Q2 2019 Earnings Call
Please stay on the line for the next available operator.
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Speaker on today's conference Sir.
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Relying on these things on hold until the conference begins.
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.
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 also be discussing certain non-GAAP financial measures. The definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release, we issued earlier today and form 8-K, we filed earlier today with that I'm pleased to turn the call over to Doug Wagner, Thanks, Kyle and good afternoon, everyone.
Our teams executed well this quarter and a more challenging freight market.
Continued investments in our technology platform and the flexibility of our operating model demonstrated our ability to post solid financial results in an environment with lower volumes and significant truckload pricing headwinds.
Relative to last year at this time, there is less demand for capacity.
And that coupled with an oversupply of trucks means there's little to no spot freight and all truckload prices have come down dramatically.
Well, we are far from the peak conditions, we saw a year ago. There are many things that keep us excited about where we're headed.
We continue to expand with our larger truckload shippers and are winning more contract freight to partially offset the loss of spot market freight versus a year ago.
Our managed transportation offering continues to resonate with shippers and we had another nice quarter of new customer wins.
We're seeing our technology create value for both our shippers and our carriers as we continue technology will increase the efficiency of our internal freight marketplace for all participants, including shippers and carriers as well as echo sales operations and back office team members.
Our updated guidance has us reducing costs on a year over year basis, even as we add to our sales and technology teams.
The market's not working in our favor like it was in 2018, but I've never been more excited about the pace of our technology evolution and our position in the market.
Now ill highlight some of the Q2 results.
Total revenue was $554 million, representing a 12.8% decrease from last year.
Net revenue was $100.6 million, representing a 5.8% decrease from last year.
Adjusted EBITDA was $23.1 million, representing a 5.4% decrease from the prior year.
And non-GAAP fully diluted EPS was 42 cents compared to 46 cents in the year ago period.
Now I'd like to turn it over to Dave to go into more detail on our performance.
Thanks, Doug before I dive straight into our results I'd like to highlight a few key themes.
They continue to play out in 2019 first truckload spot market continues to be very soft rates are down and spot opportunities are much lower than last year.
Number two.
The truckload of contract Mart, but market is very competitive as you'd expect in a soft market, but despite the high level of competition, we're gaining share in this important component of the market.
Number three truckload pricing remained relatively flat on a monthly basis throughout the quarter, but the year over year decline accelerated due to escalating rates in 2018.
And number four we are investing in rolling out technology to drive further automation into our platform.
And we believe these investments will continue to drive lower cost through higher productivity over the next several years.
I'll get into more specifics on these themes as we walk through our quarterly results, but first I want to thank our clients for their support and inbound logistics annual Shipper survey, where we were awarded the number one threepl for the third year in a row.
We're very proud of this recognition as our entire organization has a strong commitment to exceed expectations for our clients and for our carriers and I want to thank all of our employees for the hard work that theyve executed over the last year to help us earn that recognition.
So now let's take a look at our results by mode as shown on slide four.
In Q2, total truckload revenue was $362 million and decreased by 18% over the prior year. The majority of the revenue decline was due to lower rates truckload volume was down 7% year over year and our revenue per shipment was down 12%.
Consistent with the first quarter the volume decline was entirely attributable to our spot business as primary award volume increased by 9% in Q2.
The decrease in rates is consistent with the change in market conditions.
And a decline in the cost of capital capacity.
To state the obvious our industry is really showing how volatile and cyclical it can be the current environment is about a 180 degrees from where we were a year ago.
Responses rapid change has been to be more aggressive in our pursuit of contract business.
This sounds simple, but an execution, it's important that we remain strategic with our clients and remain positioned to exceed their service expectations.
In a competitive market, where others are more focused on growing share regardless of profitability. We've made the conscious decision not to chase market share at all cost.
We will lead with service and focus on driving partnerships with our clients and our carriers are shippers are shippers value. This approach at the same time, we recognize that cost is a critical component to the equation.
Our network and corresponding lane density enable us to consistently secured capacity at rates below the market averages were in a great position when the market inevitably shifts as we've expanded many shipper relationships as evidenced by our contract growth and we remain confident in our ability to tap into spot capacity when our clients require it.
If the market remains soft soft we'll continue to steadily grow our contract truckload LTL and managed transportation business.
When the year over year comps on the spot business start to ease up we expect to continue to drive organic volume growth across all key categories of the business.
During the quarter, our primary award business represented 53% of our total as compared to 43% a year ago.
Last quarter, we mentioned our launch of available loads in Echo drive and I'm very pleased with the reception from the carriers in our network.
As a component of our launch strategy, we surveyed our users and found that many of our carriers were also actively utilizing other online tools.
Not surprising given the evolution of digital capabilities.
We've been pleased that in this recent survey our users rated eco driving them as the most preferred above all other competitive portals. This is very exciting as we're just starting to grow our digital interactions with our carrier base and we've got lots of great ideas about how to advance this offering with both technology and data science.
Turning to LTL, we generated a total of 165 million, 3% growth over the prior year.
