Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Echo Global Logistics, Inc. (NASDAQ:ECHO)

Q2 2014 Earnings Conference Call

July 24, 2014 5:00 PM ET

Executives

Suzanne Karpick - VP, IR

Doug Waggoner - CEO

Dave Menzel - COO

Kyle Sauers - CFO

Analysts

Alexander Vecchio - Morgan Stanley

Jason Seidl - Cowen and Company

Allison Landry - Credit Suisse

Jack Atkins - Stephens Inc.

Nathan Brochmann - William Blair

John Mims - FBR Capital Markets

George Sutton - Craig-Hallum

David Campbell - Thompson, Davis

Thom Albrecht - BB&T Capital Markets

Matthew Young - Morningstar

Kevin Steinke - Barrington Research

Operator

Good day ladies and gentlemen, and welcome to Echo Global Logistics Second Quarter 2014 Earnings Conference 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, this conference call is being recorded.

At this time, I would like to hand the conference over Ms. Suzanne Karpick, Vice President of Investor Relations. Ma'am, you may begin.

Suzanne Karpick

Thank you for joining us today on our second quarter 2014 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer; Dave Menzel, Chief Operating Officer; and Kyle Sauers, Chief Financial Officer. We have posted presentation slides to our web site that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site www.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'd like to turn the call over to Doug.

Doug Waggoner

Thanks Suzanne and good afternoon everyone. I'd like to start by thanking those of you who were able to join us in Chicago for our Investor Day last month. Its always exciting for me and the entire Echo team to bring investors to our officers, so that you can experience first hand how we are building this great organization, including how we serve and bring value to our clients through our technology, and differentiated culture that drives our results.

We have followed up on our strong first quarter with a record setting second quarter that continues to demonstrate all aspects of our execution. We delivered gross revenue for the quarter of $305 million, net revenue of $53 million, and $0.22 of non-GAAP earnings per share. These are all records far surpassing results achieved in any previous quarter at Echo.

The primary drivers of our success, were our execution in a tight capacity truckload market, expansion of our sales team, increased productivity, and the ongoing execution of our acquisition strategy.

Further, the results reflect a second sequential quarter of net revenue margin improvement, even while continuing to grow truckload revenue as part of our total gross revenue mix.

It has been well documented that the first quarter was impacted heavily by weather, which pressured both capacity and costs. While we have seen capacity and cost constraints stabilize during the second quarter, they are still at levels well above those we have seen over the past few years. Our network of carrier partners, enables us to serve shippers, as they face increasing challenge of managing the supply networks.

Additionally, our growing truckload volume enables us to provide attractive freight to our expanding carrier network. This cycle of growth enables us scale our freight network, matching the needs of both our shipper clients, and our carrier partners.

For the quarterly highlights, lets go to page 3 of the slides, and you will find a review of the numbers for the second quarter of 2014. For the quarter, we delivered total revenue of $305.1 million, which represented 36% growth over the second quarter of 2013. Our organic growth rate was 22%, which is our highest organic growth rate in the last nine quarters. We continue to see excellent performance in the truckload portfolio of our business, and strong growth in both transactional and enterprise clients, including increased share of wallet.

Our net revenue was $53.3 million, a 34% increase from the prior year. This growth was driven by increased volume and offset by a modest decline in net revenue margin, due primarily to changes in mode mix, as our truckload business continued to deliver the largest portion of our growth.

Our non-GAAP EBITDA was $11.8 million, up 30% from the prior year. We continue to make significant investments in the growth of our business, both through technology and additional headcount, and these investments are driving our top line growth, which in turn is increasing our profitability.

As we have discussed in the past, our growth is driven both by the day-to-day execution of our organic growth strategy, and by the acquisition of complementary businesses. Both elements of this strategy, contributed to our growth this quarter.

We announced in mid-May the acquisition of One Stop Logistics, a $50 million transportation brokerage, located in Watsonville, California, led by Steve Brown, a 15-year veteran of One Stop, 95 employees of One Stop joined Echo as part of the acquisition, and the process to integrate them fully into Echo is well underway. This brings our annualized acquired revenue to $150 million, all of which was acquired in the first half of 2014. Our three recent acquisitions contributed to over $30 million in revenue to the quarter, demonstrating the success with having quickly leveraging these businesses post integration.

I now want to 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 4 which summarizes revenue by mode of transportation.

Our truckload revenue increased 57% year-over-year to $159.9 million for the quarter, driven by a 36% increase in volume and a 16% increase in revenue per shipment. The increase in revenue per shipment was driven by tighter capacity in the truckload market, due to driver shortages, hours of service and further impacted by increasing demand in the overall economy. Sequentially, our truckload revenue per shipment increased by 1%. This increase is notable, given that we experienced a 15% sequential increase in Q1, caused by market tightness that Doug alluded to, was predominantly driven by harsh weather conditions. The bottom line, is that capacity remains tight overall, and rates remain well above historical averages.

