional players or perhaps a few of the large digital upstarts?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [47]

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Yes. We don't like -- don't want to get into the details. Let's say, it's always competitive. A bid process is by nature competitive. We have seen, in some cases, the digital upstarts are very aggressive in certain, like Doug said, regions or areas maybe that they're trying to build a carrier base in. So I'd say, that it has been -- the market is softer.

So the competition does increase across all providers and the rates are coming down. So those are kind of the factors that we see and I wouldn't want to go really any deeper than that.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [48]

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Fair enough. And then off of it, spot pricing is clearly down, but could you talk a little bit about the cadence of the contract pricing of late? I think it was still up year-over-year last quarter. Is that still the case currently?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [49]

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So in our data, the contract price is actually down in Q2. So it was up modestly in Q1. It's come down -- it's a little bit down in Q2. And when we look at our contract business, it kind of comes into 2 or 3 different pretty big buckets.

One would be the stuff that we talk about so often, which is annual, year-long kind of contract bids. And those cycles -- and those prices for the most part are set. They may get modified over time, but in a lot -- most cases, they're set.

But there's also a fairly significant amount of contract business that comes in the form of mini-bids, which is going to get priced based on current market conditions. And so I think that that's starting to kind of bleed into the numbers and driving the freight rates from our perspective, our revenue per load down across all the categories.

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Operator [50]

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Our next question comes from Bruce Chan of Stifel.

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J. Bruce Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [51]

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I'm mostly good on my questions, but maybe there is one that I wanted to zero in a little bit more on here. You talked about headcount and how you were continuing to invest in headcount growth and certainly, we see that playing out. But given that we are progressively seeing a weaker and weaker market, maybe in -- at least in more and more guide downs. At what point do you decide to maybe flex back on that headcount growth or do you at all?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [52]

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So we -- there's a couple of -- there's 3 kind of key areas, I think, that we look at, more operational as opposed to -- I'll skip the tech side for a second, but the operational areas would be the client sales focused headcount. And in that area, we probably wouldn't make significant adjustments because that's an investment in 2020 and 2021. And that's the biggest area that we've grown the operational headcount.

The other 2 kind of pieces of the puzzle are the carrier sales headcount, which we have to kind of keep an eye on how quick freight is moving, and what -- and that's an area that we might slow down a little bit on. It makes a lot of sense if the volume is not there and the spot business is kind of light that as we -- and as we roll out more technology, we can get higher levels of the productivity. So that's an area that we focus on kind of slowing down a little bit on.

And then the third is operational support across all areas of the business, and that's another area that we remain very focused on. And it's an area that's a little more controllable based on business volumes.

So I think that those are the 3 key areas on the client sales hiring front would be more likely to kind of stick to our guns and build knowing that we're in a freight cycle and these cycles come and go and change, continue to build there at a reasonable pace. And then in the other 2 areas, manage the headcount to the needs of the business and so we keep an eye on that.

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J. Bruce Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [53]

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Okay. Great. That's really helpful. And then just a final question on the M&A side. I don't know if you can provide a little bit more color, but as far as where you would look to build, are you mostly looking for lane level density kind of filling out geographic pockets? Are you looking to add more in Managed Transportation? Are there any specific areas of the business where you think that M&A is more appropriate?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [54]

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I think there's opportunities in both, Bruce. If you look on a lane-by-lane basis, when there's literally millions of O-D pairs depending on how granular you want to slice it, there is always opportunities to create more density in some lanes. So if you're looking at a business and they've got a certain presence in the marketplace, call it regional, that could be additive for us.

Like I said on the earlier comments, there are niches of brokerage which don't have overlap. Things like flatbed and temperature control or geographic when you look at Canada and Mexico. So I think those are opportunistic.

And then, by definition, if you're looking at a Managed Trans business, there is no overlap, because that's typically a single source solution. So we would essentially be buying a book of business and some relationships on a Managed Trans type of an offering.

So I think all of those can be interesting, and it's just a matter of finding opportunities that are a good fit that can go on to our platform, which is always part of our equation, and where the owner can fit in and continue to grow that branch for Echo.

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Operator [55]

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Our next question comes from Kevin Steinke of Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [56]

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So just to follow up on the discussion about the second half a little bit in terms of the actual gross revenue guidance you gave. You gave guidance for the third quarter, a $40 million range top to bottom, which implies quite a wide range of potential outcomes for the fourth quarter, and I think $110 million from top to bottom. So can you maybe talk about what factors get you towards the higher or lower end of that range for the fourth quarter?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [57]

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Sure, Kevin. So a couple of things, just on Q3, so we talked about where we were the last couple of weeks at 19% down on a per day basis. And so then, our guidance for Q3 offers a 12% to 18% range. One thing to point out is there's an extra day this year -- in this year's quarter. So we picked up some there, our comps get a little bit easier as we near the end of the quarter. And then Dave talked about the contract wins and the success we've been having there. So we feel good about how that plays out in the back half of the year.

