Q3 2019 Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to the Eco Global Logistics third quarter 2019 earnings Conference call.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your touched on telephone.
A reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Cauliflowers Chief Financial Officer.
Thank you. Thank you for joining us today to discuss our third quarter 2019 earnings hosting the call or 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 our website that accompany management's prepared remarks, and these slides can be act.
Yes on the Investor Relations section of our site Echo Dot com.
During the course of this call management will be making forward looking statements based on our based on our best view of the business as we see it today.
RCC violins contain additional information about factors that could cause actual results to differ from management's expectations will also be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure. It was contained in the press release, we issued earlier today and form 8-K Wi Fi.
Filed earlier today.
With that Im pleased to turn the call over to Doug Wagner.
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 and 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.
And the pace of these industry challenges I'm very proud of our team in the way we've continued to execute.
We are 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 DNA and commission costs on a year over year basis for the third quarter in a row.
[laughter].
As we've talked about in the past. We've also started to see the typical cyclical pattern and our truckload gross margin.
That's truckload by cost bottom out and turned upwards and rationalization and supply starts to emerge.
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 going again be passed along.
We continue to invest in automating our marketplace I again want to emphasize that we have a highly automated markets today with robust integrations with our shippers and carriers online capabilities for small and midsize shippers and utilizing data science and advanced analytics to drive pricing and other predictive capability.
Is that are used by our experienced people to wrap it all together a deliver first class service.
This bundle differentiates us in the market, we're making it more powerful as time goes bar.
Last quarter, we talk about features that enable our carriers to search and bid on freight online.
This quarter, we've watched truckload spot pricing on line two our eco ship portal and we're rapidly driving forward to automate transactions at the pace that the market requires.
A lot more of this in Q4 and throughout 2020.
Now on slide three well 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 39 cents compared to 55 cents in the year ago period.
Now I'd like to turn it over to Dave to go over more detail at our performance.
Thanks, Doug.
Indicated on slide four Q3 truckload revenue was 369 million 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 six 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 is spot volume was down 15% year over year, and our ward volume was up 8% year over year.
Growth in award volume has been driven by expanding our relationships with key account 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 the marketplace.
This includes continuing to from the high service levels to help our shippers successfully manage their supply chains.
And it's off market and despite increased competition from new entrants, we continue to take share by going or truckload volume on the contract side of the business.
During the quarter, a 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 shipment volume was up 1% in Q3, well revenue per shipment was flat with the prior year.
Turning to slide five 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.
Quarterly revenue change was also impacted by lower truckload rates. The decline is smaller than our transactional business due to the LTL mode mix.
We did close 16 million, so new business in the quarter and have a very strong pipeline heading into Q4 or managed transportation teams are doing a great job serving our clients in our high satisfaction history of client retention and efforts our transactional sales team and business development are working well together to drive continued growth in this business.
Turning to slide six we generated 97 million and net revenue in 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 then I'll turn it over to Kyle to review additional Q3 financial details and outlook.
Thanks, Dave on page seven of the slide you'll find a summary of our key operating statement 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 DNA expense was 46.1 million and the third quarter of 2019 down 8% from a 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 can think continue to find ways to reduce costs through automation and benefit from lower incentives.
And this year.
Depreciation expense was 6.8 million a third quarter of 2019 up from 6 million in the year ago period, an increase in depreciation continues to be associated with 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 a 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 39 cents decreasing from 55 cents in the third quarter of 2018, and then the primary differences between our GAAP and non-GAAP fully diluted EPS.
Our 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 eight contains cash flow and balance sheet data in the third quarter of 2019, we had free cash flow of 11.4 million, an 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 dollar ABL facility.
We did not make any repurchases of our common stock or convertible debt during the quarter. When we have approximately 23 million still available on our repurchase authorization.
Now I'll take a moment to walk through our guidance for the fourth quarter, which we've highlighted on slide nine.
Our first point out the revenue during the last three weeks or the first three 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 progress throughout the third quarter, which is a typical seasonal pattern and also aligns with the cyclical pattern that dog highlighted in the opening comments. So margin during the first three weeks of October I have been in the low 17% range.
