Catching up with Doug Waggoner, CEO Echo Global Logistics.

LM Group News Editor Jeff Berman recently spoke with Doug Waggoner, CEO of Chicago-based 3PL Echo Global Logistics. Waggoner offered up insights on various logistics and supply chain trends and themes, including: freight economic conditions, capacity and rates, M&A, and technology, among others. Their conversation follows below. 

Logistics Management (LM): How you are viewing the current state of the freight economy and the ongoing freight recession, amid the ongoing low-demand environment that was a clear theme in recent commentary in earnings reports for publicly-traded carriers and logistics service providers?

Doug Waggoner: In terms of the freight economy, I would say that it's not low demand. It's sort of stagnant demand. If you compare [now] back to 2019, we're probably at those levels. We had a little bit of euphoria with the pandemic high. And the problem in the freight market right now is an oversupply of capacity. I guess the bigger point is, how does that capacity alleviate over time? If you look at past freight cycles, we've got into the trough of the cycle, and the capacity comes out pretty quickly. This time around, I think because of the PPP money and because of this, the SBA money, there were a lot of small trucking companies—and when I say small, I'm talking about carriers with one or two drivers—that stuck around longer than usual. The SBA money is a 30-year amortization loan with no payments for two years, so that that essentially bought them two years of runway. So, I think now that those payments are coming due, it's putting pressure between the cost of equipment, the cost of insurance, and having to repay loans. I think we're starting to see a slight acceleration of companies leaving the market. I was talking to an equity analyst, and he brought up an interesting point that I never really thought about, which was during sort of the pandemic freight boom, when rates were sky-high, up as much as 30%, drivers didn't have to drive as many miles to make to make the money they wanted to make.  So right now, in addition to having additional carrier authorities—that's one of the metrics that people track for how many carrier authorities are on file with the DOT—we still have record-high numbers, although they are coming down. Yet, the other factor that's probably contributing to excess capacity is that now that rates are 30% lower, drivers are driving more miles to make the same amount of money, so that effectively adds capacity. And you have more trucking companies and drivers driving more miles. What we have is an oversupply of capacity problem. And until that burns off, we're not going to see a more normalized freight market with normalized pricing. Some people think that an exogenous event like a hurricane can help, and it has in the past, like with Hurricane Harvey in 2017. But the difference between Harvey and Ian and Milton and the two recent hurricanes is that a hurricane in Florida doesn't really disrupt the national network all that much. There is not that much freight transportation moving into and out of Florida, as compared with South Texas, for example. In South Texas, Houston was hit hard, and you have the border freight in Laredo and Brownsville. I think that Hurricane Harvey had a huge impact on the freight market that lasted for months, whereas hurricanes in Florida just don't have the same impact.

LM: Where does all of that leave things now, in terms of freight economy conditions?

Waggoner: There really is no catalyst at this time to, say, flip the market, as people would call it. We just have to wait for capacity to slowly exit and, get the market back into equilibrium. And I think we're trending that way, and I think we'll see it in 2025 but it's going to be sort of a slow recovery, and not a like we've seen at times in the past.

LM: You addressed excess capacity, which is a theme that we've been talking about for a long time. What about the other half of the equation, as it relates to demand or lack thereof? Is it a case of sluggish demand remaining fully-intact, or are there some seasonal bumps, at this point?

Waggoner: I think we've actually seen some seasonality this year, for the first time in a while, which tells me that it's a more normal market, and the demand isn't bad. There are different puts and takes. For a while, there was no import freight and there was sort of an industrial recession, but the consumer was strong, and now industrial seems to be picking up a little bit, and maybe the consumer side is weakening because of credit card debt and high interest rates and inflation. As things move around, it seems like the overall demand is still reasonable. It's just not spiking up, like people would hope.

LM: Shifting gears, how do you view the current East and Gulf Coast ports’ labor situation, with the ILA and USMX re-starting negotiations in November and their tentative agreement running through January 15, 2025?

Waggoner: To be honest, we did not see much during the three days of the strike, but had it gone longer, I think, it would have seen a lot more [disruption], as we have seen these things before, particularly on the West Coast. When there's a longshoreman disruption, the ships either sit in the harbor and there's no freight coming through the port, which means there's no freight moving over land, or those ships get diverted to other ports. What that means is the industry has all the trucks where they thought they needed them, but now they need to be somewhere else, so that actually can be quite disruptive.

