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Edited Transcript of ECHO.OQ earnings conference call or presentation 22-Jul-20 9:00pm GMT

Q2 2020 Echo Global Logistics Inc Earnings Call

CHICAGO Aug 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Echo Global Logistics Inc earnings conference call or presentation Wednesday, July 22, 2020 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

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Matthew Young

Morningstar Inc., Research Division - Equity Analyst

* Stephanie Benjamin

Truist Securities, 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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Ladies and gentlemen, thank you for standing by, and welcome to the Echo Global Logistics Second Quarter 2020 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, our Chief Financial Officer, Mr. Kyle Sauers. Thank you. Please go ahead, sir.

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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 2020 earnings. Hosting the call are Doug Waggoner, Chairman of the Board and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We posted presentation slides to our website that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site, echo.com.

During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We will also be discussing certain non-GAAP financial measures, and 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, and good afternoon, everyone. I appreciate all of you joining today.

With all that is happening in our world, our last quarterly call was spent with much of our time talking about lower volumes from our shippers, reductions in costs and headcount and the strength of our balance sheet and liquidity position. While there's still plenty of uncertainty in the U.S. economy, today, you'll be hearing us talk more about getting back to year-over-year volume growth, taking market share and the resumption of sales hiring classes and near record free cash flow. I'll repeat something I said on our last call, which is how proud I am of the Echo team and our ability to serve shippers and carriers in a work-from-home environment with our industry-leading technology and culture.

I continue to hear stories of Echo solving problems where others couldn't and how strong our service levels have been throughout these challenging times. Nothing coveys this message better than being named the #1 3PL of the year by the readers of Inbound Logistics for the fourth year in a row. Our employees should be very proud of this prestigious award, and we want to thank all of our shippers and carriers who voted for us.

I'm quite confident we have never seen a quarter with such a stark difference between beginning and the end. We began the quarter with LTL volumes down 24% and truckload volumes down 4%, and we exited the quarter with LTL volumes down low single digits and truckload up double digits, remarkable turnaround for the industry as a whole but I believe just as strong a testament to Echo's value proposition for shippers and carriers and our continued success gaining market share.

We watched the cost-to-buy capacity go down quickly in April, which improved our truckload margins, only to see the cost of capacity increase for each of the last 11 weeks since that time. This, in turn, has put pressure on our truckload margins due to our award commitments with shippers. We expect 1 of 2 things to happen from here. First, demand continues to hold strong with capacity tight and more spot rate begins to enter the market, which creates opportunities for more volume and improved overall gross margins. This environment would also result in new award freight to be reset at higher prices. An alternative scenario is that demand slows, which would likely ease the cost of capacity and improve gross margins on award freight but might be indicative of less robust economic recovery. However, as you'll hear later, the July trends thus far are not indicating a slowdown of freight demand as would be seasonally normal, so I would tend to expect the first of my 2 scenarios to be more likely. Whether that happens tomorrow, next week or next month, I'm not sure, but I think the time is near.

With that as a backdrop on the cadence of the second quarter, I'll now take you through some of the highlights of the quarter as highlighted on Slide 3. Total revenue was $515 million, representing a 7% decrease from last year. Net revenue was $88 million, representing a 12% decrease from last year. Adjusted EBITDA was $14.8 million, representing a 36% decrease from the prior year. Non-GAAP fully diluted EPS was $0.19 compared to $0.42 in the year ago period.

And 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 into all the numbers, I want to start off by saying that most of our second quarter metrics require a little more explaining as the freight market was much different, as Doug mentioned, at the beginning of the quarter than it was at the end of the quarter.

So let's take a look at Slide 4 for the mode review. Truckload revenue was $352 million Q2, which was a decrease of 3% over the prior year. This decline was all pricing, as revenue per load was down 6%, in part due to lower fuel costs and the rate decline was offset by a 3% increase in truckload volume.

So as we're all aware, we've seen dramatic swings in supply and demand within the quarter. In March, our truckload volume was up 12% year-over-year. Then, as discussed in the last quarter's call, truckload volume dropped in April and was down by more than 2% for the month. Volume quickly bounced back in May and June, and in fact, we were up 8% on a year-over-year basis in June. As you would expect, rates fell hard in April, then began to steadily rise. And that trend has continued into July. In fact, truckload rates, excluding fuel, have recently hit their highest levels that we've seen in the past 12 months. Bottom line, it's been a very volatile quarter.

Stepping back, much like previous quarters, we've continued to take market share with larger shippers and we've increased our primary award volume. In Q2, our award volume was up 27%, which increased our overall mix of contract volume to 62% of total. This is up from 53% a year ago and reflective of our success expanding our market share with larger shippers.

As we've discussed in the past, higher award freight mix can impact net revenue margin positively when truckload rates decline, like we experienced during the first half of the quarter and can also put short-term pressure on net revenue margin when rates rise. In sustained periods of tight capacity, shipper prices begin to adjust and capacity constraints typically result in an increase in spot business. The growth in our larger truckload clients as well as the strength of our business model positions us well to provide capacity in the spot market when it's required.

