Q3 2020 Echo Global Logistics Inc Earnings Call
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I would now like to hand, the conference over to your Speaker today Mr., Peter Rogers Chief Financial Officer. Please go ahead Sir.
Thank you.
Thank you for joining us today to discuss our third quarter 2020 earnings hosting the call are Doug Waggoner, Chairman of the board and Chief Executive Officer, Dave Mandel, President and Chief operating Officer, and Pete Rogers Chief Financial Officer.
We've posted presentation slides to our website that accompany management's prepared remarks, and these slides can be accessed in the investor Relations section of our site Echo Dot com dirt.
During the course of this call management will be making forward looking statements based on our best view of the business as we see it today, our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.
We'll also be discussing certain non-GAAP financial measures the definition and reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure is contained in the press release, we issued earlier today and the form 8-K 8-K, we filed earlier today with that I'm pleased to turn the call over to Doug Wagner.
Thanks, and good afternoon, everyone. Appreciate all of you joining us today.
First off I want to introduce P. Rogers as our new Chief Financial Officer.
Peter the long tenured echo veteran and I'm thrilled to have him join echo's executive team.
He was played an instrumental role in had various leadership positions in our accounting and finance organization dating back to when we were a private company.
He has a deep understanding of our industry, our business our processes and our technology.
It was 13 plus years that echo.
It has built strong internal relationships with people throughout our organization, including our board of directors and I'm confident in his ability to lead our finance organization.
Switching gears, let me cover some of the key highlights for the third quarter.
As all of you know the freight markets have been accelerating since the brief trial triggered by the COVID-19 back in April.
Capacity has been very tight and truckload rates have increased throughout the quarter hitting record highs as recently as last week.
We saw an increase in demand from shippers, while the supply of capacity has not correspondingly expanded.
This obviously creates upward pressure on prices.
It also creates an environment, where shippers find it increasingly difficult to find a truck and a larger percentage of the loads that they tender pursuant to the execution of their routing guides gets rejected.
Well this environment can be quite difficult on shippers. It's also an environment, where echo can provide increased value by tapping into our capacity across multiple modes of transportation.
This quarter, we not only did a great job of living up to our shipper commitments and our contracts, but we also found them a lot of additional capacity in the spot markets.
Our people have continued to do a great job, serving our clients and carriers, while continuing to work remotely and I want to thank all of them for their hard work throughout the quarter.
Now I'll take you through some of the highlights of the quarter as highlighted on slide three.
We had record revenue in Q3.
That's total revenue was 691 million, representing a 23% increase from last year.
Speaking of records, we actually had record brokerage revenue of 534 million.
Record managed transportation revenue of 158 million ready.
Record truckload revenue of 488 million.
And record LTL revenue of 175 million.
Net revenue was 100 million, representing a 4% increase from last year.
Adjusted EBITDA was 21.9 million a slight increase over the prior year.
And non-GAAP fully diluted EPS was 40 cents compared to 39 cents in the year ago period.
Q3 was a really strong quarter and we delivered excellent results and I'm extremely proud of the organization and now I'd like to turn it over to Dave to go into more detail on our performance.
Thanks, Doug.
As I mentioned last quarter, we had what we described as a full rate cycle within the span of a few short months.
We entered Q2 in a soft environment.
And exited with increasing freight volumes and rates those trends continued into Q3 and contributed to the record revenue in the quarter.
When thinking about the current market I believe the biggest difference than what we experienced in the third quarter compared to recent and even not so recent history whats the velocity of the truckload rate increases the magnitude of the truckload pricing increase and just three short months has never been greater or truckload cost per shipment in Q.
<unk> by 29% sequentially, which is almost two times the largest sequential change we've ever experienced.
In the past we've discussed how the combination of the change in rate and the speed of the change is a significant determinative factor on.
Net revenue margin performance.
I also believe our team did a great job of managing in this very difficult environment, which includes balancing the service needs of our shippers and carriers honouring contractual commitments repricing strategically where the market has dislocated.
Delivering spot capacity to ensure that shippers can keep keep up with increasing demand Oh.
Now, let's take a look at slide four and all.
Highlights some more specific details underlying our truckload and LTL performance.
We delivered truckload revenue of 488 million in Q3, which was an increase of 32% over the prior year. This growth was fueled by record shipments and increased rates, our truckload shipment volume increased by 14%.
Year over year, and our revenue per shipment increased by 16%.
The combination of market conditions, and our own strategic intent has resulted in a steady increase in our award business over the past seven quarters. This culminated in our primary award freight represented 62% of our truckload freight mix up in Q2, this quarter due to ongoing capacity constraints shifting supply chains and increasing.