Increases in both rates and volume drove this performance.
Our LTL shipment volume was up 2% in Q1 and Q to Q2 at a revenue per shipment was up 1%.
Our eco ship platform continues to gain tractions with our with our small to mid size LTL shippers similar to Echo driver Eco ship platform is highly rated by our shippers and we will continue to enhance this platform over time.
Turning to slide five our transactional revenue of $428 million declined 15% driven primarily from the decrease in truckload revenue.
Our managed transportation revenue was 126 million in Q2 decrease of 5% over the prior year. The quarterly revenue change was impacted by lower truckload rates as managed transportation shipment volume was up 3% in Q2.
We had another strong quarter from a new business when prospective with $32 million of new freight span landed during the quarter.
Turning to slide six we generated 100.6 million in net revenue and our net revenue margin increased 134 points over the prior year to 18.2%. This increase was due to an increase in truckload margin of 189 basis basis points and a decrease in LTL 34 basis points.
The increase in truckload net revenue margin was driven primarily from award business, where we again saw a significant decrease in loss loads due to the softening in capacity.
I'd now like to turn it over to Kyle to review additional Q2 financial details and outlook.
Thanks, Dave.
On page seven of the slide you'll find a summary of our key operating statement line items Commission expense was $31.1 million in the second quarter of 2019, decreasing 4% year over year Commission expense was 30, 30.9% of net revenue compared to 30.3% for the second quarter last year.
Our non-GAAP operating expense was $46.5 million in the second quarter down 7% from a year ago second quarter of 2018.
We've again added to our sales and technology teams, but we've been able to reduce costs on a year over year basis due to continued automation and lower incentive costs.
Depreciation expense was $6.8 million in the second quarter up from $5.8 million in the year ago period.
This increase in depreciation is associated with the increase in our continued investment in technology.
Cash interest expense was $1.3 million during the second quarter compared to $1.6 million in the year ago period.
The decrease is due to the repurchase of a portion of our outstanding convertible debt.
And our non-GAAP effective income tax rate was 25% for the second quarter of 2019.
As Doug mentioned non-GAAP fully diluted earnings per share was 42 cents decreasing from 46 cents in the second quarter of 2018, and the primary differences between our GAAP and non-GAAP fully diluted EPS.
Our 3 million of amortization of intangibles $2.2 million of noncash interest expense and $2.4 million of stock comp expense.
Moving to slide eight which contains selected cash flow and balance sheet data in the second quarter of 2019, we had free cash flow of $20.3 million and operating cash flow of $27.1 million. This brings our trailing 12 months free cash flow to $86.7 million.
Capital expenditures totaled $6.8 million in the quarter compared to $5.6 million in the prior year.
We ended the quarter with $16 million cash and $322 million of accounts receivable and at the end of the quarter, we had nothing drawn on our $350 million ABL facility.
During the quarter, we repurchased 702000 shares of our stock for $15.5 million or an average of $22.06 per share. In addition, we repurchased 26.4 million face value of our convertible debt for $26.1 million.
And as of the end of the quarter, we have approximately 23 million available on our repurchase authorization.
Now I'll take a moment to walk through our guidance for the third quarter and the remainder of the year, which we've highlighted on slide nine.
Revenue during the last two weeks was down 19% on a per day basis compared to last year.
Our net revenue margins during the second quarter decreased as we progress through throughout Q2, which is a typical seasonal pattern as we've talked about before.
Margins during the last two weeks have been in the mid to high 17% range. So given all these current trends, we expect Q3 revenue to be in the range of $530 million to $570 million and for the full year, we expect revenue in the range of $2.1 billion to $2.25 billion.
With regards to other guidance, we expect the following commission expense to be between 30.5, and 31% for the third quarter and the full year.
DNA costs to be between 45, and a half and $47.5 million for the third quarter, and 185 and $191 million for the full year, which is down $10 million from the previous midpoint.
Depreciation is estimated to be about $7 million for the third quarter and $27 million for the full year.
Capex is still estimated to be $27 million to $30 million for the year.
Cash interest of approximately $1.3 million for the third quarter and $5.3 million for the full year.
And we continue to expect our quarterly tax rate to be approximately 25% for the third quarter and for the full year.
We also anticipate our share count to be approximately 26.6 million shares for the remainder of the year.
Excluded from our non-GAAP calculations in the third quarter and full year, we expect amortization of approximately $2.8 million in $11.8 million noncash interest of $1.6 million and $7.4 million and stock compensation expense of about $2.6 million and $10.4 million.
I'd now like to turn the call back over to Doug.
Thanks Kyle.
No. There's no escaping the fact that we compete in a cyclical industry and the market has changed from the tight capacity next bleeding rate environment of early to mid 2018.
An important aspect of how we run the business is to make adjustments in different phases of the cycle.
When the market starts to soften.
We anticipate there will be less spot freight available. So we know we will need to win more primary lanes in order to maintain volumes.
Of course, we need to take a balanced approach between pricing to win more lanes and maintaining our net revenue margins.