So switching the topic to spot volumes. The economic slowdown in the first half of the quarter had a significant impact on the spot business, and it was down 20% on a year-over-year basis in both April and May. When the market tightened in June, our spot business did accelerate and it was basically flat with prior year levels.

Turning to our less than truckload business, we delivered $142 million in revenue in Q2, which is a 14% decrease compared to the prior year. The decline was driven by an 11% decrease in shipment volume and a 3% decrease in revenue per load, which was mainly attributable to lower fuel costs. Like truckload, our LTL volume was down significantly in April and steadily recovered throughout the quarter. LTL volume was off 20% in April, 11% in May and just 2% in June. We've been seeing signs of increased capacity constraints in the LTL market as well, which are primarily attributable to COVID-related operational constraints.

Moving to Slide 5. Our transactional revenue of $397 million decreased by 7% due to the lower truckload pricing and lower LTL volume. As I mentioned earlier, volume and shipping accounts have all trended in a positive direction throughout the second half of the quarter.

We discussed on our last call that we delayed our sales hiring -- sales hires that were scheduled in the spring, which will reduce our overall hires for the year as well as our overall planned headcount. At June 30, our sales organization, which is inclusive of the client, carrier and operational positions totaled 1,586 people and was down by 12% over the prior year. To help you do the math, that's 219 less people than we had last year in the sales organization as a whole. However, we've again started bringing in new classes, and we are currently planning to consistently add sales talent throughout the back half of the year.

Proud of our training team for quickly adapting and shifting all of our training programs to a virtual setting and we're confident that we have the tools and capability to bring our new people up to speed efficiently and effectively. In addition, the combination of technology, combined with a good dose of hard work and hustle, has continued to drive improved productivity. Shipments per sales employee were up by 9% in Q2, and I want to thank our entire client and carrier sales team for continuing to drive improved productivity while maintaining high levels of service, all while working remote. Their ability to stay focused on our mission has been amazing.

We've continued to make meaningful progress automating our freight marketplace. In Q2, we began providing electronically driven quotes via API connections with a select client group. We've launched book it now capability with our carriers and continue to see increases in mobile download and usage. Our inbound carrier offers and bookings continue to increase.

Turning to Managed Transportation. Our Managed Transportation revenue was up -- or was $118 million Q2, which was a decrease of 6% over the prior year. Consistent with the trends in our brokerage business, we were down 26% through April -- through our April earnings call actually, and we've seen steady improvement throughout the quarter. This bounce back has been driven by both increases in our existing client base as well as the onboarding of the new business. On a year-to-date basis, we've already signed $90 million of new Managed Transportation business. So this new business, along with continued economic recovery, is expected to drive growth in the second half of the year.

Turning to Slide 6. We generated $88 million in net revenue, 12% decrease over the prior year. The decrease was primarily attributable to lower revenue in Q2, but it was also impacted by lower margin compared to a year ago. Net revenue margin was down 106 basis points at 17.1%. That's despite a sequential increase from Q1. The decline was due to a decrease in our truckload net revenue margin. Back to intra-quarter volatility, truckload margin decreased substantially in June as volume continued to grow and capacity tightened.

And thinking about the freight cycle, we've talked about how shipper rates typically lag carrier rates. This cyclical impact on brokerage net revenue margin has been discussed for many years. One of the key drivers of this cyclicality is the speed of change, and it's quite obvious that the speed of rate decline and now increase is unprecedented. As would be expected, this is translating into short-term margin pressure, but we believe this market is one in which we provide tremendous value to our clients and to our carriers and that pressure will likely ease as shipper rates adjust and spot activity increases.

I'd like to now turn it over to Kyle.

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

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Thanks, Dave. If we move to Page 7 of the slides, you'll find a summary of the key operating statement line items. Commission expense was $26.6 million in the second quarter of 2020, which is a decrease of 14% year-over-year; and commission expense was 30.2% of net revenue, which compares to 30.9% for the second quarter last year.

Our non-GAAP G&A expense was $46.6 million in the second quarter of 2020, and that was flat with the year ago second quarter. Depreciation expense was $7 million, up from $6.8 million in the year ago period; and cash interest was $1.2 million during the second quarter of 2020 compared to $1.3 million in the year ago period with that slight decrease being attributed to a lower amount outstanding on the combination of convertible debt and our ABL during the quarter and a lower interest rate on the ABL facility. Our non-GAAP effective income tax rate was 24.8% for the second quarter.

And as Doug mentioned, our non-GAAP fully diluted earnings per share was $0.19, decreasing from $0.42 in the second quarter last year. And then as a reminder, the primary differences between the GAAP and non-GAAP fully diluted EPS in the second quarter of 2020 are $2.8 million of amortization of intangibles from acquisitions, $200,000 noncash interest expense and $2.3 million of stock compensation expense.

