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Edited Transcript of ECHO earnings conference call or presentation 23-Oct-19 9:00pm GMT

Q3 2019 Echo Global Logistics Inc Earnings Call

CHICAGO Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Echo Global Logistics Inc earnings conference call or presentation Wednesday, October 23, 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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* Adam Kramer

Cowen and Company, LLC, Research Division - Associate

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* David Pearce Campbell

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

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Jizong Chan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research 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 afternoon, ladies and gentlemen, and welcome to the Echo Global Logistics Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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

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Thank you. Thank you for joining us today to discuss our third quarter 2019 earnings. Hosting us in 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 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 best on our -- 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 these non-GAAP financial measures 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, and good afternoon, everyone. The freight market continues to be challenging, with industry data pointing to lower year-over-year volumes and continued pricing pressure in full truckload. However, truckload spot pricing appears to have somewhat stabilized and are reasonable signs that we have returned to a more typical seasonal pattern. In the face of these industry challenges, I'm very proud of our team in the way we've continued to execute. We're operating more efficiently and leveraging our technology investments to keep our costs down even while we further add to our technology teams. Our results this quarter reflect the variable cost structure of our model as we were able to reduce both G&A and commission cost on a year-over-year basis for the third quarter in a row.

As we've talked about in the past, we've also started to see the typical cyclical pattern in our truckload gross margin. As truckload buy cost bottom out and turn upwards and rationalization in supply starts to emerge, our margins can compress for a period of time as the decreases in shipper rates catch up to the carrier rate decreases and before the new carrier rate increases can again be passed along.

We continue to invest in automating our marketplace. I again want to emphasize that we have a highly automated market today with robust integrations with our shippers and carriers, online capabilities for small and midsized shippers and utilizing data science and advanced analytics to drive pricing and other predictive capabilities that are used by our experienced people to wrap it all together and deliver first-class service. This bundle differentiates us in the market, and we are making it more powerful as time goes by.

Last quarter, we talked about features that enable our carriers to search and bid on freight online. This quarter, we've launched truckload spot pricing through our EchoShip portal, and we're rapidly driving forward to automate transactions at the pace that the market requires. You'll see a lot more of this in Q4 and throughout 2020.

Now on Slide 3, I'll highlight some of our third quarter results. Total revenue was $561 million, representing a 12.9% decrease from last year. Net revenue was $97 million, representing a 12.8% decrease from last year. Adjusted EBITDA was $21.8 million, representing a 22.5% decrease from the prior year. And non-GAAP fully diluted EPS was $0.39 compared to $0.55 in the year-ago period.

Now I'd like to turn it over to Dave to go over 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. As indicated on Slide 4, Q3 truckload revenue was $369 million and decreased by 17.3% over the prior year. The majority of the decline was due to lower rates as we experienced a 15% decline in truckload revenue per shipment on a year-over-year basis. On a monthly basis, revenue per shipment has remained relatively consistent over the last 6 months. Truckload volume was down 2% year-over-year, which was an improvement over last quarter. Consistent with Q2, the volume decline was attributable to our spot business as spot volume was down 15% year-over-year and our award volume was up 8% year-over-year.

Our growth in award volume is been driven by expanding our relationships with key accounts as well as adding new relationships. This has been an important part of our strategy, and our sales and operations teams have done a great job delivering our value proposition in the marketplace. This includes continuing to provide high service levels to help our shippers successfully manage their supply chains. In a soft market and despite the increased competition from new entrants, we continue to take share by growing our truckload volume on the contract side of the business. During the quarter, our primary award business represented 55% of our total as compared to 47% a year ago.

Turning to LTL, we generated total revenue of $168 million, 1% growth over the prior year. Our LTL shipments volume was up 1% in Q3, while revenue per shipment was flat with the prior year.

Turning to Slide 5. Transactional revenue of $433 million declined 15% driven primarily from the decrease in truckload rates. Our Managed Transportation revenue was $128 million in Q3, a decrease of 5% over the prior year. The quarterly revenue change was also impacted by lower truckload rates. The decline is smaller than our transactional business due to the LTL load mix. We did close $16 million of new business in the quarter and have a very strong pipeline heading into Q4. Our Managed Transportation teams are doing a great job serving our clients. And our high satisfaction, history of client retention and efforts, our Transactional sales team and business development arm are working well together to drive continued growth in this business.

Turning to Slide 6, we generated $97 million in net revenue, and our net revenue margin of 17.3% was flat year-over-year. We had a very modest degradation in truckload net revenue margin that was offset by an equally modest increase in LTL margin.

