Echo Global Logistics, Inc. (ECHO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Echo Global Logistics First Quarter 2021 Earnings Call. I would now like to hand the conference over to speaker today Pete Rogers, Chief Financial Officer. Please go ahead.
Pete Rogers: Thank you, and thank you for joining us today to discuss our first quarter 2021 earnings. Hosting the call are Doug Waggoner, Chairman of the Board and Chief Executive Officer; Dave Menzel, President and Chief Operating Officer; and Pete Rogers, 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 website at echo.com.
Doug Waggoner: Thanks. And good afternoon, everyone. I appreciate all of you joining today. And I'll start on Slide 3 of our presentation and hit some of the highlights for the quarter. The first quarter represented a continuation of the positive trends from recent quarters in terms of demonstrating Echo’s, performance and value in the midst of both strong demand and continued supply constraints. Our team executed at a very high level and delivered for our customers during a quarter with soft freight markets turned on their head by winter storms. These storms hobbled numerous parts of the country and set rates again to all-time highs. Throughout the disruption in shipper supply chains and carrier networks, Echo achieved record-breaking revenue, adjusted gross profit, adjusted EBITDA and adjusted EPS in Q1 2021. This marks our third straight quarter of record-setting revenue. The credit goes to all of our employees who have continued to deliver for both clients and carriers. Now I'll take you through some of the highlights in the quarter. We had record revenue in Q1 as total revenue was $801 million, representing a 45% increase from last year. We had record brokerage revenue of $617 million, record managed transportation revenue of $184 million, record truckload revenue of $576 million and record LTL revenue of $190 million. Record adjusted gross profit of $120 million representing a 34% increase from last year. Record adjusted EBITDA was $28.3 million a 90% increase over the prior year. And non-GAAP fully diluted EPS was also a new record at $0.61 compared to $0.19 in a year ago, period, reflecting a 217% increase. Again, a record-breaking quarter across the Board. I'm really proud of our team and our overall execution for this quarter. Please turn to Slide 4. Last quarter we discussed the strong progress we've made over the last five years and highlighted our success, growing market share and profitability through our own combination of people, process technology and data science. This unique mixture has helped to improve efficiency and productivity for our employees driven, continued growth in truckload, accelerated growth in managed transportation offering and strengthened our digital freight marketplace.
Dave Menzel: Thanks Doug. As we discussed last quarter Q4 2020 was characterized by strong freight demand and tight capacity, which resulted in truckload rates hitting all-time highs. That environment persisted into Q1 and it was further exasperated by the winter storm that impacted much of the country in February. The net result was a further tightening of capacity in new records in terms of truckload rates. Frequent discussion topic we’ve had with investors over the years has been centered around what point in the freight cycle, most favorable operating environment for Echo. Fundamentally, one of the advantages of our business model is its flexibility. We can and must adapt to changing freight cycles. Our business requires content adjustment. And our people are prepared to deal with constant change. The current environment is obviously quite favorable for carriers. There's more freight than trucks, or maybe I should say, than drivers. The ports are backlogged, demand is strong and so rates are high. On the other hand, shippers are dealing with high rates, tight capacity and disrupted supply chains. In this environment, we provide significant value by utilizing our unique blend of touch and technology combined with a robust multimodal network that enables us to bring solutions to shippers. Bottomline, I also want to acknowledge our people and our partners for doing everything they can do to deliver quality service and solutions during this unprecedented time.
Pete Rogers: Thanks, Dave. On Page 7 of the slides, you'll find a summary of our key operating statement line items. Commission expense was $36.3 million in the first quarter of 2021, increasing 33.2% year-over-year as a result of the increased adjusted gross profit. Commission expense was 30.2% of adjusted gross profit, essentially flat when compared to 30.3% for the first quarter last year.