We move to Slide 8, where we have selected cash flow and balance sheet data. We ended the quarter with $35 million in cash on hand and $305 million of accounts receivable, which is the basis for our ABL borrowing base. In the second quarter of 2020, we had free cash flow of $20 million -- $21 million and operating cash flow of $26 million. Because of the difference between our typical terms of shippers in terms of carriers, our cash flow is often positively impacted during quarters of sequential decline like we had this quarter due to COVID. Capital expenditures totaled $5.1 million in the quarter, and that compares to $6.8 million in the prior year.

And then as you move to Slide 9, where we highlight our liquidity position, as I mentioned previously, we had $35 million in cash on hand at the end of the quarter. We had an available borrowing capacity on the ABL facility of $227 million, and that borrowing capacity is 85% of our eligible accounts receivable. We had borrowed $145 million on the ABL, down from total borrowings of $169 million at the end of last quarter. And we settled the remaining obligation on our convertible debt earlier in the second quarter, so our only debt facility at this point is our ABL. So our combined cash on hand and available borrowings on the ABL leaves us with a net liquidity of $118 million at the end of the second quarter.

We're offering Q3 guidance along with some select information provided for the full year on the next slide. And while we're very encouraged by the direction of the freight markets and in particular, our success in continuing to take share, we recognize there's still plenty of uncertainty. So we're limiting our guidance to just this current quarter. And as usual, we want to also give you some recent trends through the early parts of July, which this quarter is 12 business days of activity and that July data is as follows: Per day revenue in July is up 10% versus last year; truckload volumes are up 12%; LTL volumes are up 9% compared to last July; and our net revenue margins here in early July are 15%.

In the guidance for Q3, we expect the following: revenue of $565 million to $615 million, a range of up 1% to 10%; commission expense should be between 29.75% and 30.25% of net revenue; G&A costs are expected to be between $46.5 million and $49.5 million. We've welcomed back almost all of our employees that had been furloughed, and we've started hiring again for our sales classes as David mentioned. We continue to monitor our costs, and we're being prudent about investments, but we are investing in our future through the addition of new salespeople and expansion of the -- our technology and data science teams.

We expect depreciation of about $7.2 million; cash interest of $1.1 million; a tax rate of 25%; a share count of approximately 26.3 million shares; and then excluded from our non-GAAP calculations in the third quarter, we should have amortization of approximately $2.7 million and stock compensation expense of about $2.3 million. And just as a reminder, we will no longer have the line item of noncash interest as we've settled our convertible debt obligation.

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. So I'm pleased with Echo's performance in a very tumultuous quarter. We saw what is normally an 18-month freight cycle play out in a single quarter; and during that time, we were very successful at taking market share in our contract award business, growing it by an impressive 27%. Simultaneously, we had a lot of success landing new managed transportation deals that will add to revenue in the coming quarters.

I'm also very happy with our agility in a very volatile market. Given the wild swings in the industry's capacity utilization, which directly impacts the so-called tightness or looseness of market, we were able to quickly adjust to all market conditions to manage volume growth, pricing and margins, and we did all of this with our employees working from home.

Given the current market conditions of relatively higher prices and tighter capacity, I think we are in the middle of an inflection point, meaning that we have seen the prices spike and it's more difficult to find trucks, but we've not yet seen a significant surge in spot freight. As we go a little past this inflection point, I would expect to see spot freight increase, bringing with it higher margins. Ultimately, as spot volumes continue to build, shippers choose to renegotiate contract rates, so they can lessen their dependency on the spot market. And so the cycle goes. Of course, the great unknown is how the pandemic will disrupt the economic recovery and which verticals are the winners and which ones are the losers.

I would like to thank the Echo technology team for creating and supporting world-class systems that allow us to work from home and execute efficiently. In fact, we rolled out quite a new -- quite a bit of new functionality during the quarter, and some of the new capabilities are externally facing with carriers in our digital freight marketplace, while some are more internally focused on better execution. Finally, thanks again to our clients and our carriers and our employees for making Echo the #1 logistics company in the Inbound Logistics poll for the fourth year in a row.

And with that, that concludes our prepared remarks, and at this time, we'll 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 the line of Jack Atkins from Stephens.

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

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Okay. Great. And congratulations, guys, on a great quarter here in a very volatile environment. So I guess first question for either Doug or Dave, whoever wants to take it or maybe you both want to take it. But could you talk, if you look at your customer base over the course of the last couple of months both for June and July, maybe where you're seeing pockets of relative strength or weakness? I mean it's been such a sharp recovery on the demand side despite the fact we have high levels of unemployment and obviously, autonomy is not in the best shape. So what do you think is driving the strength in demand that we've really been seeing since the beginning of June?

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

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Yes. Jack, this is Dave. The -- I think a couple of things. I think that the magnitude of the economic shutdown in April caused a restart, if you will, of the overall economy. And so it's probably -- and related to that restart has been and what's likely been some rebuilding of inventory levels to kind of catch up in some cases and in some cases, maybe out of concern that there could be another shutdown. So I think it's kind of like the magnitude of the slowdown, which is followed by the reopening and the restart. And that's how I would just kind of distill the demand side.