I'd like to now turn it over to Kyle to review additional Q3 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 line items. Commission expense was $29.1 million in the third quarter of 2019, decreasing 12% year-over-year. Commission expense was 30% of net revenue compared to 29.8% for the third quarter last year. Non-GAAP G&A expense was $46.1 million in the third quarter of 2019, down 8% from the year-ago third quarter of 2018. As Doug highlighted in his opening remarks, while we're still investing in growth and, in particular, technology, we continue to find ways to reduce cost through automation and benefit from lower incentive compensation this year.

Depreciation expense was $6.8 million in the third quarter of 2019, up from $6 million in the year-ago period, and the increase in depreciation continues to be associated with the investments we're making in technology. Cash interest expense was $1.3 million during the third quarter of 2019 compared to $1.6 million in the year-ago period, and the decrease is due to the repurchase of a portion of our outstanding convertible debt during the past year. And our non-GAAP effective income tax rate was 25% for the third quarter.

As Doug mentioned, non-GAAP fully diluted EPS was $0.39, decreasing from $0.55 in the third quarter of 2018. And then the primary differences between our GAAP and non-GAAP fully diluted EPS are $2.8 million of amortization of intangibles from acquisitions, $1.6 million of noncash interest expense and $2.5 million of stock comp expense.

Slide 8 contains cash flow and balance sheet data. In the third quarter of 2019, we had free cash flow of $11.4 million and operating cash flow of $17.1 million. Our free cash flow for the trailing 12 months is $76.1 million. Capital expenditures were $5.7 million in the quarter compared to $6.3 million in the year-ago quarter. We ended the quarter with $26.4 million in cash and $350 million of accounts receivable, and at the end of the quarter, we had nothing drawn down on our $350 million ABL facility. We did not make any repurchases of our common stock or convertible debt during the quarter, and we have approximately $23 million still available in our repurchase authorization.

Now I'll take a moment to walk through our guidance for the fourth quarter, which we've highlighted on Slide 9. I'll first point out that revenue during the last 3 weeks, or the first 3 weeks of October, was down 12% on a per-day basis compared to last year. And our net revenue margins during the third quarter decreased as we progressed throughout the third quarter, which is a typical seasonal pattern and also aligns with the cyclical pattern that Doug highlighted in the opening comments. So margin during the first 3 weeks of October have been in the low-17% range. Given all the current trends, we expect Q4 revenue to be in the range of $500 million to $540 million. And then for the full year, we expect revenue in the range of $2.155 billion to $2.195 billion, which is the same as our previous full year guidance at the midpoint.

With regards to other fourth quarter guidance, we expect the following: commission expense of around 30.5%, G&A costs between $45 million and $47 million, depreciation estimated to be about $7.1 million, CapEx of $6 million to $8 million; cash interest of approximately $1.3 million, and we continue to expect the quarterly tax rate to be about 25%. We anticipate our share count to be approximately 26.6 million shares for the quarter. And then excluded from our non-GAAP calculations in the fourth quarter, we expect amortization of approximately $2.8 million, noncash interest of about $1.6 million and stock compensation expense of about $2.6 million.

Now I'd like to turn it back over to Doug.

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

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Thanks, Kyle. I'd like to talk for a moment about the competitive landscape for truckload brokerage. There's been plenty of discussion lately about the various competitors, including the tech startups, the creation of so-called digital freight marketplaces as well as predatory pricing to gain market share. So I have 5 points that I'd like to make about the topic. First, there's always been new entrants to this space. In fact, there are probably 4 or 5 new brokers that start up each year in Chicago alone, which is apparently the freight brokerage capital of the universe, and why is this the case? Well, first, there's very low barriers to entry. Anyone that has a phone system and buys a bond and licenses some off-the-shelf software can be a freight broker. However, most of these businesses have difficulty scaling up without adequate capital and technology, and they tend to have to be bootstrapped over a long period of time, and at some point, they become an acquisition target for larger brokers.

There's another class of brokers that have some capital behind them as well as the wherewithal to build some proprietary technology, which is required to run proprietary processes, and I would argue that all brokers at scale have proprietary processes. This is not new. Echo was one of these startups, and we had some capital and a strategy to deploy proprietary technology. One unique characteristic of these companies is that, by definition, they make a much bigger investment in technology, including the hiring of top-tier technologists. And for those of you who were around in 2009, you'll recall that this was a big part of Echo's story on our IPO road show. We've always valued technology and, in fact, consider ourselves a tech company as much as a freight company.