Given all the current trends, we expect Q4 revenue to be in the range of 500 to 540 million and then for the full year, we expect revenue in the range of 2.155 to 2.195 billion.
Which is the same as our previous for your guidance at the midpoint.
With regards to other fourth quarter guidance, we expect to following commission expense of around 30.5%.
DNA costs between 45 and 47 million.
Depreciation estimated to be about 7.1 million.
Capex of six to 8 million.
Cash interest of approximately 1.3 million.
We continue to expect that 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 to 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. 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 five points that I'd like to make about the topic.
First.
Theres always been new entrance to the space in fact, there probably four or five new brokers a start up each year in Chicago alone.
Which is apparently the freight brokerage capital of the universe.
And why is this the case will first is very low barriers to entry anyone that has a phone system and buys a bond and licenses some off the shelf software can be afraid broker.
However, most of these businesses have difficulty scaling up without adequate capital in 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.
Theres 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.
That was one of these startups and we had some capital in a strategy to to deploy proprietary technologies.
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. There were around in 2009, you'll recall that this was a big part of Echo story on our IPO Roadshow.
We have always value technology and in fact consider ourselves a tech company as much as a freight company.
In recent years private equity is come onto the scene and they've been snapping up mid sized 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 startups, coupled with industry consolidation, which means that the bigger getting bigger and this leads me to my second point.
Which is that the truckload market is massive.
The time, we bought command echoes truckload brokerage business was approximately $650 million and we had another 600 million of LTL and managed transportation business.
Demand was a pure truckload broker of over 500 million. So when we integrated them into echo it was a merger of two meaningful truckload brokers.
What was amazing to me is that of Echo's 30000 clients only 400 of them, we're doing business with command.
And with the smaller tuck in acquisitions that we've done you can imagine there is much less overlap as you would expect.
If you look you've reviewed the research by Armstrong and associates, who studied the threepl industry. You'll note that the non asset logistics revenue are growing at a rate three times 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 in digital marketplace concepts are not a new idea.
That was 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.
For the concept of 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 assessable to outside participants.
Shippers and carriers as we've indicated with our announcements regarding eco ship and Echo drive.
We believe our measured approach gives us the best of both worlds relationships and trust for those shippers and carriers the 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 and the realm of pricing, we've seen signs of extremely aggressive pricing being offered by one or two competitors. While this can your yield short term success and 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 rate and when the market. Once again produced a spot freight we will be well position to capitalize on it so.
So in summary, the truckload brokerage industry is very competitive but it has 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 theres a lot of competition. It's a huge market that's growing three times 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 roadmap 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 overtime. These prices will revert to market more.
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, but 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.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one.
Tom telephone.
If your question has been answered or you wish to remove yourself from the Q. Please press the pound Keith.
Your first question comes from Jack Atkins Stephens, Inc.
Yes, Dave Kyle good good afternoon, and congratulations on.
Pretty solid quarter, all things considered given the given the backdrop.
Thanks, Jeff.
So.
Doug Let me.
Yes, Dave you then one least let me start with you guys as it relates.
What you what you're seeing and.
And hearing from your customers about about peak season, we've been hearing from others that it's kind of been delayed start to peak.
Just be curious to get your thoughts on how you think.
Fourth quarter is going to play out and I know, we have a compressed peak. This year just would love to get your your thoughts on what your customers are telling you about.
Peak season, and how they're feeling from I just.
And economic perspective.
Sure Jack I mean, I think we got a similar question, maybe probably a little early early in the in the cycle last quarter about what we thought it might we might see ahead in peak and.
Play that at the same answer that I gave back that's probably applicable today number number one you know we've learned over the years as the so called peak for Echo.
Never been quite a peak.
A lot of our business is more industrial nature, and then to some extent the truckload side on the beverage side in particular, you know and and then some other other products, we see more of a 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'd say that.
October was was in my mind, just a little a little soft. So there was no no visible sign of a big step up.