I think geographically, we've seen a little bit of additional strength in some southern states, which also -- it gets -- it touches into the capacity side because kind of touch of the produce season that's impacted California and Texas, and we've seen capacity maybe tighten a little bit more in some of the southern states. And that may be related to business activity that initially was starting up and kind of cranking up in some of the reopenings.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [4]

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I would just add to that, Jack, on the supply side. I think there's been an asymmetrical recovery industry by industry. And so if you think about the carriers that serve those customers that are either doing better than expected or worse than expected, it causes them to have their equipment in places where it might not normally be, and so it tends to be a little bit disruptive to the national network.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [5]

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Yes. No, totally. That makes sense. And I guess just following up on that, Doug, one of the big outcomes, I think, most people would agree from the COVID-19 pandemic is increase in B2C and e-commerce activity, just broader adoption of that across the retail channel. To what degree do you think that either drives a higher level of inventory kind of on a -- more of a steady state going forward and potentially more truckload activity going forward? Is this e-commerce boom, is it good for truckload demand overall? I guess how would you think about that?

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

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Well, I tend to think that the same amount of truckload moves regardless of kind of the supply chain. So as you see shifts from brick-and-mortar stores into more omnichannel distribution strategies, you still got to get it from a manufacturer or a port to a distribution center somewhere. It may not be the same one it was going to in the past, but I think it's probably a difficult question to answer without a whole lot of analysis across a whole lot of companies and industries.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [7]

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Yes. Yes, no doubt. I was just curious about that. Last question, I'll turn it over. You referenced a 9% improvement in shipments per employee in the quarter. How much of that do you attribute to capacity being looser for, call it, 1/3 to 1/2 of the quarter relative to normal? And how much of that would you attribute to all the investment that you made in technology to drive higher levels of automation across your system? Just trying to think how much of that we can sort of think about as being more permanent going forward.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [8]

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Yes. I think there's -- we've said, obviously, the last few quarters that our longer-term intention is to grow our volumes faster than we grow our sales and operational headcount. We've been doing that for the last 2, 3 quarters. It's difficult to pin down in any specific quarter the percentages. It's a great question, obviously one we've gotten before. I think that there's a portion of that productivity that we're getting that's directly attributable to the investments we've been making, the automation around tracking, automated tracking and rolling out tools for our carriers to access our loads online and give us inbound offers. So there's definitely a component from that perspective.

And there's also a component from slowing down a little bit on the hiring. So I mentioned in my prepared remarks our headcount on the sales side of just under 1,600 people was down by a couple of hundred people. Now some of that was delaying sales classes. That does have the unintended effect of improving the productivity a little bit because those -- had we brought in those same people, they might not be in a productive state early in the cycle. So there's a little bit of that in the number. It's hard to parse it across both of those things.

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Operator [9]

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Our next question comes from the line of Jason Seidl from Cowen and Company.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [10]

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This is Adam on for Jason. Just wanted to ask a little bit about kind of your actions kind of resulting in you being able to take market share. Kind of what do you think is going to helping you guys take market share? And maybe who are you -- who do you think you're taking it from in the marketplace?

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

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So I think it's a very big market, number one. So it's difficult for us to say, and I'm not going to conjecture exactly where it's coming from per se. But I would say that it's not a new concept that we're very focused on service and our ability to leverage our network for larger shippers. Over the last couple of years, we've talked about our desire to continue to grow, whether it's in the spot market or the contract market. And so we've been able to expand our relationships across larger shippers. I think we're doing the same thing across the small and midsized companies, but the COVID crisis probably hit those companies a little more disproportionately.

But we're seeing -- as we've talked about, those monthly metrics, a pretty strong bounce back. So I think it's service related, and it's kind of leveraging the things we keep talking about, the talent and the technology across both our customer and carries bases enabling us to be successful and grow volumes. And then I think that revenue and profit growth will come over time as we deal with the ebbs and flows of rates and market conditions.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [12]

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Got it. And then maybe a little bit about -- kind of along similar lines about competitor pricing in the market.

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

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There's nothing to -- not much new to report there. I think when the market -- first off, you get a little better -- as a -- for us, you get a little more visibility during the bid cycle because you're going through rounds of bids and you kind of know where you stand. It's a little more apparent that it's either highly competitive or not. As we've talked about, again, lots of -- it's very competitive industry. It's always very competitive. But in the second quarter, we're kind of through the bid season. We're not seeing as much activity on RFPs, so the visibility is a little less in that regard. And the game kind of switches a little bit, which is looking for capacity as routing guides start to break down a little bit with more frequency and costs are going up. It doesn't -- you don't feel that per se price competition in the same way because you're really looking for capacity and trying to find ways to leverage your network across your shipper base and help them solve their problems. So I'd say that, given that backdrop, it feels like it's less of a focus item today than it might have been a year ago.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [14]

