Q1 2020 Earnings Call
Well, ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Echo Global Logistics first quarter 2020 earnings call. At this time all participants are in the listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.
Please be advised of today's conference is being recorded if you require any further assistance. Please press star zero.
Now, let's say in the conference over to your host Mr., how salary Chief Financial Officer. Please go ahead Sir.
Thank you. Thank you for joining us today to discuss our first quarter 2020 earnings. We appreciate your patience there were a bunch of participants waiting to get connected to the calls or wanted to give that you extra minutes I.
Hosting the call or Doug Waggoner, Chairman of the Board and Chief Executive Officer, Dave Mckay, President and Chief operating Officer, and Kyle Sauers, Chief Financial Officer.
We posted presentation Pie chart website that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site I called Dotcom. During the course of this call management, we're making forward looking statements based on our best view of the business as we see it today or 60 filings contain additional information about factors that could cause actual results to differ from managed.
Its expectations.
Well 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 measures contained in the press release, we issued earlier today in the form 8-K, we filed earlier today and with that I'm pleased to turn the call over a dog Wagner.
Thanks, and good afternoon, everyone I appreciate all your joining us today, and we got a lot to cover.
As everyone knows the Corona virus outbreak led to a lot of uncertainty right now.
We're gonna do our best to give our current views of how the situation may play out.
And in the near term.
I want to think by so by thanking our People's our collective response to this has been overwhelmingly.
We've talked for years about what a difference our culture makes in terms of the dedication of our team to put clients and carriers first.
It's times like this when you can really see the different shine through.
Fortunately, we were prepared to transition to <unk> to remote working we're able to execute it work from home capability in short order for three primary reasons number one.
Tire business runs on a common technology platform.
All of our systems, including core applications phones, and messaging or designed to enable our teams to seamlessly worked together for many location at any time.
They're all securely assessable over the web and we have robust reporting and our people are cross trained this all makes a huge difference.
Number two our infrastructure teams have been constantly reinvesting improving and upgrading our platform when we hit the trigger to initiate our business continuity plans our team and our systems were ready.
Number three or people have deep relationships, both internally and externally. These relationships have been built over years of working together.
In times of prices. These relationships are the backbone of our ability to get the job done.
During February we began to ready ourselves to execute our business continuity plans, enabling our entire workforce to work from home.
On March 20, we officially closed access to our Chicago.
Headquarters and shortly thereafter, the rest of our offices across the country.
Since that time, the vast majority of our workforce has been working from home.
All of our systems remain the operational and our people are productive inefficient.
At times like this it's important to remember that we provide an essential service for our shippers on our carriers.
We take that responsibility seriously.
Our managed transportation clients rely on us for 100% of their transportation needs and I'm proud of how we serve them through this initial phase we received.
That's a tremendous feedback from our clients, which has been great to hear.
On the brokerage side, our clients and carriers depend on us every day.
Our people are really stepped up to serve our volumes to remain remarkably strong during this time.
As we go through our prepared remarks today, we will highlight current trends our balance sheet strength and our outlook moving forward, but first let me share our first quarter results as highlighted on slide three.
Total revenue was 551 million.
Representing a 2.4% increase from last year.
Net revenue was 89.9 million, representing a 9% decrease from last year.
Adjusted EBITDA was 14.9 million.
Representing a 31% decrease from prior year.
Non-GAAP fully diluted EPS was 19 cents compared to 38 cents in a year ago period.
Given the uncertainty of the current environment and the likelihood that the U.S. will experience a period of of lower shipping volumes due to the financial hardship and impact on many businesses, we've taken steps to reduce our operating costs.
While continuing to invest in our future.
Our cost reductions to date I mean included an overall reduction of all discretionary general and administrative spending.
The deferral of all new hire classes through May.
And a reduction in our workforce most of which we hope will be temporary.
Echo has always been a growth oriented business.
Strategy is to take market share and grow.
Our people are fundamental to that strategy and for those reasons. It was a difficult decisions taken steps to reduce our workforce. However, we also believe reducing operating costs is responsible choice as volumes moderate and while overall, we're pleased with shipping volumes there had been pockets where declines are evident.
We'll continue to monitor and evaluate further actions that might be required to ensure that we were in a great position to both recover and thrive when the market begins to rebound.
Now I'd like to turn it over to Dave to go into more detail on our performance.
Thanks, Doug.
I also want to start by acknowledging thanking our entire team for the amazing job done adapting to the car situation.
One carrier sales teams operational personnel and other support functions have done an incredible job.
Our technology professionals on the capability they have deployed over the years have made all of us incredibly productive while working remote it's about total team effort. So I want to thank everyone.
If you'll turn to slide four I'll take you through our topline performance by mode.
Truckload revenue was 368 million in Q1.
Which was an increase of 4% over the prior year.
This increase was driven by 10% increase in volume and offset by a 6% decrease in revenue.
Pricing.
Consistent with the trends that we've been recently reported on our contract primary award volume.
The main driver of truck load growth in fact, our wallboard volume was up 27% year over year, resulting in an overall increase in contract mix.
52% a year ago to 59% in Q1 20 Twond.
Spot business was down 4% in Q1 spot remains soft due the first 10 weeks of before.
We did see a spike in spot volume in the last couple of weeks of March.