We also have to look around the corner and think about where will we be when the market tightens up again, and therefore, how much risk do we want to take.
All in all I think we've proven over time that we do a very good job of trying to find the right balance on this approach.
We understand that these cycles come and go.
And we continue to invest and build for the long term.
Most of this investment today is in the technology and data science.
And the payback will come through automation optimization and reduced SGN a costs.
I remain very optimistic in our future as we have an amazing set of capabilities to compete and win in any market.
And our people are experienced and talented our carrier base is a very high quality in our network has scale and our technology enables efficient execution and we are aggressively advancing this platform through echo accelerator.
We do continue to think about and work on tuck in M&A.
As an additional growth driver.
We've assembled a good pipeline of opportunities and we believe that valuations have become more reasonable.
M&A has been a key part of our strategy in the past and provides a catalyst for organic growth.
As we assimilate the acquired business onto the Echo platform and then expand their capabilities.
Finally, our client.
Satisfaction and carrier satisfaction is very high I want to thank our clients for voting echo his number the number one threepl and inbound logistics annual survey and we're excited about our threepi.
We plan to keep rolling.
So with that I'd like to thank everybody and open it up for questions.
Thank you, ladies and gentlemen, I'd like to ask a question. Please press Star then one on your test.
Telecom again, if you would like to ask a question. Please press Star then one.
One moment for our first question.
Our first question comes from Allison Landry of Credit Suisse. Your line is open.
Good afternoon, and thank you.
I was wondering if you could maybe parse out how much of the net revenue margin expansion that.
As seen in the last couple of quarters.
More efficient buying capacity our assays.
Favorable by South spreads and maybe that offsets out of lower gross revenues and then if you.
If you could maybe comment on that sequential deceleration you're seeing in the net revenues is that primarily due to you.
The narrowing of the divide it sounds spreads so far in Q3.
So.
Two questions in terms of the.
The first question.
Allison, which is which is.
I think that the.
The net revenue expansion.
This is primarily the result of a typical cycle that weve seen play out in the freight business for a long time, which is.
When rates are moving downward they tend to move a little bit.
More quickly with the carriers than they do with the shippers and so theres. So thats one part of the equation. The second part of the equation as I mentioned in my prepared remarks is that especially in our award business.
Because of the the change in freight environment, we've pretty significantly reduce the amount of negative loads, which is negative margin, which create some margin expansion for us on the award side, because there's just less loss business there.
I think that we've looked at.
Our ability to buy.
At or below market averages and we've consistently performed better than market averages and that hasn't changed dramatically.
If anything it's expanded a little bit over the last six months.
So I think that was kind of second part of your question is how much came from from actually just buying better and so we have seen some improvement there, but its we can pretty consistently been that over the last several years.
And then okay.
That could you give me give me a hand with your second question.
Also.
Got it.
I think Kyle it made the comment that.
In the last few weeks that the net revenue margins have been started and then need to our that 17 sort of like mid seventys as the high Seventeens and I was just wondering what might be driving that sequential deceleration.
So you know it's interesting I think that.
In June we saw continued we saw a little bit of a price increase on the carrier side happen in June persisted a little bit into July so I think that kind of coming out of the holiday period. We saw we saw some compression of margins and then as the.
The holiday has kind of subsided weve seen that bounced back a little bit. So I think it's it was mainly driven by.
The market tightening up just a little bit in June .
And then may be easing up a little bit as we've kind of gotten into mid July .
Okay.
And then Doug you mentioned.
I think the last comment that you made that valuations have come in at that now.
Curious if we should take that comment maybe as a signal that you guys are a bit closer to something on the acquisition front and perhaps even in the last three to six months. Thank you.
Well of course, we can't comment on anything before its concluded but.
The Com was just intended to let you know that were active in the marketplace, we're having lots of conversations and meetings and.
And.
It's our intention to.
Do deals when we find the right deals at the right price.
Okay. Thank you.
Thank you Andrew.
Our next question comes from Jack Atkins Stephens. Your line is open.
Hey, guys good afternoon, and congratulations on executing really well in a tough tough backdrop out there.
Thanks, Jeff So.
Doug or Dave Let me ask you just sort of when you think about the capacity situation in the broader market I mean.
Is there a way to kind of think about how oversupplied or.
I don't think if I understood why but I guess, how oversupplied the the truckload market is relative to last year and would you say.
100, 5200 300 basis points.
More capacity than there is demand I'm just trying to help.
Kind of frame up.
Sort of how.
Just trying to frame up how much capacity excess capacity there is out there right now.
Well I'll take a stab jakone and maybe Dave wants to jump into.
Ill back in the heyday of 2018, when the market was Super tries and there were not enough drivers and not enough trucks.
I I sort of four forecast and probably told some of you that I thought it was going to last quite a while because.
I got the sense that the trucking companies weren't buying capacity and it was hard to find drivers even if they did you know and.
As we got into late 2018.
Market seemed to soften a little bit we actually did a carrier survey.
We.