Freight demand, we saw that trend reverse Star award for rate dropped to 54% of total truckload in Q3.
However, it's important to emphasize that our primary award business continued to grow during this tough market, which is consistent with our long term commitment to shippers are award volume was up 14% over the prior year on top of that we also provided much needed capacity to our clients to the spot market or spot volume grew by 17%.
Year over year.
Again, our ability to execute in very challenging conditions is enabled by a combination of our proprietary technology and data science, our unique business processes are robust quality and quality carrier network and the commitment of our talented people.
Bottom line, our freight volume has continued to grow and this is a reflection of that go continuing to take share as well as the underlying tailwind of improving freight demand.
Freight demand is improving due to overall economic factors driven by Reopenings and closely related to the restocking that is occurring due to depleted inventory levels. In addition supply chain disruption, resulting from shifting consumer spending patterns has impacted the role that we play and help our shippers shippers secure much needed capacity.
Clearly capacity is not expanded as rapidly as freight demand. The primary culprit seems to be the ongoing dilemma. The driver shortage exasperated by the impact of Carbonite team.
Drivers are more reluctant to be away from home for extended periods of time than the funnel of new drivers coming in an industry has slowed. This has resulted in line haul rates to carriers hitting an all time high in Q3.
That peak was short lived as they then again increased in early October.
I will say that the rates have flattened out a bit over the last few weeks.
This very tight truckload market is also impacting LTL.
Turning to our less than truckload business, we delivered a record revenue of 175 million in Q3, a 5% increase over the prior year shipment volume was up 7% and our revenue per shipment decreased by 2% over the prior year the rate decline was due to lower fuel costs.
LTL rates tend to move a bit slower than truckload rates nowhere near the level of volatility that we see and truckload.
But as you would expect LTL rates are in fact, increasing LTL revenue per shipment went up by 4% sequentially.
Was which was indicative of the capacity squeeze that's impacting this mode. We do anticipate continued increasing costs in LTL.
Our LTL volume growth was driven from both increases in our brokerage and our managed transportation business.
We're very proud of the of our LTL capability, which is made possible by our strong relationships with the LTL carriers and our robust network given our scale, we have the unique ability to provide significant value to both shippers and carriers in a tight market like this one on the shipper side, we provide a comprehensive network one stop shop.
Execution, and leading online capabilities on the carrier side, we also deliver significant value, enabling them to optimize their own networks improve yield managed service levels assure reliable payment and continue to serve small shippers with a high degree of efficiency.
Moving to slide five we delivered record transportation revenue of 534 million in Q3, which was an increase of 23% over the prior year or.
Our strong multi modal capabilities has enabled the significant growth.
At September 30, our sales organization totaled 1617 was down 7% over the prior year or focus on automation enabled by our ongoing technology investments have helped us deliver on productivity improvements in this market in.
In Q3.
Shipments per sales F T increased by 15% over the prior year. This is the fifth consecutive quarter of improvement in productivity and demonstrates our ability to grow volume faster than headcount even in a tough market.
So the improved automation is coming from our carrier facing application Echo drive in August we launched book It now and that will drive mobile, enabling our carriers to secure freight through our either through our portal or on their phone in fact mobile bookings increased by 76% sequentially as weve begun to get much more aggressive in marketing these cable.
Bill It is.
Cross our carrier base, we also recently announced a partnership with keep trucking, leaving a leading the yield the provider to make afraid available to their smart load board. We continue to innovate I'm sure that's easy for carriers to join our network in fine freight that reduces their empty miles and improve their overall yield.
On the shipper side. We also continue to automate we saw LTL volume growth recovery fastest through eco ship or online shipper portal. In addition, we've launched direct <unk> connection with several shippers to provide fast real time truckload quoting.
Just had efficiency for both us and our clients and Leverages the investments we've been making in our data science and our ability to deliver targeted truckload pool.
Coming online we delivered revenue of $158 million in Q3, an increase of 23% over the prior year. We also had another strong quarter of new business as we closed approximately 26 million.
In Q3, and another 10 million already in October, bringing our year to date signings to 122 million.
It's encouraging to see that most of our clients have bounced back from the slowdowns in Q2, and the new business is now driving year over year growth.
Turning to slide six we generated $100 million and net revenue a 4% increase over the prior year.
The increase was driven by record revenue, but offset by a 275 points of compression.
Resulting in net revenue margin 14.5%.
The majority of the net revenue compression was in our truckload business, where we experienced a 293 basis point decline due to the increase in the cost of capacity and its impact on our award business.