You might want to see in October , but I would say that's not that's not uncharacteristic of what we've seen in prior years, either so not a lot to report there on the peak.
Okay now that that.
That's helpful. Thank you for that David and I guess.
Following up on that and then it does 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 of year significantly more bid activity than than we normally we would.
Yes.
Seeing opportunities to go out and maybe capture some market share and maybe get another bite at an apple for either customer or bid package that.
Wasn't there earlier in the year I'm just.
Maybe there.
There are some chances for you guys to maybe drive volume growth going into next year.
Just wanted to.
See some freight that's up for bid the normally as an upper bad if that does that question makes sense, yes, I think thats a it's a really good question I think that.
It is true that in general.
Given the 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 more frequently than they have in the past take advantage of lower rates. It does it does give us some additional opportunities either expand our relationship or to add new customers and some.
Cases, and you see some of that in our growth I mean at 8% lackluster market does your contract business grow 8% year over year on a volume from a volume perspective is pretty good evidence of of that facts. So I think that your points well taken shippers.
You know every shippers different and kind of view that a little bit different lane in some market cycles, you see a little more tendency to maybe delay let things play out and in this cycle with the fact that rates have come down I think the opposite to low it's probably a little more common guys trying to get through the process, maybe a touch earlier or on the.
Same cycle as they normally do so.
That's a dynamic that's happening it's not it's not that significantly different from prior years, but I think that.
In terms of just the trend in the end the.
You know the attitude to try to get get through the cycle little bit earlier, we're seeing some of that but 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 progress.
Prognosticate, what the rates are going to look like in 2020, there there are lower today, but who knows what the second half of 2020 is going to bring.
Well that that that leads into my I guess last question, Dave I mean, as you think as you look out to next year at sort of.
You guys have a large base of small carriers that you interact with on a day Annandale basis.
Have a much more real time indication.
What's going on with those with those suppliers of capacity.
If you're thinking conceptually about.
Bidding for freight next year.
Bigger picture. It 2020, how do you think this cycle plays out I mean, putting aside what everyone else has been saying I mean, what's your opinion in terms of how you think 2020 plays out in terms of supply and demand and.
Hi, setting up to be volatile year, and I'm, just curious to know what you guys you're thinking about.
Yeah, I mean, I think that Theres a couple couple of things there one of the things. We've we know where we are and oftentimes, we're not 100% show, where we go on and how fast we're going to get there.
Historically freight cycles, probably on average of lasted 18 to 24 months and you see things turn were nine were probably 14 months into a cycle today of down rates. They mentioned that in my prepared comments that.
Yes, right I'm not going to use the word bottomed out, but I think over the last four or five months, we've seen a lot more consistency than we did say from July two may and so that's an indication that we've we're getting more and balance so to speak there is that we don't know when the next catalyst is going to hit.
To to possibly start that upward trend again.
I think that it's logical to believe that we're going to get through the peak, we're going to head into the normally slower time.
January February March is tends to be a.
You know a slower freight markets. So we're probably going to see as much movement in rates. What you know if you if youre looking at it you'd probably thank it's going to be closer to the second half of the year and would start we will 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 that that's how I'd think about it but again I I'd be careful too.
To get to certain about about that the about that forecast okay.
What makes a lot of said, it's not really appreciate.
Thanks, so much.
Your next question comes from this call majors with Susquehanna.
Hi, Thanks for the thanks for taking my questions here.
Two for me just if we could just step back and take her pick a high level look at seasonality in and I know you said in the prepared remarks to revenue per shipment head could actually stabilized over the last several months.
Anything you could go to pack about about just how October fields versus how in October .
Should feel.
If 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 and several quarters earlier this year. Thanks.
Yes, I think that.
I would just say this is difficult to.
To take two or three weeks of data and make a quarter out of it in this and this market.
You see a normal.
Typically September push at 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 on what we're going to see for the rest of Q4. So I know, it's a little bit of a non answer but thats, probably the best that could give you right now.
Could you expand on the net revenue margin trend I mean, typically you see a bit of an improvement from threeq to Fourq I don't know it.