In recent years, private equity has come onto the scene, and they've been snapping up midsized brokers that are worthy of providing a platform for continued M&A. So what this all means is that there is a continuous cycle of new start-ups coupled with industry consolidation which means that the big are getting bigger, and this leads me to my second point, which is that the truckload market is massive. The time we bought Command, Echo's truckload brokerage business was approximately $650 million. We had another $600 million of LTL in Managed Transportation business. Command was a pure truckload broker of over $500 million. So when we integrated them into Echo, it was a merger of 2 meaningful truckload brokers. What was amazing to me is that, of Echo's 30,000 clients, only 400 of them were doing business with Command. And with the small tuck-in acquisitions that we've done, you can imagine there's much less overlap as you would expect. If you've reviewed the research by Armstrong & Associates who study the 3PL industry, you'll note that the nonasset logistics revenue are growing at a rate 3x higher than GDP. So while there are more and bigger brokers taking market share, the overall market opportunity is growing at an equivalent or higher rate.

Three, transaction automation and digital marketplace concepts are not a new idea. Echo's been automating transactions for years. We do this both on the client side as well as the carrier side. We have found that the biggest barrier to more automation has to do with the desires, capabilities and technology resources of our partners. Four, the concept that digital marketplace can mean a lot of different things to different people. It can be an environment where all parties interact electronically without human intervention, and we do this today with LTL. For truckload, we have long had a marketplace, but it's an internal marketplace that sources capacity at the best possible price for the shipper and the best possible margins for Echo. Over time, we're making aspects of our internal marketplace accessible to outside participants, shippers and carriers, as we've indicated with our announcements regarding EchoShip and EchoDrive. We believe our measured approach gives us the best of both worlds: relationships and trust for those shippers and carriers that value that and automation for the more progressive partners. This approach gives us the greatest possible access to shippers and carriers.

And finally, number five, in the realm of pricing, we've seen signs of extremely aggressive pricing being offered by 1 or 2 competitors. While this can yield short-term success in taking some market share, it's not sustainable for the long term. Even though we've witnessed this activity, we remain disciplined in our strategy of profitable growth, and we find plenty of opportunities to take market share based on having great service at a competitive price. As Dave mentioned earlier, we are growing volumes through additional contract freight, and when the market once again produces spot freight, we will be well positioned to capitalize on it.

So in summary, the truckload brokerage industry is very competitive, but it's always been competitive. The main difference today is that we're seeing more consolidation, and the larger brokers are scaling up and using technology. And although there's a lot of competition, it's a huge market that's going 3x as fast as GDP, so there are plenty of growth opportunities. Technology is definitely a differentiator for scaled brokers, and we're very comfortable with our state of technology and our future road map. And with regards to pricing, we believe that the selective predatory pricing that we've seen is not sustainable, and given the market size, it will not move the overall market, and we further believe that over time these prices we'll revert to market norms.

And then finally, I just want to reiterate that we've got an active M&A pipeline. And while we obviously can't predict or preannounce M&A activity, be assured that we're continuing to work and execute on deals when they make sense.

And so with that, I'd like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jack Atkins with Stephens Inc.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [2]

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Congratulations on a pretty solid quarter, all things considered, given the backdrop. So Doug, let me -- or I guess, Dave, either one, let me start with you guys as it relates to just sort of what you're seeing and hearing from your customers about peak season. We've been hearing from others that it's kind of been a delayed start to peak, would just be curious to get your thoughts on how you think the fourth quarter's going to play out. And I know we have a compressed peak this year. Just would love to get your thoughts on what your customers are telling you about peak season and sort of how they're feeling from just an economic perspective.

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

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Sure, Jack. I mean, I think we got a similar question maybe probably a little early in the cycle last quarter about what we thought might -- we might see ahead in peak. And probably, the same answer that I gave back then is probably applicable today. Number one, we've learned over the years that the so-called peak for Echo has never been quite a peak. A lot of our business is more industrial in nature. And then to some extent, on the truckload side, on the beverage side, in particular, and in some other products, we see more of a peak season almost in the summer than we do going into the holidays and the Christmas season. We're not very highly retail centric when it comes to services. So having said that, we're probably not the experts on retail peak season.