We've consistently talked about our shipper pricing typically lags when the market changes and there's no doubt that the tight capacity were currently experienced experiencing is unprecedented however on an overall basis. Our truckload net revenue margin showed modest sequential improvement in August and September as spot business will offset the award margin pressure from wrap.
Thirdly rise in rates.
I'd now like to turn it over to Pete to review, our operating expenses liquidity position cash flow and outlook for Q4.
Thanks, Dave on page seven of the slides, you'll find a summary of our key operating statement line items.
Commission expense was $29.8 million in the third quarter of 2020, increasing 2% year over year Commission expense was 29.7% of net revenue compared to 30% for the third quarter last year.
Non-GAAP DNA expense was $48.7 million in the third quarter of 2020, increasing 5.8% from the third quarter of 2019.
Depreciation expense was $7 million in the third quarter of 2020 up from 6.8 million in the same period a year ago.
Cash interest expense was $1 million during the third quarter of 2020 compared to $1.3 million for the same period in 2019. The decrease is due to a lower amount of outstanding debt.
Our non-GAAP effective income tax rate was 24.8% for the third quarter of 2020.
As Doug mentioned non-GAAP fully diluted EPS was 40 cents, increasing from 39 cents in the third quarter of 2019.
The primary differences between our GAAP and non-GAAP fully diluted EPS in the third quarter of 2020, our 2.7 million of amateurs Asian of intangibles from acquisitions and $2.3 million of stock compensation expense.
Slide eight contains selected cash flow and balance sheet data.
We ended the quarter with $47.6 million in cash on hand, and $433 million of accounts receivable, which is the basis for our ABL borrowing base.
In Q3, 2020, we had free cash flow of $12.6 million and operating cash flow of $17.6 million capital expenditures totaled $5 million in the quarter compared to $5.7 million in the prior year.
On slide nine we are highlighting our liquidity position as I stated previously at the end of the quarter, we had $47.6 million in cash on hand, we had an available borrowing capacity on our ABL facility of $316 million that borrowing capacity is calculated is 85% of our eligible assets.
This receivable, we had borrowings of $145 million on the ideal consistent with the end of Q2.
Our combined cash on hand, and available borrowings on the Abbeel leaves us wasn't that liquidity of $219 million at the end of the third quarter.
We're offering Q4 guidance along with some select information provided for the full year as usual. We also want to give you. Some recent trends through the early parts of October which this quarter is 17 business days of activity.
Per day revenue in October is up 37% over last year truckload volumes are up 18% and LTL volumes are up 14% compared to last October net.
Net revenue margin in early October with approximately 15%.
Now for the guidance for Q4, we expect the following revenue to be between 675 and $725 million a range of up 27% to 36% year over year coming.
Commission expense to be between 29.75% and 30.25% of net revenue.
DNA costs are expected to be between 49.5 and $52.5 million for the quarter.
This is driven by continued investment in our future through the addition of new sales and operations individuals along with the expansion of our technology and data capabilities and increased incentive compensation.
We expect depreciation of about $6.8 million.
Cash interest of approximately $1 million a tax rate of approximately 25%.
And share count of approximately 26.5 million shares.
Excluded from our non-GAAP calculations in the fourth quarter, we anticipate amortization of approximately $2.7 million and stock compensation expense of about $2.3 million with that I now want to turn it back over to Doug.
Thanks Pete.
You heard the numbers from Dave and Pete and I think they speak for themselves.
From my Vantage point those numbers are even more impressive when viewed side by side with our original 2020 guidance that we provided back in February.
Since then we've endured the economic impact of a global pandemic and almost our entire workforce has been working remotely yet when I look at the latest guidance that we just provided on Q4, they would imply full year revenue growth of 5% above our original full year 2020 estimates.
And gionee cost, 4% below our original figures quite simply I believe that those numbers and this quarter again demonstrate tremendous execution on the part of the Echo team.
We bounce back from the initial impact of the pandemic and were able to quickly capitalize on favorable market conditions by moving more freight with fewer people all working from home.
It isn't easy in this market.
It's hard work to find trucks when capacity is tight as we as tight as we have recently experienced but that's what we do.
I think we also did a great job of managing net revenue margin at a time when our buy rates increased 19 consecutive weeks in a row.
How do we do it well.
It takes a talented and motivated team of people with strong client and carrier relationships. It takes proprietary processes and workflows and we put a lot of thought into the nuances of how to best source capacity and incentivize our team for consistent execution. It also takes leading technology enabled by massive amounts of data.
Okay, and sophisticated algorithms to support real time decision, making in execution and I'm proud of the entire echo team.
We rolled out quite a bit of do technology in the recent quarter. The new features were primarily in the area of client and carrier integration capabilities for more touchless transactions, all of which provide cost effective access to more freight more capacity and enhanced internal productivity.