We should have expected improvement into October that's really more about the into Fourq <unk> anything on.
How normal that particular metric feels going quarter would be helpful.
Yeah, Bascome I'll take that.
They actually in October I mentioned, there in the low 17% range here for the first.
Few weeks.
Which is actually an improvement over the the end of Q3 margins declined throughout the third quarter.
And so it's not unusual that the you know as we've said in the past than normal seasonal pattern with our truckload margins would be a little higher in Q4 than they are in in Q3, but Doug also pointed out earlier that this is the part of the truckload cycle were 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 margins the best we can use in using technology and people, but thats.
Five as close as I can get to two guiding you on margins for for Q4.
No you reconciling that with Doug's comment was was helpful that it's kind of we're getting that.
Last one from me.
I believe you said you didn't buy shares during the third quarter.
Actual shocks that 20 bucks or so during the month of August you did you were active in Twoq <unk> at a slightly higher price.
What should we read into that or is this an indication that you're seeing.
A good in high return pipeline and M&A is.
The balance sheet needs to be flexible when the economy is shaky or.
Is there a restriction for something else entirely just any thoughts from on the buyback program Twoq to Threeq, you and and how you look at that as or use of capital going forward. Thanks.
Yes, that's good question I wouldn't I wouldn't read much into it we obviously never know where the where the stock is going to trade. The next day. So we're making decisions at a at a given point in time I probably.
I went out that over the last year, we've repurchased 35 million of the stock and 71 million of our of our convert so we feel like we've made good use of the the buyback plans that we've had in place, but but you're right. We're we ought to we're always continue to evaluate the M&A pipeline, which Doug mentioned, we're looking at a lot of opportune.
Ladies and we manage that versus delevering versus buying back our stock.
So in this quarter, we just we just simply chose to build up the cash position.
And I mentioned, we've still got little over $20 million remaining on the authorization. So we'll keep weighing those different options, but.
Nothing to read into it there.
Thank you.
Thanks basket.
Your next question comes from Jason personnel with Cowen and company.
Hey, guys. 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.
Resulting in increasing bankruptcies.
Retail industry and 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.
Yeah, I'll take that we certainly have I mean, I think the that's been pretty well publicized some of the call at the mid some of these midsize carriers that went out of business and in the last quarter.
So we haven't seen as much of it from the small really small or you know is going to owner operators I'm not saying that didn't that doesn't exist on I do think that.
There's definitely more trucks parked on the sidelines and we've seen that like you said these bankruptcies that 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 so.
We've seen capacity coming out I do think it's coming out of the marketplace.
I couldn't tell you.
If weve reached the end of that's part of the cycle, yet I would probably suspect not and but it hasn't affected our ability to source and execute our customers in it and obviously in that when you look at the rates it hasn't dramatically impacted change in rates.
Got it appreciate the color there.
Yes, just for a follow up here.
Wanted to ask a little bit about.
Gross margins sports 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 in and also some of the the technology initiatives that you guys are taking.
What do you think this kind of means for margins.
In the longer term.
Yes, I think that competition and technology and productivity can always have a longer term.
Effect on margins you still are gonna have the 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.
I think there could be some margin compression, but at the same time I think we and other other large brokers that are utilizing technology and data science will offset that with increased productivity.
Got it appreciate the time guys. Thank you.
Thank you.
Your next question comes from Stephanie Benjamin with Suntrust.
Hi, good afternoon.
Hello.
I wanted to touch a little bit on just the spot market volume in the volumes in the environment. There I'm just.
Just anything that you're hearing or seeing where that might kind of turned the other way or is this something where your expectations really not going to see that turn until 2020, obviously the the growth in their contractual business is really strong and kind of offsetting a lot of that so just kind of wanting to hear your outlook for that kind of spot market freight and then I just have a.
Quick follow up.
Sure Stephanie the.
Yes, again, when you look forward lot of times. The turns are predicted very well in advance number one so.