Doug Waggoner: Thanks, Pete. I think from the first quarter record breaking results speak for themselves, and it's been highlighted with our guidance. We anticipate these conditions to persist throughout 2021 and into 2022. As a recent results indicate we are well positioned to capitalize in these prolonged times of supply chain disruption, but also view it as a unique opportunity to further differentiate ourselves to our growth and our scale. Last quarter, I highlighted some of our top organizational opportunities for the future. API connectivity, automated pricing, EchoDrive and EchoShip technologies internally facing technology and managed transportation growth. We made some great progress in the first quarter against many of these initiatives, but this is only the beginning. Weighed by strong financial performance to goals and opportunities for continued investment remain even more promising. Our focus is resolute or unique combination of people technology and data science will continue to be the reason for our success with our shippers and our carrier partners. That concludes our prepared remarks. And at this time I'd like to open up the call for questions.
Operator: And your first question comes from the line of Jack Atkins with Stephens. Your line is open.
Jack Atkins: Hey, everybody. You've got wait on for Jack this afternoon. Congrats on the quarter.
Doug Waggoner: Thanks.
Jack Atkins: I wanted to, if I could start wanting to ask about API integrations with the larger shipper load boards. How has that process coming along? Obviously, you mentioned $5 million in revenue stemmed from that this quarter. I'm wondering how much of that, or if slash how much of that initiative is contributing to the strong April and second quarter guidance and where do you want that $5 million to be down the line?
Dave Menzel: So the – this is Dave. The April numbers, I mean, I think that there's a couple of key things first off it's – where the progress has been fantastic. We've got a handful of clients integrated and we've got a pipeline of more coming. So we see that as a nice growth opportunity into 2021 and into 2022 and beyond. So I think that there's a big long-term opportunity for growth in this area which creates both revenue growth as well as productivity improvements as we move forward. In terms of the impact that it has on the April results, I'd say that's pretty minor. I mean, today, it's still a very small portion of our overall spot business and our April results are still driven primarily by the core of what we're doing. So we do see it accelerating as we move ahead. And I see it as a long-term opportunity, but it's not the hugest of needle movers in terms of April results.
Jack Atkins: Okay, great. Thank you. I want to stick on that large shipper subject, if I could. As you guys sort of look to reshape the business to be more competitive with the large contract shippers in the bidding process, what's the right mix of spot versus contract when you balance that initiative and a market like what we're seeing today?
Dave Menzel: Yes, it's a great question and one that we've never been able to successfully answer. We've gotten it plenty of times over the years. For Echo, our spot to contract mix has kind of ebb and flow as you would expect the freight cycles. And we've seen as high as about 60% of our business being contract business, in a cycle that has a very static supply and demand or balance, let's call it a supply and demand dynamic. And then we've seen it as low as 40% when the spot market has kind of gone crazy. We don't have a formula to say what exactly the right mix is. I think it's one of the unique things about Echo is we've got a very broad mix of customers. We've got many small and mid market clients that we would love to grow that share of the market. A lot of that business is transactional in nature would be classified as spot business because those type of companies don't tend to run routing guide and RFP processes in the same way. So it's difficult to answer that question. I would just say that it kind of ebbs and flows with the freight cycle, and we'd like to see growth in volume across all of those channels. And so we continue to pursue both small and mid-sized companies as well as larger clients.
Jack Atkins: Sure. That makes sense. One more and then I'll turn it over. I know you guys don't comment specifically on route guide depth, but I'd be curious to know or get your thoughts on potential for routing guides to start breaking down again, as we move through May and June, even with how difficult the comparisons are or we'll be getting as the months go by just given how tight capacity is out there right now. Just wondering if there's any potential for that to worsen?