I would say that October was, in my mind, just a little soft. So there was no big visible sign of a big step-up that you might want to see in October, but I would say that's not uncharacteristic of what we've seen in prior years either. So not a lot to report there on the peak.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [4]

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Okay, okay. No, that's helpful though. And I guess kind of following up on that, one -- and then, Doug, this kind of goes to your point in your prepared comments on pricing. But one of the things we've been hearing over the last couple of months is that customers are coming back and wanting to rebid freight. We're seeing more bid activity this time this time of year, significantly more bid activity than normally we would. Are you guys seeing opportunities to go out and maybe capture some market share and maybe get another bite at an apple for either a customer or a bid package that wasn't there earlier in the year? I'm just -- I'm wondering if maybe there are some chances for you guys to maybe drive volume growth going into next year as you sort of see some freight that's up for bid that normally isn't up for bid, if that question makes sense.

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

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Yes, yes, I think that's -- it's a really good question. I think it is true that, in general, given the pricing environment, right, the extreme change from '18 to '19, customers are in fact rebidding freight or peeling off many bids probably a little bit more frequently than they have in the past, taking advantage of the lower rates. It does give us some additional opportunities to either expand or relationship or to add new customers in some cases. And you see some of that in our growth, I mean the 8%. In a lackluster market, to see a contract business grow 8% year-over-year on a volume -- from a volume perspective is pretty good evidence of that fact. So I think the point's well taken.

Shippers. Every shipper's different and kind of views it a little bit differently. And in some market cycles, you see a little more tendency to maybe delay and let things play out. And then this cycle with the fact that rates have come down, I think the opposite is probably a little more common, guys trying to get through the process maybe a touch earlier on the same cycle as they normally do. So that's a dynamic that's happening. It's not that significantly different from prior years, but I think that in terms of just the trend in the attitude to try to get through the cycle a little bit earlier, we're seeing some of that.

I think there's some concern out there, some concern by shippers that now -- that later in 2020 -- you hear that from a lot of the asset carriers and as people prognosticate what the rates are going to look like in 2020. They're lower today, but who knows what the second half of 2020 is going to bring?

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [6]

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Well, that leads into my, I guess, last question for you, Dave. I mean as you think -- as you look out to next year and sort of -- you guys have a large base of small carriers that you interact with on a day-in and day-out basis, and you have a much more real-time indication for what's going on with those suppliers of capacity. And as you're thinking conceptually about bidding for freight next year, how -- bigger picture for 2020, how do you think the cycle plays out? I mean, putting aside what everyone else has been saying, what's your opinion in terms of how you think 2020 plays out in terms of supply and demand? And it's setting up to be a volatile year, and I'm just curious to know sort of what you guys are thinking about.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [7]

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Yes, I mean, I think that there's a couple things there. One of the things we've -- yes, we know where we are, and oftentimes, we're not 100% sure where we're going, I mean, and how fast we're going to get there. Historically, freight cycles, probably on average have lasted 18 to 24 months, and you see things turn. We're 9 -- we're probably 14 months into a cycle today of down rates. I mentioned it in my prepared comments that rates -- I'm not going to use the word bottomed out, but I think over the last 4 or 5 months, we've seen a lot more consistency than we did, say, from July to May. And so that's an indication that we're getting more in balance, so to speak. There's -- we don't know when the next catalyst is going to hit to possibly start that upward trend again. I think that it's logical to believe that we're going to go through the peak, and we're going to head into a normally slower time. January, February, March tends to be a slower freight market, so we're probably not going to see as much movement in rates.

So if you were looking at it, you'd probably think it's going to be closer to the second half of the year, and we'd start -- we'll have been 24 months at least into a cycle. We've got the drug testing that may gain a little bit of steam as 2020 goes on. So I think if I was trying to forecast it, that's how I think about it. But again, I'd be careful to get too certain about that forecast.

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Operator [8]

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Your next question comes from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [9]

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Two for me. Just if we can just step back and take a high-level look at seasonality, and I know you said in the prepared remarks that the revenue per shipment had actually stabilized over the last several months. Anything you can unpack about just how October feels versus how an October "should feel?" And when you talk to your shippers, does it feel like things are at least stabilizing versus the sort of downside breaks we've seen in several quarters earlier this year?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [10]

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Yes, I think that -- I would just say this: it's difficult to take 2 or 3 weeks of data and make a quarter out of it in this market. You see a normal -- typically, September push, quarter end, things tend to soften up going into October. They did soften up just a little bit, nothing major, and so it's I think steady as she goes, and the jury's out a little bit on what we're going to see for the rest of Q4. So I know that's a little bit of a nonanswer, but that's probably the best I could give you right now.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [11]

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Could you expand on the net revenue margin trend? I mean, typically, you see a bit of an improvement from 3Q to 4Q. I don't know if we should've expected improvement into October. That's really more about the end of 4Q. But anything on how normal that particular metric feels going into the quarter would be helpful.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [12]