Our LTL revenue increased 19% year-over-year to $111.1 million, driven by a 10% increase in volume and an 8% increase in revenue per shipment. Our increase in revenue per shipment was driven by increased rates from LTL carriers overall, and our acquisition of One Stop Logistics, which averaged higher weight per shipment across their customer base.

Our intermodal revenue increase 24% year-over-year, totaling $19.7 million for the quarter. as we discussed in our last call, we recently integrated our intermodal platform into Optimizer, our core technology. This has allowed a larger portion of our sales force to more easily bring intermodal opportunities to their clients, as a part of our multi-modal offering. The benefits of the improved technology were partially offset by a continued sluggish intermodal demand, due to increased transit times resulting from congestion in rail networks that spilled over in Q1.

Other revenue increased 9% in the second quarter, over the same period in 2014, totaling $14.4 million, due to the growth in our enterprise business.

Let's turn to slide 5 for a breakdown of revenue by client types; our transactional revenue increased 44% year-over-year, contributing $226.9 million for the quarter. This growth was driven by both volume and productivity increases. Our volume increase, was driven by increases in truckload volume from existing clients, and increasing the number of organic transactional clients, and as a result of our recent acquisitions. Our transactional revenue per sales rep increased by 23% on a year-over-year basis.

Our sales headcount increased by 216 people year-over-year, totaling 1,028 at the end of Q2. 126 of this year-over-year increase was driven by our internal hiring strategy, while the remainder primarily came from our recent acquisitions.

Our revenue from enterprise clients increased by 18% year-over-year, contributing $78.2 million in the second quarter, 2014. This is our highest revenue growth rate in our enterprise business over the last seven quarters, and is the result of an increase in the number of our clients, and an increase in the average revenue per client. We added seven new clients during the quarter.

Turning to slide 6, I will review the net revenue and net revenue margin. Our net revenue increased 34% year-over-year to $53.3 million in the second quarter. This is a result of a 36% gross revenue growth, offset by modest year-over-year decline in net revenue margin. Our net revenue margin was 17.5% in the second quarter, representing a 22 basis point decrease over Q2 2013. This decline in net revenue margin was primarily due to changes in mode mix, as truckload revenue represented 45% of total revenue in Q2 2013, and 52% in Q2 2014. Our net revenue margin expanded sequentially by 44 basis points.

Our truckload net revenue margin improved by 93 basis points on a year-over-year basis. Additionally, truckload net revenue margin increased 42 basis points sequentially. This sequential increase in truckload margin is a reversal of a Q2 trend, we have experienced over the last few years.

On the LTL side, net revenue margin declined by 32 basis points on a year-over-year basis, and was flat sequentially.

I'd like to now turn it over to Kyle, to discuss additional financial results.

Kyle Sauers

Thanks Dave. On page 7 of the supplemental materials, you will find a summary of our key operating statement line items.

Commission expense was $14.8 million in the first quarter, increasing 48% year-over-year. Commission expense was 27.7% of net revenue, representing a 248 basis point increase from the second quarter of 2013. This increase is the result of changes in our sales channel mix, and the growth of our truckload revenue, which has a higher commission expense. Based on the impact of our recent acquisition and our current mode in channel mix run rates, we expect commission expense to come in between 27.2% and 28.2% for the full year. Non-GAAP G&A expense was $26.7 million in the second quarter of 2014, up 30% from the second quarter of 2013. This amount excludes one time acquisition related transaction costs of approximately $400,000 incurred during the quarter.

Of the $4 million sequential increase in our G&A expense, approximately half is related to our three new acquisitions, and half is due to the continued investments in the growth of our business. Not considering the impact of any further acquisitions, we expect G&A costs in the next two quarters to increase only modestly from current levels.

Depreciation and amortization expense was $3.4 million in the second quarter of 2014, increasing 31% year-over-year. The majority of the increase is related to our three new acquisitions completed during 2014. We expect this amount to increase to approximately $3.8 million and $3.9 million for the next two quarters respectively.

Our effective income tax rate was 38.2% for the second quarter of 2014, compared to 38.1% in the prior year. Non-GAAP EBITDA increased 30% from the second quarter of 2013, to $11.8 million. Non-GAAP net income increased 31% from the second quarter of 2013, to $5.1 million. Non-GAAP fully diluted earnings per share was $0.22, increasing 31% from the second quarter of 2013. GAAP fully diluted EPS was $0.18 in the second quarter of 2014, due to acquisition related transaction costs and changes in our contingent considerations payable.

Slide 8 contains selected cash flow and balance sheet data. In the second quarter of 2014, we generated $8.2 million in positive operating cash flow. This was an increase of 75% from the second quarter of 2013, and was primarily due to increased earnings and timing differences of changes in working capital. Capital expenditures totaled $4.1 million in the quarter, an increase of 97% from the second quarter of 2013. This increase is related to continued investments in technology, and the expansion of our facilities to accommodate our growth.