I'll give it that caveat I think that I'd say, it's it seems like the spot business has been it's down but it's been more on the steady when you look at sequentially and and so a lot of times lot of the the big percentage declines that we disclose and are talking about have more to do with 2018 or it's certainly a lot to do.
2018, and so I think that you know the comparable will get easier in Q4.
And then and then we'll get into next year and that'll that'll be the case. So I think that if you looked at it sequentially, it's hard to pick a catalyst around the corner. There's a few things like I mentioned earlier, you know the drug testing, maybe the LTV rules stepping up a notch.
Maybe maybe that something with the economy that tariffs lists or there's something 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 as the.
Spring and summer seasons kind of kind of hit.
Great No 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 is really decelerated throughout the year is that you know anything.
Moving to speak to what has changed throughout the year or is this reflection of just some of the weakness in the industrial economy any color you might add would be great. Thanks.
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 the LTL networks, the little more of a close network a bigger network more barriers to entry and there's a little more discipline on pricing that we see you know from the from the LTL carriers I think that's a factor.
Thats been prevalent throughout 2019 in and it's.
Yes to some extent the reason I think rates of kind of held in that 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 relatively steady.
All right well thanks, so much.
Thanks, Stephanie.
Your next question comes from Tom Wadewitz with Qbs.
Yeah. Good afternoon, I know you've talked a little bit about gross margin just I guess wanted to touch on that a little bit further kind of a multi quarter question on it.
How how much of your truckload now is contract and how much is spot roughly.
Roughly 55% contract.
Okay. So I mean, I guess the way I understand that the gross margin pressure develops and as part of the cycle is that the contract rates come down you've kind of.
Even fairly clear, saying, you think spot pricing or cost capacity is kind of bottomed.
Has that contract business price down a fair bit.
Where do you think that there's kind of risk. The next couple of quarters pricing on that 55%.
Comes down a bit further and you just kind of see what I think of is the natural cycle of a couple of quarters of that gross margin pressure.
Probably yes, and yes, you know, it's definitely come down a bit I mean, there's a lot of the contract business and we call it contract and it pretty assumes it's one year contracts is not always one year contracts there could be a trump has a pretty large amount of many 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.
You know kind of all on this annual renewable cycle, that's not the case, but I'm sorry periodically it comes down and kind of adjust probably to more current rates.
So to the extent that there are so you know the could be some declines in there as you know I think it's just going to depend on.
What the market does throughout these bit throughout the bid cycles and the majority of the beds you know kind of.
Some of the bigger ones starts now so to speak and might be the majority of its going to begin to wrap by April , but you've got constant rebidding happening things of that nature.
But I do think the answer is yes, you know the contract prices have come down a little bit for us and.
And there's some and there's some chance that they'll come down further and.
But it'll depend on market conditions.
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 for seeing.
The benefits and sometimes you see multiple.
Allergies, working together to drive cost savings, but if we look at 2020.
Are there some productivity driver is that.
Expect to realize whether its technology or other.
Yeah, I'd say, we're seeing some benefits right now and we're on a pretty.
Regular an aggressive pattern to roll out new functionality each quarter. So.
I think we're at a place than our roadmap where.
The benefits will be coming on each quarter as we go forward.
Are those benefits or productivity like sales rapport procurement of capacity or what kind of.
Back office.
Efficiencies come through.
They are both.
In some cases, it's back office processing and less touches.
In other cases, its 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.
One of their place I'd add to that.
It's just the opportunity to.
Good to look at more freight than we might have otherwise. So so freight that we might not have bid on or foreseen in the past or capacity that we may not have necessarily known where it was a technology.
Gives us visibility to more on both sides and one final area is that a lot of our.
Technology, and our data science has the ability to optimize gross margins. So.
Whereas you know the margins certainly.
Expanding and track with market conditions, we want to be able to maximize them and whatever market condition were in and some of our technology and data sciences aim to doing that.
Okay, great Yeah. It makes sense. Thank you for the time.
Q.
Your next question comes from Bruce Chan with Stifel.
That's good afternoon.
So I just wanted to ask a quick one on your comment about.