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Got it. Really appreciate the color there. And maybe just shifting gears a little bit for a final question here. Obviously, there's been a lot of kind of government stimulus and the PPP loans in particular. I wanted to maybe ask about that in regards to capacity production, whether you think kind of as those loans come up and stimulus kind of becomes less impactful, just in the general economy, if you think that capacity will be reduced or not.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [15]

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I think it kind of greatly depends on the rates and the environment. So it's been such a dramatic swing where rates dropped precipitously. Capacity came out. Government stimulus was put in place. Drivers had options. Then the rate -- things have bounced back really quickly, and it's -- I think the ability to attract the drivers back in at the same pace has been likely a challenge for many trucking companies. And if the rates sustain, I think that the capacity comes back. If we go through another swing on the downward cycle, it probably stays out. So that's how I'm looking at that dilemma, if you will, or how that might play out over the next 3 to 6 months.

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Operator [16]

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Your next question comes from the line of Stephanie Benjamin from SunTrust.

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Stephanie Benjamin, Truist Securities, Inc., Research Division - Associate [17]

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I just wanted you to talk a little bit on -- I really appreciate that you did frame some guidance for the quarter at least on the revenue line and just what you've seen so far. So maybe just if you could walk through some of the puts and takes between the low end and the high end of that guidance and what you're assuming from an overall market standpoint at those ends.

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [18]

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Sure, Stephanie. This is Kyle. I'll take that one. So obviously, we talked about a range of $565 million to $615 million, which is up 1% to 10% compared to last year. And then we talked about our July revenue being up 10% so far and so near the high end of that.

Maybe the first thing I'd point out is we probably think there's a little bit of benefit given where the holidays -- the Fourth of July holiday fell this year versus the prior year and maybe opportunity for more business activity this year kind of across the economy than there would have been the way they fell last year. So there's probably a little bit of benefit there. But we've had a really strong start to July, increasing volumes, increasing revenue per load relative to Q2 but even relative to June and where we were exiting June.

So we just want the guidance to be mindful of what a typical seasonal pattern would look like and that may materialize yet here since we're so early in the quarter and the possibility that some of the strength that we've seen could subside. Obviously, having said that, we haven't seen any slowdown yet, so we just want that guidance to be able to frame across a bunch of different scenarios that could come about.

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Stephanie Benjamin, Truist Securities, Inc., Research Division - Associate [19]

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Got it. Appreciate it. And then switching to kind of the M&A environment. Wouldn't really expect you guys to give any kind of update on that, but I think it is interesting just given the massive volatility that we have seen in the last couple of months. Has anything kind of altered from an M&A standpoint, either interest from sellers, multiples on some of the private guys, interest or conversations? Or maybe they wouldn't talk to you before but now are willing to take your calls. And then on the other end, maybe has anything changed how you would approach the market? So any color there would be helpful.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [20]

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Yes. I would say that our appetite remains unchanged. We're interested in doing accretive M&A. We continue to look at opportunities. I will tell you that some of the opportunities we were looking at have struggled a little bit through the COVID crisis, and so as you can imagine, when they're looking at a multiple of their EBITDA and their EBITDA is down, it causes them to rethink whether now is the right time to do something or not. So we've seen some opportunities evaporate a little bit because of the target company's performance in this environment. At the same time, we're seeing new opportunities come across the transom, and we're evaluating those.

And as it pertains to your question on multiples, it's a little tough to say right now because there really haven't been a lot of deals getting done. And so I wouldn't say there are any timely comps.

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Operator [21]

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Your next question comes from the line of David Campbell from Thompson, Davis & Company.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [22]

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I assume you have not estimated G&A for the year because you're not estimating revenue for the fourth quarter. Is that the reason?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [23]

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Yes. So David, we didn't give guidance on that for Q4. I think it's probably reasonable to expect some small step-up sequentially from the third quarter in our G&A costs. David mentioned that we're continuing to add some more sales classes. I think it's possible we'll have lower turnover for some of the upcoming quarters, which adds to near-term costs, but it's -- that's obviously great for our growth and productivity longer term. I guess I want to -- and I say all that with potentially a step-up in costs but recognize that the reason we're not giving Q4 revenue guidance and G&A guidance is just due to the overall uncertainty of the economy. So if we were impacted by some additional or significant shutdowns or if there was an even bigger pickup in volumes and maybe rates than we've already seen, that could impact that either way. So just trying to help you frame it a little bit, but you had the point of why we didn't give guidance on that because we didn't give guidance on revenue as well.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [24]

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Right. You mentioned a lot about market share growth. Do you think that, that growth is largely caused by your ability to efficiently provide solutions to transportation problems that other competitors don't have the technology for and therefore, you're taking advantage of that by gaining share? Is that a good reason to expect that to happen?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [25]

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Yes. Dave, I think that's a great point, and it's why we invest so much in technology and data science because we want to, first and foremost, provide great service to our clients. We want to be easy to do business with for our carriers. We want our employees to be as productive as possible and able to process as many transactions per day as they can. And so all that comes together. And then not to mention, as Dave commented earlier, we've been going upmarket with larger shippers, and larger shippers generally have a lot more freight that you're not seeing. And if you do a good job for them, you have opportunities to get a greater share of wallet. So I think that's also something that pays dividends for us as we continue to go upmarket with larger shippers.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [26]