As our financial position has continued to improve by utilizing our free cash flow to pay down our debt.
We continue to look at opportunities to expand our capabilities through M&A.
As you know it's impossible to say when we will pull the trigger on something as we continue to have a very thoughtful approach that considers value synergy ease of integration and how a particular target would complement our existing business.
Looking forward, it's difficult to see how the current conditions abate anytime soon 'cause.
Capacity seems to be somewhat capped for the time being.
As Dave mentioned, there continues to be a driver shortage.
And renewed drug testing is beginning to take its toll.
Class eight truck sales surged past the replacement level in September of 2020, but that was the first time that's happened since October of 2019.
On the demand side of the equation it would seem that the pan them as the pandemic drags on consumers will continue to favor purchasing physical goods as opposed to services and that is a boon to the freight industry.
So with that that concludes our prepared remarks. So at this time I'd like to open it up for questions.
[noise]. Thank you. Sir you reminder, to ask a question you will need to press star one on your telephone.
Your first question is from Jack Atkins of Stephens. Your line is now open.
Hey, guys. Good afternoon, and congratulations on your new role you've got some big shoes to fill.
Thank you [laughter]. So I guess first question, who wants to take this may maybe this is for Doug or Dave, but I mean.
Look at your results in the third quarter.
You know you just significantly outperformed the you're too I guess closest competitors that have.
This model that have reported you saw net revenue.
Up sequentially and I guess you know.
Doug if you want to maybe take a step back for a minute I mean, what do you think.
What do you think is driving this.
Significant share gains, you're seeing and the outperformance relative to the rest of the industry is it the technology that you guys have been implementing now.
Finally, getting some traction the productivity gains the automation.
Through it because it'd be clearly feels like you guys are.
Differentiating yourselves for the rest of the industry here.
Well you know I think we've got a very stable team running this business. We've been very focused now for several years on enhancing our technology enhancing our data sciences as we've talked about and it really comes down to execution and you know that that's a big word that has to happen across the entire business.
So whether it's in sales whether it's in.
Carrier sales operations finance and so you know.
I can't really speak to what our competitors are doing but you know as I said multiple times in my prepared remarks, I'm just real proud of how the echo team has executed and.
I think that we've we've got our business down we're making incremental improvements.
Thing, which drastic and we just keep getting better.
Well that that that makes it it makes sense I guess as we look forward. How are you guys thinking about your headcount plans as we sort of move into 2021.
What do you need to do on a on a on the headcount side to support this hyper growth.
Jack the we mentioned last quarter that we had resumed our you know picked up or hiring plans. After John Q2, we did a little some furloughs and.
And and deferred if you will or sales and head count and then we pick that back up in July and even now we're ramping that up a little bit more. So we saw a sequential increase in sales head count you're going from Q2 to Q3 I would anticipate a small sequential increase again by the end of Q4, we haven't.
We haven't formalized 2021, but I would you know.
You know as we said we've got we've got five straight quarters of productivity increased at the same time, we're showing great growth and we want to continue to.
Build our team and so we will continue to hire will hire into 2021, and we'll probably communicate more more detail what the what the plan is you know in February now for the next year, but I would anticipate seeing some growth in headcount, but again.
Volume.
Depending on market conditions, and certainly over the long run we would expect the volume to outpace the the personnel growth.
Okay. Okay that makes that makes a lot of sense.
Maybe just one near term question and I'll hand, it over but could you could you maybe talk about what your customers are telling you around their expectations for peak season and.
I guess.
It's pretty clear, we're going to have capacity challenges well into next year.
Are you guys thinking about.
Puts and takes on the on the demand front as we go into next year.
I guess inventory restocking is gonna be it can be a big item, but [laughter]. How are you guys thinking about the demand side of the equation.
You know that's a it's a great question, Jack I think that you know.
Looking at looking at.
The first part of your question about peak and and 22020, we're kind of in the middle of it now obviously and as we've talked about over the last gosh six years.
Peak for certainly for our business isn't what it used to be you know our peak might really be in the in that in the second and third quarter versus the holiday season, and so we've seen steady steady demand growing I should say growing demand coming out of this pandemic and continuing into October now I would I would I would expect that.
Subside, a little bit as we get past.
You know past the maybe the Thanksgiving holiday, but you know given that ecommerce is going to is it seems to be dominating you know the consumer spending patterns. So I think that it was I think about the fourth quarter I do think that I mentioned in my remarks, the rates have kind of started to level off and wouldn't surprise me if they stay.