Payments for acquisitions net of cash acquired during the second quarter were $19.3 million, and we made $300,000 in payments under our contingent obligations related to prior acquisitions.

At the end of the quarter, our contingent obligation and notes payable to sellers, is reflected on our balance sheet at $25.3 million, which is at estimated fair value. Also, as of the end of the quarter, we had $27.4 million in cash.

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

Doug Waggoner

Thanks Kyle. I am very excited about the progress that we are continuing to make drawing Echo's business, while becoming a 3PL of choice for both shippers and carriers.

We announced at our Investor Day last month, some long term financial and operational targets. These included 2017 revenue of $2 billion and non-GAAP EBITDA of $100 million. On that day, we shared many of our strategies and initiatives, and we will continue to make investments in support of these plants.

We have shown again this quarter, that these investments are paying off. Having just completed the second quarter of 2014, with more than $300 million in revenue, and $12 million in non-GAAP EBITDA, we feel very confident about achieving these 2017 targets.

Near term, we see continued signs of growth in the third quarter. Through the first few weeks of July, we have experienced 35% revenue growth over the prior year, with 21% of this coming organically. Thus far during the quarter, we have seen a modest decline in our net revenue margin percentage, related to the second quarter.

With our most recent acquisition in mid-May, we updated full year revenue guidance to $1.07 billion to $1.13 billion. Based on our success thus far in 2014, we are now increasing full year guidance to $1.14 billion to $1.18 billion, again, not including potential impact of any new acquisitions throughout the remainder of the year. To support this growth, and the growth in the years to come, we are also updating our full year G&A guidance to $102 million to $105 million.

And with that, I'd like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Bill Greene from Morgan Stanley. Your line is open. Please go ahead.

Alexander Vecchio - Morgan Stanley

Hi there. Good evening. Its actually Alex Vecchio in for Bill tonight. So I wanted to ask about the updated guidance on revenue specifically. So the midpoint of the updated guidance sort of suggests that your second half revenue should grow about 33%, which is a little bit of a deceleration, versus your 2Q growth rate. However your comps get easier and you've actually got acquisitions as a tailwind. So I am just sort of trying to wonder, if this is sort of -- are you kind of suggesting that the 2Q strength was may be a little bit one time-ish and not sustainable, or maybe there is some conservatism baked into your top line guidance. But it just seems to me that, there is some good momentum here, and maybe there is some upside there, but I just want to get your comments on that?

Dave Menzel

Well I think that -- this is Dave, commenting on this briefly. As we indicated, our growth rate is above 30% through the first part of July. But we get a lot of 2014 left to come, and the first half of this year had implications of bad weather in the first quarter and still some intermodal disruption in the second quarter. So we feel confident around this 30% plus growth rate for the remainder of the year, but at the same time, realize that there is still a good portion of the year left to go. So we feel like, this is kind of the appropriate range to guide with this much going forward.

Alexander Vecchio - Morgan Stanley

Okay. That's fair. And then, you had mentioned that your consolidated net revenue margins were down a little bit sequentially in the third quarter. Can you comment on how your truckload net revenue margin, specifically have been trending so far in the third quarter?

Dave Menzel

I would say that very modestly down. Its pretty early in the quarter, but just -- I think the main point is not necessarily increasing down a little bit, but we have got a -- not even a full month into the quarter to providing a realistic guidance on that number.

Alexander Vecchio - Morgan Stanley

Okay. and then just lastly, we have been hearing almost from every single truckload carrier that's reported thus far, including one just this evening that -- the driver shortage is just getting worse and worse, and I just wanted to get your guys' thoughts on how that sort of impacts a broker like Echo? Is this a positive, is this a negative, is this a neutral, how does the driver shortage of the asset-based players really play into a broker like you guys? Thanks very much.

Dave Menzel

Sure. I think the primary implication with the challenges that the asset-based carriers are having with the driver shortage, is that capacity is tight, and shippers need assistance and help from brokers to find capacity in a reliable way. And so, we believe that the tightness in capacity is in fact a benefit for Echo, because our value proposition resonates even more strongly, with shippers, and we are seeing that in terms of driving volume to us, and we are of course -- we are making corresponding adjustments to our strategy to make sure that we have invested in our carrier sales and sourcing organization, and we continue to build a strong truckload network, to basically be able to execute in this environment.

So the short is -- we believe its an advantage, and you see that in some of the results year-to-date.

Alexander Vecchio - Morgan Stanley

Great. Thanks very much for the time.

Operator

Thank you. Our next question comes from Jason Seidl from Cowen and Company. Your line is open. Please go ahead.

Jason Seidl - Cowen and Company

Hey everyone, thanks for taking my question here. We are hearing a lot out in the LTL world about the carriers, potentially taking a second round of general rate increases out there. Does that have any impact on your operations, positive, negative, or neutrally?