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Yes. And you must have some internal estimates of what the market is growing by to calculate a -- that you've increased your share. Is that not something you disclose?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [27]

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Well, in terms of the short term, trying to say what percentage of the market we have, I think it's pretty tough given all the volatility and so we would probably look at that statistic on a little longer-term basis. But that's probably the best I can do off the cuff.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [28]

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Okay. And my final question is the approximate net revenue margin in early July, 15%, that's quite much less than the third -- than the second quarter. And how does it compare with a year ago the same -- for the same days?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [29]

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So we didn't disclose it for the same days last year, David, but we -- for the full quarter last year, we did see a sequential decline from Q2 to Q3. We were at 17.3% for the full third quarter. So hopefully, that will help you out.

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David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [30]

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Well, I just wondered if the 15% would be typical for the quarter or whether there's some unusual ability or unusual margin stuff in the first half of July that does this -- that always does this.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [31]

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Yes. It's not -- it's probably not typical and wouldn't say always does this. I think it's -- you talked a little bit about the speed of the market change and how quickly rates have shifted from a steep decline and then a steep increase. And we've got -- on the truckload side of the business, you've got the highest rates today that we've seen in the last 12 months, and that'll happen in about 6 weeks' time frame that we went from almost a low to a high. And that's been unprecedented.

So we've always got a lag in shipper pricing and carrier pricing. And so when rates move that quickly, it's to be expected that there's going to be margin pressure. We're seeing that as we look forward. And we don't forecast where the margins are going because there's just a whole lot of inputs that are going to play out in the future, but we would -- if things continue on this trend, we would expect that there'd be more spot activity and that shipper prices would begin to adjust to reflect current market conditions. And that doesn't happen all at once. That happens over time.

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Operator [32]

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Your next question comes from the line of Bruce Chan from Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [33]

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Doug, you talked about some of the growing business mix with the large shippers, which seems like a pragmatic evolutionary move. But as I think through that, are there any meaningful trade-offs to consider in terms of absolute net revenue dollars versus maybe your average margin per customer as that change happens, as that mix shift happens? And then just a quick follow-up, as you kind of fully deploy your digital marketplace, does that mix maybe start to shift back in the other direction?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [34]

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Well, I think that large shippers are a great opportunity for us to bring in bigger chunks of revenue, but it doesn't diminish our interest in the smaller shippers, especially those that ship predominantly LTL. And those smaller shippers are a great hunting ground for our newly hired and trained salespeople, who are joining us in probably in their first year not really ready to sell truckloads. So we think we have a model that can approach both ends of the market, and we like both of those segments. I'm sorry. What was the second part? What was the second part of your question?

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [35]

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Well, I think you kind of answered the second part in there as well. But maybe just another follow-up on the M&A side. I'm wondering if there's been any change in the types of companies that you're looking at as a result of the pandemic. Is there any demand for new services that customers are looking at? Or do you maybe have more of an appetite for technology-related acquisitions, some tools, for example, that you'd like to shore up a little bit more quickly?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [36]

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Not really. I think we're pretty open minded when it comes to looking at any opportunity, but then we're pretty selective when it comes to pulling the trigger. So we look at a lot of things that are pretty close to our space, but we also entertain other ideas. And -- but I don't think our criteria or areas of interest have really changed all that much.

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Operator [37]

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Next question comes from the line of Jeff Kauffman from Loop Capital.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [38]

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Sorry, I was on mute. Congratulations, everyone. Two questions. You mentioned the 9% employee sales productivity. And you talk about third quarter business being up anywhere from 1% to 10%, and you've started to rehire. How quickly can you get employment levels to the right number? I mean 9% employee productivity is a tough number to repeat quarter after quarter. And then how long do you think it'll take to get to the right level of staffing?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [39]

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That's a good question. I think that I don't have a forecast in front of me, but I do think that we -- in terms of productivity gains, I think we can continue to deliver on pretty high gains because of the technologies we're rolling out.

And I think with regard to staffing, we haven't slowed down that much. Even though I mentioned the 200 people we were down, we actually planned the year to be pretty much even to maybe just up a little bit going into the year. So we'll crank up the hiring, and we'll keep an eye on market conditions. And at the end of the day, it's probably, in our mind, a 3- to 4-month delay because we pushed these spring classes out. So we're just going to have to continue to monitor what the economic outlook looks like to reevaluate our staffing.

