Echo Global Logistics CEO Waggoner takes a look at various market conditions

Logistics Management Group News Editor Jeff Berman recently spoke with Doug Waggoner, CEO of Chicago-based Echo Global Logistics about various topics, including: the state of the freight economy, a look at the upcoming Peak Season, the trucking market, and M&A, among others. Their conversation follows below. 

LM: When assessing the current state of the freight economy, what are some of the biggest things you are keeping an eye on?

Doug Waggoner: In our recently-announced second quarter earnings, we had 82% top-line growth, which was a combination of increased volume and also higher prices. It has been an interesting market, for sure. As we continue into the third quarter, we still see that elevated pricing and that good volume strength, and we really are kind of forecasting that for the remainder of the year. Capacity continues to be tight. I have talked to some truckload carriers, and they have told me that not only are they not adding capacity but they also have trucks parked because they cannot find drivers. Class 8 truck orders are pretty elevated right now, but my understanding and belief is that those are all for replacement vehicles because the used truck market is pretty hot. If you have an order for new trucks and you can take delivery, you can get top dollar for used trucks and have a new truck that has better fuel efficiency and better maintenance costs. Unlike past cycles, I don’t think carriers are adding capacity so if you take those two things together then, perhaps, we are at a peak. The question is do we come back down the other side of the peak or is it a plateau? To us, it feels like more of a plateau, because I think there is still a lot of stimulus coming from the federal government that is going into people’s pockets, as they are spending that money. Companies are telling us inventories are still not reset to the levels that they want, and there is still a backlog in supply chains. And you still have ships waiting to get unloaded at ports. It just feels like these conditions are going to persist for the immediate future into 2022.  

LM: A recent report highlighted how rising transportation expenses are making things more difficult for shippers. What is your view on the inflationary impact on supply chain, logistics, and freight operations and what are you hearing along those lines from your shipper customers, in terms of making things less painful for them?

Waggoner: They always ask us to work with them to lower their rates, and that is kind of what we do, but it is all relative. That is a good point, in that it is inflationary, much more so than what you hear from the government or on the news. Supply chain costs are embedded in the price of every product, so when transportation costs are going up 30% and your supply chain costs are 6% of your price of goods, they just went up a couple of percentage points. A lot of shippers are having to raise their own prices on their products to their customers, and it has a ripple effect throughout the economy.

LM: Shifting back to trucking capacity, with capacity tight, due to the driver situation and other factors, coupled with spot volumes and rates at or near record levels, how do you view the current state of the spot market?

Waggoner: The mechanism that lies below the surface is that these large truckload shippers have routing guides that they bid out, and every lane they have awarded the traffic to one or more carriers/brokers at a specified price. And when that price no longer moves the freight because of the market conditions and the opportunity costs for the trucker and for the costs of the truck for the broker, you get people that turn down loads. You may get offered five loads in a routing guide from Denver to Chicago today, but a carrier may only be able to take two because it does not have the trucks in Denver it needs, because they are elsewhere. What the carrier may not tell the shipper is it can get a better price on the street, and likewise for a broker who has a database of carriers trying to get a truck out of Denver and back to Chicago at a price where it can make a couple bucks. As the market gets tighter, it turns down freight. But that freight still needs to move; that shipper still needs to get products to its customers so, at some point, it will get moved into the spot market, which means generally the shipper is saying to all of the carriers and brokers participating in its routing guide “what is it going to take to move this?” So, somebody somewhere will have a truck at a price it is willing to move the freight for, and, in this part of the cycle, it is generally going to be much higher than the contracted rate. Now, the shipper gets its freight moved, but is paying an exorbitant price, relative to what was entered into the budget earlier in the year. Then what happens is the market kind of naturally corrects as that shipper is putting more and more freight into the spot market and paying a higher price, it motivates them to go back to their carriers and brokers and say “I am willing to give you a little bit of a higher price on your contract rate, because I have to get it out of the spot market,” so they will renegotiate the contract. That has the effect of moving freight from the spot market back into the contracts. You will kind of naturally see less spot freight. As long as the market supply and demand are somewhat stable and prices have stabilized, you will start to see spot freight move back into contract and shippers renegotiate their contracts. A lot of times they will do “mini bids,” where they select the lanes where they are feeling the most pain and renegotiate those to get their freight moving. But everywhere else, where they are still moving freight under contract, they will leave those alone. The other thing we are seeing are shorter-term bids. It used to be you would get an RFP from a shipper, for the next 12 months, and now they are only doing it for six months or three months, because the market is so unclear, at this point. I think you will see spot freight decline until such time, when it tightens up further, there is a hurricane, or some exogenous factor that disrupts the market and creates an even higher spike, which naturally creates a surge in spot freight again. And when we get to the other side of the market, when it starts cooling off, and there starts to become more supply for capacity than demand for it, you will see the prices start to drop. There will be virtually no spot freight, because spot rates start to go lower than the contract rates, and the shippers and brokers will take everything they can get in their contracts.   