Doug Waggoner

No. I mean, we have seen rates go up in the last year, and we work with the carriers in a very cooperative way. They are, I think seeing their capacity being better utilized and its giving them some pricing power in the economy. But we work on a customer-by-customer basis for our enterprise accounts and for our transactional business, we have got locked-in pricing, and so I think the rate increases that we have taken have been reasonable, and our carriers or partners that manage that process with us.

Jason Seidl - Cowen and Company

With your locked in pricing, could that drive some more business potentially, to you, if they take another [indiscernible]?

Dave Menzel

I think there is a couple of ways to think about that. I think that on a large -- on the large enterprise accounts, we work with the LTL carriers, as Doug said, to try to match our relationship with our customers and shippers and lock-in pricing that makes sense for the carriers, for those particular enterprise clients. I think on the transactional side, as prices increase, our prices aren't necessarily lockable, we will take increased prices from the carriers, just like everybody else, and at the same time, the general overall market is increasing. So our ability to pass on those rates should remain very good, and so it shouldn't have meaningful negative implication on Echo, because really the market is going up altogether so to speak.

Jason Seidl - Cowen and Company

Okay. That's fair enough. And when you look at the truckload business, has there been any differences in demand between what you've seen out of the drive-end [ph] market and the refrigerated market?

Dave Menzel

Our business is more drive-end oriented. So I would say that, the temp controlled market is not, the big -- a large part of our networks though, in our case, I wouldn't want to comment on the differences between those two markets.

Jason Seidl - Cowen and Company

Okay guys. And lastly, before I turn it over to the next person, could you give us an update on just sort of the acquisition market, and how it looks? Has it changed any from the last time you guys spoke to us?

Doug Waggoner

No I think its pretty similar to the last quarter. We have got a good pipeline, we continue to work it. We are staying true to our strategy of tuck-in deals that fit well into our network.

Jason Seidl - Cowen and Company

Sounds good. Guys, thanks for the time as always. I appreciate it.

Doug Waggoner

Thank you.

Dave Menzel

Thank you.

Operator

And our next question comes from Allison Landry from Credit Suisse. Your line is open. Please go ahead.

Allison Landry - Credit Suisse

Thanks. Good afternoon. Given that all the major rails are adding significant resources to their networks, improved service, and speaking about this in conjunction with the apparent pull forward in demand, ahead of the West Coast [indiscernible]. Is there any potential that 2Q results were sort of an anomaly, and maybe as you look into the third quarter, we could see some relative loosening in capacity, and basically, if we see more containers move by rail and maybe a little bit less seasonal demands, if it was put forward into the second quarter? What are your thoughts on that?

Dave Menzel

I think that -- its difficult to quantify whether that will have any meaningful effect, kind of on the truckload market, in the second half of the year. Yes, I think that, the truckload has to have been modestly impacted by the transit times on the rails, certainly in the first quarter, and maybe a little bit in the second quarter. So there is potential, that whatever boost we saw in the truckload, might subside a bit in the second half of the year. My sense is that, it won't be very material or very noticeable to our truckload business so to speak. But I think it’s a possibility that there will be some modest impact.

Allison Landry - Credit Suisse

Okay. So things are expected to still remain pretty tight.

Dave Menzel

Yes.

Allison Landry - Credit Suisse

And where do you see your mix of truckload versus LTL by the end of 2014?

Dave Menzel

So if you look at this quarter, I would say the mix is probably going to be pretty close to the same, is what we just saw this quarter. We got a partial quarter benefit from our acquisition of One Stop. So if our truckload growth rate is organically a little higher, through the back half of the year, then LTL, it would probably tend to kind of balance out and look a little bit like Q2, then we might have a little more -- little more truckload mix by the back half of the year, but I think it'd be modest, if we don't make any additional acquisitions.

Allison Landry - Credit Suisse

Okay. Thanks so much for the time.

Dave Menzel

Sure. Thanks.

Operator

Thank you. And our next question comes from Jack Atkins from Stephens. Your line is open. Please go ahead.

Jack Atkins - Stephens Inc.

Great. Good afternoon guys, and congratulations on a great quarter.

Doug Waggoner

Thanks Jack.

Jack Atkins - Stephens Inc.

So guess just to kind of start off with a 22% organic growth; you know Doug and Dave, when you think about how that parses out between increased share of wallet with your existing customer base versus maybe some new customer wins, or new customers that are coming to you because of the tightness in the truckload market. Is there any way to kind of think about that from a high level, just in terms of where that organic growth is coming from, because -- you are clearly growing at multiples faster than the domestic economy. Just curious about that.

Doug Waggoner

Well I think -- we don't break it out, but I think its fairly balanced. We saw our number of total clients increase to 20,900 and that was a 14.8% sequential growth, and about a 20% year-over-year growth. So clearly, we are adding new customers, and that's helping our sales productivity. And as we mentioned in our prepared remarks, we are seeing higher revenue per customer, and that's our share of wallet that we talk about. I really think we are doing it across all fronts.