With surveyed a number of smaller carriers and we estimate that added any capacity and then backfill. It added significant capacity and I don't know if that extends to the larger carriers or not but I certainly do think that.
The industry bought a lot more trucks than we realize that they did and so that's manifesting itself now as excess capacity, but it's hard to quantify.
Got you, yes, I feel like it to be taken a shot in the dark to try to actually quantify that Jack I mean, and we talked about the survey we did and of course. It was with smaller carriers did include a lot of large carrier. So it's not representative of the entire markets a little difficult to extrapolate it but we saw you know in the neighborhood of 5% to 10% equipment added.
In 2018 from.
Selected smaller carriers that chose to respond or survey, which.
Yes, quite which as Doug mentioned quite a bit and then if you look at the truckload truckload.
Shipment indexes.
They are flat or down a little bit this year Cas index et cetera. So.
Ill put those two things together then I see that rates are we mentioned that rates were 12% lower.
And.
Year over year in the in Q2, so you've got a 10% to 15% price reduction happening overall. So those those are the data points I would look to to try to answer the question, but I don't know if I could give you a definitive answer no that makes sense I know, it's hard to put too fine a point on it.
Let me ask I guess, the the other side of the coin which is.
Are you guys seeing anything in your.
In your business.
For the last couple of months that would lead you to believe that maybe some of the smaller carriers are sort of dropping off and you maybe there's some attrition in terms of just.
The carrier count out there.
I know you guys have a pretty broad base of folks that.
That you work with Im just curious if you're maybe seeing on the margin some smaller carriers given how challenging it is out there go out of business.
I would just say just what we read about more so than seen in the data.
It's difficult to see it in the data because there is a bit of excess capacity. So it's a little.
Loads get covered a little more quickly and so there is capacity out there so it doesn't.
Doesn't kind of show itself to us in the data read a little bit about.
Carriers that might be closing their doors are small owner operators that.
Logically would go on to do something else, if they could make a better living but havent seen a lot of that information and the data.
Okay got you and then I guess just one last question on that line of thought but I mean.
You know when we think about the tail end of this year and into early next year. There are some things changing on the regulatory front whether it's.
It will be R&D revealed the final conversion happening in December or the drug and alcohol clearinghouse and.
Follicle testing I mean there.
And to think that we could see some capacity come out over the next six months, even without attrition from from from challenging end market fundamentals I'd just be curious to get your take on do you think those regulatory.
Developments are going to maybe help tighten the market up over the next couple of quarters.
And our jackets, it's hard to say I mean, if you go back through mid 2017.
And we were kind of coming out of the market that was in the doldrums and.
Very quickly we saw you know with that with the two hurricanes in the LDS later in this in December .
We saw a rapid acceleration of.
Tight capacity and we never saw coming so I think it just speaks to the volatility in the.
Transportation capacity market and the difficulty you have in predicting that.
Understood.
One last question I'll turn it over Doug you mentioned Echo drive.
In your prepared comments.
Can you give me maybe give us a sense if.
If you could just around what's what the customer feedback on that it's bad and and is there any sort of way to kind of help us think about the.
The the uptake in terms of what what are what you've been able to see once you are able to drive to that more automated.
And I know you guys already have very highly automated but just that that particular part of the business that you've been rolling out over the last several months.
So Jack I'll give you a little color on that Doug wants to add to it.
He will and then.
So uh huh.
A couple of things we've had we've echo drives our portal and mobile App, we've had it out there for some time. We recently just launched a new features which is making all or a portion of our load board available to our network carriers and I'd say that we've gotten great feedback from from our carriers in terms of ease at which it is to navigate to utilize and.
And it's an efficient vehicle for carriers to search for freight when trucks free up and they're looking for load to get covered so with our model, which is a relationship model between our carrier sales team and our carriers. We've got a lot of touch points, obviously happening every day with all of our carriers in our network and and I would say that right at this point in time, it's one more way another way for our carriers to access our freight on their own time frame. So it allows 24 seven access.
So if something happens on a weekend or overnight. They can kind of search for freight make an offer unloads and we're seeing that activity. We're seeing a lot of searches were were able to.
See the data were these searches are happening and think about ways that we don't have freight that matches that there's capacity out there that were not tapping into so we're just kind of getting started in terms of how we can utilize that data more effectively.
But overall I'd say that the focus that we've had.
Has been too.
Improve the interaction with the with the with the people the process and the technology and overtime that will create more and more automated transactions.
Okay, Dave. Thanks, So much guys really appreciate the time.
Thanks Jack.
Thank you.
Our next question comes from Tom Wadewitz have you'd be at your line is open.
Yeah good evening.
Wanted to ask you about the dynamic that seems to be playing out in the market.
I guess, we you know we hear a fair bit about pretty aggressive competition among brokers and the you know contract rates among brokers are down pretty hard obviously, you know we see that in the revenue per load at the same time and whether there's pressure on the asset carriers. It seems like there maybe having a little more stickiness and in what they got at the end of the contract season, maybe seeing you know contracts that were down a little bit or rates.