LM: With the holiday rush and Peak Season heating up sooner than later, coupled with low inventories and also port congestion issues, too, how are you viewing the 2021 Peak Season?

Waggoner: It is interesting, because earlier in the summer we got through the produce season, where normally we see an impact on the market conditions, except this year we did not really notice it so much. The market conditions were already so tight, it was hard to place any of it on produce. I get a sense that things could maybe be the same way this fall. It is tight, and there is a lot of freight volume and limited capacity. I am sure there will be an effect from back to school and the pre-holiday season like there generally is. That also could have gotten smoothed out with Covid and people staying home and buying things online from Amazon…maybe consumption is not as lumpy as it is in a normal year.

LM: There has been a fair amount of industry M&A activity lately, with the Uber Freight acquisition of Transplace being a good example and also Knight-Swift buying AAA Cooper another one. How do you view M&A, as it relates to seeing more of these larger—and also smaller, tuck-in—deals in the future?

Waggoner: There are a confluence of factors that are heating up the M&A market. Start with the fact that nearly every company in our space has had a tremendous year, in terms of growth and earnings. So, if you were inclined be a seller at some point in your future, now is probably the best time to do it because you are going to be valued on your trailing 12 months and probably have a good forecast for the remainder of 2021, and will capture the highest value. If the market should turn to the downside of the cycle in the next 18 months and you wait until then, you have waited too long and now could maximize the value of selling your company…you are going to have to wait for the next cycle. I think that is kind of factor number one. Factor number two is, for strategic buyers like Echo, we are sitting on a lot of cash and have paid down our debt, our stock price is up a little bit, and we have had good organic growth. You could supplement that with some M&A growth and add some strategic capabilities. On the buy side, we are probably like many companies as an interested buyer looking for opportunities. The third factor is you have private equity firms, and they are doing what private equity firms do—raising funds of up to $2 billion-to-$4 billion, a lot of money. They are looking for deals. Banks are willing to loan at a pretty high multiple, and they are also offering very good interest rates. If you are private equity buyer and you are sitting on a mountain of cash and have access to all the cheap debt you want, there are a lot of deals that look pretty good, and you might even pay up for them a little bit, because you can and money is cheap and you have lots of it. The final factor is you have these SPACs (special purpose acquisition company). Although it seems like they peaked earlier in the year, there are a lot of SPACs that have been raised, but those are also a mountain of money looking for an opportunity to buy a company. I think there is a lot of interest on the buy side and a lot of money on the buy side. And on the sell side, if you are a private company or a private equity-owned company who has reached the end of the plan and ready to be flipped out, what better time to sell your company than in this market? It is going to continue, and I know there are a lot of deals that are going to come to market over the next couple of months. I think you will see it continue.

LM: How do you view the growth of the e-commerce supply chain, given how things have evolved going back to the onset of the pandemic? What does the major shift to e-commerce by consumers mean to a company like Echo?

Waggoner: There are a lot of people that maybe [prior to the pandemic] had not used e-commerce and really like it, or there are others that do it to save time and get items delivered to your doorstep tomorrow, or maybe even today. I don’t see that changing. I use Amazon more now than in the past. In terms of how this affects Echo, even if that freight is not getting delivered in a 53-foot trailer— or a 28-foot LTL trailer-to my house, the Amazon DC has to get it from somewhere. The TV I buy on Amazon used to go to a Best Buy distribution center and then move over LTL to a store location. It is now going to an Amazon fulfillment center in the back of a van to my house, but it had to get to the fulfillment center. I think what is happening is that e-commerce is changing kind of the links in the supply chain, but it is not erasing the supply chain. It is changing the lanes, literally the highways, that freight moves on, but the freight still moves. As I think about it for Echo, I think it would be nice to have a piece of that pie, because Amazon is not the only one out there doing e-commerce, and they have a pretty slick supply chain, but there are a lot of people that compete with Amazon that also want to deliver items to your doorstep without going through the Amazon marketplace. There is a lot of activity and also alternatives right now to buying from Amazon where you can get that same kind of personalized service and there is a last mile component to it. When we were talking about M&A earlier, that is an area that is interesting to us, in how we get into the last mile space, because that is where the growth in e-commerce is going to come from.

LM: With the Senate recently voting to pass a major infrastructure bill, what does it mean for supply chain stakeholders?

Waggoner: There are two factors. The first one is the country needs to improve its transportation infrastructure, given the rough conditions of many bridges and highways, as well as congestion in cities. Anything we can do to make it more efficient has a net benefit to the economy downstream. And another factor is a new infrastructure bill means there is going to be a lot of freight moving, because all of this construction and work that is going to get done takes stuff to do it…and that stuff is going to move on a truck. I am hopeful we can participate in the freight market that is generated by this bill.