Which was on the shutdown sent their initial shock waves through the economy.
This increase was driven by a surge in demand on consumables and medical supplies, but was short lived.
Over the past few quarters or truckload volume trends.
Been improving and despite this crisis that can that trend continued in the current work.
As a reminder, truckload volume was down 2% year over year in Q3, 2019 improved two up 1% in Q4 2019.
And significantly improved in Q1 2020 as it increased by 10%.
We've seen the demand for consumable products on a special items stabilize in April and the spot market has again softened.
The late March surge did disrupt it.
Tighten capacity, we've seen that subside as well despite the difficult hardships. This crisis has put on truck drivers capacity has been relatively loose throughout April.
Truckload volume increases have stepped back and are down by about 4% on a year over year basis. During the first 13 business days in April.
Turning to LTL, we delivered 158 million in revenue in Q1.
As a 2% increase over the prior year.
This increase was driven by higher volume in our brokerage business for the quarter. Our volume was up 3%. Despite this gain we've experienced in more significant decline in LTL volume due to the shutdowns that commenced in mid March.
Our LTL volume has declined by 24% in April small to midsize companies seem to have been hit hardest an initial phase this an economic downturn.
Turning to slide five or transactional revenue of 428 million increased by 4% due to the increase in truckload volume, primarily resulting from the continued success in securing additional contract business and the growth in the LTL brokerage.
Our productivity again improved in Q1.
As we discussed in our call last quarter, our shipments per sales rep to eat were up 5% year over year in Q4 2019.
We approved on that metric in the most recent boarded a 19% increase in shipments per sales ft.
Many of our automation initiatives are enabling this improvement.
We had new sales glasses lined up to started in March April and May but due to the outbreak we decided to defer those new classes until June. So before this all started we anticipated bringing in approximately 160, new client and carrier sales reps between March engine.
Our current plans or reduce that numbered around 60 to 80 new reps.
Given the state of the economy, we anticipate reduced attrition as we move through the year.
We will continue to evaluate our hiring plans as the year progresses and adjust as we think appropriate based on the speed of the recovery.
It's unlikely that will grow our overall sales head count in 2020, but instead continue to focus on driving productivity in those increases through technology advancements and adoption.
Our managed transportation revenue was 123 million in Q1, a decrease of 3% year over year.
This decline was impacted by a slowdown in the second half of March.
You know, we typically managed 100% of the freight for mass transportation customers. So their business has impacted.
We're going to feel that impact either positive or negative well many of our clients have experienced increased volume into this crisis more has seen decreases in volume.
Our managed transportation customer base is mostly small to midsize businesses and less than truckload is the more dominant mode. Among these clients.
And in transportation volume declined by 26% today in April and while this decline was widespread we did see a handful of businesses that were deemed.
To be not a central and hit more significantly.
We're hopeful that the vast majority of those impacted will bounce back when the economy begins to recover.
Another big driver that will lead to the growth in our managed transportation as new business wins.
This year has started off really strong in terms of clothes business as we've already signed $69 million any anticipated revenue.
Our pipeline remains strong our.
Our managed transportation teams have done a great job throughout this crisis.
As Doug said, our clients rely on us Neverland Gopher uninterrupted management of all of their transportation needs in both our people and technology proved to be invaluable during this.
Turning to slide six we generated 89.9 million a net revenue for the 9% decrease over the prior year. The decrease was primarily attributable to a decline in net revenue margin is there a margin of 16.3% was down 204 basis points.
Over the prior year.
The decline in margin is primarily due to the increase in award business in a softer spot market.
Up until mid March the freight markets were relatively balanced in truckload rates was fairly steady then the mortgage spiked up in the last two weeks of the core.
We saw a corresponding uptick in spot business as I said earlier, but at the same time most of those gross margin net revenue margin gains.
Offset by higher by prices.
In support of our contract business.
Our net revenue margin has improved in April due to the loosening the capacity and lower fuel costs.
In the midst of all this chaos you continue to invest in our future.
Been making excellent progress on our digital marketplace and we've had continued improvement in both the utilization and effectiveness of our solutions.
At the beginning of the quarter, we launched new features an echo driver.
Which enhanced our search capability and provided proactive mode suggestions for carriers. Those features that well received and have continued to drive increased echo drive usage and build offers for carriers and more bookings directly resulting from our online strategy.
I'd like to I'll turn it over to kind of review additional Q1 details and forward outlook.
Thanks, Dave.
On page seven of the slides, you'll find a summary of our key operating statement line items.
Commission expense was 27.2 million in the first quarter of 2020, decreasing 9% year over year Commission expense was 30.3% of net revenue compared to 30.4% quarter last year.
Non-GAAP gene expense was 47.8 million in the first quarter at 20, 21% from the year ago first quarter of 2019.
Depreciation expense was 7 million in the first quarter of 2020 up from 6.3 million a year ago.
Cash interest expense was 1.3 million during the first quarter 2020, compared to 1.4 million in a year ago period and that decrease is due to a lower amounts outstanding on the combination of our convertible debt HDL during the quarter.
Our non-GAAP effective income tax rate was 25% for the first quarter of 2020.
As Doug mentioned on GAAP fully diluted earnings per share.
Were 19 cents decreasing from 38 cents in the first quarter of last year.