And down as much so it seems like there's maybe a little different cycle dynamics and we would think is normal.
And I guess associated with that you might think there might would be more volume flowing to the brokers.
But we don't seem to be seeing that so I just wonder if you could offer some thoughts on that.
Kinda broker versus asset player dynamic and whether a cheaper broker rates might drive some volume and.
Out a quarter or.
Looking out the next couple of quarters.
Well I think the I think that the.
Yeah, because there's some excess capacity out there that that number one is you know if you pull the shippers and you look at you know the routing guides and you find all kinds of different scenarios out there and what the asset you know direct asset coverages, so broker coverage and.
Among among shippers that are going to lean more toward.
Heavier asset coverage, you know say, a 60 40 split or something like that the routing guides are working well. So there's less freight you know kind of.
Coming over on the spot side, and so because of that the brokers you know aren't seeing the spot business, maybe that they are used to seeing and they would compete a little more heavily to get their share you know of contract business, but they they compete with the asset so I wouldn't say that there's a significant.
Change other than you know if somebody wants to drive volume, they're going to probably sharpen their pencil a little bit and compete and we see that price competition for sure and that's why for us.
And we have to compete on price every day, but you know our AR, we focus a lot on the service and our strategic relationships.
With our shippers and in that in that regard.
No were able to you know either hold or expand our market share with those shippers based on the service that we provide in the commitment that we can we can give them.
Through different parts of the cycle.
Right.
Okay.
What about.
Thinking about cycles I, you know I guess, the most recent one might.
I think you know more recent might offer a better.
Framework for thinking about how the cycles play out so looking at 2015 and 16 when freight was weaker.
Do you could you offer maybe some thoughts on how this the current cycle Oh, you know what do you think it's pretty similar that you know maybe a 2000 nineteens kinda simulator 15, and and might play out with some further weakness next year in contractor. What do you think is kind of maybe the same or different versus the prior down cycle in freight.
For us it's a lot different because in that period of time that you referenced we were going through a major integration.
We have a large acquisition so.
That was a pretty big distraction for us integrating the culture and the technology of the Grand acquisition at the same time that we had a soft market.
And we got through that and we were well positioned for the the market turn when we saw it in late 17.
So I think that this this.
You want to call it 12.
Doesn't feel as bad to us as the 15 16 trough did because I think we're better equipped to deal with it.
And I also don't think that the market is gone down that far I think it's just accentuated because 2018 with such a almost a bubble year in terms of pricing and we've got somewhat of a reversion to the mean.
Right.
Yeah, Okay that makes sense I mean, it definitely seems like you're in a different spot in your your.
The system is working well in terms of some of the expense coming down so okay. Thank you for the time.
All right. Thank you.
Our next question comes from Jason Seidl, Cowen and company. Your line is open.
Thank you operator, hey, guys.
First some mixed things from the railroad about the anticipation in peak season Whats Your managed transportation business, telling you to expect.
In the upcoming peak.
Well I don't think that.
You know in that part of the site you know.
We're not seeing any significant inventory build up and in relation to the peak right. Now are our managed transportation business is more industrial.
Then it is retail so.
Maybe we wouldn't see it quite as much because of that factor.
But I would say, it's been steady but haven't seen a significant you know.
Any significant movement toward toward the peak at this point.
Okay fair enough.
And Doug getting getting back to.
Talking a little bit about acquisitions could you walk us through.
What you are looking to add or do you think echo might be missing that you might be able to go out there in the marketplace and provide customers with.
Sure well you know, we've always been pretty true to our strategy, which is staying close to our core of our business non asset.
Value added technology enabled.
If you look at our our coverage we've got pretty good density now on dry van brokerage, we've got a great LTL brokerage coverage, we've got a managed transportation business, which is traditionally cater to smaller shippers with.
Lower freight under management spends.
So I think.
The ability to add to that is.
Big opportunity and go up market. So we could look at managed transportation type companies.
We could look at niches and brokerage that our geographical in nature like Mexico and Canada.
We could look at niches like temperature controlled or flatbed tank or so so theres a lot of niches that.
Our complimentary to what we do if we bought another LTL or dry van brokerage, we'd have to be mindful of how much customer overlap there is and carrier overlap and think through if that.
Make sense and do the math, but they are still even opportunities there just because of the size of the market.
And the value of some of those relationships. So it's it continues to be a target rich environment. We took a couple of years off after we acquired command and.
You know for us that was a transformational deal.
Really position us well for the 2018 market and we were able to make a lot of hey last year.
And we were on hiatus from M&A, but I think thats all washed through the pipe now and we're ready to get back on the horse.
That's great color I appreciate the time as always.
Thank you.
Thank you.
Our next question comes from Bascome majors Susquehanna Your line is open.
Yes. Thanks for taking my question here I, just want to walk through some of the dynamics impacting in the second half.
You talked a little about the net revenue margin into the third quarter.
Kind of tying things together with.