LM: Are there things you are addressing or communicating to your customer between now and January 15, when the tentative agreement expires, in terms of contingency plans or things to monitor that could impact their supply chain planning and operations?

Waggoner: I don't really know of any of those conversations that are going on, as we we're not really dealing with the people that directly import, per se. Our customers tend to be more downstream from that and we're not really in on those conversations.

LM: Shifting back to the trucking side, how do you view the current state of spot and contract truckload pricing?

Waggoner: Rates bottomed out and have crept up a little bit, and then now, when we see the seasonality and when we see Roadcheck and then produce season, the market does tighten up, and the rates react pretty quickly. I also think that the asset-based carriers just aren't going to go any lower. Their cost of equipment has gone up significantly, and the cost of labor has gone up. I think that asset-based trucking companies have reached the limit to how low they'll go. I think the rates will only go up from here.

LM: By how much, do you think?

Waggoner: I think, in the near-term, it is probably around high single-digits in the first half of 2025, and then, depending on what happens with capacity, they could go up higher. If there is an exogenous event like a port strike, rates could go up faster and higher. That is how I think about it.  

LM: When you talk to your shipper customers, as we approach the home stretch of the year, what are some of thew things that are top of mind for them? What are sort of their biggest concerns and also what are the things that they're focusing on or paying close attention to, at the moment?

Waggoner: A lot of people are thinking about the election. The outcome of the election really sort of takes two different directions for the country and perhaps the economy. We haven't heard a lot [from them] about tariffs, but people feel like one party is a lot more pro-U.S. manufacturing. The near shoring thing in Mexico is real. We're expanding our business operations in Mexico, and we've hired a warehouse facility at the border. I don't think that's going to stop either way, but a lot of companies are getting out of China, and they're going to Vietnam, Mexico and other places. That's going to maybe change some of the freight flows a little bit, but I think we'll still see that freight. Interest rates are on peoples’ minds. People believe that if interest rates continue to come down—and no reason to believe that they won't—that will be a stimulus to the economy and an investment. The M&A markets have been sort of stagnant for the last 24 months. I think there's a lot of pent-up demand to do M&A deals in our industry, and interest rates coming down will help that, along with the market conditions improving for freight. So, I would expect 2025 to see more M&A activity.

LM: You had mentioned how the industrial economy is still dealing with some challenges, and the ISM numbers certainly back that up. When you look at the, stuck in neutral feel, or rut, manufacturing is in, how are you seeing that play out as it relates to your customers in that space?

Waggoner: It's been slow. I think there's some slight improvement. Again, I think that's one of the areas that will be impacted by interest rates.

LM: When you look at the verticals for the customers that you serve, what are some of the higher-volume or more active ones among your customer base? Where are you seeing the most activity, or spikes?

Waggoner: I don't know that there's any spikes, but I would say there has been relative strength in food and beverage. Consumer activity continues to be good. Manufacturing, like we said, has been weak, but we're starting to do more and more with retail consolidation, and that business is holding on so far.

LM: What do you think about the increased attention on freight fraud? It seems like it has received a lot of attention lately. Are you hearing and seeing a lot more about instances related to freight fraud over the last 12-to-18 months or so?

Waggoner: Absolutely. There's a lot of bad actors right now. I would almost classify them as syndicates with foreign origins, and they're very well-organized. They're very tech-savvy, and they are very aware of how our industry operates. So, they're stealing loads, and they're buying defunct MC numbers and posing as carriers, and they're getting logins to brokers’ mobile apps, and acting like they're a legitimate carrier and booking loads and then stealing them and fencing them. We've got pretty good protocols in place, so the impact that we've experienced has been minimal, but we've seen a lot of activity with people trying to do it. There are stories with some of our competitors where they've been burned bad, so it's a real problem. And it's because freight has turned so digital in the last few years that these bad actors that have digital skills are taking advantage of that.

LM: It is really a tough situation, to be sure, especially when considering the harm it can cause for shippers and carriers. What are some other things industry stakeholders need to keep an eye on?