The primary differences between our GAAP and non-GAAP fully diluted EPS in the first quarter 2020, or 2.8 million of amortization of intangibles from acquisitions 1.5 million of noncash interest expense and 4.6 million of stock compensation expense.
Slide eight contains cash flow and balance sheet data.
We ended the quarter with 39 million cash on hand, and 335 million of accounts receivable, which is the basis for our NPL borrowing base.
In the first quarter 2020, we had free cash flow of 4.6 million in operating cash flow of 9.7 million.
Capital expenditures were 5.1 million in the quarter compared to 6.4 million last year.
During the quarter, we repurchased approximately 490000 shares of our common stock for 9.4 million.
The repurchase activity was weighted towards the beginning of the quarter and we suspended repurchase activity in early March we also repurchased approximately $89 million of our convertible debt at just under par.
We've added slide nine to dive further into our liquidity position, we feel very good about our ability to manage through any sustained freight downturn, given our borrowing capabilities, but want to walk through that flexibility.
As I mentioned at the end of the quarter, we had 38.7 million of cash on hand, we also had an available borrowing capacity on our ABL facility up 257.7 million.
That borrowing capacity is calculated as 85% of our eligible accounts receivable at the ended the quarter, we had borrowings of $100 million on the a bill primarily as a result of the convertible debt repurchases that we've executed recently.
So this leaves 157.7 million of remaining borrowing capacity under our ABL with the ended the quarter.
As we discussed on our last call we intend to use this available capacity and our cash on hand to pay off the remaining 69.2 million of convertible debt, which matures at the end of this month.
Considering our end of Q1 borrowing base. This leaves us with net liquidity of 127.2 billion.
Our ABL facility has a maximum barrel borrowing capacity up to 350 million depending on the borrowing base and carries interest at LIBOR plus 125, when our borrowings are less than half of our a bit available borrowing base in LIBOR plus 150, when we're over 50%.
We expect to be borrowing at LIBOR plus 150, after we pay off the convertible debt finally, the ABL facility matures in three and a half years.
This situation has been challenging for many of our shippers. Fortunately, we have strong relationships and our shippers understand that.
For us to be an excellent service provider, we need to be able to pay our people and our carrier partners in a timely fashion. So while there were certainly some customers and simply can't pay their bills as quickly or in some cases at all it's a small minority. So we have only seen a small movement in our DSO in the last month.
The two things that are worth understanding persons that I mentioned before as our receivables balance grows so does our borrowing base and RBL, giving us more flexibility and second as we've highlighted in the past we carry credit insurance on the vast majority of our accounts receivable.
Which provides a nice backstop for any non paying customers.
Now I want to talk about guidance as we referenced in our press release will be suspending our full year guidance due to the uncertainties surrounding cobot 19.
Well, we do want to give you as much information as we can't about the upcoming second quarter and trends were seen so far.
Through the first couple of weeks of April.
Our per day revenue in April was down 12%.
Volumes and LTL, we can more than truck load and as Dave mentioned earlier, we've seen truckload volumes down, 4% and LTL volumes down 24%.
These year over year comparisons are likely modestly impacted by a good fright Friday holiday that was included in this year's first 13 business days, but isn't in last year's comparable.
We have seen improved net revenue margins they were 17.4% so far in April.
Lower cost of capacity and lower fuel costs had been the key drivers, but some of that impact has been offset by a shift in mode mix towards truckload.
Now for guidance on Q2, we expect revenue of 450 to 500 million a range of down tend to 19%.
This guidance anticipates that freight volume has bottomed out and we anticipate a modest recovery in the back half for the quarter due to seasonality impacts and business is slowly ramping back up.
We expect commission expense to be between 29.75, and 30.25% of our net revenue.
Gionee costs are expected to be between 43, and a half from 46 and a half million.
3% at the midpoint compared to last year and down 6% sequentially.
Moved quickly to reduce costs in this environment in a few ways as highlighted earlier, we've deferred new hire classes, we ever move some personnel from the business to rightsize operations in line with business activities, we've slowed other discretionary investments and new significantly.
We have significantly less spend in travel and client visits.
Anticipate lower incentive compensation across the board.
We also expect depreciation of about 7 million cash interest of approximately 1.4 million a tax rate approximately 25%.
And share count of approximately 26.2 million and then excluded from our non-GAAP calculations in the second quarter, we expect to amortization of approximately 2.8 million noncash interest of about 300000 and stock compensation expense of about 2.3 million.
We will look to provide full year guidance at some point in the future the economic recovery comes into full of focus.
Now I'll turn it back over to Doug.
Thanks Kyle.
Well this was another strong quarter for echo despite the onset of the krona virus in March and the subsequent activation of our business continuity plan.
Having 100% of our employees working from home did not slow us down we were able to continue providing the high levels of service that our clients some carriers have grown accustomed to.
We do know from past market disruptions that its times like these when we further cement our shipper in carrier loyalties and the depth of those relationships.
We've also been quite successful landing new managed transportation deals as well as winning new contractual lanes in routing guides.
So not only are we moving the freight and going after market share, but we have not missed a beat on our technology and our data science Roadmaps.
We're currently in a mode of continuous technology releases, those releases are bringing new marketplace capabilities as well as internal efficiencies.
We continue to be interested in M&A and believed that the future will yield some good opportunities.
We continue to have an active pipeline and are in discussions with several parties.
