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Echo Global Logistics, Inc. (NASDAQ:ECHO)

Q1 2014 Results Earnings Conference Call

April 24, 2014, 5:00 pm ET

Executives

Suzanne Karpick - Vice President of Investor Relations

Doug Waggoner - Chief Executive Officer, Director

Dave Menzel - Chief Operating Officer

Kyle Sauers - Chief Financial Officer

Analysts

Bill Greene - Morgan Stanley

Jason Seidl - Cowen & Company

Nathan Brochmann - William Blair

Jack Atkinson - Stephens

John Mims - FBR Capital Markets

Tom Albrecht - BB&T

Allison Landry - Credit Suisse

David Campbell - Thompson, Davis & Company

Matt Young - Morningstar

Operator

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics first quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host for today, Ms. Suzanne Karpick, Vice President of Investor Relations. Ma'am, year-over-year may begin.

Suzanne Karpick

Thank you for joining us today on our first quarter 2014 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer, Dave Menzel, Chief Financial Officer and Kyle Sauers, Chief Financial Officer. We have posted presentation slides to our website that accompany management's prepared remarks and these slides can be accessed in the Investor Relations section of our site echo.com.

During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.

We will also be discussing certain non-GAAP financial measures. The reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release and supplemental 8-K filings for the quarter, both of which are also posted on our website.

With that, I would like to turn the call over to Doug.

Doug Waggoner

Thanks, Suzanne, and good afternoon, everyone. I am pleased to announce that Echo has kicked off 2014 with a record quarter in terms of gross and net revenue, delivering $248 million in gross revenue, $42 million in net revenue and $0.14 of non-GAAP earnings per share. This performance was aided by a sequential improvement in net revenue margins, even while increasing our mix of lower margin truckload business. Bottomline investments we are making in growing our business are paying off as we prove to be a valuable multimodal service provider to our clients in periods of tight capacity and market disruptions.

As everybody is well aware, the first quarter was marked by adverse weather conditions, which created challenges for shippers as they struggled to manage their supply chains in the face of rising costs and service disruptions. Many asset-based providers found their networks more difficult to operate efficiently and this combined with driver shortages and other regulatory constraints created an environment, where we were able to add additional value to both our shipper clients and our asset-based transportation partners.

I am very proud of how Echo responded to these challenges and the high levels of service we delivered to our clients and our carriers. Our technology, people and commitment to taking the complicated out of transportation management, were all critical elements driving our performance in this environment.

So for quarterly highlight, if you will turn to page three of the slides, you will find a review of the numbers for the first quarter of 2014. For the quarter, we delivered total revenue of $247.7 million, which represented 21.4% growth over the first quarter of 2013. Our organic growth rate was 13.4%, and that's the highest that it's been in five quarters. This strong performance was driven by our truckload business and we saw increased growth across both transactional and enterprise clients.

Our net revenue was $42.2 million, a 9.8% increase from the prior year. This growth was driven by increased volume and offset by a decline in net revenue margin due to both changes in mix and margin compression in our truckload business.

Our non-GAAP operating income was $5.4 million, down 4.2% in the prior year. This was due to continued investments in our business which are driving top line revenue growth. On a sequential basis, we generated a 30% improvement in non-GAAP operating income on net revenue gains 14.2%.

One of the key strength of our business model is the ability to grow organically and through acquisitions, which we demonstrated again this quarter. In the first quarter, we made two acquisitions, which together generated approximately $65 million in truckload revenue over the trailing 12 months. Online Freight Services or OFS was acquired in January and we discussed this on our last earnings call. OFS has been successfully integrated and is demonstrating continued growth, post integration with Echo.

Additionally, we acquired Comcar Logistics in February. Comcar has offices in Jacksonville, Florida and Denver, Colorado. We have already integrated Comcar on to Echo's technology platform. We are very excited about the opportunity to leverage these investments to drive continued growth and contribute to the improving operating performance of our business.

And now, let me turn the call over to Dave who will discuss some of our operational results in more detail.

Dave Menzel

Thanks, Doug. Please turn to slide four which summarizes our revenue by mode of transportation. As you can see our LTL revenue increased 5% year-over-year to $90.9 million driven by a 2% increase in volume and a 3% increase in revenue per shipment. Our revenue increases were driven by both our enterprise and transactional clients. Truckload revenue increased 45.9% year-over-year to $128.6 million for the quarter, driven by 23% increase in volume and 18.7% increase in revenue per shipment. The rate increases we saw in Q1 were unprecedented in terms of sequential spike in rates.