The topline outlook that you've given it feels like net revenue if you're able to continue expanding in a weaker market on the margin front could be down some somewhere between.
Mid to high single digits, maybe even low double digits in the second half as a whole.
That's a really wide range.
Understanding that you don't want to necessarily guys have been too precisely but are we in the ballpark there about.
A reasonable range of outcomes as we recalibrate our expectation.
So thats why I want to make sure I understand your question you are asking about to a range of expectations for our net revenue dollars in the back half.
And how that would compare to last year's back half correct.
Yes, I think I would I would probably.
Stop short of.
I've given guidance on that because we don't guide on margins.
We did we talked about the last couple of weeks here.
Starting off July where margins are in the mid to high 17%.
We feel like our ability to buy better than the market benefits us as the market changes I think the other thing I'd highlight is and we've talked about this one before but it's not unusual that Q2, and Q3 are lower lower margin quarters than Q1, and Q4 kind of seasonally because of.
Truckload demand.
But I don't want to go too much further than that in terms of predicting where the margins are going to be in the back half of the year in how that would relate to the back half from last year.
Understood.
Let me ask a an operating expense question.
If net revenue is down appreciably in the second half.
Is that.
Is that incorporated in your updated operating expense in DNA guidance.
And can you talk kind of functionally the levers you have to pull I imagine incentive comp is one piece that gets you between the low and the high end and.
But anything else you'd like to throw out there and kind of where those things stand today in the budget that you've laid out thanks.
Sure So obviously that.
The most obvious place that that cost would be impacted if margins move gross margins move up or down is through the commission line, which is fairly fairly consistent percentage of of net revenue.
In terms of what's built into the DNA guidance for the for the back half of the year the remainder of the year. It does it takes into account.
Different scenarios, which is why we have that range I think we feel good about how we've been able to bring costs down from our original expectations.
But weve also but the revenue guidance down from our original expectations. So at the midpoint.
We now expect to decrease costs year over year by 3% or so.
Even with adding to the sales and technology teams and investing there like we have through throughout different freight cycles in the past.
So I think the.
It does flow through in the incentive compensation as you as you talk about.
And that's all that's all built into that guidance that we have.
And last one forgive me if I missed it did you give an indication on capex and if you didn't when you give that for this year and maybe something early.
As far as next year based on what we know today. Thank you.
Yes, so we still expect to be somewhere in the $27 million to $30 million range for Capex for for this year and.
I would probably expect that that might move up modestly next year is kind of the initial guide post before we give guidance for next year.
Thank you for the time.
Thanks.
Thank you. Our next question comes from Ravi Shanker of Morgan Stanley . Your line is open.
Good afternoon, everyone. This is christine on.
Hi, Justine.
Number of comments in regards to technology and what you guys are doing on that front, but I'd be curious to hear your perspective on.
What you're seeing in terms of patterns.
From some of the other digital freight brokers.
So what they are going ask or whether it's certain types of claims or certain types of customers.
And how that relates to your own competitive moat around your technology product or the type of.
Customers are lanes that you're serving.
You could just give a little color on that front.
Well were no expert on the.
Competition, that's in startup mode, but we.
We've seen some evidence that they are going after the larger shippers.
With big routing guides.
And.
Also appears to be more regional lanes in nature.
So you know as we noticed it but it's a huge market so don't necessarily feel affected by it.
Got it that's great thanks very much.
Thank you.
Our next question comes from Stephanie Benjamin of Suntrust. Your line is open.
Hi, good evening. Thanks for the question I just wanted to follow up a little bit I know, we talked a lot about just capacity in the market, but I wanted to hear a little more about your commentary around just overall freight.
Maybe you could dig into that in terms of you're seeing any specific industry or if it's more just a later start any seasonal patterns are kind of expectations going forward, if you're seeing any changes would be helpful. Thanks.
Yes, I'll give you a little color on it and then Doug you can you can you can add to it on in our larger shippers.
It manifests itself more in the in the.
Lack of spot market freight that we see we should probably makes sense to you because our contract business has grown and.
And our spot business is down quite a bit but included in our spot business.
It is also a significant amount of SMB customers and when we look across our SMB customer base.
We have seen more and this isn't these are customers that weve retained and believe that we've retained our share with what we've seen more decliners than growers and I think that's a good indication just the overall shipment volumes were kind of down across the industry and it's difficult for us to.
Point to inventory levels or tariffs or GDP, you know of.
Industrial production stats to say to correlate it but I would say that.
When you get down into this SMB category.
You tend to see more decliners than being gainers.
Yeah, I would just add two things one.
Recall that we tend to be more industrial and our customer base and not.
I've noticed lately there is some weakness in manufacturing.
And then the second point is.
The noise around the tariffs.
We we don't really have a grasp on how that's affecting freight although when you talk to a lot of shippers.
It all effects it affects all of them in some way or another and how they react to it varies quite a bit. So I believe that there is some impact on on freight flows based on concerns about tariffs, but it's a I think impossible to really clarify that story.
Got it well I really appreciate the color. Thanks, so much.