But the current environment causes to be very thoughtful in terms of valuation liquidity and financing and we would expect to have more clarity on M&A in the coming quarters.
Looking forward, it's no surprise that we have difficulty projecting the depth and duration of a likely recession.
It is obviously hard to know at this moment in time, what the recovery will look like.
For our own planning purposes, we assume that will be an extended U shaped recovery and we believe that we're now at the bottom.
But what I do know for sure is that the resiliency of the Echo model will allow us to weather the storm by keeping our cost under control.
It's amazing gross margins and optimizing profitability.
We have strong balance sheet, and we will emerge from this time as a stronger company supported by our loyal clients and carriers.
And finally I want to thank all the folks that echo for tremendous execution during a challenging environment I can genuinely say that the current adversity is really brought us all together with a closeness in a sense of purpose.
And I am sincerely an obvious free to core that I've witnessed from the echo team at all levels of the organization.
That concludes our prepared remarks and at this time, we'd like to open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Giant question past the pankey, please standby, while we compile the kewaunee roster.
My first question comes from Jack Atkins with Stephens. Please go ahead.
Hey, guys. Good afternoon hope everybody is doing well and.
Congratulations on a on a good quarter here all things considered.
Thanks Jack.
So you know Doug I guess, if I could start with one for you and Dave I mean can you can you.
Kinda talk about it I hate to ask you to highlight intra month trends, but I think the market is so dynamic I think there's just a lot of questions around sort of what's happening and where you know.
What's the word that were what's the trajectory of thing what are the what the trajectory would you like today. So is there a way to kind of think about.
Seeing with in April are you seeing things deteriorate further when we think about those those month today trend that you guys reported or do you feel like things have kind of stabilize now the customers that were going to shut down we're going to slow down activity they've done that already just try to get a feel for the trajectory of of business.
Brands within April do you feel like things have stabilized.
Sure Jet Jack this is Dave.
I'll give you a little color on that obviously were.
This is unprecedented pretty early in the though so so it's it's.
It's new but I would say that we saw a.
A pretty steep decline on the LTL side of our business in March and we've seen that stabilize in April and actually recover a little bit again, Kyle mentioned the difference on good Friday in business days not.
Volume trends indicate LTL for now has had a let's call. It phase hit hit the bottom so to speak it's in the volumes seems to be flat to recovering a touch in April on the truckload side.
It was a little a little different dynamic because we had a bit of a spike late March as I mentioned earlier.
Lot of restocking and I think manufacturers and distributors, maybe trying to get product closer to customers et cetera, and then that volume did also come down pretty steep late in the first couple of weeks in April.
On that but we haven't quite seen as much I wouldn't say I've seen it bounced back and it's actually trending a touch down still but not a dramatic rate. So I think it.
It's relatively stable the declines have stabilized we see a little bounce back on the LTL side. So.
Hopefully that's helpful in a little color to what we've seen.
It definitely as Dave. Thank you. Thank you for that and I guess kind of pivoting to the cost side for a moment you guys.
I think did a great job sort of laying out a lot of the different levers that your but you're pulling your to manage manage expenses and this you know unprecedented.
Situation, but is there a way to kind of help us frame up.
Between the incentive compensation.
You know it and the lower levels of.
Of hiring at some of the other cost leverage you're pulling you know what do you think that can do to sort of help promote from a cost perspective.
You know here in 2020.
Just some just some I guess goalpost would be helpful.
Yeah, Jack I think.
It's challenging to give too much there for the year, because we we already been guiding for the back half of the year for total costs or or revenue I think there's a lot of uncertainty I think we we do have a lot of flexibility in the model as you know.
Compensations, a big part of of.
The model throughout the company and.
So that that could have quite a bit of variability we feel like we're moving very quickly on rightsizing. The organization to match match the business levels, we're very hopeful that.
And the not too distant future the people that have been furloughed from from ACA, we'll be back.
Joining us and helping to support additional volumes from the customers but.
But I think it'd be hard to project what that looks like.
Our next quarter or the other quarter.
I think it's.
Finally, the overall headcount costs and labor costs, including incentive compensation are going to be the the lions share of the the cost drivers for us.
Okay understood, it's going to be sort of topline dependent than it sounds like which makes makes sense, but last question and I'll turn it over.
David you talked about obviously, it's a very challenging trends in the old LTL market here over the last you know.
Month month and a half.
Are you seeing any.
Incremental.
Pricing competition sort of arise in the LTL industry are you seeing any of that begin to develop over the last several weeks given what tonnage is doing.
I think our care our carriers being more competitive tried to what your business I guess as well I guess my question I got Jack.
I would say not really no we've.
Talked a lot of carriers over the last.
Few weeks, obviously and.
And I think that.
You know that experience I think no.
Similar volume trends that we have in general.
And but there's not been a lot of pricing changes and so I can't forecast you know what will happen over the next six months say.
And I think there's a lot of that might depend on the recovery, but it also might depend on the operating costs that everyone incurring in this environment moving freight dealing with the shutdown and potential terminal disruptions, possibly due to staffing issues or illnesses. So theres a lot of moving part, but I haven't.
I wouldn't say that we've seen anything significant in terms of.
In terms of pricing changes.
Today.
Okay. That's that's helpful. Thanks again for the time guys.