Over the preceding four years, our sequential truckload rate changes peaked to 3% in 2010 and actually had a decline between 2.5% and 5% over the last three years. We believe this spike in truckload rates was driven by a combination of events ranging from factors including industry conditions that have been putting cost pressure on truckload carriers to the severe weather conditions that dramatically reduced capacity in Q1. This tight capacity environment puts significant pressure on shippers in terms of their ability to manage their supply chain.

By design, the investments we have made in our truckload operation over the last few years have positioned us well to add value to our clients by enabling them to tap into small to midsized truckload carriers to excess capacity. This drove volume increases across our truckload clients, both our larger national accounts, as well as our small to midsized shippers.

Approximately two thirds of our 46% truckload revenue growth was organic, with the balance generated by our acquisitions completed in Q1. Organic growth rate was relatively consistent between our transactional and enterprise business. Our intermodal revenue decreased 5.7% year-over-year, totaling $15.3 million for the quarter. Intermodal transportation was disrupted by severe weather which was a primary driver of the year-over-year decline.

We have recently integrated our intermodal platform and to optimize our core technology to better promote this offering about the various sales channels. We expect this to continue to bring value to our clients as another leg of our integrated multimodal solutions.

Other revenue decreased 1.4% in the first quarter over the same period in 2013, totaling $12.9 million. Other revenue includes small parcel, international and expedited revenue and this decrease was primarily driven by changes in mode mix within our enterprise business.

Please turn to slide five for breakdown of revenue by client type. Our transactional revenue increased 24.1% year-over-year contributing $177.6 million for the quarter. Organic growth across our truckload and LTL modes drove 14 percentage points of the increase. The remaining 10 percentage points were driven by our acquisitions. Our transactional revenue per sales rep increased by 22.7% on a year-over-year basis. Our sales headcount increased by 67 people year-over-year totaling 914 at the end of Q1.

Our revenue from enterprise clients increased 15.1% year-over-year contributing $70.1 million in the first quarter of 2014. This increase was primarily due to the continued growth in the number of clients. We added seven clients during the quarter and had a renewal rate of greater than 96% on contracts expiring during the quarter. We continue to have a strong pipeline of new enterprise opportunities, when adding seasoned talent to this part of our organization.

Turning to slide six, I will review our net revenue and net revenue margins. Our net revenue increased 9.8% year-over-year to total $42.2 million in the first quarter. This is a result of 21.4% gross revenue growth offset by a year-over-year decline in net revenue margin. Our net revenue margin was 17% for the first quarter, representing a 35 basis point increase sequentially and 181 basis point decrease over the same period in 2013. This decline in net revenue margin was driven primarily by two factors, year-over-year truckload net revenue margin compression being the first and second, year-over-year expansion of truckload within our mode mix.

Starting with the truckload. The rising prices and general tightness in capacity drove a 122 basis point decrease in truckload net revenue margin on a year-over-year basis. This decline is significantly lower than the 277 basis points year-over-year decline we experienced in Q4 of 2013, reflecting an improvement in our ability to adjust pricing in the face of extreme market conditions. Truckload revenue represented 51.9% of total revenue in Q1 2014, as compared to 43.2% in Q1 2013. This shift in mode mix was the primary driver of the remainder of the margin decline on a year-over-year basis, approximately 59 basis points.

As I mentioned earlier, our net revenue margin increased by 35 basis points on a sequential basis and our truckload net revenue margin increased by 207 basis points sequentially. The majority of our sequential increase in truckload net revenue margin was offset by mode mix due to the acquisitions and the higher sequential truckload growth rate.

With that, I would like to turn it over to Kyle.

Kyle Sauers

Thanks, Dave. On page seven of the supplemental materials, you will find a summary of our key operating statement line items. Commission expense was $11.2 million in the first quarter, increasing 12.7% year-over-year. Commission expense was 26.6% of net revenue representing a 69 basis point increase from the first quarter of 2013. This increase was the result of changes in our sales channel mix and the growth of our truckload revenue, which has a higher commission expense. We continue to expect commission expense to come in between 25.5% and 27.5% for the year.

G&A expense was $22.6 million in the first quarter of 2014, up 11.7% from the first quarter of 2013. This amount excludes one-time acquisition related transaction costs of approximately $1.2 million incurred during the quarter. As highlighted earlier, we been very successful with our recruiting effort thus far in 2014 which has accelerated some of our expected G&A spend. We expect this, a full quarter of our two new acquisitions and other costs associated with our continued growth to add approximately $2 million more to our G&A run rate for the second quarter.

Depreciation and amortization expense was $3.0 million in the first quarter of 2014, increasing 13.9% year-over-year. The increase was driven by continued investment in our proprietary technology, the cost of the expansion of our corporate office and the partial quarter amortization of intangibles related to our two recent acquisitions. We expect this amount increased to approximately $3.3 million in the second quarter.

