Echo Global Logistics (ECHO) Douglas R. Waggoner on Q2 2016 Results - Earnings Call Transcript

| About: Echo Global (ECHO)

Echo Global Logistics, Inc. (NASDAQ:ECHO)

Q2 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

Kyle Sauers - Chief Financial Officer

Douglas R. Waggoner - Chairman and Chief Executive Officer

David B. Menzel - President & Chief Operating Officer

Analysts

Matthew Frankel - Cowen & Co. LLC

Alexander Vecchio - Morgan Stanley & Co. LLC

Jack Atkins - Stephens, Inc.

Allison M. Landry - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jamie Clement - Macquarie Capital (USA), Inc.

David Pearce Campbell - Thompson Davis & Co., Inc.

Thomas Wadewitz - UBS Securities LLC

Kevin Mark Steinke - Barrington Research Associates, Inc.

Matthew Young - Morningstar, Inc. (Research)

Brian P. Ossenbeck - JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Echo Global Logistics Second Quarter 2016 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 follow at that time. And as a reminder, this call is being recorded.

I would like to introduce your host for today's conference, Kyle Sauers, Chief Financial Officer. Sir, you may begin.

Kyle Sauers - Chief Financial Officer

Thank you, and thank you for joining us today to discuss our second quarter 2016 earnings. Hosting the call are Doug Waggoner, Chairman and Chief Executive Officer; Dave Menzel, President and Chief Operating 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 definition and reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release we issued earlier today and Form 8-K we filed earlier today.

With that, I'm pleased to turn the call over to Doug Waggoner.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Thanks, and good afternoon, everyone.

We are happy to report another quarter of strong volumes and profitability in an environment offering less freight at lower rates than the previous year. These results were particularly impressive given the time and effort being spent by so many of our employees on the technological, functional and operational integration of our Command acquisition.

As you turn to page three of the slide, here are some of the highlights. Revenue grew 19% to $444 million. This growth was despite the year-over-year revenue headwind from the drop in fuel prices of approximately $19 million. Net revenue grew to $85 million, up 22%. Our net revenue margin increased by 48 basis points, with truckload now comprising 67% of our total revenue, up from 61% a year ago.

Non-GAAP EBITDA grew by 10% to $18.5 million. After affecting for integration costs of $3.1 million during the quarter, non-GAAP EBITDA grew by 28%. GAAP net income grew to $0.07 a share compared to a loss of $0.03 a share in the prior year period. Non-GAAP fully diluted earnings per share were $0.27 per share or $0.33 per share after excluding the integration costs.

These results were a strong indication of our continued execution for clients, carriers and the resiliency of the Echo growth model, even in times of lower rates and less spot market freight, and the ability to take market share in a highly fragmented market and grow one of the best brands in the logistics space. There's no better testament to this fact than Echo's recent award by the readers of Inbound Logistics as the number two 3PL for the second year in a row.

I'd like to take a moment to thank all of our clients who took the time to vote for Echo as their top 3PL.

I now want to turn the call over to Dave, who'll discuss the Q2 results in more detail.

David B. Menzel - President & Chief Operating Officer

Thanks, Doug. I'll kick off by reviewing the results by mode of transportation, as highlighted on slide four. Starting with truckload, our business grew by 32% to $300 million in the second quarter. Primary driver of our top line growth was the acquisition of Command, which was closed on June 1, 2015. So, we still had two months of acquisition related growth in our year-over-year comparison. Consistent with our commentary last quarter, our volume gains have been offset by lower pricing.

Our revenue per load in our truckload business was down 15% year-over-year. From a full truckload perspective, we achieved increases in Echo's historical load account of 12%, and increases at Command totaling 6%. We're proud of these market share gains in light of the soft economy and considering the integration efforts we're spending to ensure the realization of our long-term goals. I want to again thank our people for hustling every day to advance our businesses and serve our clients and carriers.

Our LTL revenue was flat on a year-over-year basis, totaling $118 million. LTL volumes grew approximately 6% on considering net revenue conversion that we discussed last quarter. Revenue per shipment was down 1% mainly due to lower fuel rates. Our LTL business remains a critical component of our multimodal value proposition, and we've rolled out new technology in Q2 to improve the way our sales reps access our robust LTL carrier network.

As we've talked about in the past, we believe we have the strongest network of LTL carriers in the business and our technology enables our customers to access those carriers to optimize their freight network in an uncomplicated way. In other words, our capabilities aggregate that LTL capacity and streamline carrier interaction all the way from load tendering, real-time tracking and through the settlement process.

We've recently rolled out our LTL capabilities to the Command sales team and we've already seen great results. And once fully trained and integrated, this will significantly increase our ability to reach the market with this offering.

On the intermodal side, our revenue was up 6% at $19 million for the quarter. This increase is also attributable to intermodal revenue from Command and is offset by volume and pricing decreases in Echo's historical business. Market conditions on the intermodal side have not changed materially since the last quarter. At the same time, when the over the road rates begin to rise, we anticipate being able to leverage this capability to add value to our shippers across the different market segments that we serve.

Now, let's take a closer look at our revenue by customer type. It's highlighted on page five of our presentation. Our transactional revenue, which represents the revenue from our brokerage business, grew 23% on a year-over-year basis, totaling $362 million in Q2, 2016. Transactional revenue was down 4% year-over-year, excluding the impact of the Command acquisition. Again, volume gains were offset by lower rates.

We ended the quarter with 1,654 sales reps, which include both client and carrier sales, reflecting a decrease of 33 people from a year ago. This decrease in overall head count was due to reduction in our staff on the carrier sales side of the business, as we're down 79 people year-over-year. This decline occurred from natural attrition, which we chose not to replace due to current market conditions and the pending integration of the Echo and Command carrier sales organizations.