Jack Atkins - Stephens Inc.

That makes a lot of sense. When we think about the volume trends in the quarter, from a month-to-month perspective, is there any way to kind of think about how those progressed, as we move to the second quarter, can you break that down for us?

Dave Menzel

We don't have those specific monthly volume numbers in front of us right now. So I'd say that there was a modest acceleration in June, kind of back half of the -- certainly the back half of the quarter. But I don't have the specifics relative to each month.

Jack Atkins - Stephens Inc.

Okay. That makes sense, and then Dave, you mentioned, I just missed this when you were going through it, but the sequential change in truckload net revenue margins in the second quarter, did you say that that was up, flat or down? I have missed that in your comments.

Dave Menzel

I said that was up, let me just reflect with that. Hang on just one second, let me get that metric for you. The sequential change of 42 basis points in the truckload margin in Q2.

Jack Atkins - Stephens Inc.

Okay. That's helpful. And then Kyle, of the increase in SG&A from your prior guidance, how much of that is tied to One Stop versus additional investments that you're making in the business organically?

Kyle Sauers

So we didn’t' disclose the exact G&A from One Stop, of the sequential change from Q1 to Q2, about half of that $2 million -- half of the $4 million, so $2 million is related to new acquisitions. Again half of that is -- the two acquisitions that were done, partly through Q1, and then the rest would have been from One Stop, and then the remainder of that $4 million increase is from additional hiring throughout the business, and being out of plan on our hiring in the sales organization.

Jack Atkins - Stephens Inc.

Okay great. And then last question from me, on the commission rate as a percentage of net revenue, is it fair to assume, when we think about our models in the outer years, that we are looking at something in the mid-27s, or may be even 28, in terms of commission as a percentage of that revenue, where you think that could may be come back down, maybe out year, just depending on revenue mix?

Kyle Sauers

So I don't want to give specifics on out years, but I will tell you, it will continue to vary a little bit from where it is, just kind of based on the mode in channel mix, and then to the extent there is acquisitions that have a compensation structure that's different than what we have in place throughout the rest of the company, that's going to impact it. But we will continue to make sure that we update you guys on where we see him headed in the near term.

Jack Atkins - Stephens Inc.

Okay. That's great. Thanks again for the time and great quarter.

Kyle Sauers

Thanks Jack.

Operator

Thank you. And our next question comes from Nathan Brochmann from William Blair and Company. Your line is open. Please go ahead.

Nathan Brochmann - William Blair

Good evening guys. Great quarter. Congrats.

Doug Waggoner

Thank you.

Nathan Brochmann - William Blair

Wanted to talk a couple of things, kind of just to follow-up on some Jack's questions. But in terms of the SG&A at this point, if you kind of take out the acquisitions, obviously it looks like you got finally some really nice leverage on that. How do you feel right now in terms of where we are, again kind of X the acquisitions in terms of the base? I mean, I clearly know we are still ramping up headcount a little bit there. But in terms of anything else to the left, to the right, that you're feeling that you might need to add? Or are we finally at a point where we really can leverage that SG&A that you have in place, minus the acquisitions?

Kyle Sauers

I tell you that we are going to continue to make investments in the business, there is no question about that, and we are continuing with some strong hiring plans in the second half of the year. But having said that, the thing I did mention was that, we don't expect G&A to accelerate throughout the back half of the year, relative to the second quarter. I would expect it to increase just modestly, and if you look at the midpoint of the new G&A range of $103.5 million, that kind of implies $54 million of G&A in the back half of the year. So not a major increase there.

Nathan Brochmann - William Blair

Okay. That's great. And then in terms of -- Doug, you alluded to kind of the amount of new customers that you have been able to win both sequentially, and year-over-year, and I think that's a testimonial till your sales efforts as well as just a tight environment. What is your experience in the past in terms of may be if you have garnered, some additional customers, because they are scrambling to get freight moved. How sticky those relationships end up being, in terms of, whether they convert from transactional to enterprise, or whether they even continue to be consistently transactional customers, if the capacity tightness kind of ebbs a little bit?

Doug Waggoner

Well if I understand the question Nate, first of all, the enterprise clients are very sticky. Obviously we thought for that 95% plus renewal rates. The transactional business can be -- has a little more churn to it, and that's obviously a big focus of our sales training and a lot of the energy that we put into our culture, and having a service oriented mindset with our employees. So we'd like to think that over time, we are focused on delivering some of the highest quality service in the industry, and we believe in what we call the service profit chain, which is treating our employees right, having them feel good about their job, having them shine through the clients, and having them appreciate the experience in coming back for more. So that's our philosophy, that's how we run the business, and hopefully, its bearing fruit.