Our effective income tax rate was 38.1% for the first quarter of 2014, compared to 37.4% in the prior year. Non-GAAP operating income decreased 4.2% year-over-year to $5.4 million in the first quarter of 2014. This is a result of lower net revenue margins as our gross revenue growth significantly outpaced both our G&A and our depreciation and amortization increases year-over-year. Non-GAAP net income decreased 4.7% in the first quarter of 2013 to $3.3 million.

Fully diluted non-GAAP earnings per share was $0.14 and fully diluted GAAP EPS was $0.10 in the first quarter of 2014 due to the acquisition related transaction costs and changes in contingent consideration payables.

Slide eight contains selected cash flow and balance sheet data. In the first quarter of 2014, we generated $10.2 million in positive operating cash flow. This was an increase of 63.3% from the first quarter of 2013, primarily due to timing differences of changes in working capital. Capital expenditures totaled $4.3 million in the quarter, an increase of 95.7% from the first quarter of 2013. This increase was primarily related to the previously mentioned expansion for our headquarters in Chicago.

Payments for acquisitions, net of cash acquired during the first quarter was $13.8 million and we made $1.2 million in payments under our contingent obligations related to prior acquisitions. At the end of the quarter, our contingent obligation to sellers is reflected on our balance sheet at $7 million, which is its estimated fair value. Also as of the end of quarter, we had $42.6 million in cash.

I will now turn the call back over to Doug for some closing comments.

Doug Waggoner

Thanks, Kyle. We are very pleased with our growth in the first quarter, particularly with how difficult the first couple of weeks of January were due to the weather. Even more encouraging was the growth we continue to see thus for in the second quarter. Through the first few weeks of April, we have seen 27% growth over the prior year. Just as important, our organic growth rate has been 17%. We have seen modest decreases in our net revenue margin thus far in the second quarter and expect the continued strong growth of our truckload segment to pressure our overall net revenue margin.

On our last call, we issued full year guidance which did not include the impact of anticipated acquisitions throughout the year. As a result of our acquisitions completed in February and our revenue growth thus far in 2014, we are increasing our revenue and G&A guidance for the full year 2014. We now expect revenue to be in the range of $1.04 billion to $1.1 billion and G&A to be in the range of $93 million to $97 million.

We recently announced our annual Investor Day to take place on June 9. We look forward to seeing all of you there at which time we will talk more about our differentiating position in the marketplace, our growth strategies and our approach to serving clients and carriers, as well as issue long-term financial targets for 2017.

It was a challenging first quarter for all transportation providers, both asset and non-asset-based alike. Echo is doing a great job of navigating the environment to provide capacity for clients at prices that satisfy our carriers and all the while taking significant market share.

With that, I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bill Greene of Morgan Stanley. Your line is open. Please go ahead.

Bill Greene - Morgan Stanley

Thank you. Good afternoon. Doug, in your last remarks there, you mentioned that the net revenue margin so far in the second quarter had, were modestly lower. Is that a mix effect or is that because there is still some mismatching trying to keep the prices that you charge your customers above what you are or rising faster than your underlying cost of transportation?

Doug Waggoner

I guess, mostly it's just the pressure from the increased truckload on road.

Dave Menzel

Bill, one of the things we have seen in early April is that capacity has loosened a little bit. So there is a little less spot business as the capacity has loosened up in the first couple weeks of April. But at the same time, are kind of just of the front end of starting produce season. So typically, in our business, and Doug has referred to, its kind of more like a just modest sequential decline but we always expect to see a little bit of pressure in Q2 that's primarily related to the seasonality in our business.

Bill Greene - Morgan Stanley

Okay, that makes sense. When you approach the market, do you feel like you have a lot of control over the pricing? Obviously, you don't over the truckload pricing itself, but do you feel like there is a great ability in the spot market for you to try to push harder on prices if you wanted to get those net revenue margins to expand? Or is it kind of like the market gives you the price and you try to make sure that you can fill in an appropriate net revenue margin?

Dave Menzel

Well, I think, Bill, there is lots of answers to that question. I think it's pretty complicated and client by client situations drive the pricing decisions that we make on a day-to-day basis. First priority is to be a reliable service provider to our clients and to do that we want to able to tap in to the market in an appropriate way to find dependable carriers to help us manage the supply chain. So I think that on the one hand, throughout the quarter and continuing into the second quarter, shippers are understanding of the capacity environment and they want a reliable solution. So on the one hand, they are certainly willing to have a conversation to talk about the appropriate pricing in the marketplace. But at the same time, like all shippers, they are concerned with managing the cost of their transportation. So there is absolutely an environment in which there is a frank conversation happening with our client about how to approach the market and that's very constructive. So there is pressure on both sides of that.