On the client side, considering both the sales and operations, we're up 46 people. So, we're continuing to grow our client organization, which is a key component to our long-term growth strategy. Our Managed Transportation business continues to perform very well, as total revenue was up 7% at $82 million. This growth rate would have been 12% when considering the fee-based restructures we talked about last quarter.

Consistent with these metrics, our net revenue was up 20% year-over-year. We had a strong quarter of new business wins and closed 16 deals that represent approximately $50 million of freight under management. In addition, we closed our first Managed Transportation client generated by an opportunity at Command and we have several more great opportunities in our current pipeline.

Consistent with our historical track record, we renewed 100% of our revenue from expiring contracts in the quarter. Our Managed Transportation solution is at the core of Echo's strength, leveraging everything that we have to offer. Our proprietary technology along with the dedication of our people is the cornerstone to our offering as our clients are looking to Echo to outsource their transportation to drive improvements and their ability to manage their supply chains. We add that to a multimodal capability through our LTL, partial, truckload, and intermodal capacity solutions, resulting in a very strong value proposition that resonates in the markets that we serve.

Let's move on to our net revenue in the corresponding net revenue margin, which we highlighted on slide six. Our net revenue was up 22.5%, driven by the acquisition of Command, the growth of our truckload business and the strong growth in our Managed Transportation. In addition, our net revenue margin increased by 48 basis points to 19.2%. This increase is driven by continued improvement in our truckload net revenue margin, but partially offset by the continued trend of truckload driving a bigger portion of our overall business.

As Doug mentioned, our truckload revenue was 67% of our total revenue, up over 600 basis points from the 61% in the prior-year. Our truckload net revenue margin improved on a year-over-year basis at both Echo and Command. Echo's historical truckload margin improved by 102 basis points and Command's truckload margin improved by 11 basis points. In aggregate, our truckload margin was up 161 basis points year-over-year. It's worth noting that we experienced a fairly significant market tightening after Memorial Day, which continued through mid July. This tightening drove our purchased truckload rates higher and had the effect of compressing our net revenue margin in June. Rates have begun to soften over the last two weeks, but have not returned to the levels we saw earlier in the quarter.

With respect to LTL, our net revenue margin improved by 20 basis points over the prior year, again, reflecting a more stable pricing environment.

Finally, the integration of Command is progressing very well and we're very excited to say that we intend to go live on the common technology platform within the next few months. All of our people are excited about the future and anxious to begin to work together as one company to realize the benefits of our combined operations.

I'd like to now turn it back over to Kyle to review details of our financial performance.

Kyle Sauers - Chief Financial Officer

Thanks, Dave. On page seven of the slides, you'll find a summary of our key operating statement line items and I'm going to highlight a few of those. Commission expense was $25.2 million in the second quarter of 2016, increasing 24% year-over-year. Commission expense was 29.6% of net revenue, representing a 25 basis point increase from the second quarter of 2015.

Non-GAAP G&A expense was $41.5 million in the second quarter of 2016, up 28% from the second quarter of 2015. But excluding integration costs of $3.1 million related to the Command acquisition, non-GAAP G&A expense would have increased 19% over the prior year to $38.4 million. The increase in G&A is primarily due to the Command acquisition, which is only included for one month of last year's second quarter.

Depreciation expense was $3.6 million in the second quarter of 2016, increasing 23% year-over-year. Cash interest expense was $1.6 million during the second quarter of 2016, up from $1.1 million last year, and the increase is due to a full quarter of interest in the current year. Our non-GAAP effective income tax rate was 39.8% for the second quarter of 2016 and difference between this quarter's tax rate and our expected rate of approximately 38% is primarily related to the discrete cost that were associated with the completion of both a state and an IRS audit covering several years.

GAAP fully diluted EPS was $0.07 a share in the second quarter of 2016 compared to a loss of $0.03 in the prior year. Non-GAAP fully diluted EPS was $0.27 a share, decreasing 10% from the second quarter of 2015, or $0.33 and increasing 11% after you exclude the integration cost that I mentioned earlier.

The primary differences between our GAAP and non-GAAP EPS in the second quarter are $4 million of amortization of intangibles, $1.9 million of non-cash interest expense, and $3.8 million of stock compensation expense. Non-GAAP EBITDA increased 10% from the second quarter of 2015 to $18.5 million, or increased 28% to $21.5 million after you consider the integration cost of $3.1 million.

Slide eight contains selected cash flow and balance sheet data. In the second quarter of 2016, we generated $11 million in free cash flow. Capital expenditures totaled $8.5 million in the quarter, but I want to point out, this is not the actual cash outlay for CapEx during the quarter. It's part of our facility expansion here in Chicago. We have a typical but significant tenant improvement allowance incentive from our landlord to help build out the space. So, almost $4 million of that $8.5 million in CapEx during the quarter was part of that incentive.

We ended the quarter with $40 million in cash, $229 million of accounts receivable, and nothing drawn down on our $200 million ABL facility. And during the quarter, we repurchased 618,000 shares of our common stock at an average price of $22.19, for a total of $13.7 million.

And I want to take the opportunity to update and reiterate some of the guidance we've put out on our previous call. We tightened the range on our full year revenue guidance to $1.70 billion to $1.76 billion, which indicates second half revenue of approximately $850 million to $910 million. Commission expense for the second half of the year should be in the range of 29.5% to 30.5% of net revenue, consistent with our previous guidance. And although we've not previously articulated any anticipated cost synergies through our integration efforts, at this point, we've identified and executed on annual cost savings of approximately $3 million.

And so this, along with a little slower hiring pace in 2016 that Dave mentioned earlier, allows us to reduce our expectations for G&A expense for the full year. We now expect G&A for the full year, excluding integration costs, to be $151 million to $155 million, which is a reduction of $5 million at the midpoint from the previous guidance. And that indicates a range of $74.5 million to $78.5 million in the second half of the year. We expect integration costs, in addition to the previously mentioned G&A cost, to be $4.5 million to $5.5 million for the second half of the year.