Dave Menzel: Yes, it's a good question and hard to predict. I think that we obviously have a very robust spot market, which is indicative of the fact that many of the routing guides are not performing to shipper expectations. I expect that to continue as a freight demand continues to increase through the summer months. This is a – I would say that February, March and April are pretty unique. February being impacted, of course, by the huge winter storm, which then through a lot of disruption in the marketplace, which created a spike in rates in March and is persistent I'd say, as we go into April, but now we're getting into what I would call is a traditional heavier freight cycle season. So my expectation is we're going to – routing guides are going to continue to see pressure. It's hard for me to predict whether that gets a little worse or a little better, but I would definitely expect that to continue. We're seeing that in April.
Jack Atkins: Great. Thanks so much.
Dave Menzel: You got it.
Operator: And your next question comes from the line of Bruce Chan with Stifel. Your line is open.
Bruce Chan: Good afternoon. Nice result and thanks very much for the question. Doug, Dave, I know you've both addressed the question about structural pressure on gross margins at various points over the past a few years, but if I look, kind of cycle over cycle at where gross margins are now versus back in the kind of late 2017 to early 2018 timeframe, you're clearly seeing more pressure now. So maybe just want to get your thoughts on what's driving the differences versus again, the previous cycle, is it something to do with competition or the nature of the capacity market today, or how shippers are behaving or is it just a function of your size and how much you've grown and then maybe you can speak to some of the offsets and where they might be in your model?
Dave Menzel: Yes, Bruce. This is Dave. Thanks for your question. The biggest factor is the significant increase in rates – truckload rates. So it's kind of interesting when you look at just the gross profit or load, which I know we don't disclose that specific metric. But I think that's probably more of interesting indicator as to whether competition or all these factors have really changed the game. I think it's a bit misleading to just compare the margin when rates are so much higher today than they were two or three years ago. And so, over the long term, I certainly understand and can appreciate how automation efficiencies in our business driven by both changes that we make as well as competitors make, may in fact over time reduce some of the gross margin in the business. But we haven't seen that frankly in the last five to 10 years. It's kind of just cycling through freight cycles. And again, I'm a little more focused on what the gross profit is per load that we moved and then the specific margin. And so I think that's because of the higher rates are seen. What looks to be margin compression, but in reality, it's more of a function of the higher rates that makes sense to you.
Bruce Chan: Okay. That's very helpful. And then, I don't know if you give this color, but any maybe visibility on how those gross margins trended through the quarter by month?
Dave Menzel: Let me take a look. The – they kind of bounced around a little bit I would say. The – three – the February margins kind of took a dip, I think, with the freeze and the real spike in rates, and then the spot market activity in March did exactly what you'd probably expect it to do, which is lift those margins a little bit when spot activity kind of increased in March. So I would say it took a little dip in the middle month is how I would frame that up.
Bruce Chan: Got it. And then just a last quick one here, and obviously a nice volume performance on the truckload side. If you kind of split that out between spot versus contract, I don't know if you mentioned it, but how did each of those two kinds of sub segments of truckload trend through the quarter?
Dave Menzel: Our spot business was up, I think around, let me double check my metrics here, but I think around 45% and our contract business was down just over 10%, I believe in the quarter.
Bruce Chan: Perfect. Well, it's super helpful and I appreciate the time and the answers.
Dave Menzel: You got it Bruce.
Doug Waggoner: Thanks, Bruce.
Operator: Our next question comes from the line of Jason Seidl with Cowen. Your line is open.
Jason Seidl: Thank you, operator. Hey Doug. Hey Pete. Good afternoon. Wanted to focus a little bit on the contract type business. What percent of your contract business right now would you consider at market rates and how should we look at that as it moves throughout the rest of this year?
Dave Menzel: That's an interesting question. I think that here's what I would say is that over the last three quarters, we have seen an increase in the amount of negative loads, negative business, primarily of course, associated with our contract business. And to be honest, it's been kind of steady because rates have continued to go up every quarter. And so it's hard for me to put a number on it, but you'd probably – like we don't look at it that way, but I think that, it infers to me that it probably 80% of the businesses is price, reasonably at market rates and there's probably another 20% or so of the business that is I'm not going to use the word underwater, but maybe either temporarily or currently, below what we think the current rate is in the market and it causes us a challenge to service and it's just – it’s the nature of our business. I mean, we've always had that. It's not – it's more than probably in the past for sure, because of the steady increase in rates. But it's not unique. So it's a good question. I don't have a – like I said, not a specific, but it's probably something like the 80:20 rule probably be fair.