Bill Greene - Morgan Stanley

That makes sense. The final question is just, Doug, on your last comments there about the underlying organic growth there being 17%. Do you feel like there has been a sequential improvement in the economy? Is that, I know it is always tough to say, but what sort of the driver there, is it more transactional or is it more enterprise?

Doug Waggoner

Well, I think, in our numbers, it has been more transactional, but our enterprise pipeline continues to be strong. We continue to close deals at the same traditional rates. And I feel like we are just hitting on all cylinders and the investments we made are paying off and we are just executing.

Bill Greene - Morgan Stanley

Fair enough. Okay. Thank you for the time.

Operator

Our next question comes from the line Jason Seidl of Cowen & Company. Your line is open. Please go ahead.

Jason Seidl - Cowen & Company

Hi. Good afternoon, guys. How is everything?

Doug Waggoner

Good. Thank you.

Jason Seidl - Cowen & Company

I had a couple of quick questions. You mentioned what you have seen thus far in Q2 on the gross. So you said there was a modest decrease in your gross margins. Now is that sequentially or you are talking year-over-year?

Doug Waggoner

We are talking sequentially.

Jason Seidl - Cowen & Company

Okay, I just wanted to clarify that. Also you talked a little bit in your release and in your remarks about doing a better job this time around on your truckload gross margins. Is this a case where you have been able to sort of maybe back to some people and ask for higher prices on your end based on that market is just that much tighter now? I am just trying to figure out what's going on in the quarter?

Dave Menzel

Well, I think that, as I mentioned earlier, absolutely the cost of capacity has sharply risen in the first quarter. So on the one hand, our year-over-year truckload margins are in fact down. So you can t look at it one way to say that the cost have segment risen more quickly than our ability to pass them on. But at the same time, we have in fact had those conversations to raise pricing as appropriate in certain situations so that we can provide reliable capacity to our clients. So those conversations are ongoing. Clients are certainly interested in having a reliable solution. So we are working hard to keep up with the market conditions to be able to provide reliable capacity. So obviously prices have in fact gone up pretty dramatically in the first quarter due to that environment.

Doug Waggoner

I would also point out the fourth quarter call that we talked about being a little short handed on the sourcing side. As we indicated today, we have added sourcing capacity and that's helped us out.

Jason Seidl - Cowen & Company

Okay. You also put in your slide deck about changes in your channel mix, in your sales channel mix. What sort of impact should we expect going forward?

Dave Menzel

Well, I don't know that there is any material changes in results, so to speak, from any changes in the channel. And I don't know that there has been a dramatic shift in any way. The acquisition of OFS drove a little more agent-based businesses, but at the same time, our core business is growing at a pretty rapid rate as well. So I don't see any significant changes from that.

Jason Seidl - Cowen & Company

Okay. It looks like you guys are still very well positioned to keep adding on potential acquisitions. Could you talk a little bit about the outlook on what you are seeing currently in the acquisition market for you?

Doug Waggoner

It's just a regular process of our business to look for opportunity, meet with owners and cultivate relationships that make sense and I feel as good now as we ever have and have that opportunities in front of us.

Jason Seidl - Cowen & Company

Fantastic, gentlemen. Thank you for the time as always.

Dave Menzel

Thank you.

Operator

Thank you. Our next caller is Nathan Brochmann of William Blair. Your line is open. Please go ahead.

Nathan Brochmann - William Blair

Good afternoon, everyone.

Dave Menzel

Hi, Nate.

Nathan Brochmann - William Blair

I wanted to just follow-up on that a little bit in terms of freight flows that you are getting and you mentioned that it's more on the transactional side. Are these relationships that maybe you currently have or have had in the past or might have been in the pipeline, are you guys starting to see lot of inbound calls in terms of people really starting to scramble to get freight moved?

Doug Waggoner

I would say, it's a combination of things, Nate. We definitely got increased share of wallet from existing clients in the last quarter during the tight capacity. Our phone did ring a few times more than usual, and we are aggressively going in the network, shaking the bushes, looking for opportunities.

Nathan Brochmann - William Blair

Okay, that's great, and then a little bit on the cost side. I definitely appreciate the recent acquisitions and congratulations on getting the hiring going, because I know that had lagged a little bit, but in terms of looking forward at your guidance, the cost side is up a little bit more than the revenue side. I was wondering if you could help us in terms of just the balance between what that is on hiring versus the recent acquisitions?

And then obviously the productivity numbers are starting to come true. If you could talk a little bit about what productivity you are seeing out of the training program at this point?