Nathan Brochmann - William Blair

That makes sense. But little more specifically, do you feel like right now, that some of these transactional customers that you are not working with -- that maybe you didn't work with a quarter ago, again, probably because they are scrambling to get their freight moved. Are you immediately starting to have a higher percentage of conversations of maybe, A, we can get you [indiscernible] enterprise feel or --?

Doug Waggoner

Well, a large percentage of our enterprise clients do in fact come from the ranks of some of the transactional customers. I don't know that the percentage has really changed much. Although, there certainly are people out there looking for opportunities to improve on their transportation costs, and coming to realize that potentially a partner could help them do it better than they do it internally. So we definitely use our transactional customers as lead gen for our business development team, and I don't -- I haven't really seen the percentages shift though, just in recent months.

Nathan Brochmann - William Blair

Okay. And then last question before I turn it over, but going back to kind of the net revenue margin issue a little bit, are you finding that at this point, that the shippers are obviously well aware of the rate increases; so as you're going to shippers, in terms of what they might have been paying a month ago, and obviously, there is rate increases that you are passing along and some margin you're looking to keep in terms of -- on top of that. Are they very accepting of that, and say, hey whatever it takes, we got to get the freight moved, or you have seen a little bit of pushback here and there?

Doug Waggoner

I think it varies by mode, but certainly shippers understand that we are now in a rising rate environment. I think the LTL carriers are pretty aggressive in terms of raising rates on business that doesn't operate well in their networks. In the truckload space you see -- I guess, it probably correlates more to people with volume, the need to find capacity in a tight market, and willing and having to pay more for that. So I think the general awareness has come up, and it has allowed us to take our rising costs and passed them through and maintain our margins.

Nathan Brochmann - William Blair

Great. Thanks for all that. I appreciate it.

Operator

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

John Mims - FBR Capital Markets

Thank you. Good evening everybody. So guys, I am going to go back to the guidance as well too and looking really on a sequential change basis, things got a little noisy in the back half of last year, and I appreciate that you are looking at a 30% plus gross revenue number, but when I factor in the increase in SG&A, the increase in D&A, the commission rate, I am getting total operating expenses growing at about the same clip, at about 30%. So really it all comes down to how good of a year this seems to shake out, with the net revenue margin. Particularly, if you can keep it somewhat sustainable from 2Q, if that margin is -- if you're able to maintain that for the back half of the year, I think the numbers look pretty compelling. But is there any reason to think that, you would see any kind of seasonal decline in that from what you know right now, or is the 17.5 a sustainable run rate?

Dave Menzel

I think a couple of points there John, on one point, all of us have kind of had trouble in the past, trying to forecast, two, three, four quarters out, where net revenue margins have been over the past two, three years in these markets. They have been pretty volatile, and they have changed from time to time. So we have been pretty cautious to try to not get too far out ahead of our skis and make a forecast that are longer term in nature on that front. So that's the first point I'd like to make. And I think the second point that I'd like to make is that, while -- we are making the investments necessary to continue to build the capacity to compete and serve our clients in this tight capacity market.

So I think that, while our focus long term is to drive growth and to drive the financial objectives that we painted at our Investor Day, its not primarily to focus on short term operating margin gains, at the expense of the long term. So we are pretty focused on continuing to invest and growing our sales and our carrier sales organization, because we think that will position us very effectively for long term growth, and that will in fact, lead to, obviously increased earnings and increased margins. So I think your analysis is probably pretty close in terms of how the second half might look, but at the same time, we are confident that the investments decision to continue to add staff, are pretty smart in this environment.

John Mims - FBR Capital Markets

Sure. No, no, that's really helpful. That makes sense. And maybe just a little bit more simply than on just the top line. Enterprise we would expect, I mean, you have had such good sustainable growth there. From a sequential basis, you'd expect that to continue to tick-up in transactional, really your -- I mean, depending on what the market gives you, there is probably less seasonality this year than you saw in the drop-off in fourth quarter of last year?

Dave Menzel

Yes, I think that's true. I mean its hard for us to say, what might happen in November and December, so I'd be pretty cautious about making that specific forecast for Q4, but there is a large amount of Q3 -- Q2 and Q3 business that from our truckload segment, it does come from the beverage industry; and so obviously during the summer months, we see some pretty strong volume in that regard. But that's not necessarily going to be different, on a year-to-year basis.

John Mims - FBR Capital Markets

Sure. That's right. I was just trying to strip out some of the customer specific stuff in fourth quarter. One quick update, with the salespeople you have hired now, is there any updates or numbers in terms of 10-year employee turnover on the sales ranks, revenue per head etcetera?

Dave Menzel

For 10-year, its in the 20 -- I think its around 21 months or so, pretty consistent with last quarter, turnover rates in the low 30s. With the increased number of amount of hiring we have been doing, we are still seeing in those 30s right now. I think was in the high 20s last quarter. So it was probably kicked up a little bit on the turnover side. But we have made a lot of additions in the second quarter, and we will continue to make a lot of additions in the third quarter.