Depreciation expense should be approximately $8.5 million for the second half of the year, with Q4 being slightly higher than Q3. Cash interest expense should still be approximately $3.4 million for the second half of the year. And we still expect our tax rate to be approximately 38% in the second half of the year.

Excluded from our non-GAAP calculations, we expect the following in second half of 2016. Amortization of approximately $8 million, non-cash interest of $3.9 million, and stock compensation expense of $4.2 million. And after considering the stock repurchases during the second quarter, share count for the third quarter should approximate 29.2 million shares.

Thus far during the third quarter, we've experienced truckload volume growth of 12.5%, with both Echo and Command in double-digits. Total revenue for the first few weeks of the quarter is up 2.7% versus the prior year. Dave commented earlier on some of the dynamics that are compressing margins in June and thus far in July. While we don't predict where margins will go during the quarter, we do expect some of that compression to persist on a year-over-year and sequential basis.

I would now like to turn the call back over to Doug.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Thanks, Kyle. Second quarter continued the trend of lighter freight volumes, a soft spot market and lower truckload rates. While these all affect our near-term outlook for a variety of factors, we expect capacity to tighten and rates to rise again in the future. This again with our continued volume growth, our acquisition strategy, and the synergies coming from the Command integration, all make me confident we will reach our 2018 targets.

As Dave mentioned, we did see a sudden and significant capacity tightening in the second half of June that we believe was caused by a combination of a late produce season, road check and the timing of the end of month and end of quarter in conjunction with the 4th of July holiday. We saw an immediate scarcity of trucks, along with the corresponding price spikes and net revenue margin squeeze. These conditions have subsided and we've seen capacity loosen back up over the last couple of weeks, albeit not to the levels seen earlier in the year.

What is interesting, however, is how little external catalyst it took to disrupt the market, and it seems the distance from loose capacity to tight capacity is not all that great. Looking forward, when we eventually get to a point in the macroeconomic cycle where the disruption is caused on the demand side of the market or the supply side of capacity is constrained by regulatory or other issues, I believe we will see a return to market conditions which are very attractive for non-asset brokerage.

Most importantly, we continued to demonstrate the ability to capture market share and grow our business. Our truckload volume growth continues to outpace the market, and despite all of our efforts preparing for a game changing integration, we are delivering double-digit volume growth at both Echo and Command. And this gives me a great amount of optimism and confidence in the future.

Dave mentioned our progress on the integration of Command, but I would like to add a bit more color. As we've previously mentioned, we've already combined our HR, IT and back office teams, and have a detailed organizational plan for client sales integration. All process flows have been optimized between the two companies taking a best-of-both approach. This has driven our strategies for organizational design and technology and we have developed a comprehensive plan to ensure that there's a smooth cutover on to the new common platform.

Our carrier sales organization has been unified under common leadership and we have rolled out the structure internally. This will enable us to realize the synergies identified as our combined network will be significantly larger with increased density in all regions of the country.

Over the past several months, we've had two Echo managers working and managing Command teams and we recently promoted a new Command manager to run our Long Beach carrier sales team. The feedback from this cross training and integration has been very positive and reaffirms many of the assumptions in terms of the benefits of this acquisition.

Our technology integration has been a phased approach with all but the last phase completed. So far, we have upgraded all of Command's hardware and added new components to the Echo data center, and these are all in production. In April, we rolled out functional enhancements and improved algorithms to the Command truckload platform, immediately benefiting the Command team.

In May, we went live on a common CRM platform and are finalizing all account overlap issues prior to the go-live-date. This is a critical step in unifying our sales organization and advancing our go-to-market strategy as we continue to scale our business. As a reminder, we continue to operate many accounts separately, either due to the mode or network requirements to serve those shippers. Once we are on a common platform, we will complete this part of the process.

Two weeks ago, we rolled out Echo's LTL platform to Command, which was the first step to enable Command's sales people to have access to Echo's robust LTL offering. Along with the side benefit of readying them for system go-live, as all load entry changes will be pre-trained with the Command team. I want to thank our teams for all the work that went into this rollout, as it went off without a hitch. And it's too early to get a handle on these synergies, but we're starting to see a significant pop in Command's LTL volume.

Programming on the new integrated truckload technology platforms is completed. It's working and we're going through rigorous testing as we start to train our employees. This leaves us less than 90 days away from the final system go-live in conjunction with the completion of our expanded Chicago location.

I've mentioned this before, but I want to highlight that what we've accomplished so much to get to this point. And our cross functional teams across both organizations have really delivered in terms of the quality and quantity of work and the preparation that they have put into this integration. Just last week, we hosted our leadership meetings in Chicago and leaders from Echo and Command got to see all of the planning and the technology we are about to roll out. And everyone is super excited about our future together.

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

Question-and-Answer Session

Operator

Thank you. And our first question comes from Jason Seidl with Cowen. Your line is now open.

Matthew Frankel - Cowen & Co. LLC

Hi, guys. It's actually Matt Frankel on for Jason this afternoon. How are you?

Kyle Sauers - Chief Financial Officer

Hey, Matt.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Hello.

Matthew Frankel - Cowen & Co. LLC

A couple of questions for you. First, you mentioned the LTL business at the end there, I was wondering if you can give us a better sense of what's going on in that marketplace as that becomes a bigger part of the business over time here? There's been some discussion that we've had with carriers about some broad discounting going on by some large players. I'm curious if you can just enlighten us on what you're seeing there?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, just a slight correction. In our mix of business, truckload's actually been a bigger portion over time as we've grown that truckload segment, but in the LTL sector, we've actually found relative price stability and good working relationships with our LTL carriers. So, we're not really seeing a lot of volatility in that market.

David B. Menzel - President & Chief Operating Officer

I think the one thing I would add to that is we do see a continuing trend for shippers to – that appreciate the value proposition that we bring to the table that are looking for somebody that combines kind of a multimodal capability to help them optimize their networks.