Jason Seidl: Sure. As you guys also go on with this next question, throw more money at sort of more digital operations. Is there any way to look at sort of the margins on moving a digital load versus the more traditional way to do it, or is it just too hard to split out?
Dave Menzel: Yes. I mean, we're not going to get into the specifics today about what the margins are on different micro-segments call it within our business. I think over the long term, as we get more and more automation, operating margins can be – would be probably the thing that we'll start to look at more carefully, but that's probably a three to five year kind of kind of view and not something that we're overly focused on today.
Jason Seidl: Okay. And last question, maybe this one could be for Doug, if he's around you guys are raising your guidance, you're going to generate good free cash flow in the past. You've talked a lot about, you know tuck-in type acquisitions that could be additive to your service offering in the marketplace. How does the market look? What do you guys stand on that, just curious?
Doug Waggoner: Yes. Now we're continuing to be very interested in M&A, we think it's probably the best use of our cash. Certainly, we have financial capacity to do deals. We're active in the market. We're looking at opportunities on a constant basis. I would say that the bigger deals are probably a little hard to make sense of at times in this market with cheap debt and a lot of private equity money, if an opportunity is big enough to be a private equity platform. We're seeing 14 X multiples and six to seven times leverage to get the deal done. And that's just not that attractive to us at this time. So that tends to refocus our thoughts on the smaller tuck-in type of deals. And those are the kinds of things where you've got a lot of opportunities to find the ones that are a good fit. And by that, I'm talking about management chain that can fit into our culture and a company that can utilize our technology and make sure that we don't have too much overlap with customers or carriers. And they're out there, but you've got to look at a lot of opportunities to find those right deals. And we are active, but it's just hard to predict what we're going to get one across the finish line.
Jason Seidl: That makes sense. And I think given those multiples that you just cited, Doug, I think the market would agree with you guys looking for the more tuck-in types. I will listen. I appreciate the time as always my best to everyone there in Echo and stay safe.
Doug Waggoner: Thanks, Jason.
Operator: And your next question comes from the line of Allison Landry with Credit Suisse.
Allison Landry: Thanks. Good afternoon. So I wanted to sort of ask a longer-term question and sort of curious to get your thoughts on longer-term changes in supply chains and inventory management post COVID, and whether you guys have contemplated or started thinking about whether there could be a change in how you view spot versus contractual business to the extent that freight stays stronger for longer and shippers probably become more averse to running out of inventory. And maybe this is even a question as it pertains to how you think about the enterprise business as well. So just what would love to get your high level thoughts on all of this?
Doug Waggoner: Well, I think, Allison, there is some dialogue going on in the industry right now about how the shippers get whipsawed in these markets. And when the capacity tightens up, and the rate spike and their writing guides break down, and then they have to overly rely on the spot market and pay up quite a bit. And so, there's kind of an ongoing industry discussion, I would call it, is there a better way? And potentially that could be more of a cost-plus arrangement. But in order for that to work, you've got to have a mechanism of trust, where you are basing your cost-plus on an index or something that the shipper has confidence and faith in and believes that the broker is doing their best to get the best cost in the marketplace. So, I think that that has some work to do. But certainly, some shippers are open to exploring things that can cause them to get better service performance and not miss their budget so badly. That's part of the biggest thing that I'm thinking about. I think for us we've got a great business model that can ride the wave of the cycle. And as Dave mentioned earlier, sometimes that means more spot freight, sometimes it means more contract rate, and we just adjust.