Good level for a little bit here in the fourth quarter. So I think the capacity will remain very tight so pretty strong demand certainly for next I believe for the next four to six weeks and then we may see you know a slight decline and you know it and then we'll jump into into Q1, which is a typically seasonally more soft quarter had.
Having said that going on going out and thinking about 2021.
It's really hard to say I think theres, just a lot of economic uncertainty that's still out there one of the things that we've noticed is looked at is that weve never seen such a steep increase in rates. So quick three month period of time to see cost go up by 30% as I mentioned is unprecedented.
Freight cycles have tended the last 18 months. So I think that at the end of the day, we would expect capacity to remain pretty tight and the demand side of equation, it's probably going to depend to some extent on the pandemic and our response and how the economy handles that okay, well guys. Thanks for the time I'll hand it over.
Thank you Jack Thanks.
Your next question is from Jason <unk> of Cowen. Your line is now open.
Thank you operator, gentlemen, I hope everyone is well Pete congratulations on the promotion.
Good I wanted to talk a little bit about repricing in your business on the contractual side, how much gets repriced or Q, how much gets repriced in one Q.
Yeah, I think the the this question around repricing on the contractual side as a as an ongoing.
Evolution, if you look at.
The D.A.T. reporting the contract rates and in our in our industry, you'll notice that you know they change every every month and so as we look at our book of business Weve.
We've got you know you know me.
Hello.
Guys a loser.
Hi, guys.
Could be owner and well continue with the with the question and see what happens, but basically we hear you now okay, sorry about that I don't have I don't know what happened there.
Anyway back to the question, so saying that the repricing activity is ongoing a lot of our business is you know many bids et cetera.
And what I see happening is on a lane by lane basis repricing activity on many accounts is happening all the time and it depends on dislocations in the market and whats and.
And you know where that where capacity might be extremely tight I see the bid cycle has been.
You know pretty normal if not maybe even pushed back a little bit because the market is going up. So quickly you know many companies are kind of waiting for waiting for things to settle down before they really complete their bid cycle. So I'd see shippers.
Doing that but at the same time, making you know.
You know, making pricing decisions, where they need to to try to reduce their spot exposure or whatever the case may be so I know, it's a roundabout answer I can't give you a precise percentage that's gonna get quote repriced in the quarter I would just say that repricing activity is an ongoing activity and I still expect the majority of the.
The bid activity that happened in the first part of 2021 well.
Under annual bid cycles okay.
I know you guys don't give guidance.
15% of the net revenue margin side, but you know if current conditions were to continue yet you guys have basically said that the upswing.
In in sort of the cost to to procure the transportation I sort of leveled off but albeit at a at high levels should we thinking about that 15% is getting better as you guys do get a chance to just sort of get away from the hockey stick jump up in the prices as well as a couple of repricings in the quarter.
Yeah, I think that the.
You know again, we don't you know, we don't give guidance on that number and don't put a forecast out there you could look at 2018 and you would see that we had some margin expansion occurred.
After periods of rising prices, that's a that's a pretty typical component of the freight cycle. You know this this whole.
Economy's way different than what we've seen in the past. So you know in 2020, it seems like anything could happen.
So it's I'd say that but I do think that we've seen two or three consecutive months of improved margins and so there's certainly the opportunity for margins to continue to improve.
Based on what we've seen happened historically I would just add Jason you know, there's a lot of moving parts right because as business Reprices.
It could move freight from the spot market back into the contracts you know.
And that can happen in a margin impact as well so it's hard to pin it on one thing.
Okay wanted to do a quick follow up I don't know if you guys thought about this too much noise as we hopefully.
Hopefully come out of this pandemic and we get a vaccine or maybe even multiple vaccines is going to be a quick need for vaccine distribution do you think that could.
Materially impact some of the supply at least on a temporary basis is because the government steps and to secure capacity.
I haven't given that a lot of thought I think most of those vaccines required extreme refrigeration. So it's probably a person in a niche and I don't know that that niche would affect us all that much you guys. All playing that much okay. Perfect. That's all I had gentlemen, I appreciate the time as always.
Thanks, Jason.
Your next question is from Allison Landry of Credit Suisse. Your line is now open.
Yeah.
They're Allison.
Yes, I'm here sorry.
Thanks, guys.
I just wanted to ask about the route guide that that you saw in Q3, and maybe how that progressed throughout the quarter and if you've seen any uptick or not.
We looked at the October.
So I think you know in terms of.
Routing guide you know we don't we don't we don't report like the metrics in terms of where every shipment falls on a routing guide, but I think the evidence of increasing spot volume is you know tells you that routing guides you know kind of across the industry, you know are breaking down and and.
And more business has moved over into the spot market to cover you know the demand and that's needed for shippers.