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Yes, Bascome, I'll take that. Actually, in October, I mentioned during the low-17% range here for the first few weeks, which is actually an improvement over the end of Q3, our margins declined throughout the third quarter. And so it's not unusual that, as we've said in the past, a normal seasonal pattern with our truckload margins would be little higher in Q4 than they are in Q3. But Doug also pointed out earlier that because this the part of the truckload cycle where we maybe see a little margin compression as shipper rates have caught up with carrier rates. So I think in Q4 and always, we'll continue to manage the margin the best we can using technology and people. But that's probably about as close as I can get to guiding you on margins for Q4.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [13]

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No, you reconciling that with Doug's comment was helpful. That's kind of where you're getting at. Last one from me. I believe you said you didn't buy shares during the third quarter. I mean you had some shots at $20 or so during the month of August. You did -- you were active in 2Q at a slightly higher price. What should we read into that? Is this an indication that you're seeing a good and high-return pipeline in M&A? Is it the balance sheet needs to be flexible when the economy is shaky? Or is there a restriction for something else entirely? Just any thoughts on the buyback program 2Q to 3Q and how you look at that as a use of capital going forward?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [14]

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Yes, that's a good question. I wouldn't read much into it. We obviously never know where the stock is going to trade the next day so we're making decisions at a given point in time. I'd probably point out that over the last year we've repurchased $35 million of the stock and $71 million of our convert. So we thought we've made good use of the buyback plans that we've had in place. But you're right. We're always continuing to evaluate the M&A pipeline, which Doug mentions we're looking at a lot of opportunities, and we manage that versus delevering versus buying back our stock. So in this quarter, we just simply chose to build up the cash position. And I mentioned, we've still got a little over $20 million remaining on the authorization. So we'll keep weighing those different options, but nothing to read into it there.

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Operator [15]

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Your next question comes from Jason Seidl with Cowen and Company.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [16]

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This is actually Adam on for Jason. I wanted to ask a little bit about capacity in the TL market. We've heard a little bit about higher insurance costs and kind of resulting in an increase in bankruptcies in the TL industry. So I wanted to ask you guys, have you seen some of that on your end? And have you seen capacity coming out of the trucking market?

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

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Yes. I'll take that. We certainly have. I mean, I think that it's been pretty well publicized, some of the, call it, the mid -- some of these midsized carriers that went out of business in the last quarter. So we haven't seen as much of it from the really smaller kind of owner-operators. I'm not saying that it didn't -- it doesn't exist. I do think that there's definitely more trucks parked on the sidelines than we've seen, like you said, these bankruptcies.

But at the same time, they haven't affected us. We've got a large carrier base. We've been able to source -- continue to source reliably for our clients. So we've seen capacity coming out. I do think it's coming out of the marketplace. I couldn't tell you if we've reached the end of that part of the cycle yet. I would probably suspect not. And -- but it hasn't affected our ability to source and execute for our customers. And obviously, when you look at the rates, it hasn't dramatically impacted a change in rates.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [18]

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Got it. Appreciate the color there. I guess just for follow-up here. I wanted to ask a little bit about gross margins, both short term, I know that was touched on a little bit, but also maybe looking out a little bit longer term. You talked about the competition, obviously, and also some of the technology initiatives that you guys are taking. I mean, what do you think this kind of means for margins in the longer term?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [19]

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I think that competition in technology and productivity can always have a longer-term effect on margins. You still are going to have a cyclical variation and volatility that we experienced in the cycles, and in fact, in recent quarters, we've seen more volatility than we've seen a long, long time. But I think there could be some margin compression, but at the same time, I think we and other large brokers that are utilizing technology and data science will offset that with increased productivity.

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Operator [20]

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Your next question comes from Stephanie Benjamin with SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

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I wanted to touch a little bit on just the spot market on volume and then volumes in the environment there. Does anything that you're hearing or seeing where that might kind of turn the other way? Or is this something where your expectation is really not going to see that turn until 2020? Obviously, the growth in the contractual business is really strong and kind of offsetting a lot of that. So just kind of wanted to hear your outlook for that kind of spot market freight. And then I'll just have a quick follow-up.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [22]

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Sure, Stephanie. The -- yes, again, I mean when you look forward, a lot of the times, the terms aren't predicted very well in advance, number one. So I'll give it that caveat. I think that -- I'd say it seems like the spot business has been -- it's down, but it's been more on the steady when you look at it sequentially. And so a lot of the times, a lot of the big percentage declines that we've disclosed and are talking about have more to do with 2018 -- or, certainly, a lot to do with 2018. And so I think that the comparables will get easier in Q4, and then we'll get into next year, and that will be the case.