So we think that that part of the market continues to grow. So it's an attractive part of the market for us to compete in, but as Doug said that we haven't seen instability I'll say and the pricing has been relatively consistent in the marketplace from our perspective over the past six months.

Matthew Frankel - Cowen & Co. LLC

Understood. Thanks. And on Command, if you could just remind us the differences in the business mix between Echo and Command, where one is focused versus the other, from a carrier perspective, from a client perspective, from a geographical perspective? Just give us and remind us how that plays out.

David B. Menzel - President & Chief Operating Officer

Sure. Just as a reminder, so Command's business was over 90% of truckload brokerage. And as you know, Echo prior to the acquisition of Command was much more of a multimodal business that had a brokerage business that was about 55% truckload and the remainder LTL and intermodal with a higher concentration on the LTL side obviously, as well as over $200 million of Managed Transportation business.

So, Echo's business was much more diversified across modes of transportation and probably a bit more focused on middle market and smaller market companies. But even having said that, we had begun to go up market, especially on the truckload side. And Command business has been focused on middle-market and larger truckload opportunities and primarily positioned prior to our acquisition in the spot market. And they thrived in 2014 when the market conditions got pretty volatile and rates increased significantly.

And one of the big things that when we looked at the networks and we looked at the geographical dispersion of the business, we found that Echo's truckload business was much more concentrated, I'll say, west of the Mississippi. And in Command's case, they had a lot more network density east of the Mississippi and particularly in the southeast and in the northeast. And so the combination of the two companies created what we saw as a much stronger national network on the truckload side. And so what we – we brought a lot of new capabilities to Command in the LTL and the Managed Transportation and the intermodal side of the business. And they've strengthened our truckload offering significantly and they brought significant technology to the table that Doug just explained that we're in a process of integrating.

So, it's given us a much denser network. When we go live on a common platform, we believe we'll be able to realize the synergies for that and plus we've now given our sales forces a much more complete offering to bring to the marketplace.

Matthew Frankel - Cowen & Co. LLC

Thanks, guys. Appreciate it.

David B. Menzel - President & Chief Operating Officer

Thank you.

Operator

Thank you. And our next question comes from Alex Vecchio with Morgan Stanley. Your line is now open.

Alexander Vecchio - Morgan Stanley & Co. LLC

Good evening. Thanks for taking the questions. Kyle, I just wanted to clarify something you mentioned earlier on the gross margin. Did I hear you correctly that consolidated gross margins are compressing both sequentially as well as year-over-year so far through July and that you expect that trend to persist through the full quarter?

Kyle Sauers - Chief Financial Officer

So, I didn't comment on what we expect to happen for the full quarter necessarily, but that there are more challenging year-over-year comparables in the second half of the year and that we did see these conditions that Dave had mentioned that I'll let him offer some additional color on that did cause margins to compress as things tightened in June and July.

Alexander Vecchio - Morgan Stanley & Co. LLC

Okay. So, so far through July though, things are compressing though year-over-year and sequentially through July so far?

David B. Menzel - President & Chief Operating Officer

Yeah. That is correct, Alex.

Alexander Vecchio - Morgan Stanley & Co. LLC

Okay, got it. I wanted to come back to the long-term guidance for $3 billion in 2018. If we take out $250 million for acquisitions I believe, $250 million for Command cross-selling, the implied organic revenue growth you would need in order to hit that goal would be upwards of 25% at this point over the next two years. And that's more than double. So I think the 10% to 12% you originally had baked into that guidance when you originally gave it a few quarters ago.

I guess, I'm just wondering what's going to change so dramatically that's going to get that organic growth to accelerate to that extent in order to hit that number? What kind of gives you guys that confidence that you can still achieve that number at this point?

Kyle Sauers - Chief Financial Officer

So, I'll make a couple of comments. We've given ranges for M&A activity and synergistic revenue from the Command acquisition that are kind of general ranges to help us get to those targets and we feel really good about continuing to execute on both of those pieces of the strategy. As Dave and Doug both talked about, the integration's going very well and we feel more confident than we ever have that we're going to be able to get some great synergies out of that acquisition and that combination of the two platforms in carrier networks.

And then in addition to that, we're showing great truckload volume growth, great ability to expand that Managed Transportation business in spite of a market that isn't offering a lot of additional freight. And we think that that will only enhance and expand as the market changes to be a better environment for brokers.

Alexander Vecchio - Morgan Stanley & Co. LLC

Okay. And just lastly housekeeping. Kyle, can you just repeat what you expect the integration cost to be in the back half of the year?

Kyle Sauers - Chief Financial Officer

In the back half of the year, $4.5 million to $5.5 million.

Alexander Vecchio - Morgan Stanley & Co. LLC

Got it. Okay. All right. That's all I had. Thanks very much for the time.

Kyle Sauers - Chief Financial Officer

Thanks, Alex. Thanks.

Operator

Thank you. And our next question comes from Jack Atkins with Stephens. Your line is now open.

Jack Atkins - Stephens, Inc.

Hey, guys. Good afternoon and thanks for taking my questions. So, Doug, I guess, first off, thanks for all the additional clarity around the progress that you guys are making on the integration front with Command, but just sort of following up on the last question around the revenue synergies. I was just curious, when you think about that $200 million to $300 million that you've targeted there and the go-live on the new IT platform, is there a way to quantify maybe how much of those revenue synergies you've already captured and sort of when you think you'll be able to start seeing those ramp? I mean is it as soon as the fourth quarter or do you think it's really going to be the first half of 2017 before we see that really play out?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, I think, realistically it'll play out in 2017, but let me just highlight some of the factors that play in. And first of all, and I think Kyle alluded this, you've got tremendous pricing fluctuations that are tied to the macroeconomic cycles. And for the last several quarters, they've been a headwind. At some point, we think they'll be a tailwind as we hit that inflection point. But I mentioned that we just went live with LTL at Command. We're seeing a lot of excitement with the Command reps having a better LTL product to sell, more carriers, better carriers, more competitive pricing. We're teaching them how to sell LTL where they've predominantly sold truckload, but I also said in my comments that it's early to make projections from what we're seeing, but what we're seeing is very exciting.