Okay, and then my follow up but just in terms of the enterprise pipeline I'm, just given that the volatility of car market and.
The different factors, maybe if you could speak to how the pipeline a bit that is shaping up for Q4 and heading into 2021. Thank you.
Yeah sure Allison. Thank you I mean within you know on.
On the managed transportation side, we've been so very excited about.
You know the amount of business, we've executed this year and I think what's what we see is that shippers are faced with significant challenges and we can provide a lot of value to help them.
Both manage their routing guide in their network of carriers, but also to provide you know deep reporting an execution on the transportation side. So our pipeline remains very strong on the managed transportation side I think we've broken a record already in 2020 with a $122 million of new business signed as of this point in time.
I am so, we'll obviously anticipate more business coming through the end of the quarter and that'll be a record year in terms of signing so we.
We feel very very good about where we stand there and it's great to see you know that growth in that business and that's been consistent really over the last four or five years, we've seen some nice consistent growth on this managed transportation side.
Okay. Thank you guys so much for the time.
That's helpful. Thanks.
Your next question is from Stephanie Benjamin of true with your line is now open.
Hi, good morning, and good afternoon. It is [laughter].
Hi, Stephanie.
I was curious if you could talk a little bit about your end market exposure, maybe some particular.
Verticals, where you saw particular strength during the quarter.
Sure. The you know we've talked about this a little bit last quarter as well you know that our business is very very diverse as you know we've got a pretty large component of our overall business is small to midsize companies and so we've got a diverse customer base and we've seen strong growth in.
Areas that you'd probably suspect you know industrial growth in general, which was very light at the beginning of Q2, but has been strong in Q3 our distribution.
Including the DC to DC moves that I think are in support of E. Commerce has been very strong packaging retail food big box and we've seen a nice comeback on the small small business side.
You know our business is not concentrated heavily and entertainment travel hospitality and some of the industries that are probably feeling the most pain and so it's been pretty broad based I would say in terms of what Weve seen you know.
Leading to all these record revenue.
Growth in the numbers that we just reported.
Got it. Thank you and then just as a follow up I'm curious about what you're seeing from a competitive.
Activity standpoint.
Not only in the truckload side, but also an LTL any any pickup in either of those areas.
I would say.
The.
The competitive landscape as we've always said is there's a lot of lot a lot of options for shippers out there. There's a lot of asset based providers a lot of brokers and you know there's a lot of competition ongoing in terms of.
Kind of bidding and winning freight every day I think that most certainly our you know the more direct competitors that we face in the brokerage industry are facing similar challenges with the right. You know very rapidly rising cost of capacity and then trying to adjust rates to reflect you know those additional costs and so.
The <unk> the <unk> because of the environment you know we're not as.
We don't see the competition its not.
No.
Probably the same as when it's very soft out there and there's a lot of bidding going into routing guides and in some cases, you've got guys. You know in the past over the last three four years, you know maybe trying to buy some market share and so its kind of eased on that front is what I would say and I think that's largely in response to the tremendous increase in the cost of capacity.
I'd.
Got it thanks, so much thanks.
Thanks, Stephanie.
Your next question is from David Campbell of Thompson Davis and company. Your line is now open.
[laughter], yeah same sort of thing.
Taking my question.
More of a theoretical.
Question I have then.
Yeah, I recognize that you've tremendous.
Incidents in technology over the last five years has produced this capacity and capability to increase market share.
Especially in the truckload business then.
But also less than truckload, but what I'm not I'm confused about.
If the technology is so great.
And acquiring new business.
Why is it that.
That you take on the business.
At a certain cost.
And not not have.
The technology matched at really high rates.
Except except in a delayed basis.
Moving to decreases in the.
Gross margin.
Well I think.
David there's there's market pressures.
Market forces at work both on the buy side of the transaction and the sell side. So.
No as as prices go up, especially at the rate of change that we just experienced there there's a lag impact and you.
You know our technology helps us with the execution.
Some of our algorithms are folks.
Focused on price discovery, but still there's there's a rate of change that you know when when prices are going up or are by cost usually goes up faster than our sole cost and Conversely, when prices are falling or by cost goes down faster than our sole cost. So you know throughout the freight cycle there.
There's portions of of expanding margins and compressing margins and I think that's always been a feature of this industry.
And you know I think we.
We manage that as best as we can and I think on a relative basis, we do a pretty good job of it.
Right right.
Second question is.
Yes next year, you will you probably will have the opportunity for us.
Boys you work back at.
The opposite.
Yeah. The once again decking and yeah. It is over you will move back into your facilities is that is that kind of change any of the productivity measures well handle that.