Kyle Sauers

Sure, Nate, this is Kyle. I will talk about the G&A piece and let Dave or Doug comment on the productivity, and maybe the best way to do this is just walk you through the sequential changes from Q4 to Q1 to what Q2 looks like. So to get from Q4 of 2013 to Q1 of 2014, there is about $700,000 or so of that G&A increase that's related acquisitions, the G&A that was inherent in those acquisitions and then the rest of that is primarily payroll related. We talked about increases hiring in the quarter. We do our annual payroll changes at the beginning of the year. So that's what's driving that. Then as we increase an approximate $2 million more into Q2, both of the acquisitions were completed mid-quarter. So we will add another $0.5 million or so related to the acquisitions and then another $0.5 million again is primarily payroll related, additional hiring and the impact of some of the mid-quarter hires that we did in Q1.

Nathan Brochmann - William Blair

Okay, that makes sense. And then on the productivity side?

Dave Menzel

Yes, so there was two things going. So obviously with this tight capacity environment, one of the things that was important to us was hiring aggressively in the first half of the year, both to position typically pretty heavy summer surge, combined with the tight capacity environment. So as Kyle said, we are adding headcount. Majority of which goes into the sales organization to drive sourcing, but some of that to the client sales side. And from a sales productivity perspective, I think that the key thing is that we are seeing this 22% increase in productivity in the current quarter. We have seen some pretty steady increases. We continue to evolve our training program. Our attrition rate in the current quarter was lowest it has been in a while, 26%. So we are seeing a lot of success in terms of both getting our sales rep up and producing and as well as lowering that attrition rate. So we feel great about the programs that we have in place and just expect to continually implement them as we move forward.

Nathan Brochmann - William Blair

Okay, great. Thanks a lot. I will turn it over.

Doug Waggoner

Thanks, Nate.

Operator

Thank you. Our next question comes from the line of Jack Atkinson of Stephens. Your line is open. Please go ahead.

Jack Atkinson - Stephens

Great. Thanks for taking my question, guys. So I guess just to go back to Nate's question on the hiring for a moment, expand on that, could you maybe talk about or parse out the number of net hires that you would like to make in 2014 and how do you think about that between client facing sales reps and then carrier facing sales reps?

Dave Menzel

So we talked on our last call, we gave, I believe and we set a goal 120 net hires. And we said we indicated that we would probably around 250 people to hit that 120 number. We have never really specifically said, exactly how many are going into carrier sales and client sales, because we want to be able to adjust and move on the fly as market conditions change. But I would say that more than half would probably go into carrier sales organization, given the truckload environment that we see today. So we have in fact frontloaded the hiring in that area so that we can be confident in our ability to serve the customers. So then when you think about that net 120 hires, we added roughly 56 people, 57 people to our sales organization in the current quarter, year-over-year. So we are on target or ahead of target, I should say, with respect to the goals that we set at the beginning of the year in terms of headcount addition.

Jack Atkinson - Stephens

Okay, great, and then Doug or Dave, when I think about the compression we have been seeing, not necessarily on that net revenue margin on an absolute term, but I guess I am thinking about net revenue margin or net revenue dollars per shipment. It seems like we turned the corner with that in the first quarter and just judging by your tone, I think that that's continued into the second quarter. So do you guys feel like that we are going to start seeing maybe some expansion in terms of the net revenue per shipment as we move forward? And then when you think about where you are in terms of repricing your book of business to the current freight market, where do you feel like you are in that process?

Doug Waggoner

Well, it's a complicated answer, Jack, just because market conditions change. So the portion of your businesses that's been tied up in committed pricing versus spot can vary quarter to quarter, based on market conditions. In the case of Echo, because we are a multimodal transportation provider, we have got LTL and truckload and intermodal, all interspersed. We have got the enterprise business which does tend to have committed prices and on the flip side, we have committed pricing from our carriers on that business. So it's a , lot of moving parts to try to give you prognostication.

Jack Atkinson - Stephens

Okay, that I guess, makes sense.

Doug Waggoner

If you just want to focus on truckloads, I would say that we anticipate the market to continue to get tied in the long run. You have got - produce season coming up. You have got a continuously improving economy. You have got the regulations, the driver shortage. So we would forecast continued tightening capacity and prices going up and to the extent that we can manage some portion of that in the spot market. It works to our benefit and we are trying to be very prudent with our committed pricing, knowing that prices are going up and negotiating accordingly.

Jack Atkinson - Stephens

Okay, guys. Thanks again for the time.

Dave Menzel

Thanks, Jack.

Operator

Thank you. Our next question comes from the line of John Mims of FBR Capital Markets. Your line is open. Please go ahead.