Thanks Jack.
Our next question comes from Bascome majors with Susquehanna. Please go ahead.
Yes, thanks for taking my questions here I was hoping we could follow up a bit on the LTL side given that.
Degree of incremental weakness, you're seeking you're seeing him demand front right now.
Can you help us understand better how that business in particular, the gross margin in flex through a down cycle given that we really just haven't seen.
Recessionary like outcome and a large non asset LTL.
At this point as a public company.
Yes.
I'll just leave it at that.
Well I think on the.
On the volume side.
Our LTL businesses both.
Brokerage and managed transportation.
And.
And maybe a little little steeper decline on the managed transportation side, what's interesting about that is that for echo, we manage 100% of our clients transportation. So there's no opportunity to gain share per se. If a client has to shut down or reduce operations. So we see we kind of feel 100%.
On that volume decline in that area. It doesn't have any impact on gross margin our net revenue margin.
Actually in either case in terms of the volumes I would say, but on the brokerage side the other piece and the puzzle is.
That the majority of our customers than our LTL shippers on our broker insiders are small to midsize businesses and so again.
Good news for Echo is that the majority of our customer base is then I think.
Its industrial and nature manufacturing distribution wholesale trade.
Obviously, there's been an impact on mentioned, we mentioned that 24% decline.
And it's small and midsize companies, so, but they're not there's not an exposure in what I would say some of the heavier head industries whether that be.
Obviously hospitality tourism.
You know maybe auto.
And other other.
Retail apparel, so many other industries that day about harder hit or not core industries nacco deals like.
I think it stabilize I don't think it has a significant impact on our margins in our LTL on the LTL side of our business just might have as Kyle mentioned earlier overall, a little bit of a mix issue with LTL declines greater we're talking to path.
Well, it's lower dollars per shipment, but tend to be higher margins and so they can impact our overall net revenue margins that theres, a if there's a mix change in there maybe a little bit of we've had a pretty steady mix.
Element here for a while but this could cause a little bit more mix shift I'd say on further in the near term.
So it sounds like.
The indication is that we don't see that the typical sometimes significant gross margin flexibility in LTL and a weaker market that we might see MTO.
Yes.
It's not as volatile for sure.
And I would not expect to see any kind of any significant volatility there.
No not but order of magnitude like you see it sometimes in truckload.
And Kyle forgive me if I Miss This did you did you did you discuss the Capex budget at that has moved at all thanks.
So we are we didnt actually talk about it.
So you know what most of our Capex relates to technology.
Yes, good two thirds or a little more is our internally developed software.
I think.
Doug highlighted we've not pull back on the investments we are waking in in technology and data science, we're moving forward with all of our technology Roadmaps, we have found some areas.
To pull back a little bit on projects or initiatives that was or slow them down.
But more on the.
Refreshing hardware side said, but that's really only reducing the capex by about 10% or two or $3 million.
So we're kind of.
Expecting something in the call. It 23, 24 $25 million range for the year something like that.
Thank you.
Thank you. Our next question will come from Stephanie Benjamin with Suntrust. Please go ahead.
Hi, good afternoon.
Good afternoon.
I was hoping you could discuss a little bit about the sequential volume trends actually during the first quarter on that believe you gave in the last call that truckload volumes were up about 7%. So does seem that there was some improvement was that largely due to that big spike. They saw the second half the March and then.
To your point about kind of this the guidance assuming that we are at the bottom from a volume standpoint, you know what are some of the drivers he thinks.
That you should enable that kind of by improvement as we move forward out at less.
Oh, okay.
Ill cover I'll talk a little bit about.
In terms of that.
Monthly progression on the on the truckload side.
We did see improvement in volume per day in throughout the quarter. It was.
Roughly 7% in January and February and came up to.
Just over 11% in March and I think the core driver of the volume improvement that we saw has a lot to do with the success that we've been having in the contract into the RFP season in the RFP cycle, we've been winning greater share more bit more beds and we've seen.
You know more of that business continuing to come online. So trends were very favorable in terms of our ability to grow the business. Prior to this crisis and I think that we had a lot of momentum and we still see that we're still seeing awards come across and we still feel really good about that and that was.
That was big driver and I think that.
And then you had a little bit of the restocking surge potentially in the last week or two we saw like I mentioned in his prepared remarks.
Some additional spot business that came in March that also help.
Helped those numbers and then the second part of your question was what we could you repeat the second part of that question I think Doug will pick that up.
Sure.
Thank you gave some commentary just about you know we think we're kind of at the bottom of the impact of this pandemic hopefully.
But all right.
And with the guidance so kind of as you look forward you know what gives you.
Confidence or you know is bullish in terms of volumes improving from here.
Yeah, well I mean, that's the some an assumption that we made in our planning as we pointed out in our prepared remarks, and it's based on the fact that the.
The Swift downward trend that we saw has subsided and flattened out we're seeing as Dave mentioned, the small rebound in LTL.
All of our active shippers are continuing to ship and.
We're not getting any news from them that they see it another cliff coming.
And then as we think about you know.
What appears to be a pretty strong effort to get companies back opened up again and back to work, we think that that can only help volumes and it's not going to detract from volume. So like I said, it's in a bit of an assumption on our part, but when we put all those pieces together, that's what we come up with.