We're excited about the fact that the Command people are excited to sell Managed Transportation. They've never had that as an offering before. And they closed one deal, and as Dave mentioned, we've got several more deals in the pipeline and Managed Trans deals, depending on the size of the opportunity, can move the needle. So, we're excited about that. We're excited about the productivity and the margin opportunities being all on one truckload network and on a new and improved truckload technology platform. We think that the technology, in and of itself, can both make us more productive and help us managing the profitability of the freight.

And we also think that having one network, as Dave mentioned, with kind of the synergy between the two geographic densities, is going to make us a better broker for existing customers, where we can help them with additional warehouses and locations where maybe we're not so competitive today.

So, those are just a few of the items. We think there is opportunities in rail, when market conditions change. Right now, they're not favorable towards intermodal, but again, once we pass that inflection point and get into a different kind of truck market, we know that it'll make our intermodal offering attractive. And we think, between the two companies, the increased density in intermodal will be an attractive option for our clients.

Jack Atkins - Stephens, Inc.

Okay. Okay, great. And then, I guess, kind of shifting gears and thinking about, now that you're in the latter innings of this integration process, what's the appetite like on the M&A side? And what are you seeing out there in terms of potential opportunities? And do you think 2017 will be a year where maybe that M&A engine gets cranked back up again?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, we're seeing a lot of deal flow right now. I think a lot of opportunities in the marketplace. Now, that being said, it's hard to predict when we'll close one, because we're being very selective and very deliberate and we're looking for the right values and the right strategic fits. I would tell you that private company valuations right now seem to be on the higher end of the cycle. And we don't want to do something that doesn't make sense financially, and it's also got to be a good fit. And as we become a bigger player with a bigger geographic presence and a bigger customer presence and a bigger carrier presence, we have to be mindful that what we do fits within our existing network and strategies. So we have to look at, in some cases, niches that are underserved by us today, whether they're modal or geographical or niche services that we don't offer. And we think there are a lot of those opportunities out there. So, we are active as we speak. We've got a pipeline. We're looking at deals. It's just impossible to say when one will close.

Jack Atkins - Stephens, Inc.

Okay, great. And the last question for me, this is more of a housekeeping item for Kyle. But I think cash from ops was down year-over-year in the second quarter. Could you maybe talk to some of the puts and takes behind that? And are you seeing some pressure from some of your customers to maybe extend payment terms or things like that? Is that perhaps something that's impacting things on a year-over-year basis?

Kyle Sauers - Chief Financial Officer

So, no, we aren't seeing that sort of pressure. I think that the thing that you're seeing there in that change is really the effect of the Command acquisition in last Q2, and some differences in the way that flowed through our cash flow from operations.

Jack Atkins - Stephens, Inc.

Okay.

Kyle Sauers - Chief Financial Officer

I think if we look back at other quarters, the $19 million there would look a lot more similar to what you've seen.

Jack Atkins - Stephens, Inc.

Okay, great. I'll turn it over. Thanks so much for the time.

Kyle Sauers - Chief Financial Officer

Thanks, Jack.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Thanks, Jack.

Operator

Thank you. And our next question comes from Allison Landry with Credit Suisse. Your line is now open.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Thanks. So, thinking about your comments about the rising purchase transportation costs in June, and I know you spoke to the net revenue margin compression, but wondering if you could provide some color on the progression of the spread between buy and sell rates throughout the second quarter. And specifically, did they turn negative in June and has that reversed so far in July, given that rates have softened somewhat?

David B. Menzel - President & Chief Operating Officer

Sure, Allison, I'll give you a little color on that. So, we saw a pretty consistent decline in – well, I should say an increase in the purchase transportation costs and a corresponding compression of net revenue margin. April was the peak for the quarter. May was a little bit – rates got a little higher, margin compress. And then I would say it's even more – was more dramatic in June and then kind of steadied itself late in June and started to recover a little bit in July, but certainly didn't come back to those May levels.

And just to kind of give you a perspective on that. We were in the low 18% range in June. So it gives you a sense of how much compression we did see throughout the quarter. Now what happened in June, as Doug highlighted, a few things did happen. Number one, we had obviously some holidays kick into gear and the summer tightening of capacity. Produce season hit. We've got a lot of freight in California and the Southeast. So the produce season definitely impacted us. And then throughout the quarter, some of the new contract rates went into effect. So we saw kind of a lot of things hit us in June. I would say that, as of today, they seemed to have stabilized and are recovering a bit, but it's hard to, as you know, predict where that's going to end up as we march forward over the next couple of months.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's definitely helpful. And I'm not sure if you mentioned this, I apologize if I missed it, but in terms of the updated top line guidance, was there any change in the underlying volume growth assumption versus your previous expectations?

Kyle Sauers - Chief Financial Officer

Really not. It was a pretty modest change, 1% change there. We're just really tightening it up, since we've only got a half year to go, and bringing that top end down just a touch in the midpoint, $10 million lower for the full year.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Okay, excellent. Thank you.

Kyle Sauers - Chief Financial Officer

Thanks, Allison.

Operator

Thank you. And our next question comes from Jamie Clement with Macquarie. Your line is now open.

Jamie Clement - Macquarie Capital (USA), Inc.

Gentlemen, thanks in advance for taking my questions. Hi, Can you hear me?

Kyle Sauers - Chief Financial Officer

Hey, Jamie.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Hi, Jamie.

Jamie Clement - Macquarie Capital (USA), Inc.