John Mims - FBR Capital Markets

All right. Thanks, and congrats on a great quarter. So let me ask to Jack's question, it's a little bit similar but in a slightly different way. When you look at the mix now, you are close 52% of your revenue base is in truckload. Is there a way to think about like what's the right mix? Is just TL going to grow faster and that will continue to be a trend or is there some sort of balance we should think of long-term that you have targeted?

Dave Menzel

So I will jump in on that one, John. I think that number one because truckload is a bigger market opportunity, it is likely that that will continue to grow at a faster rate than LTL, but at the same time, we wouldn't say there is an optimal mix. Our position in the marketplace is to be a multimodal provider and so our solution primarily as you know ranges from LTL, truckload, intermodal, partial shipment. That's kind of our core focus today. And so from time to time, whether due to an acquisition that we might make or due to an enterprise business we might see changes in mix. I think just due to market size, for us, based on our stage of development, truckload growth has been higher and it's likely to predict that it would continue to be higher. But at the same time, we don't think about the business as trying to drive to toward an optimal mix. It's more about positioning solutions that work for our clients.

John Mims - FBR Capital Markets

Sure. So then looking at the gross revenue per shipment was up almost 18% and net revenue per shipment is obviously increasing. As TL is a bigger piece of the mix and that should continue to hold? Or how much of that was just due to the fact that the spot market gave you this pricing opportunities this quarter?

Dave Menzel

Yes, I ah think a ton of that is mode mix. When you try to take our aggregate result on a shipment by shipment basis and look at, it is difficult because of the mode mix changes. So that does hold. If our mode mix holds that kind of holds as well, obviously as our truckload percentage is growing as a percent of our LTL, that's going to drive that aggregate revenue per shipment up or gross profit per shipment up as well.

John Mims - FBR Capital Markets

Great, and last question for me. I will turn it back. When you look at the truckload margin compression that's still the sequential TL margin improvement, impressive numbers that you put out in prepared comments, but how much can you attribute, I mean you referenced having more flexibility with pricing, but how much of that was client facing versus and being little more mature from a sourcing standpoint and having better land density and better core carrier base?

Dave Menzel

Well, I think that the answer to that is a little more client focused because our costs are in fact rising. When you are in an environment of rising cost, we would certainly suggest that we believe every quarter we are doing a better job, both sourcing and procurement perspective. But it's difficult to obtain an accurate relative measure of that performance when you are in this period of rising costs. So in terms of the answer your question, it's probably more client facing because of that fact.

John Mims - FBR Capital Markets

Right, okay. I guess what I am trying get at from the sourcing side is, if you get denser and different lane, if you are providing, you establish better relationships with carriers where you can do more backhaul, even in this environment there is still a more sustainable part of that margin. Are you starting to see that?

Dave Menzel

Yes, I would say that that's fair. I don't want to say that we have been in such a volatile market over the last couple of years, so it is hard for us to make too many forward-looking comments on the sustainability, so to speak of the specific margins. But it is a pretty dynamic market. It is changing a lot. Our prices are changing a lot. So it's something that is a big part of what we do every day, trying to manage it and be on top of it. To your point, our land density, our sourcing capabilities are part of driving our costs down, our ability to secure capacity at reasonable rate, but at the same time, we need to build a quality network and we are a partner to our carriers and we want to find the right carriers for the right load and make sure that we are doing that and we are a great partner on both end of the equation.

John Mims - FBR Capital Markets

Great. That makes sense. Actually I do have one quick little housekeeping thing. You gave an addition number of the enterprise customers at a 96% renewal rate, I think is what you said. But what's the actual number of enterprise customers or clients you ended with in the quarter?

Doug Waggoner

236.

John Mims - FBR Capital Markets

236, perfect. All right. Thanks again, and again, great quarter.

Doug Waggoner

Thank you.

Dave Menzel

Thanks, John.

Operator

Thank you. Our next question comes from the line of Tom Albrecht of BB&T. Your line is open. Please go ahead.

Tom Albrecht - BB&T

Hi, everyone. I got a couple of housekeeping questions and a couple bigger picture ones. I am traveling, so sometimes the connection is a little bit in and out. So on the transactional business, the 24% revenue growth, Dave, did you say 10% of that was organic and the other 14% was acquisitions?

Dave Menzel

It's the other way around. So it's 14% was organic and then about 10% was the acquisitions.

Tom Albrecht - BB&T

Okay. Thank you. And then I think at the very beginning of the call in terms of discussing all of your revenues, I think you said, was it 46% was organic. So not just transactional, but everything?

Dave Menzel

That was a truckload metric and that was everything and we mentioned about two thirds of the truckload growth was organic.

Tom Albrecht - BB&T

Okay. So you didn't say 46%, you said 66%?

Dave Menzel

No, I am sorry. 46%, truckload revenue growth, and about two thirds of it, roughly 30% or so was organic and the rest was acquired.