They maybe this is Kyle I'll, just add to that a little bit that.
When you think about our range of 450 to 500 million for the second quarter.
Topline the midpoint of that is down about 14% year over year, and we've said that through the first 13 days of the quarter were only down 12% and that includes good Friday, so arguably probably down even a little less than that so.
Well, we're thinking about airplane and in our ranges. It just assumed some modest seasonal improvement and freight volumes and in addition to what dougs highlighting that conversations we're having with customers and what we're seeing.
Got it and that's very helpful. And then can you remind us.
From a housekeeping standpoint, what the Gen natural seasonality is from net revenue margin from one Q2, Q and kind of how that's playing out so far I know you gave an update already in its probably a little early to tell but any additional color there would be great.
Yeah, I mean, you know.
We've seen so many different cycles over the past four or five years that.
I don't know what the normal as but I would say that you know prior to this crisis going into Q2, you know we would have we would have weve typically seen increased volume.
Primarily on the truckload side going across LTL too from a seasonal perspective, if you think sequentially.
That is driven from you know more business activity. Obviously and then also just the summer season that drives increased beverage consumption et cetera. So you get you get it you get more volume coming into Q2.
We also come out of an award cycle in depending on the economic climate, we were in a pretty balanced freight market and an imbalance freight market that steady we would expect gross margin compression modest.
Intentionally coming into Q2, because you've got more award business coming online and.
You know, there's it's competitive and rates aren't moving around a lot and so there's not as much disruption. So that would have been probably the you know unlikely scenario before this all happen and then now this is all happened I think the volume.
Options are up in the air a little bit, but we've seen it steady as both Kyle and Doug commented on so we may see a little bit of volume resurgence.
Depending on how you think this recession in this.
Connie will play out, but a little bit of resurgence with the change of seasons.
Naturally occur more business is coming online and there's been a lot of government support pretty small and midsize businesses. So there's some things too.
It could be.
Look too.
And then I think on me capacity side in the margin side.
Pretty consistent margins on the LTL side potentially some expansion on the truckload side depending on.
The cost of capacity is coming down.
Doug and Kyle and often highlighted the cyclical nature of the business that we're in and often times.
You know carrying costs move a little faster than shipper cost and so we'll just have to see how that plays out as we move forward throughout the quarter, but I would not sitting here today would not expect to see compression like out on a on the margins I'd like I would have maybe before this crisis.
Great and I'll leave it that thanks.
Thank you. Our next question comes from David Campbell with Thompson Davis from Cowen. Please go ahead.
Yes, Thanks for taking my question then.
Thanks for having a good quarter.
In a difficult environment.
You know anyone could expect you to do any better than that.
I'm not sure that's their living on a different planet.
But here in are here on Earth, you did a great job.
Thanks, David.
Hi, I'm surprised that you can't estimate.
Floris.
DNA for for 2020.
Some sort of range.
That seems to be.
Okay, that's an area that you're focused on controlling costs.
I'm, sorry surprise, you can't give us access.
Estimates.
Based upon your own.
You know internal assumptions on revenues.
Yes, David I appreciate that.
And we are saying I think that the challenges without giving.
Revenue guidance for the back half of the year it.
It's harder to estimate.
What we would expect our staffing plans to be to support a certain level of business what incentive compensation.
Look like but maybe it let me give you a couple of things just stood.
To try to help you think about it.
We already talked about.
The midpoint of our Q2 DNA is 45 million.
So that's down sequentially by close to $3 million, some and we talked about that being.
Head count.
Changes not as much hiring.
Lower anticipated incentive comp production and travel things like that.
And so if if you made an assumption that Q3 wasn't going to look any different than Q2, I'm not I'm not telling you. That's our expectation and we do think that things are going to be looking better, but I think our costs would look similar as they do in Q2.
In Q3, if the business was operating similar.
So I guess that we're hopeful that volumes start to recover.
Bringing back most of it's not all of those furloughed employees. So we'd see costs move up in Q3, if that was happening.
And then I think Q4's, just a little too far out given all the uncertainty.
To be giving too much more information at this point.
Yeah right. Okay. It's really it's really it's really based on the fact that you're not giving us a revenue estimates for the year.
That.
Certainly looks like things should can't get any worse on the LTL main 24% down in April.
Is it is a quite a change from the first quarter.
And he said, it's mostly is small midsize customers.
That's doing that and that that delayed.
Retailers going into businesses that you had a big factor.
I think it's just maybe like they're not going out of business, but just the they're not in business.
Maybe temporarily not in business.
As a good way to put right, but the other the and I do think you were actually we are optimistic on the second half we mentioned in the prepared remarks that we closed an unprecedented amount of new business in the in the first quarter going through through actually hit the data this call $69 million managed transportation, because a lot has LTL as well and so.
And that business is expected to come online.
In the back half of Q2 in early in Q3, some of those accounts, where we don't have project plans on yet so I can't be real specific but I do think that's also encouraging in terms of the LTL side in providing potential upward trend as we move to throughout the year from where we're at today.
And my last question is is there any M&A business.
You know as I've read about some truckers going out of business or.
Good morning bankruptcy.
There should be some small and midsize trucking companies that would be available at a decent price.
Im surprised that.
You have found any added and Andy do I have something wrong in that assumption.
There as well, we won't there won't be buying any trucking.