So I think that if you look at it sequentially, it's hard to pick a catalyst around the corner. There's a few things, like I mentioned earlier, the drug testing, maybe the ELD rules stepping up a notch, maybe something with the economy if the tariffs lift, or there's some catalyst there. But I think it's pretty likely that the environment stays the way it is through March or April, and then we'll have to see where we're at as the spring and summer seasons kind of hit.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [23]

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Great. Helpful. And then just shifting gears quickly, I just wanted to touch on the actual LTL side of the business. It looks like pricing was kind of flattish or it's really decelerated throughout the year. Is that -- anything maybe to speak to what has changed throughout the year? Or is it a reflection of just some of the weakness in the industrial economy? Just any color you might add would be great.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [24]

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Yes, I think that flattish is certainly a lot better than on the truckload side. So to some extent, it tells you that the LTL network is a little more of a closed network -- a bigger -- a network with more barriers to entry, and there's a little more discipline on pricing than we see from the LTL carriers. I think that's a factor that's been prevalent throughout 2019. And it's, to some extent, the reason I think rates have kind of held in that part of the market versus declined at the rate on the truckload side. So I think things are maybe softening up a little bit there but nothing too dramatic. It's relatively steady.

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Operator [25]

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Next question comes from Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [26]

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I know you've talked a little bit about gross margin, just -- I guess I wanted to touch on that a little bit further, kind of a multiquarter question on it. How much of your truckload now is contract and how much is spot, roughly?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [27]

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Roughly 55% contract.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [28]

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Okay. So I mean, I guess the way I understand that the gross margin pressure develops and is part of the cycle, is that the contract rates come down. You've kind of -- you've been fairly clear in saying you think spot pricing or cost capacity has kind of bottomed. Has that contract business priced down a fair bit? Or do you think that there's kind of risk in the next couple of quarters pricing on that 55% comes down a bit further and you just kind of see what I think of as a natural cycle of a couple of quarters of that gross margin pressure?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [29]

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Probably yes and yes. It's definitely come down a bit. I mean there's -- a lot of the contract business, we call it contract, and it -- we're going to assume it's 1-year contracts. It's not always 1-year contracts. There could be a pretty large amount of mini bids and special projects that's under a contract price included in that 55%. So it's not -- you don't think of it as entirely kind of all on this annual renewable cycle. That's not the case. But -- so periodically, it comes down and kind of adjusts probably to more current rates.

So to the extent that there's -- there could be some declines in there. I think it's just going to depend on what the market does throughout the bid cycles. And the majority of the bids kind of that -- some of the bigger ones starts now, so to speak, and might be the majority of it is going to wrap by April. But you've got constant rebidding happening, things of that nature. But I do think the answer is yes. The contract prices have come down a little bit for us, and there's some chance that they'll come down further, and -- but it will depend on market conditions.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [30]

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Right. Okay. Makes sense. On the technology side, can you give us some thoughts? I know that these technology investments, sometimes, you're looking at a multiyear framework foreseeing the benefits. And sometimes, you see kind of multiple technologies working together to drive cost savings. But if we look at 2020, are there some productivity drivers that you would expect to realize, whether it's technology or other?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [31]

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Yes, I'd say we're seeing some benefits right now, and we're on a pretty regular and aggressive pattern to roll out new functionality each quarter. So I think we're at a place in our road map where the benefits will be coming on each quarter as we go forward.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [32]

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Is -- are those benefits or productivity like sales rep or procurement of capacity or what kind of -- or back office? Where might those efficiencies come through?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [33]

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They're both. In some cases, it's back office processing and less touches. In other cases, it's client sales and carrier sales, people being able to process more transactions. So as market conditions improve and we take market share, we ought to be able to do more with the same number of people.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [34]

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One other place I'd add to that is just the opportunity to get a look at more freight than we might have otherwise, so freight that we might not have bid on or seen the past, or capacity that we may not have necessarily known where it was. The technology gives us visibility to more on both sides.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [35]

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And one final area is that a lot of our technology and our data science has the ability to optimize gross margins. So whereas the margins certainly expand and contract with market conditions, we want to be able to maximize them in whatever market condition we're in. And some of our technology and data science is aimed at doing that.