Hello, Matt <unk> backend of facilities.
Change here.
You are a problem.
Dave you've been here I think we have a really strong culture and part of that culture comes from being together. So I actually think having everybody back together will improve our productivity.
You know certainly not committing to the office you know add some more time to everybody's day and that's that's a feature of working from home, but I think there's also a lot of power and haven't everybody together and I know you've been here on our trading floor and so you see in the energy that we generate so I can't wait to get back to those.
Dave.
Okay.
Yeah, and I would just add to that that you know, we're going to wait and see how everything evolves over the course of the next year and and we certainly.
We talked about this a couple of quarters ago were you know very pleased and and to some extent even surprised that that our productivity has remained very high or execution has remained fantastic in this remote working environment and so you know there will probably be a transition period, where there.
There is more flexibility for people and that stuff those those questions and decisions we are going to be looking at in 2021 once we get.
You know a little bit further past the pandemic that we're in right now.
Okay. Thanks.
Thank you. Thank you David.
Your next question is from this chain of Stifel. Your line is now open.
Hey, good afternoon Pete.
Nice quarter to make your debut here [laughter], Doug if I could threaten our.
Yeah, right exactly [laughter].
Doug I just want to start with some of your comments about how this cycle is different than some of the previous cycle up there and that was certainly helpful characterization, but I wanted to follow up and ask maybe how that influence. Your strategy did you do anything differently. This time around than maybe you did in 2017 or early 2018.
You, maybe get more aggressive in shedding freight and going back to customers are going back to the well for increases and has that had any negative impact as far as you can tell on retention.
No I mean, if I think back to 2018, you know we benefited from the rising tide just just like we have recently I think if you go back to 19.
The the the capacity.
Supply side.
Over compensated for what happened in 18. So so we saw an excess of capacity and rates started coming down in 19.
And I would say that you know throughout 19, we were we were pretty aggressive in growing our contractual business and we had a lot of success doing that and in fact, if you look back at you know probably with some of our past transcripts from 2019, though there really wasn't much spot business.
So.
We had success with us with that strategy and then when the cobot hit and we got through the trough.
We were able to maintain all that contractual business that we won plus start to benefit from the incremental spot business that occurred.
And as we look forward I think you know part of it is in 2020, we're a lot different.
Company than we were in 2017 that we've got a lot more scale in a lot more capability got more relationships with shippers and carriers and so we think we can continue to be aggressive on the contractual freight regardless of where we are in the cycle and will take the spot freight when it's there.
That's very helpful. And then just switching gears a little bits of the multitude of major issues that were looking at right now one of them of course is the upcoming election, then I'll start stop short of a you know asking you to prognosticate on auto result, but you know when you think about the likely outcomes.
What are the big issues out there.
They affect your business you know what are the ones that you're worried about or looking forward to is there anyone that you think is going to have a really material influence on what what happens to echo and next year.
Or the other.
Yeah, you're getting above my pay grade Bruce I know I think one thing you know you have your pay grade [laughter] the.
The I mean, one thing that I think is on my mind is the is the extent of quote business Lockdowns, Yeah, we're starting to see some this resurgence covert in response and there's some luck downs and then there's also the discussion around.
Needed government stimulus because of the high unemployment rate. So I think that the you know that some of those issues hopefully we will get resolved post election, and I think we saw I think a strong recovery in you know in June through September call, It and part in part.
You know attributed to some pretty good government stimulus that help offset you know the what would be a very highly impactful a unemployment rate. So I think those are kind of some of the key things on my mind.
That could impact 2021 or.
And.
Depending on how they are resolved and how timely the result of the I would just add to daves comment that I think we saw.
Some of that government stimulus incented drivers to stay home and so to the extent that there is more of that you know potentially it puts more strain on the driver force.
Great well I really appreciate the time thank you.
Thanks, Bruce Thanks, Mike.
Your next question is from Bascome majors of classical Hannah Your line is now open.
Yeah. Thanks for taking my questions here I'll stop sort of asking you to tell us with 2021 is going to look like but I was hoping that.
That you could help us with some of the items you do have some visibility into some things that that may have been unique this year on the G and H side with.
Some of the volatility and temporary cost saves that need to come back next year or even incentive comp and then maybe any other items on free cash flow, where there's something unique this year that that has a cyclical reversal next year. Thanks.
Sure. Thanks, Bascome you know on the DNA front I think one thing that obviously.
Has been reduced in 2020 is definitely t. any we anticipate that coming back a little bit and 21 and be depending on.
I'd say some of the timing of the vaccine and return to normal we anticipate 21 would probably be slightly above 20.
Probably below 19 levels, just given the fact that there probably will be some sort of a reset to a new normal.