Then we won't be buying any trucking companies.
Long as I'm around here, but.
But.
We are certainly interested in.
Last but not asset transportation businesses.
And probably more in the tuck in variety.
Thank you again.
How does anything you could convert trucking companies need to just take their customers and that there are assets.
Yeah, well I think.
Part of what you said, it's true that they you know the prices are down right now.
There's oversupply of capacity.
Insurance rates are high I think it is difficult for the small truckers. We know some of them just said im going to stay home. So I don't like the rates and it's hard to find loads and so.
There is some self correcting mechanism I think built into the marketplace.
It would be hard to buy a trucking company and just convert their customers to.
Non asset brokerage.
But that being said, we do think that there are.
You know there continue to be M&A targets that are more like us that are smaller brokerage brokerages and.
Logistics companies and as I said in my prepared remarks, we continue to look for those opportunities and have the conversations where they make sense, but.
But at this moment in time, we're probably dragging our feet a little bit.
In terms of pulling the trigger on anything and want to wait and see what the landscape looks like.
As we come out of this thing.
Okay. Thanks.
Thank you. Our next question will come from British Chan with Stifel. Please go ahead.
Yes, Jeff good morning, or excuse me good afternoon, and thanks for the time.
Just.
Looking for some color here on how you characterize the competitive environment in brokerage right now I know, Dave you mentioned that we're not seeing the same level of seasonal award related margin compression.
But.
If we look back in the second half of 2019, we saw maybe a surprising amount of competitiveness as everyone is chasing the same contract business and we're looking at another very thin spot market here. So what's the likelihood that this kind of bad behavior for happens again, especially if.
This freight rates stretches out a little bit longer.
Yeah. There's this is Doug.
You don't have to be honest and tell you we haven't been paying a lot of attention to our competitors. We've kind of had our heads down running the business doing what we think is right and you know as we've said for a long time, you know, we think size and scale in network effect matters.
We think that technology and data science matter, we think having strong relationships with our shippers and our carriers matters and you know in this current environment, you know act access to capital matters, and having financial strength and a solid balance sheet matters and not being over levered matters and so.
And then having the ability to leverage or your technology and work from home matter. So we think about all those things I just rattled off I mean, those are all the things that define the echo model and so we're we're just trying to execute on our plan and we think it's working and.
I can't really tell you that competitors have had any impact on us one way or the other.
And we're taking the market share that we can get.
Okay. That's fair and then just on that data and technology side since you mentioned that.
Are you seeing any big returns on that right now you discussed the work from home flexibility certainly.
But as far as maybe where some of those algorithms are coming into play.
Are those helping you out on the buy side. It is helping you to position or are those actually breaking down right now because we're in such a black Swan type situation.
But numbers I think I think they are helping that we've been on algorithm side and price prediction capability, we've been doing that for years and we've implemented that throughout our systems and I think that those tools are very valuable we talked a lot.
You know last quarter about our initiatives on the carrier side enrolling on Echo drive in trying to drive adoption. As you can imagine is in this environment more and more dispatchers are working from home and accessing systems remotely. So we're seeing significant increase in adoption in those platforms and.
In terms of both.
You know users and searches and actually actual bookings, we still are doing much of the price negotiation and finalization on our own but we're very close to being able to rollout automation on that front as well so were.
I feel great about that and I do think that those investments in.
In being able to conduct business with us online access our freight and our loans all those kind of thing has been very.
Well timed in terms of where we're at today.
Great appreciate it I'll hand it over.
Thanks Bruce.
Thank you. Our next question comes from Tom Wadewitz would you be yes. Please go ahead.
Yeah good afternoon.
I apologize if I, if you've mentioned that this first one there were some overlap with the.
Thanks call, but.
On on the gross margin comments I would've expected a bigger move up in your gross margin in April versus what you saw in the first quarter.
Yes that I think maybe said that that's the LTL margin doesn't move but can you tell us what the truckload gross margin maybe how much that.
Moved in April compared to where it was in March.
So I don't have that exact number you know in front of me right now, but I would say that to the extent that it did move up we're really got 13 days, but it did move up upward on the truckload side managed transportation and LTL very steady no movement there the.
The fuel price in the mix Kyle mentioned the mix issue, which is another factor.
LTL being a higher margin a component of our mix.
That drags down the overall margin a little bit when that mix shift occurs. So you know you've got a lot you do have a lot of moving parts. There. So I think.
That's probably the level of detail on on that and what we wanted to get on the on the first 13 days.
And he is it.
Yes.
Yes.
Yeah look at the Medicaid team that March was super tight equal has gotten dramatically looser.
It seems like you've only a key part of that is it fair to think that the gross margin would.
I would move in a favorable direction as you look forward recognized only got a little bit of April so far.
Yeah, I think it depends on what your assumption is on capacity I think that's that could that could be the case I would agree. The other thing I guess they could have pointed out for you.
Is that we probably saw a little bit of declining gross margin throughout the quarter January February March. So when you look at that average for.
Q1, you're you're kind of getting.
A little better than maybe what the current trends would have been.
In March so to speak.
Yes, okay what's.
In terms of capacity.
I know it it's a little bit tough to tell but do you think that.
The pressure in the spot market.
Yes, driving their evidenced the capacity really starting to come out of the market in a meaningful way or is that something that just kind of hard to tell.