Hey. Doug, rates are rates and you do what you can do, but obviously your volume number's very, very strong. And I got a question for you. Obviously, you guys have taken a lot of pride in having that middle market and maybe even kind of small business focus as a partner to those kinds of shippers. Sentiment data out of small business and middle market kind of improved a bit in May, improved again a little bit in June, albeit off of low levels, but is it possible we're actually starting to see some green shoots of recovery in that area of economy?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, I guess that's what we're waiting to see. I mean, obviously, there was some supply disruption as we talked about on capacity and we're waiting to see if that's coupled with an improvement in demand. When you look at an account by account basis, you don't really see an overall trend. You see some accounts are up and some accounts are down. So I don't think we have enough data yet to draw a conclusion.

Jamie Clement - Macquarie Capital (USA), Inc.

Yeah, no, I think that's very fair. And obviously, you don't see all of your customers' freight also, correct?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Yeah, generally, unless it's a Managed Trans account, we're only seeing part of their freight. That's correct.

Jamie Clement - Macquarie Capital (USA), Inc.

Is there anything anecdotal in terms of talking with customers over the last 60 days, 90 days or anything like that that would indicate any increase level of confidence or are people just kind of waiting for the elections and that sort of thing?

Douglas R. Waggoner - Chairman and Chief Executive Officer

I hesitate to comment on that, because I don't know if I have enough data points to draw a meaningful conclusion. I think people are optimistic that it's picking up, but also have a bit of a show-me attitude.

Jamie Clement - Macquarie Capital (USA), Inc.

Fair. That's very fair. Okay. Well, I tried. Thanks very much guys.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Okay. Thanks, Jamie.

Operator

Thank you. And our next question comes from David Campbell with Thompson Davis & Company. Your line is now open.

David Pearce Campbell - Thompson Davis & Co., Inc.

Yes. Hi. Thanks for taking the question. Kyle, did you say that revenues were up 2% in July so far? Was that the number you gave us?

Kyle Sauers - Chief Financial Officer

They're up 2.7% through the first few weeks of July, yes.

David Pearce Campbell - Thompson Davis & Co., Inc.

2.7%. And then compression on gross margin, if there's a shortage of capacity pushing the cost up, why didn't revenue rates for mile offset that, because it seems to me that the shippers would be faced with higher rates if they can't get the capacity?

Kyle Sauers - Chief Financial Officer

Yeah. I think that there's a couple of factors. The market's always, especially on rate adjustments at the shipper side, a little slower to react to changes in capacity. We've certainly seen that in a lot of cycles in the past. There's a few reasons for that obviously. The first and probably the biggest reason is the amount of contract freight that moves to the system. So, one of the important roles that we play in the contract accounts is to agree to rates typically annual in nature. And those rates aren't going to change based on short-term fluctuations in the current environment. And I think the second thing that happens transactionally in the spot market is the carriers and the brokers and all the competitors are little slower to react as well. So you just a see a little – there's a little lag, if you will, on the market adjusting to either increases or decreases in rates. To the extent that increased rates persist, I think you'll start to see more receptivity to adjustments. And that's probably one of the things that we're keeping a really close eye on right now.

David Pearce Campbell - Thompson Davis & Co., Inc.

And with the integration of Command, I assume you're going to complete it by the end of this year. Is that correct?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Yes, that's correct.

David Pearce Campbell - Thompson Davis & Co., Inc.

And that integration is hopefully going to produce higher gross margins or lower SG&A relative to net revenues. Obviously, you won't have the transaction cost next year, but integration cost next year, but in addition of that would SG&A costs go down as a percentage of net revenue. Is that one of the benefits of the integration or is it largely in gross profit margins?

David B. Menzel - President & Chief Operating Officer

I think it's largely in gross profit and the ability to take market share. You know what that translates into higher volume growth or improved gross margins, we do believe, as we mentioned, that a greater level of network density and the synergy associated with their density on the east of the Mississippi and northwest creates opportunities both within the customer base and also for our sales people to add new customers. So we do think that buying power, if you will, or network density can improve our ability to compete and be successful in the marketplace. And so we're really excited about that. I think on the cost side of the equation, Kyle highlighted some of the synergies going forward. We've already kind of basically accounted for those or talked about those in terms of our guidance going forward, in terms of our SG&A expenses. And I think you hit the nail on the head on the integration costs. So our integration costs will obviously subside as we get past this first push of integration.

David Pearce Campbell - Thompson Davis & Co., Inc.

Right, right. Thank you very much. And I have – Kyle, you mentioned – no, Dave, you mentioned a number of sales employees in the second quarter. Could you repeat that? I didn't get it.

David B. Menzel - President & Chief Operating Officer

I did. There were 1,654 sales people at the end of the second quarter.

David Pearce Campbell - Thompson Davis & Co., Inc.

Okay.

David B. Menzel - President & Chief Operating Officer

That includes carrier sales, client sales, third-party agents that are part of the sales team and some of the operations folks as it has in the past, consistent with the past.

David Pearce Campbell - Thompson Davis & Co., Inc.

But does it include other employees? How much was your total employees up?

David B. Menzel - President & Chief Operating Officer

Our total employees, give me a second, I will check that numbers, so I don't give you a rough number. W-2 employees was 2,104, up – down from 2,152 a year ago. And I don't know if we have the fully loaded contracts number in there. (44:24)

Kyle Sauers - Chief Financial Officer

Yeah, total employees 2,389 at the end of the quarter.

David B. Menzel - President & Chief Operating Officer

Okay.

David Pearce Campbell - Thompson Davis & Co., Inc.

2,389?

Kyle Sauers - Chief Financial Officer

Correct.

David Pearce Campbell - Thompson Davis & Co., Inc.

Okay. Thank you.

David B. Menzel - President & Chief Operating Officer

Thank you.

Kyle Sauers - Chief Financial Officer

Thanks, David.

Operator

Thank you. And our next question comes from Tom Wadewitz with UBS. Your line is now open.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Hi, Tom.