Waggoner: There have been numerous cyberattacks in our industry with ransomware companies. The way they operate now is that they pick industries where they can hold them ransom, like hospitals and schools, and a car dealership network got hit. But freight is also one, and there's a lot of financial fraud going on. We probably get three or four emails a week where somebody is spoofing me, telling the accounts payable department to pay some invoice. It's very realistic looking. And they're constantly phishing our employees to get logins into our system. We have very robust IT security. But I can tell you, there's been at least half a dozen companies in our industry—some known, some unknown, or, I should say, disclosed and undisclosed—that have been hacked. The way it works is, they get into your system, they implant some malware, they implant a ransom note, and while they're in your network, they look for interesting data that they can steal, like Social Security numbers and identities, and credit card numbers. And then, after they've had enough time to explore your network, they trigger the malware, which locks all your files. And then when you try to use your system, a ransom note appears on your screen that says, “you know, by now, you know you've been hacked. Don't take it personal, it's just business. And if you want to see that we're genuine, you can go to this dark web address and put in an encrypted file, and we'll decrypt it for you to show you that you can get them back and then, oh, by the way, here's how much ransom we want to let you decrypt all your files and, and if you don't play ball with us, we've already stolen some of your data that we're going to put on the dark web for people to buy.” So, they play hardball and they play nasty and, and when a company gets hit, they have to try to recover it. They have to decide, do they want to pay the ransom? Do they want to fight it? The risk is, if you pay the ransom, you're now marked as somebody that will pay the ransom. The other risk is, if you don't, and you can't recover the system on your own, you're out of business. It's pretty serious stuff.

LM: How would you assess the current state of the truckload brokerage market, given some of the changes it has seen with some well-known players being sold or exiting the market?

Waggoner: I think that the prism to look through to understand the market is to first think about contract freight and spot freight. For contract freight, you know, a large shipper, like an Anheuser-Busch, will put out an RFP, which will list 1,000 lanes, in and out of, say, ten locations, and you bid on them, and you bid on them for a one-year contract. Some will do it for six months or three months, but let's just use the one-year example. You're basically locking in a committed rate to that shipper for a year. And when your spot rates are falling, that's pretty easy to do, because you can be comfortable that you committed to a price, but your buy rate is going to be lower. But when you're facing a market turn like we are now, and rates are going to go up at some point, you run the risk of getting squeezed, because, let's say you commit $2 a mile, and your cost is $1.80. And then over the course of the next few months, your cost goes to $2.25, but you're committed at $2. Now, not only did your margins get squeezed, but you're losing money on every load. So, it's difficult in a contract market, unless you have scale and you can weather the storm when the market goes against you. On the other hand, if you're small and you don't have the scale to be competitive, to even win contract freight, then you survive on spot. What's happened over the last 24 months is small brokers are really struggling, because they don't have any contract rate, and there is no spot rate, and they don't really have the wherewithal, the scale, the pricing, sophistication, or the depth in the market to be able to compete in the big shipper routing guides for contract freight. When you see bankruptcies in brokers right now, it's probably a small broker that didn't have any contract freight, and the market's not giving them any spot freight. On the other hand, the companies like Echo that have scale can bid on and win contract freight, which sort of holds us through the soft market, knowing that we're going to get squeezed when the market turns—but we'll make up for that with the addition of spot rate that starts coming when the market tightens up. I think that's it's a tale of two cities in a way. The big brokers are getting by and doing OK. And in our case, I think we're probably doing better than anybody else. We've got double-digit volume growth right now, despite, despite the fact that prices are down 30%. If you do that math, you say, well, we've grown our business volume 30%, prices are down 30%, so revenue is flat, gross profit is down a little bit, but we're getting by and still making money. We're very profitable, but if you're a small broker, your volume is probably down, your pricing is down, and so the math doesn't work. Again, it's a tale of two cities. I think the big brokers are probably getting by and doing OK, and the small brokers are really struggling.

LM: Do you expect to see increased M&A activity in 2025? As a follow-up, is Echo actively looking at potential M&A targets?