I think obviously inherent in having a very widened range for Q4 is where Q3 ends up. So I think as we get on to our next call, we'll tighten up that range for Q4 for you. But really the things that drive the difference from the top end to the bottom end are the volume growth, and a lot of that is depending on what's happening in the truckload spot market and then what happens with truckload rates. So we're looking at quite a few different scenarios.

I think we always feel better about being able to forecast where our -- the LTL brokerage and the Managed Transportation business is going to play out. But really the driver of the difference as we've seen so far this year and a lot of the variability in the back half would be what's happening in the truckload market that we've talked so much about today.

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Operator [58]

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Our next question comes from David Campbell of Thompson, Davis & Company.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [59]

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First of all, why is -- I don't understand why less-than-truckload business continues to increase. I think, in general, it's increased for all the players and despite the decreases in truckload business. And then the thing that begs the question is less-than-truckload going to fall eventually just like truckload? How reliable is it that less-than-truckload can continue to go up when truckload goes down?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [60]

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So Dave, the -- our -- the majority of our less-than-truckload businesses is made up of small- to mid-sized customers, number one. So we target kind of a certain part of the LTL market. And we find that obviously our value proposition to that segment of the market is very powerful because we can provide them kind of a one-stop shop to aggregate and find the right carrier for the right shipment. And so we've had a lot of success continuing to grow, number one, in different market conditions on the LTL side.

The second piece of the puzzle is the LTL market is much more of a network. And so there is fixed costs associated with operating LTL. So there's more barriers to entry, so it's a little more constrained. So it doesn't have the same kind of volatility that you see in the truckload market, much more kind of consistent approach.

Now obviously it -- the overall volumes in LTL would be correlated to the overall economy, completely agree with you there. But the capacity does not come and go in LTL the way it does in truckload. And I think that's probably why you see much more consistency certainly out of Echo on the LTL side.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [61]

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The other thing I would just add, David, is that with LTL, when you have a softer macro environment, you'll tend to see a lower average weight per shipment. So I think what happens is shippers are still shipping to their same customers but the order sizes are smaller.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [62]

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And that's the -- that's also a problem with the truckload business, isn't that, that the size of the shipments go down.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [63]

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Well, I think in truckload you just have fewer loads, because your -- in truckload you're supplying large quantities usually to a distribution center, whereas LTL tends to be more to an end user. And so I think, truckload softness manifests itself in load counts. LTL softness manifests itself in weight per shipment.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [64]

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Right. But despite the fact that weights per shipment are down, your LTL revenue was up in the second quarter. So it's still running a lot better than truckload revenue. Is that...

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [65]

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Yes. Our volume was up. And the rates, like I mentioned, the rates in LTL are actually up year-over-year, whereas in truckload they're down significantly because of the impact of the capacity side of the equation, the way it ebbs and flows. LTL pricing is much slower to adjust.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [66]

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Why can't truckload capacity convert to less-than-truckload? I don't understand if the company wants to get more of less-than-truckload capacity just take your truckload capacity and move it.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [67]

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It does convert a little bit, but it's just -- when you look it on a price-per-pound basis, it's got to be much smaller shipments for it to make economic sense to convert. But you see a little bit of that in the volume business when the market changes. And you probably see more of that with LTL carriers than you might see with Echo in terms of how their business might change a little bit as volume shipments might convert to full truckload actually also.

So like when capacity is really tight, someone might take a 20,000 shipment -- 20,000 pound shipment and put it on an LTL carrier that has excess capacity in a given lane, but when volume -- when capacity is really loose and truckload prices are lower, that same shipment might move on a full truckload.

So it's just a lot of -- I think that people do optimize and analyze those factors on the edges, and try to find the right mode and that's one of the things we do for our clients.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [68]

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Yes. The truckload carriers don't really have the wherewithal to consolidate and aggregate shipments. So it's hard to use their capacity for LTL unless it's a multi-stop truckload.

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Operator [69]

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I'm showing no further questions at this time. I'd like to turn the conference back over to Doug Waggoner, Chairman and Chief Executive Officer, for any closing remarks.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [70]

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Well, I would just like to thank everybody for joining us for our second quarter call, and we look forward to talking to you in a couple months for our third quarter. Thank you very much.

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Operator [71]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.