Tom Albrecht - BB&T

Okay, and then, Doug, you gave some April performance numbers, 27% gross revenue, 17% organic. How about volume or shipment counts?

Doug Waggoner

I don't have those at my finger tips. But I think it is all relative.

Dave Menzel

Yes, I mean an estimate would be to look at the mode mix that we have and we don't typically disclose the actual volume number. So we don't have that on our finger tips and you would have to back, make an estimate that was consistent from a rate and volume perspective with the prior quarters would be the way to look at.

Tom Albrecht - BB&T

Right, fine So coming back to the pricing discussion in general, I know there is a lot of moving pieces in your business in particular, but could you maybe, walk us through, maybe it is only a loose ballpark question, but where carrier price increases were at the worst point in the quarter and what shipper price increases were trying to figure out a gap and maybe where they are today?

Dave Menzel

Well, I don't think we can really provide any additional color on that. I think it was pretty steady. To be honest, I think it would be hard for us to pinpoint significant changes during the quarter. It started probably in December. We started to see a spike in rates. Talked a little bit about that last quarter, but I would just say throughout the quarter, they spiked up pretty consistently, like I mentioned on the call. Maybe things are even a little bit in terms of April but we are still at historic levels in terms of a tight capacity environment. But just because the weather has calmed down in the end of the quarter most part of April, typically a little bit slower. So we have seen a little tiny bit of softening but I wouldn't want to say too much about that because it is still very strong, still very tight capacity.

Tom Albrecht - BB&T

Right. Some of that is to be expected, no doubt about it. At the shipment volume level, you grew 5.4% across the entire organization. What was that approximately for truckload for LTL?

Dave Menzel

So the volume overall was roughly 23% on the truckload side and 2% on the LTL side.

Tom Albrecht - BB&T

Thanks, that's helpful. And then you also gave a couple other numbers 122 basis point, I think it is what you said year-over-year decline in truckload net revenue margin. That was an improvement from 277. That 122, are they truckload net revenue margin? You have given so many numbers. Did that improve sequentially? I know that 122 is a year-over-year number.

Dave Menzel

Yes, the 122 is a year-over-year, and it improved 207 sequentially.

Tom Albrecht - BB&T

Okay. So do you guys have any lead on the produce season. There has been some discussion that could be sort of late in laying. It will kick in, to some degree, regardless but relative to maybe last year, do you have any comments on that?

Doug Waggoner

We haven't really started yet. Our guess is it is going to be a little bit later this year.

Tom Albrecht - BB&T

Yes. Okay. I think that's all I had then. So I will jump back in the queue. Thank you.

Dave Menzel

Thanks, Tom.

Operator

Thank you. Our next question comes from the line of Allison Landry of Credit Suisse. Your line is open. Please go ahead.

Allison Landry - Credit Suisse

Good afternoon. Thanks for taking my question. So you mentioned some additional cost coming online in the second quarter in terms of SG&A and a little bit on the D&A side, but as you think a little longer term, when do you think that you can start to generate from operating leverage? In other words, how long should we expect operating income to grow at a slower pace than the top line and at this point we would be looking for that 2015 to start seeing this trend reversed or could it be maybe by the end of 2014?

Dave Menzel

Allison, I think that one the reasons we chose not to give the EPS guidance at the beginning of the year, was because of the volatility of gross margins and it has created a situation where we are obviously drive a lot of topline growth, but making investments at the same time to drive growth of the business. So right now, we are focused on adding capacity in this environment so that we can continue to drive our topline growth. So we would be hesitant to give specific margin improvement operating leverage metrics right now for the second half of the year, but obviously we are very focused on driving that topline growth. We are very confident long-term that if we continue to scale this business that we are going to see significant operating margin improvement, but we are in a heavy growth mode with a tight capacity environment and a pretty big opportunity in front of us to continue to leverage all of that. So we would hesitate to try to be specific about that second half of this year right now.

Allison Landry - Credit Suisse

Right, that makes perfect sense. So I guess maybe just following on that, are we looking at this like a two-year trajectory, or a three-year trajectory? Can you put any sort of book-ends on that?

Dave Menzel

Yes, I don't think now would be the time to cast a neat picture on that operating leverage but certainly as we continue to scale, we are confident that we are going to get operating leverage as we grow. But to say on things today for the timeline for us to try to paint that long-term vision. But I suspect that will get more attention at our Investor Day, come and we will talk a little bit about the strategic plan and how we intend to continue to grow and invest in the business. So I just want to reiterate that we are confident that we are going to drive topline growth, we are confident that the leverage is going to come, but just not saying any real specific timeline right now in terms of achieving that objective.