But we will resume. We have, I think, added about 60 people in June. So we'll continue to do that throughout the year and try to get back on track from a staffing perspective.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [40]

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Okay. And can we talk a little bit about your carrier partners? When I talk to FreightWaves or some of the organizations out there on how spot rates tightened so quickly, they tell me, well, demand's back a little bit, but really it's capacities come out and you've got drivers choosing not to drive, whether it's COVID related or whether it's market P&L related. And everyone we talk to talks about how capacity is rationalized, particularly the mid- to small size carrier. Can you talk a little bit about what's going on with your carrier partners and your ability to bring that capacity to the table?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [41]

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Yes. I mean I can give you -- I think we talked a little about -- I'll try to give you a little more color. But I think that -- I think it's as simple as thinking about the dramatic swing -- I mean I think like we said earlier, a fairly dramatic change in the demand side. In April, demand fell off the table; and then in May and June, demand came back pretty quickly. And so the supply side or the capacity, when the demand fell off, it came out of the equation pretty quickly. So -- and you had government stimulus on top of it that provided economic relief for drivers and other participants on the supply chain. And I think it's just slower to add that capacity back. It's not as easy as flipping a switch. I mean in some cases but just -- it just lags a little bit in terms of the capacity coming back into play. And I think -- but I think at these -- as the rates increase, we'll see the capacity come back, but it takes some time to catch up and rationalize if you will.

So I think it's both. There are 2 sides to the equation. It's not one or the other. It's both. And I think it's the pace of change on the demand side, and it's -- the capacity is just going to be a little slower to react.

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Operator [42]

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Your next question comes from the line of Matt Young from Morningstar.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [43]

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Just a quick follow-up on the sales hires. It sounds like you guys plan to accelerate the hires as the year progresses. Does the remote work setting potentially change the recruiting dynamics at all? I guess is there a reason to think that it changes the quality of the candidates or perhaps maybe even just make it more difficult in the quarters ahead?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [44]

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I don't think so. I think that it's maybe more difficult for candidates and people to find jobs today than in this current market. There's so much change going on. I think with the technology tools that we have, we can deploy both from a recruiting perspective as well as from a training perspective, we're very confident in our ability to attract people and get them onboarded as needed.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [45]

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And Dave, have you guys seen a material uptick in COVID-related costs, so to speak? I mean would that be baked into some of your margins? Maybe everybody working from home, your IT cost tick-up, is there anything to speak of there?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [46]

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Kyle, do you want to handle that?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [47]

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Yes. So Matt, we were really well positioned to move to work from home in March when we did, and there was some modest incremental costs that are behind us. There's really -- there may be a little bit of additional cost, but it's not much, probably more than offset with less T&E that's happening right now. So that -- I'm not sure when that benefit goes away or if we know when people will be back traveling.

And then I suppose the other significant costs we have when we think about how this has impacted us is our facilities, all of which still exist and paying rent on. But we have -- we do have a lot of flexibility with our model and with our technology to think about how we manage that going forward, and we're continuing to evaluate that. But I think there's -- we're fortunate that we have a lot of flexibility there to think about what the future will be for the way we manage our facilities costs.

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

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Okay. And I guess, Kyle, one more question on the commissions. I know obviously the absolute dollar amount is going to be down year-over-year, but it was also down as a percentage of revenue. Just wondering why the relative drop. Is there -- would that be related to mix?

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Kyle L. Sauers, Echo Global Logistics, Inc. - CFO & Secretary [49]

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It's -- there's always a mix impact there. Depends on the business channel that it's coming through. Mode is a big piece of that. We've -- I'm sure we've talked about before, but when we -- our truckload has a higher commission rate on it because we have people on both the buy and sell side of the transaction. Having said that, truckload was actually up better than LTL during the quarter. But I think it's also a reflection of our selling costs and over time, how we could expect that to decrease as we get more and more efficiencies through new technologies and our workforce becomes more productive, kind of back to one of the previous questions where we've had more productive sales folks and we expect that to continue because of technology that, that over time could impact that raw percentage even as the dollars grow -- commission dollars grow along with our net revenue.

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Operator [50]

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Your next question comes from the line of Tom Wadewitz from UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [51]

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I wanted to see -- I apologize if I'm asking about something you may have covered. There were overlapping calls. But obviously the market's tightened up a lot. I think we're hearing about, I guess, failures and so kind of like mini bids coming back where the shippers aren't getting the capacity they expect, which I think is a good thing in terms of getting rates up. I just wanted to see if you could offer some thoughts about you think that process is taking place that you're getting higher rates with shippers. Or how long does that take place so that you kind of move beyond the gross margin squeeze that I think have been taking place in June and July?

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

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Yes. In my prepared remarks, Tom, I talked about the fact that we're probably right at the inflection point right now where you're seeing tight capacity, spiking rates and not quite any spot freight volume yet. So our call, as it were, would be that somewhere in the not-too-distant future, as we pass the inflection point, we'll start to see more spot freight. That'll help our margins, help our volume, and it will also cause shippers to think about renegotiating their contract freight.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [53]

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So is that something where you would expect the gross -- like our -- would you even think that conditions in August and September, assuming that freight stays strong, would you think the kind of broker conditions are pretty similar to what they were in June and July? Or does that upward price adjustments happen pretty quickly?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [54]

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They probably lag the market a little, but they do have -- they would be, in my view, happening in different accounts in different places. So they would be happening. It's hard to predict the exact -- the magnitude. I'll put it that way. But yes, I think they would be happening.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [55]

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Okay. So you might see some easing of the gross margin pressure later in the quarter as you have time to get rates up.