Allison Landry: Okay, and then maybe this is sort of along the same lines, but it just maybe in the last year have you had more interest from customers in wanting to adopt or sort of use the digital freight platform, and do you see this accelerating in the next 12 to 24 months?
Doug Waggoner: Yes, I think, we've been talking a lot about our API integration. And that's really an exciting opportunity for us, because with these very large shippers with the big load boards, especially when there's a lot of spot freight in the market, it's a lot of work, to respond through their website, or whatever mechanism they're using to give them quotes on other loads. So, what we found with our initial integrations is that, first of all, we're able to quote on a 100% of the loads, which is more than we were before manually. And our win rate is higher and our margins are better. So, you add all that up, and we want to automate as much of that as we can through APIs. And as Dave mentioned, we've got the first batch under our belt, but we've got a pretty big pipeline of additional API integrations that are coming along. And we're also doing PMS integration. So that would be where we're integrating to a third party TMS platform and the users of that platform have the option of flipping a switch in that software and being able to see Echo rates on all their truckload shipments.
Allison Landry: Okay, perfect. That was very helpful. Thank you, guys. Thank you, Allison.
Operator: And your next question comes from the line of Stephanie Benjamin with Truist. Your line is open.
Stephanie Benjamin: Hi, good afternoon.
Pete Rogers: Hi, Stephanie.
Doug Waggoner: Good afternoon.
Stephanie Benjamin: It would be great to hear just kind of your thoughts on the broader competitive environment, not only from some of the digital players, but also just competition from some of these traditional asset-based players who are building out brokerage businesses, just kind of your thoughts as you move throughout the quarter.
Doug Waggoner: Yes, Stephanie it's always competitive, on the one hand, on the other hand, it's such a huge marketplace. And so, I would say over these last few quarters, we've just really got our heads down focused on the opportunities that are in front of us with our existing clients and our existing carriers. And so, we went into our competition, we did against them in RFPs. We bet against them on spot freight, but we don't put that much of our energy on evaluating them just because we're trying to execute our own business.
Stephanie Benjamin: Absolutely, no, that's helpful. And then switching gears to your LTL business, I think, another record quarter here with really nice volumes and rates. We'd love to hear a little bit more on just kind of what was the main drivers of such strong volumes? Where you seeing in any particular verticals, is this due to the growth in e-commerce, industrial recovery, anything that you can kind of point to for just that performance in the quarter?
Dave Menzel: Sure. I think there's two kind of key things here. One is we're definitely and especially in the March and into April, for sure have seen the impact of industrial recovery impact the LTL business, as you know, our client base on the LTL side is much more small and mid-size companies versus very large shippers. And so, they were probably disproportionately impacted during the early phases of the pandemic, and starting to see some of that recovery, as well as hitting favorable comps in April. The second big driver has been the success we have in the managed transportation businesses. So that's driven a pretty significant amount of growth in LTL. Now, the only kind of interesting setback, if you will, was the freeze event in Q1. So that created really some big service challenges on the LTL side, and lots of delayed deliveries. So, we did have a kind of like a dip in volume growth in February. But again, like I said earlier, accelerated in March, accelerated even further in April. So, we've always been a strong LTL, SMB market provider. We feel really great about eco ship, our ability to handle customers online, pursue micro shippers, SMB shippers in a multi-modal way. And I think that's a big reason that we're having continued success in the LTL side.
Stephanie Benjamin: Great, thank you so much.
Pete Rogers: Thank you.
Operator: Thank you. And your next question comes from the line of Alex Johnson with UBS.
Alex Johnson: Hey, good afternoon. It's Alex on for Tom Wadewitz.
Doug Waggoner: Hey Alex.
Alex Johnson: Hey, Dave, got so close to answering my question with that last answer. You have multiple parts of the business. And whether it was an impact in first quarter just curious if there's a way of sort of directly measuring what the impact was positive, negative, or neutral or just how you would sort of think about that?