Allison Landry - Credit Suisse

Okay, fair enough. Thank you so much.

Doug Waggoner

Thank you.

Operator

Thank you. Our next question comes from the line of David Campbell of Thompson, Davis & Company. Your line is open. Please go ahead.

David Campbell - Thompson, Davis & Company

Yes. Thanks. Dave, you mentioned the acquisition of OFS added sales agents in the quarter. So how many sales guys did you end the quarter with?

Dave Menzel

We ended the quarter with about 270 sales agents. So the total of our sales headcount was 914, 270 were sales agents.

David Campbell - Thompson, Davis & Company

All right, and you also mentioned, or somebody mentioned that the sales productivity has increased 22%. I don't know if I wrote that down right or not, but I am trying to figure out how you are calculating that because I am not getting much of an increase in net revenues per sales employee?

Dave Menzel

So its gross revenue, not net revenue was figure we gave. The 22% was correct, but gross revenue and it is transactional revenue per sales rep. So it doesn't include our enterprise businesses. It's just our transactional revenue per average sales rep. There is a little bit of an average calculation there.

David Campbell - Thompson, Davis & Company

Yes, that was up substantially year-to-year, but down from the fourth quarter. I guess that's a seasonality situation, right?

Dave Menzel

Yes, it's a little bit of seasonality and a little bit of frontloading like I mentioned earlier, adding capacity, adding significant carrier sales, early in the year to really position us well to handle the increased volume as they come.

David Campbell - Thompson, Davis & Company

Right. So the net revenue per sales employee and agent, do you expect that to increase by the end of the year? Or are you already satisfied with this level of --?

Dave Menzel

We are never satisfied with that. I think that we would continue to invest and expect continued growth. I want to clarify a couple of things. I think that I didn't comment on the net because we are not trying to get too specific about forecasting margins in this environment. So it's a gross revenue. I think this average was up a little bit sequentially as well. So I just wanted to clarify that comment, even though Q1 would normally be a period in which you might expect it to decline and especially in light of the making of personnel investment, but it did slightly go up in Q1 relative to Q4 as well.

David Campbell - Thompson, Davis & Company

But you would you expect that number to improve because of the seasonality business at least, then as employees get more efficient?

Doug Waggoner

Exactly.

David Campbell - Thompson, Davis & Company

All right. So that will make to the numbers look better as the year unfolds. Okay, most of my other questions have been answered and thank you very much. I appreciate the help.

Dave Menzel

Thank you very much.

Doug Waggoner

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the Matt Young from Morningstar. Your line is open. Please go ahead.

Matt Young - Morningstar

Good afternoon, guys. On the enterprise side, it seems in recent years there has been a trend for some of the large shippers out there to consolidate the number 3PLs they use. So the transportation management probably even the execution side, or at least they talk about it, wondering if you have seen more enterprise account single source with you or you are seeing opportunity for greater while chair on that front as shippers consolidate their 3PLs?

Dave Menzel

I think the shippers that are consolidating 3Ls are probably more in the realm of Fortune 500 companies and that's frankly not our playground. We target small and midsize companies and most of our enterprise clients have never outsourced before. So they are first time outsourcers.

Matt Young - Morningstar

Okay. So they are not using, most of them are not using four or five different 3PLs to begin with then. Sorry if I missed it, on the CapEx front, are you still looking at about $15 million this year, $4 million would be for that would be for the headquarters and I am assuming $11 million to capitalize IT?

Kyle Sauers

Yes, it will be in that range, Matt.

Matt Young - Morningstar

Okay, and I am assuming that the capitalize IT cost going forward stay about where they are somewhere in the $10 million, $11 million range, probably doesn't increase all that much from here?

Kyle Sauers

Yes, I don't know if we have broken out each component of the CapEx, but that's probably somewhere near that number.

Matt Young - Morningstar

All right, that works. Thanks.

Operator

Thank you. Our next question is a follow-up from the line of Tom Albrecht of BB&T. Your line is open. Please go ahead.

Tom Albrecht - BB&T

I thought I would push you on the spot here. I know you don't give earnings guidance in that, but would you generally expect, based upon the seasonality you demonstrated since you went public that earnings should be higher in the June quarter than what you reported tonight?

Kyle Sauers

Yes.

Tom Albrecht - BB&T

Okay. That's all I had. Thank you.

Kyle Sauers

Thank you.

Operator

Thank you. And I am showing no further questions in queue. I would like to turn the conference back over to management for any closing remarks.

Doug Waggoner

I would like to thank everybody for joining us today. It was a tough quarter for transportation companies as I said earlier, but I think Echo executed well and we are looking for a solid 2014. So we will hopefully see you on our Investor Day in June. And if not, talk to you at the next quarter. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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