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [56]

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Certainly. Possible. Yes.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [57]

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Okay. Appreciate that. And then just a second one and again, apologize if you already kind of covered this. But I think you talked a little about competitive landscape. Have you seen any kind of changes? And is there any evidence of Amazon being more active or more of an impact in third-party brokerage?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [58]

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Well, we've heard about it in the media. I would say that we have not seen a lot of evidence of anything that affects us.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [59]

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Okay. And anything new from some of the other -- whether it's Uber Freight, J.B. Hunt's ICS and the other category, the [VDLs] or just seem pretty stable in general?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [60]

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It seems pretty stable.

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Operator [61]

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Your next question comes from the line of Bascome Majors from Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [62]

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Yes. Early on in the call, you addressed the M&A environment as a buyer. I was hoping you could talk about that more broadly with the rumors. I think we previously mentioned of perhaps one of the larger digital players taking a large private investment in a public [in the year]. Or any other interest of larger scale, strategic or financial M&A in the truck brokerage space domestically?

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

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We've had our head down focused on execution. The deals that we've been looking at are more of the tuck-in variety, so I would say large transformational deals have been pretty much off of our radar.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [64]

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Should interest come into the marketplace on the larger side -- I mean you've always said you're not building the business to sell it. How do you have those conversations at the Board level? Is there a price? And do you actively discuss what that is? I'm just kind of curious, if the M&A environment does heat up as the economy continues to cover and plenty of liquidity is out there, how you're positioned as both the buyer and the digital seller.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [65]

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Well, as you can imagine, our Board is always having conversations about what's best for our shareholders, and so if an opportunity were to come up, we would handle it on its merits. And we're not really focused on that, but if that should happen, we would take it at face value.

In terms of being a buyer, as I said earlier, we're -- we have an appetite. Our appetite has been more focused on tuck-in opportunities. I do think, in this environment, there could be some distress out there or there could be motivated sellers, and we're all ears to those types of opportunities, but it's not been our focus.

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Operator [66]

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Your next question comes from the line of Kevin Steinke from Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [67]

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So earlier in the call, you referenced seeing some additional strength in southern states like California and Texas, which kind of goes against the headlines we've been seeing in terms of where COVID cases have been spiking. So certainly, it doesn't sound like this is the case. But have you seen any slowdown in specific regions or states where you've seen -- started to see some of the cases surge back up?

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David B. Menzel, Echo Global Logistics, Inc. - President & COO [68]

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Yes. Kevin, probably not particularly. I think when -- I was talking a little bit more about the capacity side than the demand side and so a tightening of capacity in some of the southern states where produce had impacted could be related to -- there were some reopenings in like Texas and Florida and Georgia. So there was activity there. And you're right. Now it's kind of gone the other direction. I don't know that it's necessarily closed down per se.

So you went from this environment in many states, where we were shut down in large part, to more of a reopened. And even though those cases are spiking and precautions and are going out, and it's probably affected more services than commerce at this stage. Entertainment, travel, bars, things of that nature have been impacted, restaurants, of course. So that was kind of more the commentary that we had.

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Operator [69]

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You have final questions for Jack Atkins from Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [70]

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Okay. Great. I just -- as I'm looking at your results here over the course of this freight recession, it looks like you guys are going to have trough earnings of something around $1, assuming that we just had an LTM trough period ending in the second quarter. And that's well above where you troughed down the last freight recession, which I think was about $0.68. So clearly, you guys are just doing a much better job managing the business now that you have an integrated sales force, integrated technology platform. So that makes a ton of sense.

So I guess, as you think about this next great up cycle, how do you guys think about the opportunity to see even greater earnings potential with a bigger organization from a revenue perspective? And clearly, you guys are making a ton of progress on the efficiency side with automation, so I know that's kind of an open-ended question, but you did a -- you were more profitable in the freight recession. So should we expect a similar level of profit improvement at the top of the next freight cycle, if that question makes sense?

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [71]

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Yes. I mean I'm excited about where we are right now. I think we're executing as well as we ever have. We've got increased tenure with our sales organization. We've got a strong culture. We've incorporated data science. We're rolling out new technology every month. And if you think back in 2017, we were coming out of a recession as well as an integration of a transformative M&A deal, and we were able to execute well in 2018 and capitalize on all of that. And with the excess supply in '19 and things softened a little bit, I think going into the next period of strength, we're as well prepared as we've ever been to capitalize and maximize profitability.

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Operator [72]

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I don't see any question in the queue. At this time, I will turn it over back to our Chairman and CEO, Mr. Doug Waggoner, for final remarks.

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Douglas R. Waggoner, Echo Global Logistics, Inc. - Chairman & CEO [73]

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Well, thank you. We appreciate everybody joining us today. Stay healthy and stay safe, and we will see you next quarter.

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Operator [74]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.