Thank you.
Our next question comes from Matt Young of Morningstar. Your line is open.
Good afternoon, and thanks guys.
Yes in terms of pricing comparisons are obviously at play here, but it sounds like the bidding back the bidding backdrop has become much more competitive in recent quarters.
Noting any specific providers, becoming aggressive or perhaps a rational with the pricing to grab share.
And if so have you noted that coming more from maybe traditional players or perhaps a few of the large digital upstarts.
Yes, I would say, we don't want to get into the details, let's say, it's always competitive bid process is by nature competitive.
You know I, we have seen in some cases.
The digital Upstarts are are very aggressive in certain like Doug said regions or areas, maybe that they are trying to build a carrier basin.
So I'd say that it's it has been the market softer so the competition does increase across all providers.
And and the rates are coming down. So those were kind of factors that we see and I wouldn't want to go really any any deeper than that.
Fair enough.
And then also the spot pricing is clearly down but could you talk a little bit about the cadence of the contract pricing of late I think it was still up year over year last quarter is that still the case currently.
So in our data the contract price is actually down in Q2. So its got it was up it was up modestly in Q1, it's come down it's a little bit down in Q2, and when we look at our contract business. You know it kind of comes into two or three different pretty big buckets, one would be you know that.
The stuff that we talk about so often which is which is annual year long kind of contract bids and and those cycles and those prices for the most part of our SSAT and they may they may get modified over time, but in a lot. Most cases there their SAP, but there is also a fairly significant amount of contract business that comes in the form of many beds, which is going to get price.
Based on current market conditions, and so I think that that's starting to kind of bleed into the numbers and driving.
You know the freight rates from a from our perspective, our revenue per load down.
Across all the categories.
Okay that makes sense.
All right appreciate it Dave Thanks.
Hi, Matt Thank you.
Our next question comes from Bruce Chan of Stifel. Your line is open.
Yeah, Jeff I appreciate the time I'm, mostly gone my questions, but maybe there is one that I wanted to zero in a little bit more on here.
You talked about head count and how you are continuing to invest in head count growth and certainly we see that playing out.
But.
Given that we're progressively seeing weaker and weaker market maybe in at least you know more and more guide downs.
At what point do you decide to maybe flex back on that head count growth or do you at all.
So.
We there's a couple of there's a couple there's three kind of key areas I think that we look at more operational as opposed to Oh, no I'll skip the tech side for a second but the third operational areas.
No would be the.
The client sales focused head count.
And in that area, we probably wouldn't make significant adjustments because that's an investment in 2020 and 2021 and that's the biggest area that we've grown the operational head count the other two.
Kind of pieces of the puzzle or the carrier sales head count, which.
No we have to we have to kind of keep an eye on on how quick freight is moving and what and and that's an area that we might slow down a little bit on it makes a lot of sense of if the volumes not there and.
The spot business is kind of like that as we roll and and as we roll out more technology, we can get higher levels of productivity. So that's a that's an area that we focus on kind of slowing down a little bit on and then the third.
His operational support across all areas of the business and that's another area that we remain very focused on and it's an area. That's a little more controllable based on business volumes. So I think that those are the three key areas on the on the client sales hiring front I would be more likely to kind of stick to our guns and build build knowing that we're in a freight cycle in these cycles come and go and change continue to build their it at a reasonable pace and then the other two areas manage manage head count to the needs of the business and so we keep an eye on that.
Okay, Great. That's really helpful. And then just a final question on the M&A side I don't know if you can provide a little bit more color, but as far as where you would look to to build.
You, mostly looking for.
Lean level density kind of filling out geographic pockets are you looking to add more in managed transportation are there any specific areas of the business, where you think that M&A is.
In a more appropriate.
I think there's opportunities in both Bruce.
If you look on a lane by Lane basis, you know in theirs.
Literally millions of Odisha pairs, depending on how how granular you want to slice it.
There's there's always opportunities.
To create more density in some lengths. So so if you're looking at.
Business and they've got a certain presence in the marketplace you know call it regional.
That could be additive for us.
Like like I said on the earlier comments, there are niches of brokerage, which.
Don't have overlap you know things like flatbed and temperature control or geographic.
When you when you look at Canada, and Mexico. So I think those are opportunistic and then by definition. If you are looking at a managed trans business. There is no overlap because that's typically a single source solution. So we would essentially be buying.
A book of business and some relationships.
On a managed trans type of an offering so I think all of those can be interesting and it's just a matter of.
Finding.
Opportunities they are a good fit that can.
Go onto our platform, which is always part of our equation and where the owner can fit in and continue to grow that branch for WRECO.
Alright, great I appreciate the time.
Thank you. Thank you.
Our next question comes from Kevin Steinke of Barrington Research. Your line is open.
Hi, So just a follow up on the discussion about the second half a little bit in terms of the actual gross revenue guidance you gave.
You gave guidance for the third quarter a.
40 million range top to bottom, which implies quite a wide range of potential outcomes for the fourth quarter I think 110 million from top to bottom. So can you maybe talk about.