Thomas Wadewitz - UBS Securities LLC

Yeah. Good afternoon. Let's see, so we just – there was a asset-based company who just was kind of finishing up their call and they had a certain perspective on the market, and so I apologize I missed the part of your call. But – and I think you have a bit of a different perspective. What do you think the kind of ELD impact and the risk to that as you look forward over the next year? I think there's one school of thought that would say, well, shippers are going to demand this, that brokers come with capacity that has ELDs and that could be a risk to you. But there's another school of thought that could say, well, yeah, maybe eventually, but maybe that's not something that shippers would focus on till 2018? And I'm just wondering how you think about the impact ELD and from ELD the timing and how you would manage that if it ends up having kind of a broad impact on your capacity?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, first of all, I don't think compliance with ELD requirements is going to be all that difficult. There are a lot of solutions available to truckers, all the way from very sophisticated satellite based systems down to $150 dongles that you can plug into your engine that talk via Bluetooth to your smartphone.

So compliance isn't a big deal. Frankly, it's not all that costly. There's a solution for everybody. That being said, we expect our carriers to comply with a law. It's their responsibility. We hold them accountable for doing that. And I think the further question is once there is full compliance amongst the carrier group, will it take capacity out of the national network. I think that is true. It's very difficult to estimate how significant that will be though.

Thomas Wadewitz - UBS Securities LLC

Okay. What do you see from – I mean, I guess I know you're levered more to spot and to kind of small and midsize shippers, so maybe that's not as much of a focus, the big shippers. But I guess my sense is you probably do more in contract over time with big shippers. So what's your sense? Are big shippers beginning to focus on that or midsize shippers or are you not really seeing that at this point?

Douglas R. Waggoner - Chairman and Chief Executive Officer

Yeah. Thus far shippers have not come to us asking us to manage ELD compliance.

Thomas Wadewitz - UBS Securities LLC

Right. Okay. Okay. So you can't use -

David B. Menzel - President & Chief Operating Officer

And I would just add to that, while there are from time-to-time conversations around it and talking about the same questions you're asking of how that might impact access to capacity and ability to serve clients. But I would say that, if you were going to just to generalize across shippers, we don't see a significant press, if you will, across the customer base from the shipper community today.

Thomas Wadewitz - UBS Securities LLC

Right, right. Okay, great. Thank you. I appreciate the perspective.

Kyle Sauers - Chief Financial Officer

Thanks, Tom.

Operator

Thank you. And our next question comes from Kevin Steinke with Barrington Research. Your line is now open.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Good afternoon.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Hi, Kevin.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Hey. Kyle, did you say that truckload volumes were up in the double-digits for both legacy Echo and Command thus far in July?

Kyle Sauers - Chief Financial Officer

Yeah. So, in July so far, in total, we're up 12.5% as a company, but when you do break it down between both Echo and Command, both individually they're up in double-digits.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Okay. So I think that implies pretty significant improvement in volume growth for Command. And we've seen their volume growth improving over the last couple of quarters. So, anything you would point to that's enabling their volumes to improve despite the softer spot market environment?

David B. Menzel - President & Chief Operating Officer

Yeah. I mean, I think that we've seen a consistent trend throughout 2016 at Command with modest year-over-year improvements in volume growth throughout the year. And that's continued into July, which is great news. As Kyle mentioned, the July rates are a little higher than the averages for the quarter. So, that's another kind of a – we're only talking about a few weeks, obviously, but a positive indication that there is some momentum in the marketplace. And we're very – keeping a close eye on it hoping that that persists throughout the quarter.

But I would say that in general, the reason we're seeing success at Command and getting things on the right track is like in any acquisition and any time you have a material deal like this, there's a bit of a shock in the system when you first close the system. And we've gone through a lot of integration work, and not that every employee has been impacted by it. People do have concerns. And I think it's – part of it's evidence of really getting comfortable, operating together and getting our sales and account people focused on serving the needs of their customers. And that's yielding successes. And we're seeing, across the Command sales teams, increases in productivity and successes in the marketplace. So we just think it's kind of a building momentum thing. And then, when we go live on the new system, we're all going to be in a great position to have a much more powerful network, as well as – especially on the Echo side, a more powerful technology system to realize the opportunities in front of us.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Okay, great. And another great job on renewals on the Managed Transportation side. I believe you said 100% of revenue up for renewal was renewed. So, just wondering, on those renewals, if you're generally seeing negotiated rates move lower in the contract renewals?

David B. Menzel - President & Chief Operating Officer

I would say not – no, not materially. I mean every client situation's different. It may depend on the specific situation, but for the most part, we renew contract, consistent terms of the past. You've seen that in terms of our ability to grow gross profit ahead of revenue, as an example, in our Managed Transportation business. And obviously, over time, our people and our technology forge strong relationships and we get more productive over time with our clients. So, we're able to renew deals that have great opportunity to continue to save our customers money and help them manage their supply chain and are very attractive to us in terms of our ability to manage and grow going forward. So I would say, no changes in the historical patterns that we've seen over time.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Okay. I was kind of driving that to – maybe just the truckload rates that are baked in, given the environment. So those are kind of holding stable?

David B. Menzel - President & Chief Operating Officer

Well, in a lot of cases, depending on the situation with a customer, we will – we typically don't commit to annual rates on the truckload side of the business due to the changing market condition. So, we'll structure contracts in unique ways. And then, to some extent, it may be more fee-based, depending on the customer-specific situation. So, we're not generally locking into fixed truckload rates over a period of time.

Kevin Mark Steinke - Barrington Research Associates, Inc.

Okay. Good. Well, thanks for taking my questions.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Matt Young with Morningstar. Your line is now open.

Matthew Young - Morningstar, Inc. (Research)

Good afternoon, guys. Could you quickly talk a little bit more about the reduction in your carrier sales head count? I think you called out the soft environment and the Command integration. Just looking to clarify the link there, especially in terms of why Command would impact that.