You know I think we anticipate some some increased health insurance costs employee is kinda returned to a more regular cadence of Dr and wellness visits and you know right now, we're obviously going through our planning phase from there, but those are two things that kind of stand out as.
As items in 21 on the DNA side that might be a little bit different than 20 as it relates to free cash flow I think it's just an important reminder, that the biggest impact in our free cash flows our working capital and the difference between how quickly our customers pay versus how quickly we pay our carriers and so you typically its a source or use of cash when we see a.
Sequential decline or input increased sequentially at the topline.
This quarter, we saw the largest sequential incline.
In revenue in our history from Fyfourteen to 691, and we were still able to produce free cash flow of about $12.6 million. That's some of that's simply due to timing.
And we'd expect some seasonality to possibly creeping in Q4, but you know our guidance would imply that some growth is still Ah it's possible here in Q4 and.
So I don't think we'll see a big uptick in Q4 in terms of any free cash flow and might see you know if any are there, but you know I think as we go into 21 will return animal more of a kind of a regular cadence with our free cash flow, but we obviously see some spikes a and then kind of declines in 20 in 20 here that just been kind of the does.
Sequential movement that we've seen.
And just to.
The run back to the Gionee piece, you did not mention incentive comp in your discussion is that because this year is going to end up.
Kinda near a target level or I'm, just wanting to make sure that that.
Basically we're seeing this year is representative of next year.
Yeah, obviously, our incentive compensation is based on company performance and we've obviously seen an uptick in performance here in the back half. So you know I don't anticipate that you know we have so obviously in a quarter ago.
But not necessarily sure Dave you know that might be a headwind or a tailwind right now I think it's kind of in line with what we'd expect.
For 20 to 21.
Thank you.
Your next question is from Tom. Please me its a few B.S. Your line is now open.
Hey, good afternoon, it's Alex Johnson on for Tom.
Yes ill.
Just a first question I wanted to ask any direct or indirect impact you guys see you.
During the fourth quarter from Amazon Prime day switching into the fourth quarter, I mean, I heard Dave's comments.
About you know rates flattening out a little bit over the last couple of weeks I don't know you know Amazon Prime day is a significant enough factor to coupons.
You know high hazard as that passes but any direct or indirect impact.
Oh, probably I can't honestly can't remember when it was last year exactly what the what the date switch was.
The but I Didnt I do think that in early October we.
We saw some demand increase and that could have been a bit of a driver in terms of restocking activity in preparation for that.
Okay.
And then a second follow up question going back to Doug's, one of Dougs first comments about.
How graco can provide increased value across multiple modes that I've referenced as shippers being willing.
To change modes, and how can echo help shippers find.
Alternative modes.
If that's the case any thoughts you have there.
Yeah, well when there's when the truckload market gets tight sometimes you see movement of shipments into.
LTL or what we would call partial so partial truckloads and we've got a really strong partial business that is able to combine loads from multiple shippers or fine partial capacity on a truckload revenue in LTL carrier with the backhaul and move it at rates that are you.
You know frankly.
Frankly cheaper than truckload and cheaper than LTL, because it's kinda them in between say shipments. So you know, it's it's really about giving a shipper options and you know Weve also got an intermodal option that in some markets as a good option maybe not currently but you know being multimode just means that we can give oh.
Sure for multiple prices on the same shipment, depending on which mode, we choose to use.
Are there any specific metrics do you think about Lincoln for ship when it comes to you asking for.
Truck learn how often you find partial you know LTL and truckload for them or is there any metrics, we should be aware will pay I mean, not not a summary metrics, but I would just use an example, let's let's say a shipper has.
15000 pounds shipment you know, it's it's kind of not big enough to be a full truckload and it's.
Too big to be LTL in LTL tariffs wouldn't treated very well, so perhaps that shipper would typically ship it as a truckload but.
But with truckload capacity is tight and trucks hard to find and rates elevated you know we can offer them a great option you know using our interim our our parcel service, which is has a whole operation behind it and so that 15000 pounds shipment, which normally moves as a truckload you know.
We were treated as a partial and probably save them money from the prevailing truckload rate.
Great. That's very helpful. Thank you very much.
Thank you.
There are no further questions and I would like to turn it back to <unk>, Dod Waggoner, Chairman Chief Executive Officer for any further comments.
Well I would just like to thank everybody for joining us today I'd also like to say once more welcome to Pete and he did pick a good quarter to join us and.
Meeting so a we look forward to talking to you all next quarter. Thanks for joining us.
Ladies and gentlemen, this concludes today's conference call and thank you for your participation. Your life you may now disconnect.
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