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Operator [36]

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Your next question comes from Bruce Chan with Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [37]

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I just wanted to ask a quick one on your comments about Evan's industry growth numbers since you brought them up. We certainly respect the work that he does. I think he does a great job. But they are certainly some pretty healthy numbers, and I just wanted to see how that comports with your long-term growth trajectory and your expectations for how the market's going to develop.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [38]

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I think Armstrong's numbers include a pretty broad swath of nonasset-based logistics. So I think one caveat is it doesn't necessarily pertain purely to brokerage. But I think on the other hand, it does and it has depicted a longer-term trend of shippers giving more and more business to nonasset transportation providers. We've seen that with the willingness of shippers to use a transportation company that doesn't own any trucks and the willingness to include brokers in a routing guide and consider us a "carrier." So I do think that, that trend is favorable. And as I try to make the point in my prepared remarks, despite competition and all the things that we talk about and worry about, I think the market continues to get bigger, and it's an opportunity.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [39]

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Okay. No, that's really helpful. And you mentioned routing guides. I wonder if you can just make a quick comment on where you see routing guide depth right now. Is it still fairly balanced? Or are you starting to see that depth increasing a little bit? How are things trending sequentially?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [40]

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I would say same story, really, as last quarter. The #1 position is typically taking the freight, and so routing guides aren't much of a guide today. They're kind of a -- tender accept routine, I would say, is more the norm. We don't have great measurements in terms of just where exactly -- what the precise number is. But I would say, if you want to move the freight in a contractual way, this is not a well-kept secret. It's not a secret. Being in the #1 position is probably the place to be.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [41]

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So are we still seeing the same competitiveness on the contract side of things as we were last quarter? Or has that come down a little bit?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [42]

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I'd say yes, but there's not -- a lot of the processes are getting started, not concluding. So even like last quarter, it wasn't that there was a tremendous amount of bids per se on a contract basis really closing out. So I don't think much has changed in that in a way I think about that. I think we're going to go into this season over the course of the next 3 to 6 -- closer to 6 months, and we'll see how it shakes out. But there hasn't been a lot of new information relative to the competitiveness.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [43]

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Okay. That's fair and helpful. And just one final question here. You talked about the M&A pipeline, and I know that for the past, call it, 1, 1.5 years or so, we've seen a little bit more financial activity than we have on the strategic front, on the M&A side as evaluations start to normalize a little bit and as you go through some of these bid processes, their diligence processes. Have you started to see more activity from strategic players out there?

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

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I think as we've looked at potential M&A deals over the last couple of years, the valuations got pretty high in large part due to the interest from financial sponsors. It does seem like those valuations in the last quarter or 2 are starting to come in, and of course, seller expectations have to catch up with that. So I think that's the market that we're in, and it should be a better market for conducting M&A in the coming quarters.

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Operator [45]

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Your next question comes from David Campbell with Thompson, Davis & Company.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [46]

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I'm really confused. I don't follow all the trucking companies, but I'm surprised that there hasn't been more improvement in rates with all of these bankruptcies, and it seems like there's a lot of asset-based companies that have gone down a bit -- gone down, and that should be a reduction and, therefore, a reduction in industry capacity that would tend to favor your gross margins.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [47]

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Well, David, I think, if you look at the tight market conditions in 2018, it appears to us that the asset-based trucking industry added an enormous amount of capacity in '18, and then that's come back to bite the industry in '19. And I don't think that the bankruptcies that we've seen and the failures that we've seen thus far have been enough to offset that additional capacity that was added. But it's a start.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [48]

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All right. Well, there weren't any good -- nobody has any good numbers on the capacity of the industry, or do they? I mean, in other words, when some of these trucks go out of business, it's possible they go back in business one way or another. Is that a possibility?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [49]

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Yes, it is. I think that those trucks would go back on the market. And if another trucking company were looking to buy trucks, they could buy those trucks. But it's questionable in this market if anybody's buying any trucks right now.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [50]

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But there's no question, I think, in a lot of these bigger companies, those drivers may be owner-operators, might own their own equipment and they hire onto a new company. So it's not a one-to-one relationship when you see some of these bankruptcies to think that all of that capacity disappears right away.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [51]

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Right. Right. But in the long run, there will probably be pressure on your gross margins because of the increased automation in the business. Is that the way you look at it?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [52]

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Well, I think, first of all, you got 2 cycles at play here, right? You've got the macroeconomic cycle, which, right now, feels to us like it's kind of in a ho-hum status, and we're not in a recession and it's not booming and we're kind of limping along with the lackluster GDP. And then you have the overlay on that cycle the cycle of capacity supply and demand. And what's the balance between that? And we know in '18, we had tight supply. In '19, we had loose supply. And so I think there's a couple things that happened: One are the bankruptcies that you mentioned, which can take some capacity out of the marketplace. The other thing is all these trucks are driving every day of the week, and they're putting on miles. And at some point, those trucks get retired and you have to question whether trucking companies are going to replace all that capacity immediately with prices where they are. So at some time, capacity -- supply capacity will normalize and be rationalized to the level of demand, and that will stabilize rates until we have the next catalyst, which tightens the market up again and would probably presumably send prices back up and create a lot more spot freight.