What factors get you towards the higher or lower end of that range for the fourth quarter.
Sure Kevin So a couple things on just on Q3.
So we talked about where we were the last couple of weeks.
At 19%.
Down on a per day basis, and so within our guidance for Q3 offers a 12% to 18% range one thing to point out as there's an extra day.
This year.
In this years quarter, so we picked up some there.
Our comps get a little bit easier.
Where where Q3 ends up so I think as we as we get on to our next call, we'll tighten up that range for Q4 for you, but really the things that drive.
The difference from the top end of the bottom end are are the volume growth and a lot of that is dependent on what's happening in the truckload spot market and then what happens with with truckload rates. So we're looking at quite a few different scenarios I think we we always feel better about being able to.
Forecast, where are the LTL brokerage and managed transportation business is going to play out.
But really the driver of the difference as we've seen so far this year and.
A lot of variability in the back half will be what's happening in the in the truckload market that weve talked so much about today.
Okay. That's helpful. That's all I had thanks for taking the question.
Thanks, Kevin.
Thank you. Our next question comes from David Campbell of Thompson Davis and company. Your line is open.
Yes, Thanks, a lot for.
Taking my question.
First of all widens.
Yes, I don't understand why lessened truckload business.
Continues to increase I think in general has increased for all of us.
The players and.
Hi, good decreases in truckload business.
And then yeah Dania begs a question is using his extensive truckload gonna fall eventually just like truckload in Illinois.
Hi, how reliable isn't that.
Lessen dropped again to continue to go up.
When truckload goes down.
So so Dave the.
Our.
The majority of our less than truckload business is is.
Is made up of small to mid sized customers number one so we target kind of a certain part of the LTL market and.
We find that obviously our value proposition to that segment of the market is very powerful because we can provide them kind of a one stop shop.
To aggregate and find the right carrier for the REIT shipment and so we've had a lot of success continuing to grow.
Number one in different market conditions on the LTL side, the second piece of the puzzle.
As the LTL market is much more of a a network and so there's fixed cost associated with operating LTL. So there's more barriers to entry. So it's a little more constrained. So it doesn't have the same kind of volatility that you see in the truckload market.
Much more kind of consistent approach now obviously, it or the overall volumes in LTL would be.
Correlated to the overall economy completely agree with you there, but the capacity does not come and go in LTL. The way it doesn't truckload and I think thats, probably why you see much more consistency.
Certainly out of out of Echo on the LTL side.
The other thing I would just add David is that with LPL. When you have a softer macro environment.
You'll tend to see a lower average weight per shipment. So I think what happens as shippers are still shipping to their same customers, but the order sizes are small.
Yeah.
Yeah and.
And that's the that's also a problem of the truckload business isn't that big sizes shipments go down.
Well I think in truckload you just have fewer loads.
Because you're right.
Truckload, you're supplying large quantities usually to a distribution center rose LTL tends to be more.
To that end.
User.
And so a big truckload softness manifest itself in load counts LTL softness manifests itself in weight per shipment.
Yeah.
Right.
But despite the fact that weight per shipment are down.
Your LTL revenue was up in the second quarter.
So are you still running a lot better than that.
Rather than is our volume was up our volume was up in the rates like I said I mentioned the rates.
The racing LTL are actually up year over year, whereas in truckload, they're down significantly because of the impact of the of the capacity side of the equation the way it ebbs and flows.
Mhm <unk> LTL pricing is much slower to adjust.
Yeah, why can't truckload capacity converted lessened truckload kind of I don't understand is the company wants.
If you get more trust less than truckload capacity agents.
Okay.
The capacity and it does it does convert a little bit but it's just when you look at it on a price per pound basis, it's kind of it's got to be much smaller shipments for it to make economic sense to convert but you see a little bit of that in the volume business when the market changes and and you probably see more of that with LTL carriers, then you might see with echo in terms of how their their business might change a little bit.
As volume shipments might.
Might convert to full truckload actually also you know so like when capacity is really tight someone might take a 20000 shipment 20000 pounds shipment and put it on an LTL carrier that has excess capacity in a given lane.
But when volume when capacity is really Lewis and truckload prices are lower that same shipment might move on a full truckloads. So it's just a lot of you know I think that people do optimize and analyze those factors on the edges and try to try to find the right mode and that's one of the things we do for our clients.
Yeah. The Frontloading here is don't really have the wherewithal to.
Consolidated in aggregate shipments so it's hard to use their capacity for LTL, unless it's a multi stop truckloads.
Mhm.
Right.
Right right.
Okay, well that's a that's right that's essentially my question. Thank you very much.
Thanks, David.
Thank you.
I'm showing no further questions at this time I'd like to turn the conference back over to death, Waggoner, Chairman and Chief Executive Officer for any closing remarks.
Well I would just like to thank everybody for joining us for our second quarter call and we look forward to talking to you in a couple of months for our third quarter. Thank you very much.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you for your participation have a wonderful day you may all disconnect.