Waggoner: We're looking at deals right now. I think it's conceivable that we'll probably do at least one deal in the next quarter. 2024 was a tough year for M&A. There are two types of buyers. There are strategic buyers, with a company buying another company. And there are financial buyers, which are typically private equity-backed. The private equity market has been pretty locked out, because interest rates were high, and it's also difficult to agree on valuation right now between a buyer and a seller, and that's the third leg. All sellers want to value their company based on the performance that they had in 2022, but no buyer wants to give them credit for 2022 when their profitability is way down from that in 2023 and 2024, so buyers want to value on 2024 and sellers want to buy value on 2022. The buyers and sellers need to be able to agree on what is a normalized EBITDA, because 2022 was an abnormal normally good year, and 2023 and 2024 were abnormally bad years. So, what's a normalized profitability look like that we can base the value on? That's the struggle that people have been having for the last 24 months. As we come into 2025, I think that will start to ease a little bit. I think it will be easier to sort of determine what's a normalized profitability that people can agree on. One problem we have right now in our space is that the public company comps are very high. If you look at RXO and C.H. Robinson, those valuations are pretty, pretty rich. Private equity probably isn't going to want to do deals at those valuations so it remains to be seen. There's also a lot of companies in our industry—and I when I say our industry, I'm talking about transportation in general—that are private equity- owned and some of them have been held for a long time. And private equity firms like to hold an investment for three or four or five years and get out and make a profit. And right now, there's a lot of those holdings in which there's no profit in them if they were to sell them now. I think there's going to be some pressure to do deals, but the ability to do deals is going to remain to be seen.

LM: Looking at logistics technology, what are the things you're paying attention to and are most focused on?

Waggoner: Echo started doing “AI and machine learning” before it was in vogue, and we continue to invest in that. And some of the new capabilities that have really matured in the last 12 months are pretty exciting to us. We have already incorporated large language models (LLM) into our business whereas we're taking the capabilities, for instance, of a ChatGPT or Anthropic Claude or Genesis, and combining with our own data so that we can ask questions of our business with the capabilities of an LLM that's trained on our own data. Right now, I would say that's more of an internal use. The tool can look at our code base and help us write code faster and better. Internally, if I want to look at a report, I used to have to go pull a report, or go to Tableau. Now, I literally have an app where I can ask a question and it gives me the report on my phone. The use of natural language processing (NLP), the ability to read emails and do that is something that we're putting in place as we speak. I think the next chapter is voice AI, where you know, the ability to take a mundane task where there's a conversation on the telephone and having a bot do it in my voice, with voice inflection, with sense of humor, with industry knowledge, with process knowledge, it is unbelievable. We're looking at some technology right now where if I wanted to call you to collect on an invoice that you owed, instead of having an AR clerk do it, and making 10 calls sequentially over two hours, I can have a bot that makes those 10 calls simultaneously. One human is supervising 10 conversations that are happening in his or her voice, and if one of those conversations goes off the rails, I can click and click into the conversation and take over, and you'll never know the difference. Here's another use case. Let's say I'm a carrier rep, and I've got a I've got a load to cover. Our bigger trucking companies were automated. It's touchless, it's seamless. They can see our loads; they can bid on them. It's all automated, but there's a long tail of small trucking companies where they've got a dispatcher, and the dispatcher wants to either track via e-mail or phone calls. Let's say I got a load to cover, and I've got 10 carriers that I think could handle this load. In the existing world, I would just call one, and then I'd call the next one, and I would negotiate with each of them until I got coverage on the load. In this this new technology, I could select all 10 of those carriers, click a button, and the bot would call 10 carriers’ dispatchers and say, “I have a load from LA to Chicago. We'd like to pay $2,500 for do you want it? It's going to pick up tomorrow at 2 PM.” And you'd say, “well, $2,500 I don't think I could do it for that, but I could do it for $3,000.” The bot says, “Well, meet me halfway and we can do it for $2,750.” It will actually negotiate with you while it's negotiating with nine other people for that same load. And then once you and I agree on it, it will tell the other nine carriers, “sorry that load just got covered, but while I've got you on the phone, do you have any trucks that you need a load for? And I'll see if I can find one.” It's literally like a 10x multiplier of productivity.