As for the technology, I think that the technology helps us maximize margins relative to the market that we're in. So we kind of have to take the market ebbs and flows on gross margin and live with those, but we need every single day to try to optimize those margins within that market.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [53]

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The answer is -- I could -- your gross margins would be a lot worse were it not for your investments in technology.

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

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That's right. That's correct.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [55]

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That's really what you've done so successfully.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [56]

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Yes. I think if you look over time over the last several years, we've done a good job of maintaining our margins over all market conditions.

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Operator [57]

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Your next question comes from Jeff Kauffman with Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [58]

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Well, first off, congratulations. Tough environment out there. I want to follow up on a question that Bascome asked earlier. A lot of carriers have been telling us that things are better, yet the -- their realized rates are down and they don't have enough freight in the morning, the asset-based guys for their trucks. So I want to differentiate better from less bad. When you're talking about the environment that you're seeing, you're saying things such as, well, we think spot rates are firming, but yet we've got this negative seasonality. Is it really better yet? Or is it just less bad right now?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [59]

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I'm going to vote less bad on that question. The year-over-year comps are getting a little easier on a volume and a rate perspective. And as time goes on, they're kind of less bad. I think when you look at -- at least, when we look at our business, I can't speak to other companies and other carriers and what they're seeing. But that's not -- I mentioned in the remarks kind of a little more of a steady look sequentially, a little -- modest signs of kind of seeing some seasonality in the weeks and in the numbers but nothing to write home about.

And when I talk about the seasonality, I'm kind of referring to -- when we -- in the July of '18, call it, through May of '19, you had a pretty steady decline of rates, you had pretty steady volume declines. And so in that environment, the seasonality was imperceptible because that market was softening and offsetting the natural seasonality. And it's hard to call it if those markets are like "balanced" or not. It's still pretty soft. But as we said, like revenue per load, a couple of these other key metrics, they haven't moved around a ton over the last 4 or 5 months. So it feels a little more steady, a little less bad, using your words, but kind of steady at the same time. So that's where we're at.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [60]

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I would actually take your comment on shippers racing to rebid freight as a positive, right? Because they wouldn't do that if they thought it was just going to get worse from here. But let me ask you a different kind of customer question. A lot of other companies that we follow given all the uncertainty out there, whether it's trade uncertainty, your Brexit uncertainty, we're getting into a political election year uncertainty, we've seen some slowdown in decisions to kind of greenlight larger-scale projects. It sounds like you're seeing just the opposite, right? There's more business being bid. There's more things going on. But are you seeing any kind of slowdown? Maybe more people are trying to rebid and make those decisions. But is there any change in the length of sales cycle with customers or how long it's taking to get things done?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [61]

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I'd say it's a really interesting question. I think when you start talking about the rebidding in those cycles, we're dealing with typically larger companies. It's more steady business. I'd say it's not as project-oriented, and the majority of that business is kind of -- is more steady and -- I don't know if predictable is the right word, but let's say more predictable. And so those are the bids that we're talking about.

But I think your point's well taken. When I look at like -- about 50% of our brokerage business is small- to mid-market companies. So that's one of the things that might be a little bit different about Echo than some of the other players in the marketplace because of our multimodal offering. And I do think that, in a lot of these small- to medium-sized businesses, some of those economic factors that you've talked about are, in fact, relevant. The trade war or the uncertainty or the unwillingness to commit capital to a growth strategy or a project does create little bit of a slowdown on that SMB side of the market. So that's the place I've seen it a little bit more. It's hard to get your arms around the magnitude of it, but I think that -- I think it is a factor.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [62]

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All right well, thank you for your candor. I know it's a tough environment, but it does look like you've got some encouraging green shoots out there. So let's see what happens as we close the year.

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Operator [63]

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I'm showing no further questions at this time. I would now like to turn the conference over to Doug Waggoner, Chairman and Chief Executive Officer.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [64]

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All right. Well, I'd just like to thank everybody for joining us today. And it's a pleasure to share our results with you, and I'm proud of the team at Echo to execute well in an otherwise tough market. And we look forward to talking to you next quarter.

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Operator [65]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may now disconnect.