Dave Menzel: Yes, it's really tricky. I would say this is kind of interesting, dynamic. We had 12%, and this is not the biggest part of our business, but I think, this gets to your question. Our growth rate in LTL, was about 12.5% in January; it was 1% in February; and it was almost 20% in March. And so the question about how much, it almost looks like it all came back in March. Right? In terms of what we launched in February, the truckload dynamic, was pretty similar. Close to 20% growth in January, 10% growth in February, and then again, 20% in March. So, we didn't really make up for the truckload piece as much as we did the LTL piece. But again, I think, part of that March comp on the LTL was the pandemic, which really kind of hit home, I'd say, mid-March of 2020. So some of that is the favorable comps on the LTL side, because we did see, I don't know if you guys remember, last year, in March, we saw kind of an acceleration in advance of all the shutdowns. So, there's a lot of moving parts there. It's good question. I don't think that it was a very significant impact overall in the quarter, it just kind of shifted things around a little bit.
Alex Johnson: Okay, great. That's super helpful. And I appreciate you sharing those specific numbers by month. Second question would be obviously a lot of discussion on the call about transportation costs. But any inflation may be like in the SG&A line that we wouldn't be thinking about that you are thinking about that you would do it point out to us. Inflation obviously being a topic that a lot of people are talking about these days.
Dave Menzel: Not that I point to specifically, I think, that we provided a range there. And there's different scenarios where you get to those. But when, I think, of inflation, the different costs of things at the G&A line, I think, adding headcount and then incentive comp will be the two biggest drivers wouldn't point anything beyond that.
Pete Rogers: Maybe a full three months over the merit cycle.
Dave Menzel: Yes, in Q2, yes, sorry. Yes.
Pete Rogers: It will be third thing.
Dave Menzel: But nothing beyond that.
Alex Johnson: Okay. Thanks for the time this afternoon.
Dave Menzel: You bet.
Pete Rogers: Thank you.
Operator: And for your last question, we have David Campbell with Thompson, Davis. Your line is open.
David Campbell: Thank you. Thank you for asking questions and really, it’s great job in running your business. And I really appreciate it. And I would say that one of the questions I had was the visibility of your growth there. There is always a concern that these numbers are so strong and it will not be able to sustain the growth until the end of the year. So, you don't seem to be concerned about that. And what gives you the confidence that the growth rates will continue?
Doug Waggoner: Well, David, good question. I think we're seeing continued strong demand, we know inventories are at record lows, the stimulus money that's coming into the economies is a continuation of what we saw last year, and we saw what that did to demand. We're coming into a seasonal uptick, that we would see with produce season and a normal build in summer building into the peak season. So, all the indicators on the demand side are strong. What we're coming out of the industrial recession that we were in, over the past couple of years. And then on the supply side, I think, the capacity is somewhat capped. There's not that many trucks coming in the market. And if there were, there were no drivers to drive them. So, the capacity seems to be capped. So, between supply and demand we believe that the volume is going to be there, and we think the price is going to remain elevated. And you add those together, we're going to see continued growth.
David Campbell: Right. That's a good possibility. And we all have re-openings, that we're now hearing and experiencing was probably be helpful to your small, medium sized shippers, it must be some of these re-openings, you must be helping your business is that true?
Doug Waggoner: Yes, I think, that's true. The whole service and hospitality Part of the economy is presumably coming back. And there's a multiplier effect of the stimulus money. So, I just don't see any signs that are not bullish.
David Campbell: Right. All right, Well, thank you very much. I appreciate your answers and your comments and look forward to another good quarter coming up.
Doug Waggoner: Thank you, David.
Operator: Thank you, speakers. I am showing no further questions at this time. I will now hand it back over to Mr. Doug Waggoner, Chairman and Chief Executive Officer, for the closing remarks.
Doug Waggoner: Yes, just wanted to say thank you for making time to listen to our first quarter results today. And we look forward to talking to you again in three months.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