John Mims - FBR Capital Markets

Cool. I think that's all I got. Appreciate it, and I will turn it over.

Doug Waggoner

Thanks John.

Dave Menzel

Thank you.

Operator

And our next question comes from George Sutton from Craig-Hallum. Your line's open. Please go ahead.

George Sutton - Craig-Hallum

Thank you. Just looking at a lot of the questions that have been asked in a different way. We think of the world you operate in from a continuum of a poor environment to a, absolutely great environment. Where do you think Q2 would have fit, and where do you think we currently are in Q3, as we are kind of looking in the relative near term?

Dave Menzel

I think as we have said, that we believe these markets have been favorable for our business; and so I would put it on the -- certainly been a very strong market, and I don't know if we are going to use the words great or good, but it has been a very strong market in Q2. Expected to be the same in Q3, capacity continues to be tight. We have certainly seen some -- this normal seasonal kind of softness if you will, in the first half of July, that is very normal. But in terms of year-over-year rate increases etcetera, pretty consistent with June.

We would expect to see a fairly similar operating environment in the third quarter that we saw in the second quarter, which is in fact favorable, I'd say.

George Sutton - Craig-Hallum

Sure. One other question, relative to carrier sourcing, you've made some [indiscernible] investments that I think we can tell now in that area over the last several quarters. Can you quantify what kind of investments you have made in that specific area?

Dave Menzel

I think the main thing is that, we have done two things really, two or three things. We have made investments in technology and proving that the systems that we use to help procure, we have made investments in process to refine how we work day-to-day, and how we have developed the relationships with our carriers. But primarily, the changes that we have made -- we have made some pretty significant staffing increases, and we have actually got about 220 people in our carrier sales organization today, and that's up from 122 people a year ago. So we have made some very significant investments in building our staff and decentralizing our staff to support our operating offices and our branches, and those would be the -- kind of the high points that I would mention, in terms of those investments.

George Sutton - Craig-Hallum

Okay. That's perfect. Thanks very much and congratulations.

Dave Menzel

Thank you.

Doug Waggoner

Thanks George.

Operator

Our next question comes from David Campbell from Thompson, Davis. Your line is open. Please go ahead.

David Campbell - Thompson, Davis

Yeah, thanks very much. Most of my questions have been answered, but just wanted to ask, whether the West Coast core congestion is likely to have any problem or cause any problem with your gross margin out there or in your truckload business?

Dave Menzel

I don't anticipate that to have a significant impact on our margins or business in the third quarter.

David Campbell - Thompson, Davis

Okay. That's because you don't do much of it, or is it because of -- the percentage of your business is very small?

Dave Menzel

Well a percentage of our business -- and its spread out, and so we don't have significant outbound, relative to overall network and relative to the market, southern California. So I think, like I said, the impact should be marginal on our business, would be my expectation right now.

David Campbell - Thompson, Davis

And we used $19 million in cash -- $19.5 million of earn-off in acquisitions in the second quarter, so your cash balance is down substantially. How do you look at that through the rest of the year? Do you see excluding acquisitions, some recovery in your cash balances?

Kyle Sauers

Yeah I think so. We feel really good about how the balance sheet looks today. As you mentioned, there is $27 million in cash there. We generated $8 million in operating cash flow during the quarter, and it was a quarter of high growth, so we are pretty happy with that, and there aren't significant payments going out, outside of any potential; acquisitions that might occur during the next five months here. So we feel real good about where that's at today.

David Campbell - Thompson, Davis

What if the earnouts are not significant in the next six months?

Kyle Sauers

There is no significant payments until the disclosed payment we talked about from the One Stop acquisition early next year, which is $13 million.

David Campbell - Thompson, Davis

Okay. Thank you very much. I appreciate the help.

Dave Menzel

Thank you.

Kyle Sauers

Thanks Dave.

Operator

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

Thom Albrecht - BB&T Capital Markets

Hey guys. Couple of different questions. So I heard you commented on the truckload net margins sequentially and year-over-year. Did you provide a little bit of color on the LTL?

Dave Menzel

Yeah we said that, year-over-year we were down 32 basis points, and sequentially, it was flat.

Thom Albrecht - BB&T Capital Markets

Okay. All right. And then, let me see here. So you know when I kind of look at the model in that, I see -- with kind of the revenue targets in that, that you're talking about, that the commission expense could be below 27% for the second half of the year, and still be close to that $105 million target, were you thinking that, in that guidance of 27.2% to 28.2%, that that would be applying to the third and fourth quarters as well?

Kyle Sauers

I am not sure I am following exactly Thom, but the $102 million to $105 million is a full year G&A guidance number, and that's excluding commissions. Commissions are separate line item that we are indicating for the year, that will come in between 27.2% and 28.2%.