Evans industry growth numbers since since you brought them up.
We certainly respect the work maybe does I think he does a great job, but there 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.
I think armstrong's numbers include a pretty broad swath of non asset based logistics. So I think one caveat is it doesn't necessarily pertain purely to brokerage.
But I think on the other handed it does and it has depicted a longer term trend of shippers, you know, giving more and more business too.
Non asset transportation providers, and we've seen that with the willingness of shippers to use.
Transportation company that doesn't own any trucks and.
The willingness to include brokers into routing guide and consider us a quote carrier so I.
I do think that that trend this favorable and you know as I tried to make the point in my prepared remarks, you know.
Despite competition and all the things that we talk about worry about I think the market continues to get bigger and and it's an opportunity.
Okay. No. That's really helpful and you mentioned routing guides wonder if you can just make a quick comment on where you see routing guide depth right now is it.
It is still fairly balanced are you starting to see.
That that depth, increasing a little bits.
How are things trending sequentially.
I would say same story really as last quarter, you know that the the number one position is.
As in the as is typically taking the freight and so routing guides.
Much of a guide today, they're kind of a you know tender except 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 but.
I would say if you want to move the freight and the contractual way.
This isn't the this is not a well kept secret it's not a secret that being the number one position is probably the place to be.
So are we still seeing the same competitiveness.
On the contract side of things as we were last quarter has that come down a little bit.
I'd say.
Yes, but you know that theres not it's a lot of the processes are 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 outside so I don't think much has changed in that and that in a way I think about that I think it's we're going to go into the season over the course of the next three to six pick up closer to six months and and we'll sell shakes out, but there hasn't been a lot of.
New information relative to the competitiveness.
Okay. That's fair and then helpful. And then just one final question here you talked about the M&A pipeline I know that.
For the past call it year year, and a half or so we've seen a little bit more.
Financial activity than we have on the strategic front on the M&A side, you know as valuations start to normalize a little bit and as you go through some of these bid process either diligence processes have you started to see more activity from strategic players out there.
Well I think was 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 to are starting to come in and.
Of course seller expectations have to catch up with that.
So I.
I think thats the market that we're in and it should be a better market for conducting M&A in the coming quarters.
Okay, great. Thanks, what appreciate the answers.
Thank you experts.
Your next question comes from David Campbell, Thompson, Davis and company.
Yes, thanks very much for taking my question I'm really couldn't he's I don't follow all the trucking companies that but I'm surprised that.
It hasn't been more.
Improvement in rates.
And it's all the bankruptcy and make and there seems like there's a lot.
Asset based companies that have.
Gone down a bit drawn down.
And that should be a reduction in therefore, a reduction in industry capacity.
That would tend to favor your gross margins.
Well, David I think.
If you look at the tight market conditions in 2018.
You know 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, a 19 and I don't think that the the bankruptcies that we've seen in the failures that we've seen thus far have been enough to offset that additional capacity. It was added.
But it's a start right.
Well.
Uh huh.
There aren't any good.
Nobody has any good numbers on the.
Capacity as the industry or do they I mean.
In other words when when some of these trucks go out a business.
It's possible they go back in business.
One way or another is that a possibility.
Yes. It is I think that you know those those trucks would go back on the market and if another trucking company, we're looking to buy trucks, they could buy those trucks, but oh, it's questionable in this market if anybody's buying any trucks right now.
Yeah.
There's no question I think in a lot of these bigger bigger companies you know those drivers maybe it might be owner operators might on their own equipment and a higher onto a new companies. So it's not a one to one relationship when you see some of these.
Bankruptcies too to think that all that capacity disappears right away.
Right right that isn't in the long run.
The long run your there those are probably the pressure on your gross margins because of the increased automation in the business is that the way look at it.
Well I think first of all you got the.
Two cycles at play here right, you've got the macro economic cycle, which you know right now feels to us like it's kind of in a whole home.
Let us and we're not in a recession and it's not booming and we're kinda limping along.
So with a lackluster GDP and then you have to overlay on that cycle the the cycle of.