I think it's a little it's a little hard to tell certainly anecdotally. We we believe that is coming out of the market. The demand is real has dropped quite a bit.
Theres been big industries impacted and you know as we talk to carriers is not not as if they're closing their doors, but there's certainly examples plenty of home of carriers that are less efficient pulling some drivers that capacity off the road right now in response to lower demand. So it does.
Makes sense I couldn't say if its.
How temporary that that changes.
Yes.
The sort any story here is going to be about capacity coming out not coming in so it's it's coming out.
Okay, Great just one more if I can.
You know it sounds like you've had some good success in the contract side in truckload.
How [noise].
Hi, good as the compliance with that and you know how kind of fluid is that situation obviously.
Got you know volumes move with customers moving around a lot, but that would you expect in compliance with the contract business you won or would you say you know it's kind of temporary just given how dynamic market is.
Yes, I think it's just dynamic right now it's impossible to you know I wouldn't I wouldn't look at it.
Understand that there could be compliance issues over timing on people might.
No freight in the spot, but in general I'd say at this point, it's just a demand issue at could extend that we see we've seen some volume decline you on the struck on side versus the versus the compliance issue.
It's hard to track up, but I don't I haven't seen any sense.
That being a concern.
Right right Okay.
Great. Thank you for the time I appreciate it.
Yes.
Thanks Keith.
Thank you. Our next question comes from Jeff Kauffman with loop capital markets. Please go ahead.
Thank you very much them. Thank you for taking my question.
I just wanted to follow up briefly on Dave Campbell's question and thank you Kyle for that view of S. DNA.
I take it by your answer that you feel like Youve cut.
What needs to be cut at this point and are there other levers you can pull if if say the question like Bruce asked the environment doesn't bounced back as we think or if we pretty much made a statement on SGN I guess, that's just what we're going to go with us.
Yes, I don't think I would say that we're we've made one big move in and.
And that's it in either direction quite frankly, because we're we're managing the business on a daily and weekly basis and one of the great things about our businesses. We've got we've got KPN guys that we measure all day long everyday and so we were adjusting as we go so.
I think to the extent we had.
Volumes that work to deteriorate further.
We've got ways to adjust further as well, we're obviously hope and it goes the other way and I think that.
The nice thing for us as we anticipate that when volumes do rebound that we can we can adjust our workforce very quickly back into positive direction and be able to service all the freight that's that's available to US I think that's that's a good opportunity but.
It.
Quick moves are largely.
In the compensation area that concludes.
Delaying higher classes like we like Dave mentioned earlier.
Or just adjusting adjusting.
Our headcount across the organization to match volumes.
Okay, and then one other follow up more for Doug Doug. Thank you for the walk through the cash and liquidity and paying down a convertibles. So when you talked about if we get back into M&A, it's going to be more of a tuck in variety is is that based on the idea that we have 127 million of available borrowings.
Capacity, but we may not want to use all of it even for the right deal. So therefore, you know that's the idea of a tuck in or something strategic but that's kind of the number we should think about in terms of how far you are willing to go for the right deal.
Well I mean on a tuck ins, we wouldn't be spending all that.
I guess you'd hope not yeah.
[laughter]. So I think it's just a matter of you know we've got to take a step back and pick a breath.
Understand where multiples are understand where the you know the cash flow trends are going.
And the overall.
Market dynamics, and then based on.
The amount of EBITDA that we're buying in the multiple that we're buying it at this does it make good businesses and also you know what how does the business fit with ours.
How quickly can we integrated onto our platform.
How much customer overlap is there how many how much carrier or they fall that all the typical questions that we ask ourselves when we assess a tuck in opportunity and then looking at our overall liquidity and saying you know from a risk standpoint does it make sense.
Okay. That's all I have thank you.
Thank you Jeff.
Thank you and our next question will come from Kevin Stankey with Barrington. Please go ahead.
Hi, good afternoon, so I wanted to ask about the yeah. The managed transportation business, obviously, a really strong start to the year with.
69 million of new revenue added.
We think that momentum to continue in this environment or maybe do people frees up on decision, making or Conversely is there some.
Aspect of the managed transportation value proposition that you know is you know.
Even more attractive in this type of environment.
Yeah, Kevin I mean I do.
I'm going to predict exactly the pace, but I do think it can continue it we've seen a lot of interest our systems are.
A rock solid in terms of our ability to support a client and.
And that's.
Then very valuable you know to have access to the kind of reporting information and all the things that are transportation management solution offers our customers you know it's very valuable. During this time were seen you know executives and decision makers, having you know trying to focus on strategic issues and I think thats.
Helping in terms of the pipeline development and having opportunities to move forward. So.
We feel really good about aided success and then be the opportunity this year and in this environment to continue to talk about the value that we can provide to shippers with our with our solutions. So we're excited about the opportunity Heather.
Okay, great. Thanks, that's all for me today. Thank you.
Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Chairman and Chief Executive Officer, Mr., Doug Waggoner.
Yeah, well I'd just like to thank everybody for joining us today, it's unusual times that we find ourselves then and hope you all stay healthy and.
We're optimistic that you know like I said, we're in the bottom of this you and we hope that it's a narrow you and not a wide you, but we'll see what the market gives us and we'll be ready to react accordingly.
Look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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