David B. Menzel - President & Chief Operating Officer

Well, the – what I said was that natural attrition has occurred. We consciously went into the year slowing down our hiring on the carrier sales side, because we knew two conditions existed. Number one, we had – we've ramped up aggressively for the last two years or three years, as you guys know. And so we saw that market conditions were kind of soft, and productivity levels were lower. And so we knew that we had excess capacity on the carrier sales side of the equation.

And then secondly, with the Command integration, there is some carrier overlap. So, we will be dealing with carrier overlap in cases where carrier sales reps have specific relationships. So, this natural attrition that's kind of occurred hasn't been a problem for us in any way shape or form. It's enabled us to get higher productivity levels out of our people, which results in higher compensation levels for our people in a softer market condition, and it also positions us well to be able to manage the combination of the two networks in a very constructive way for all of our employees.

So we are still hiring. We will hire new carrier reps in the second half of the year, but I wouldn't – we're not going to grow our carrier sales head count per se until the market conditions change or the volumes that we see dictate it. And right now, we've got excess – I'd say – we always operate with a little bit excess capacity in this part of the business, to ensure that we're able to serve our customers.

Matthew Young - Morningstar, Inc. (Research)

And that was going to be my next question is, if we saw a tightening, which we – a material tightening, which I'm guessing is a little ways out, would you easily be able to ramp that up?

David B. Menzel - President & Chief Operating Officer

We would, because – yeah, we would be able to because, if we see tightening occur, the reality is, we're likely to see that really manifest itself in – as we get into peak seasons next year. So we may see some tightening throughout the second half of this year, but at the same time, the volume levels that we're operating under probably won't change materially from where they are in some of these peak months. So it gives us plenty of time to react and build up a staff to serve our clients as the volumes peak in 2017.

Matthew Young - Morningstar, Inc. (Research)

Okay, great. Appreciate it.

David B. Menzel - President & Chief Operating Officer

The last point that I think is important to make here is that we talked about – a lot about it, but I think it's important to consider is that, when we go live with our new technology, we do expect improvements in productivity. The Command technology and a lot of the capabilities they bring to the table are going to be an advancement to our current system, and we expect that to drive improved productivity levels as well. So, it's another factor that we've been considering.

Operator

Thank you. And our next question comes from Brian Ossenbeck with JPMorgan. Your line is now open.

Brian P. Ossenbeck - JPMorgan Securities LLC

Hey, good evening. Thanks for taking my call.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Hi, Brian.

Brian P. Ossenbeck - JPMorgan Securities LLC

So, just had a couple of quick ones here at the end. First, housekeeping. Kyle, you mentioned there's $4 million – sounds like there was $4 million of maybe incentives or something like that within the CapEx that was running a little bit of both trends this quarter. Can you elaborate on that? Is that something you'll get back in the future, is there some other incentive involved there?

Kyle Sauers - Chief Financial Officer

Yeah. No, just – it's really an accounting rule that causes us to take an incentive that comes from our landlord as we build out our expanded facility here. We have to capitalize that and treat it as CapEx, even though they are paying for it. So, it just – my point there was that the CapEx looks higher than the actual cash outlay that we had during the quarter by about $4 million.

Brian P. Ossenbeck - JPMorgan Securities LLC

Okay, so half of it was non-cash essentially in the quarter.

Kyle Sauers - Chief Financial Officer

Correct.

Brian P. Ossenbeck - JPMorgan Securities LLC

Okay. Sticking with cash for a second, you already talked about M&A. So on the share repurchase program, it looks like you're just about half way through now. I believe you have one outstanding for the converts as well, but it seemed like those are fairly low coupon, a little, if at all, dilution on EPS. So, maybe you can just prioritize use of cash beyond M&A and when we could see perhaps an expansion in the share repo program?

Kyle Sauers - Chief Financial Officer

Sure. So just to clarify, at the end of the quarter, we had about $17 million still available under the authorized buyback program. And that's valid through the end of next year. We haven't yet – we haven't indicated any plans to expand that at this point. And we haven't stated specific targets for timing of repurchases or exact share counts per quarter or anything like that. And I'd say we continue to look at the use of cash for the buyback program against our M&A strategy and the opportunities that are presenting themselves or that we're seeking out and also the investments in the business. I guess the final point on that is that we do feel like we have a lot of balance sheet flexibility. Obviously, there is excess cash available and we do have this $200 million ABL facility that is not tapped today.

Brian P. Ossenbeck - JPMorgan Securities LLC

Okay. And last just kind of bigger picture question. Doug, you talk about how quickly capacity shifted from tight – from loose to tight rather. As you look out into next year, which will be here before we know it, especially with the integration, how in general are you thinking about positioning the mix of contract and spot PO in 2017, or is that a little bit too early to tell? If it is, just kind of how you're approaching it strategically would be helpful? Thanks.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Well, we don't have predetermined proportions. I mean, we consider ourselves a growth company and we're going to go out and get all the freight we can get. So our transactional sales people are looking for brokerage and relationship and transactional business and our business development people are looking for Managed Transportation deals. And when we get a chance to bid into a routing guide and go after contractual freight, we look at the lanes. We put our best foot forward where we think we can add value to the customer and do it at a profit. So, given that being the strategy kind of aggressive on all fronts, we see how it shakes out, but hopefully we're pricing responsibly and maximizing our margins.

Brian P. Ossenbeck - JPMorgan Securities LLC

Okay. So it sound more bottom ups than top down, and of course, market dependent.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Yeah.

Brian P. Ossenbeck - JPMorgan Securities LLC

All right. Thanks a lot for your time.

Kyle Sauers - Chief Financial Officer

Thanks, Brian.

Operator

And I'm showing no further questions at this time. I would like to turn the call back over to Doug Waggoner for closing remarks.

Douglas R. Waggoner - Chairman and Chief Executive Officer

Yeah, I just like to thank everybody for joining us on our second quarter 2016 call. We're excited about the prospects. We're getting close on the Command final integration and we look forward to talking to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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