Capacity supply and demand and you know what's the balance between that and we know in in 18, we had tight supply in 19, we had loose supply and so I think theres a couple of things that happen one or the bankruptcies that you mentioned, which can take some capacity out of the marketplace. The other thing as you know all these all these trucks.
Are driving everyday of the weak and they're putting on miles and at some point those trucks get retired and you know 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.
Five capacity will normalize and be rationalize to the level of demand and that will stabilize rates until we have the next catalysts, which you know tightens the market up again and would probably presumably son San prices back up and create a lot more spot freight.
As for the technology, you know 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.
The answer is lagging here gross margins would be.
A lot worse were it not free or investments in technology.
That's right that's a that's really that's.
That's really what she has done so successfully.
Thank you very much.
If you look over time over the last several years you know we've we've done a good job of maintaining our margins.
Over all market conditions.
Right.
Right.
Well, thank you very much.
Thanks, David.
Your next question comes from Jeff Kauffman <unk> capital markets.
Thank you very much hi, guys.
Well first off congratulations tough environment out there I want to follow up on a question that Bascome asked earlier.
A lot of carriers had been telling us that things are better yet the the realized rates are down and they don't have enough freight in the morning or the asset base 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 what 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.
I'm going to vote less bad.
On the on that question did you know the year over year comps.
Getting a little easier on a volume in a rate perspective as time goes on you know there 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 what I mentioned it in the remarks, you kind of a little more of a steady look sequentially.
Yes.
Modest signs of kind of seeing some seasonality in the weeks into the numbers.
But nothing to ride home about and when I talk about the seasonality I'm kind of referring to when we in July of 18 call. It through May of of 19, you had a pretty steady decline of rates had pretty steady volume declines and so in that environment. You know the seasonality was in perceptible Bill.
Does that market with softening.
Offsetting the natural seasonality in and.
It's hard to call. It if the markets like quoted balance or not it's still pretty soft, but as we said look revenue per load couple of these other key metrics haven't moved around a ton over the last four or five months. So it feels a little more steady a little less bad using your words, and but you know kind of steady at the.
Same time, so that's that's where we're at.
I would actually take your comments on shippers racing to rebid freight as a positive right because they would do that.
I will just kind of get worse from here.
But let me ask a different kind of customer question.
A lot of.
Other companies that we follow given all the uncertainty out there whether its trade uncertainty.
Sit on certainty.
Or getting into a political election year uncertainty.
We've seen some slowdown in decisions to kind of Greenlit greenlight larger scale projects.
It sounds like you're seeing in just the opposite right. There is more business being bid there is more things going on but are you seeing any kind of slowed down may be more people are trying to rebid and make those decisions, but is there any change in the the length of sales cycle with customers or how long, it's taking to get things done.
That's a really interesting question I think you know when you we start talking about the Rebidding and those cycles you know we're dealing with typically.
Larger companies us more steady business I'd say, it's not as project oriented in the majority of that business is kind of.
It is more steady and.
I don't know predictable right word, but let's let's say more predictable and and so those are the bids that were talking about but I think your points well taken when I when I look at like a 50, you know about 50% of our brokerage businesses small to mid market companies. So that's one of the things that might be a little different about echo than some of the other players in the marketplace because of our.
Multi modal offering and I do think that.
In a lot of these small to medium sized businesses. Some of those economic factors that you talked about or are in fact relevant you know the trade war or the uncertainty or the unwillingness to commit capital to a growth strategy or a project.
Does create a little bit of a slowdown in that SMB side of the market. So that's the place I've seen it a little bit more hard to get your arms around the magnitude of it but I think that I think it is a factor.
All right well, thank you for your candor and.
I know, it's a tough environment, but it does look like you've got some encouraging green shoots out there so let's let's see what happens as we close the year. Thank you very much.
Thank you.
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.
All right well I'd just like the thank everybody for joining us today and as pleasure to share our results with you in.
Proud of the team at Echo to execute well and then otherwise tough market and we look forward to talking to you next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may now disconnect.