Thom Albrecht - BB&T Capital Markets

I misspoke on the labeling, but yeah, I got the $102 million to $105 million, like I guess the -- I will tell you what, I will take that one offline. But let me just ask one other question then; so it has been such a weird market where it was terrible, and then all of a sudden, it has turned in your favor. Its kind of hard to remember what the normal sequential pattern would have been from the June quarter into September? I know you gave some color on what you've experienced in July, but seems to me that, as I recall, that a lot of brokers used to see their net margins contract a little bit from the June quarter into September. Can you remind us of what the world looks like, I mean, it has been so long?

Doug Waggoner

Historically, in our business at Echo, we have -- number one, we have seen less expansion and contraction than other peer brokers, probably because of the mixed LTL business that we have, as one primary driver of that. The second issue has been for us, we have typically seen -- if I go back the last two, three years, margin compression in the second quarter from a sequential perspective, and then kind of a flat, or maybe really modest expansion. Now last year was -- I think a little bit of an exception to that. So to your point, it has been a little unpredictable in that regard, but I would say that, historically, it had been pretty flat, Q2, Q3, maybe improving just a little bit, would be what I would have called the normal pattern.

Thom Albrecht - BB&T Capital Markets

Okay. And then, I think I heard early on, when you were commenting about the truckload trends in that, One Stop in particular brought a much higher revenue per shipment, did I hear that correctly?

Dave Menzel

Yeah on the LTL side, it had an implication, and that their average weight per shipment was a little higher than our average, and so -- and the corresponding obviously revenue per shipment, also being higher than our average, and so it did have an implication on that, increased our rates a little bit.

Thom Albrecht - BB&T Capital Markets

Okay. Okay, that's all I got. Thank you.

Dave Menzel

Okay. Thanks Thom.

Operator

Thank you. Our next question comes from Matt Young from Morningstar. Your line is open. Please go ahead.

Matthew Young - Morningstar

Could you guys just talk briefly about your efforts at this point to penetrate the large national account niche. I guess you could call it the RFP, your routing guide business, is that a big push for you? I think you might have mentioned it a little bit at your -- at the Investor Day. Do you see meaningful opportunity to take share from asset based carriers on that front?

Doug Waggoner

Well our strategy has always been focused on small and mid-sized customers, but we also said that we were going to leverage our capabilities, as we got scale to go upmarket. And I would say, that that's playing out kind of exactly as we have described; so we look at the large RFP business, as it fits into our operations, and where we can make money doing it, and we certainly are landing some of those accounts, and getting larger share of wallet from those accounts. But we continue to focus on the small and mid-size as our primary strategy.

Matthew Young - Morningstar

Okay. So its more opportunistic than a major push at this point?

Doug Waggoner

Yes.

Matthew Young - Morningstar

Okay. That's all I had. Thanks.

Doug Waggoner

Thanks Matt.

Operator

Thank you. And our next question comes from Kevin Steinke from Barrington Research. Your line is open. Please go ahead.

Kevin Steinke - Barrington Research

Good afternoon. You've touched on this a little bit a couple of times, but I will ask it anyway. How well positioned do you feel with your carrier sales organization right now to handle demand that you're seeing?

Dave Menzel

We think we are well positioned. As I mentioned in response to an earlier question, not quite, but almost double the size of the staff over the last year. We are continuing to add -- we will continue to add people this year, through the back half of the year. We are -- because to some extent, the staff is a little less tenured, because of those additions. Our productivity levels are a little lower per person, than it may have been 12 months ago, but we are -- we feel good about the ability to handle the demand that we are seeing. But at the same time, we think there is opportunity to do more, and so we will continue to invest and grow the sourcing operation, certainly through the rest of this year, and I am sure, in next year as well.

Kevin Steinke - Barrington Research

Okay. And if you were to take out the G&A increase related to acquisitions, how much of the investment portion of the increase would you attribute, roughly to increasing the size of the carrier sales organization?

Kyle Sauers

Most of that increase is payroll related, and that's throughout the organization. I don't think I want to breakdown by department how much we have added, but the lion's share of that increase is related to headcount and staffing.

Dave Menzel

I will add just a little color. So three big areas, one is carrier's outsourcing. Second, with the growth in truckload, its truckload operations, especially supporting large national accounts, and then third is, normal what I will call operating expense increases associated with kind of the consistent growth that we have had in our enterprise business, which is up 18% year-over-year. So those are kind of the three primary buckets, and then obviously, as facilities and other things, costs are increasing, as we continue to expand our sales organization throughout the company.

Kevin Steinke - Barrington Research

Okay, great. Well thanks for taking my questions.

Dave Menzel

Thank you.

Operator

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Mr. Doug Waggoner, for closing remarks.

Doug Waggoner

Thank you. Just like to say, I am proud of all the employees at Echo for outstanding efforts in both Q1 and Q2 of this year, and I am looking forward to a strong finish in 2014 and beyond, and thanks everybody for joining us on the call today, and we look forward to talking with you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Echo Global Logistics' (ECHO) CEO Doug Waggoner on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts