XPO Inc (XPO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 XPO Logistics Inc. Earnings Conference Call, hosted by Brad Jacobs, Chief Executive Officer. My name is Chris, and I'll be your coordinator today. Throughout the conference, all lines will remain on listen-only mode until your question and answer session begins.

(Operator Instructions)

Before the call begins, let me read a brief statement on behalf of the Company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the Company will be making certain forward-looking statements within the meaning of applicable security laws, which by their nature impose a number risks, uncertainties, and other factors that could cause actual results that differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results could differ materially is contained in the Company's SEC filings. The forward-looking statements in the Company's earnings release all made on this call are made only as of today and the Company has no obligation to update any of these forward-looking statements.

During this call, the Company also may refer to certain non-GAAP financial measures as defined under [under our pit] rule, SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the Company's earnings release and the related financial tables.

You can find a copy of the Company's earnings release, which contained additional important information regarding forward-looking statement and non-GAAP financial measures in the Company News and Key Facts section on the Company's website, www.xpologistics.com. Thank you. I'll now turn the call over to Mr. Brad Jacobs. Please go ahead.

Thank you, operator. Good morning everybody and welcome to our first quarter conference call. With me today are John Hardig, our CFO and Scott Malat, our SVP-Strategic Planning. And we have progress to share with you today -- progress on acquisitions, cold-start, and organic growth. All three ways we intend to create shareholder value.

Let's start with acquisitions. As you saw last night, we purchased Continental Freight Services, a $22 million truck broker, headquartered in Columbia, South Carolina. It also had satellite offices in Texas, Florida, and both of the Carolinas. It's well established in the industry. It's been on business for 32 years. It has strong customer relationships, especially with manufacturers and distributors in the Southeast.

The main reason we bought Continental Freight is because we can significantly scale it up. So it's a good strategic for us. There are three things we'll do to increase the revenues and profits of Continental. One is to aggressively expand the company sales force. Second is to increase efficiency as we migrate them to our technology platform. And third is to give the sales force access to greater capacity.

They'll continue to use the carrier base they've been using but now, they also have access to the capacity and our strong operation center. Bottom line, the sales force should be able to put more freight and they're excited about that.

As for other potential transactions, we continue to have discussions with a large number of targets. The companies we're looking at are primarily trust brokers and they're all highly scalable. Scalability is the main characteristic we look for.

A part from acquisitions, we're gaining traction in our cold-start program too. We opened our third truck brokerage cold-start in Dallas just last week, ahead of schedule. Doug George is our branch president there, and he has 18 years of logistics experience. Between working at Ryder as well as at our fast-growing private truck broker, Doug has the right skill set to start and scale up a new branch.

We opened our Ann Arbor, Michigan branch in mid-April with an experienced leader in Tim Thomas. We talked about Tim on our last conference call and as you may recall, he's also an industry veteran. We expect both Dallas and Ann Arbor to have similar success to our first cold-start, which we opened in Phoenix in December.

And only a few months, Rob Martin and his team have grown the revenues in Phoenix from 0 to $750,000 in April; that's about $9 million revenue run rate in just a few months. So it's been a very successful March. We're on track to have at least five cold-starts opened by the end of the year, which was our plan from the start.

Our operation center in Charlotte is also ramping up very nicely, and this will help us scale up both the acquisitions and/or our cold-starts. And I'm happy to say that we're continuing to attract tough talents. We recently hired Louis Amo, our Vice President of Carrier Procurement and Operations. He has 15 years of industry experience, mostly in managing carriers both to shippers and other logistic companies. Our carrier relationships are critical to our strategy and moving this team off to a great start, expanding the number of quality carriers that we use to move freight.

In addition, Marie Fields has joined us as our Director of Training. Marie will play a key role of building out our training program, which is vitally important to our business plan. She was previously with C.H. Robinson for 12 years as training manager and a corporate training. Before that, Marie worked in American Backhaulers.

We rolled out the first phase of our IT platform in March. The implementation went very smoothly. We're very focused on getting our technology right from day one. Our CIO, Mario Harik and his team are doing a great job in a short time. Before I turn the call over to John, let me comment on the mixed results in the quarter.

Our expedite business, Express-1, did well with cross-border Mexico and temperature-controlled shipments. The demand was sought for by many of our core customers. And CGL, our freight-forwarding business was down as well.

Some of these reflect with what's going on in the overall economy and with market supply and demand, and some of it we can fix. We're providing more support to our sales people and we're opening offices in strategic areas. Our truck brokerage business was the bright spot in the quarter. It continued to grow substantially. Our South Bend office [bounced] logistics, more than doubled its profitability on a year-over-year basis. So with that, I'd like to turn it over to John. John?

Thanks, Brad. I'll start by giving some color to the performance of our fleet business units. While total consolidated revenue increased 7% to $45 million, in our expedite segment, revenue grew 8% year over year. We had an increase in air charter revenue related to a project completed in the first quarter at two of our target sectors, international and temperature controlled, had combined growth of 24%. These gains were offset by lower demand from our automotive and logistics customers. Gross margin percentage declined primarily due to the change in mix and SG&A was flat year-over-year.

In our freight forwarding segment, revenue was down 2%. Our revenue from domestic shipments declined although we had strong growth in lower margin international shipments booked through Miami and Tampa branches.

We opened three more locations in the quarter, which increased our SG&A expense by $169,000. Like Brad mentioned, freight brokers did very well. Revenue was up 33% to a combination of volume growth in our South Bend office and our cold-start in Phoenix. South Bend had strong flow through with first quarter profitability more than double what it was last year. Our cold-start program for truck brokers increased SG&A expense by about $400,000 in the quarter in line with our plan.

On the corporate side, expenses increased to $5.8 million. Our loss for diluted shares as per preferred dividends was $0.36 compared to earnings of $0.13 a year ago. Our liquidity remains very strong. During the quarter, we used $2.8 million in cash from operations, invested $836,000 in fixed assets, and made a $450,000 payment to wrap up an earn out on a prior acquisition.

We received $147 million of net proceeds from our common stock offering in March and paid off all resulting credit this early. We closed the quarter with $204 million cash and no debt. Now, I'm going to hand it over to Scott for update on our strategy and then we'll go to Q&A. Scott?

Thanks, John. I'll review our three-part strategy and how it ties to the financial picture. So first on cold-starts, our performance in Phoenix has been encouraging. We're attracting strong talent to one of our new offices. As Brad mentioned, we're on track to open five cold-starts by yearend. We continue to expect cold-starts to account for tens of millions of dollars in run rate revenues by the end of the year.

Second, on acquisitions. Continental is an example of the type of acquisition we're looking for. Once we close these types of deals, the plan is to rapidly add sales people, increasing SG&A to drive growth longer term. We're encouraged by the number of companies we're talking with. Given our healthy backlog of acquisition candidates, we're comfortable with our target of approximately $250 million in run rate revenues from acquisitions by yearend.

Third, we're making core investments in the business. We're ramping up our operation center in Charlotte, focusing on expanding our relationships with quality carriers and adding the backbone to be able to support a much larger organization. We expect to have approximately 100 hires in Charlotte by yearend, including the 27 people we hired so far. We're building up our capabilities in recruiting and training with new leaders in these areas, and we're adding IT resources.

After launching the first stage of our IT platform in March, the IT plan is focused in two areas. First, customizing the application and giving real-time access to metrics, which will help our sales people do their jobs more efficiently. And second, there'll be new and innovative ways of interfacing the customers and carriers in finding more efficient ways to match freight with trucks. In addition, we just launched the new website that has more functionality for shippers and carriers.

These investments in carrier relationships, training, recruiting, and technology are critical for our success in scaling up the cold-starts and the acquisitions. Along with deal-related costs, we continue to expect our corporate SG&A to increase as we move through the year.

Lastly, on the existing operations by division, in freight brokerage, we expect strong growth to continue with our South Bend, Indiana branch as we're adding sales and support people. In expedite transportation, we expect continued growth in our strategic areas at cross-border Mexico and temperature controlled. These should help us offset what's been a relatively slow expedite market in general. In freight forwarding, the market there is soft and we've not yet seen a change but we're adding new offices and going after new business to offset the headwinds.

Adding up our existing business, cold-starts, and acquisitions, we continue to target revenues exceeding 2012 to be on a run rate of approximately $500 million. With that, we'll ask the operator to open the floor up for questions.

Thank you very much. Okay, ladies and gentlemen, your question and answer session will now begin.

(Operator Instructions)

Justin Yagerman, Deutsche Bank.

Hey, good morning guys. It's Rob standing on for Justin.

Good morning.

You know, thanks for taking my questions and congrats on completing your first acquisition. It sounds like that you guys are highlighting a very solid acquisition pipeline. Could you give us a little bit more detail about the typical size and the range of these opportunities? What your timing expectations are as well as the general split of the acquisition opportunities across business offerings?

OK. Three questions in there. Let's start with the size. We have discussions going on with literally over a couple of hundred of different target and they're prioritized by actionability, by evaluation, by desirability, by strategic sense, and so forth. If you take the top 50 or so rank ones that we're most interested in, the vast majority of them -- over 40 of them are between $20 million and $150 million in gross revenues, but there a handful that are bigger than that and smaller than that -- some substantially bigger than that, some substantially smaller than that. But the most thick part of the bell curve is in that $20 million to $150 million sweet spot. So that's in terms of size.

In terms of business mix, if you look at, again, the top 50, about 45 of them are truck brokers and the remaining five or so are expedite freight forwarding intermodal. So again, the majority of them -- vast majority of them are truck brokers, but there are some others.

And the third part of your question, Rob, I think was in terms of timing. Timing is not as easy to answer as the first two because the M&A is very unpredictable and these deals like all deals have lives of their own. Deals get hot and then some of them die and then they reincarnate and the guy who told you, I'm going to return your call then we call and says here's the deal, if you can close it within two weeks and it's very unpredictable.

But I would say that given the backlog that we've got and given the number of people that we're talking to, we're still comfortable with the target of applying another $250 million of revenue by yearend. We're going to lump out between now and the yearend. That's harder to say.

That's helpful. When I looked at the Continental Freight acquisition that you guys announced yesterday evening, it looks like you got a fair price on the acquisition. We're assuming kind of around four times EBITDA or potentially lower if their margins are a little bit higher than we were expecting. Could you talk about your pricing expectations? You know, if you're kind of at that lower end of that $20 million to $150 million of gross revenue expectations as well as where it could kind of fall out in the higher end?

I think there's a scale and it's really directly correlated to size. So companies that have $1 million or less of EBITDA, to buy those four times EBITDA is really not outrageous. You know, that's something that's reasonable. To buy companies that has higher net but still single-digit millions of EBITDA, even if they have a few turns more. When you get above $10 million in EBITDA, then you're going to get the high single-digit multiples. So it's really a range from the lowest 4 to as a high as a 10 based on stocks and based on profitability.

Fair enough, when I'm thinking about the acquisition markets and I know it's obviously a key part of the growth strategy where you guys -- roughly half of the gross revenue run rate coming from that by yearend. If we enter a market where the equity or markets get even more turbulent, does that change your growth strategy with regard to the acquisitions and size preference?

I don't think so. I think we're running the business based on two scenarios. One is, well you just outlined -- capital market guides at some point and the $200 million and some odd of cash we have and with our debt capacity we can add to the company is all we're going to have forever. And we need to then take that capital and deploy it in the most efficient intelligent way to generate the greatest returns over time, partly on cold-starts, partly on acquisitions.

And then the other way we're looking at this, well, maybe if half the market will continue to be open and maybe there'll be cycles of opening and closing and after we've deployed our capitals and proven our business plan a little bit more, maybe we'll get a better valuation and it might make that great equity at a higher price or in conjunction with that, we'll then attract the lucrative acquisition.

So either way, the business plan, you're pointing about what will be between now and the end of the year is to open up a total of five cold-starts by the end of the year and we have three out of five already on that and to buy another $250 million or so of revenue through acquisitions and regardless of our view in the longer term, that's our plan.

And whether or not, as you pointed about, whether we would buy smaller ones or larger ones, it's hard to predict. We might buy a smaller number of larger ones or a large number of smaller ones -- there's a certain level of randomness to that.

I appreciate the time and color and congrats on the acquisitions and the cold-start.

Thanks, Rob.

Kevin Sterling, BBT Capital Market.

Thank you. Good morning, Brad, John, and Scoot.

Good morning.

Brad, I'm sticking with the acquisition story. Since Continental is your first acquisition, what made it attractive -- what made it an attractive candidate?

Scalability. So here's a company that's doing about $22 million in revenue, been around for a long time, 32 years, rock-solid company, great relationships with a number of stellar manufacturers and distributes all line companies most in the Southeast, constrained by carrier capacity and here we are with guess what, carrier capacity and we're developing that surely. All our whole secret sauce here is to have an operation center in Charlotte, which by the end of this year will have roughly 100 bodies there and hopefully, a couple of years from that, we'll have hundreds of bodies there -- the majority of whom will be dying for diesel -- the majority of whom will be getting capacity.

And the purpose of that is to see the acquisitions with additional capacity and to see the cold-starts with capacity. So that, with respect to Continental, this is an appropriate match strategically because here's a company with great shipper relationships, great customer base, and to keep the carrier relations that they've got right now and they add onto that, the carrier capacity that we've got in Charlotte respectively doubled the capacity overnight and it could service the customers much better.

So they're excited about that, we're excited about that and we'd like to grow Continental from a $22 million company to a $50 million or $75 million company over the next few years, without putting in a whole lot more capital. So from our return on capital point of view, assuming we execute well, this could be real homerun.

Well great and it makes sense and it sounds like it's a good model for future acquisitions. Did culture play a big role in the Continental deal as well?

We like the people. We like the people a lot and that does play a role. When we do acquisitions and we look at acquisitions to the extent we have chemistry, to the extent we get along, to the extent we like them and there's mutual respect; that tends to correlate with it being a good yield after the acquisition. And at Continental, we do like the people and we do like the culture.

Great. And Brad, as looking at acquisitions, are you seeing competitions from strategic buyers or private equity or maybe a combination of both?

(inaudible) There's very little competition for the smaller sized deals in any private equity for any of these deals that we're looking at on a smaller level. Once in a blue moon, we are coming up against one of the other strategic buyers but there's less than the number of fingers in my hand of strategic buyers that are out there looking at these smaller deals and there's hundreds and hundreds and hundreds of targets.

Okay. Great. And Brad, touch a little bit on what you're doing in Charlotte. Is the goal here to kind of build out this back office platform with 100 or so people and then kind of layer on the growth and move to the leverage there? But as you become a multibillion company where you could have to continue to grow this back office or is there some inherent leverage issue got of scaled with the back office? How should we think about your back office growth going forward?

Well, I think some leverage to it but that's not really a big feature to it. As we grow the cold-starts, as we grow the acquisitions, we will grow Charlotte and Charlotte will be 100 by yearend but it won't be 100 by the following year or the next year. It will keep growing as we have more freight.

Now, our opinion, our belief is that over the next five years, the likely scenario is that capacity is going to be much tighter and as the economy comes back over time, there'll be more freight. So if you ask, the truckers are going to win. So from our point of view, focusing on developing carrier capacity is really, really sensible to our strategy.

Okay. That leads me to another question. You talked a lot about acquisition and cold-start growth but how is it -- it sounds like you really want to focus on growing your carrier base -- so you have some success there in lining up new carriers to come into XPO network?

Yes, very much so. So we hired a really great guy, Louis Amo, who's an industry veteran managing carriers for Union Pacific, for GE, for SaveIt, for others and we've hired now about 30 people in Charlotte and about two-thirds of them are [loose] people, just dying for diesel all day long -- getting capacity and Phoenix example, which is now on a many millions of revenue run rate would not have been able to get off -- ramp up that fast were it not for the other half of the equation, which Louis Amo who in Charlotte getting capacity. So Phoenix is customer facing, sales generating and hanging off the load to our key system to Charlotte and it's working very, very well. That's a big, big part of the equation and it's successful today.

What's your sweet spot for signing up carriers? Is it a dozen or under 100 trucks or maybe 100 to 250? Is there a sweet spot that you're targeting?

So far, it's actually been the smaller ones. It's been the ones that are 25 to 100 trucks by and large but we're not limited to that. It's just the way the chips have been going so far.

Okay. And Brad, you talked about you South Bend office, I think, doubling revenue in a year. What's the key to make South Bend successful? And this is a road map for future organic growth.

Well, a few couple of things, I think one is adding sales people, training them, and compensating them correctly. And that's the formula for success with any business, particularly in this one. At the same time, I don't want you to obsess too much on the success we're having about because it's pretty hard not have success when you're so small. I mean, this is the cold-start that started three and a half years ago and now it's up to about $30 million of revenue. When you time it like that, you can grow like a week.

This is the law of small numbers, the advantage of being tiny, which was part -- what was part of the thinking which went into our strategy of that industry -- when we look at the industry. There's not a whole lot of companies that are $1 billion plus companies but there's a whole bunch of companies that are in the tens of millions in revenue.

So we said, okay, let's not fight city hall. Let's go with the flow. For whatever reason, that means you can create a branch that's doing tens of millions of revenue than hundreds of billions dollars of revenue and let's do many of them and let's find real talented people who have been there and done that before at their previous employer and empower them. And empower them with technology, empower them with carrier capacity, empower them with HR and compensation programs, and so far, it's working.

All right. Great. And last question here, just kind of a general industry question. You know, I heard this week about the US auto manufacturers not going to go the typical summer shutdown. Does this have a positive impact on your business, giving you all the exposure this summer?

Well, that cuts both ways. That will be good for the truck part of the business -- there will more freight. It's just steady, steady and there's no supply disruption and there's no jerks and jolts. That's not the best environment for the expedite part of the business because expedite -- disruptions in supply chains want things to go on in the external environment. So it cuts both ways.

Okay. Great. I really appreciate your time today and thanks so much and best of luck going forward.

Thank you, Sir.

Scott Schneeberger, Oppenheimer.

Thanks. Could you guys speak to what your policies going to be with regard to earn-outs, the use of them, just how prominent and what types of acquisitions would you consider them for and not?

Earn-outs are sometimes appropriate and sometimes not appropriate. When we can avoid earn-out, we'll try to avoid them because sometimes, you'll get in fights about them later about or if you had only done this, you wouldn't have made an earn-out, so forth but we've covered a formula that seemed to work pretty well with many of the people we're talking to, which is basing it on a gross profit mind payroll -- that kind of the lines are interest to grow the margins much possible but not to do it in a way that has a lot of cost associated that's not contributing to revenue directly.

So I think we've got a way to skin that cat that will make it black and whitish and decrease the chances of dispute going down the line, which is very important to us. The times that we used earn-outs are when we just can't bridge the gap in terms of where a seller sees value when we see value and we're just looking at it differently and just have different set of economics and can't get there and the greater way to solve that is to put an earn-out in there.

The other time we'll put an earn-out in there is -- there are some deals that we're looking at where in part we're buying it for the existing operations, but in larger part, we're buying it for the person -- for the entrepreneur that got a big business plan that they feel is better to do with us together as a team -- with our capital, with our technology, with our back office, with our carrier capacity, with our credit collections and so forth -- and they go out and drove the business up and they have a very ambitious plans and we have several people like this to build more and more locations [of a lot].

In that case, it makes a whole lot of sense to incentivize them to succeed at that, which is a win-win situation where we'd love pay on that bigger amount because the only way we're paying that is they're delivering the bacon.

Great. Thanks. And then, just expound on this a bit. With regard to cold-start, it looks like you seem to have a really great start. Could you kind of scale us through what is typical to see in an early cold-start? I don't imagine we would expect that from everyone but what are the key metrics and ways that we should be tracing them along the way?

Thanks. It's Scott. So everything is going very well in Phoenix and I think Rob Martin and his team have gotten off just to a great start, like you've said. They are ahead of our schedule. I wouldn't expect this for every cold-start and we still are staying with our $5 million to $10 million in revenue run rate by the end of first year kind of number.

I would say that when you look at Phoenix, they didn't have access to Charlotte up and fully running during a lot of the quarter. Charlotte really ramped up from only two people covering loads to now around 17 or 18 people covering loads and they're doing a much more efficient strong job at getting trucks efficiently. So I think that when you look at Dallas and Ann Arbor, which is still in very, very nascent stages, they'll get help from Charlotte more than Phoenix will but we're going to stay with our thinking of $5 million to $10 million in the first year.

Great. Thanks. And just to follow up on that, what sort of timing for the final two cold-starts of this -- I realized that they'll happen when they'll happen but are you trying to pull those as forward as possible or it might be fourth quarter, [the arena]?

You know, it all depends on finding the right people. So the key to these cold starts is not where they are or anything other than finding the right person for the job, someone who has ramped a cold-start or an office or branch from $0 to $50 million, $0 to $100 million, $0 to $150 million before, has the right kind of experience that can do it again.

We think we've found very experienced people in the three we've started so far. We'll continue to work through and we're very selective in finding only the best people and if we find more than that, then we'll go with more than that and if it opens in second, third, or fourth quarter as we go through the year, it's hard to tell.

Okay. Thanks very much.

Thank you.

David Campbell, Thompson, Davis & Company.

Yes, thank you very much. Good morning. I just have two questions. One is for John. You mentioned the expedited business from the first quarter was helped by the air charter project that was completed in the quarter. Does that mean that some of those revenues were nonrecurring? Could you describe a little bit more about that?

Yes, we got a big uptake in air charter in the first quarter of this year, and we do a little bit of air charter business every quarter. It's typically a smaller piece of our business but the uptake we had this year was nonrecurring. It was an automotive related project and it was related to a particular order for a big OEM and we had to move a lot of freight quickly and we jumped and we did it for them and so that is not going to recur as we go through the rest of the year.

Great. So we would expect some moderate less growth in the second quarter than you had in the first?

It all depends if it's replaced by other business. That's the nature of expediters. It's lumpy. It's unpredictable. It makes them fun too. We're like an ambulance service not knowing -- every morning we come in, we don't know what's going to happen and when customers do come in with emergency, we're there to respond and we hope to have capacity just where they need it and when they want it. So it's hard to predict exactly what it's going to do quarter by quarter.

All right. And Scott, you mentioned the corporate SG&A continuing to increase as the year goes on. So are you increasing from the base amount or increasing from the first quarter including the $1 million of unknown recurring expenses?

It will increase from the level it was this quarter as we go to the year and as we scale up Charlotte and add more infrastructure so it should -- I think if we look at the SG&A in general, I think on the base level, you're in the low 20 kind of range but then as we work on deals and as we go through due diligence in closing costs and all different pieces of acquisitions, that adds up onto that line. So that could push it higher and that's what's hard to forget. We do expend our accounting charges, we due diligence, we do expend legal fees, so that could push it up into the mid-20 kind of range.

So it's really combination of revenue growth and startup cost that make it hard to predict those startup costs. Okay. Thank you. Great quarter, terrific progress. Thank you very much.

Thank you, David.

Todd Fowler, KeyBanc Capital Markets.

Great. Thanks. Good morning and thanks for taking my question. Brad, can you talk a little bit --

Good morning.

Good morning. Can you talk a little bit about the brokerage gross margins and specifically, the comment in the release about the strategy in Phoenix needs some little margin sales to get some business and is that a top down strategy? Is that something that's made at the branch office and what's the thought there with looking at margins as you can see in the ramp that cold-starts are going for?

Right. I think with the cold-start, it's realistic to expect that when they first start out in the first few months, the margin is going to be lower than it was as we go along because they got to break the ice, they got to get on the board, they got to start doing business with cost covered shippers and you're not going to get that business by coming in really high on price. Having said that, the strategy is not to keep that margin low for a long period of time, let's start going doing business and then let's wait the margin to normal market level.

And how do you think about in what makes somebody a strategic customer? Is it size? Is it density? Is it somebody in a specific market? How do you think about who you're looking for, you know, basically track business to or protect business from I should say?

It's really potential for future business. It's like you'll be a large shipper or a small shipper. It's what kind of share of wallet do we think we can get and that can be retail, that could be manufacturing, that could industrial, that could be commercial. We're pretty agnostic with respect to that.

Our bias is more towards spot and contractual at this point in time but it's really the size of the business that we can get that makes it strategic.

Okay. And then just so I understand the model, the selling is all done at the branch office but the capacity sourcing is going all to be done out of Charlotte. I guess the first part -- is that the correct way to think about it? And the second part is, how does the compensation works? The compensation for the branch people -- is just based off of sales or is it based off of gross margins? And how does that work? You know, capacity is being sourced out of Charlotte and sales are being done at another different location.

Right. The first part of your question about where's capacity being sourced out of, what you said is partly right and partly needs to be adjusted. When we do an acquisition like the Continental, they've been accessing trade and they've been covering off loads for 32 years. So they obviously have both sides of the puzzle. They can get rates. They can get capacity.

When we buy, Continental for example, we're not saying stop covering your capacity, stop covering the load and we'll just do it in Charlotte. We're saying in addition to what you've been doing, you often now have all of this new capacity available to you through Charlotte.

So it's both. It's not like the acquisitions are only going to do selling and all capacity covered in Charlotte. To the extent they want to utilize Charlotte, to the extent they find Charlotte more competitive and more compelling and more responsive and more price sensitive then they'll naturally will use Charlotte but to the extent that they can source capacity on their own to make historical relationship better. That lesson, we'll keep doing that. No reason to stop that.

With respect to the cold-start, a little bit different. With cold-start, the idea there is to really have high testosterone, customer facing, revenue generating sales offices that are dime to dollars all day long, [dialed] for freight and to divide the labor up between customer sales and carrier sales. So here you have in the cold start, customer facing people, shipper facing people, handing -- and then being connected in the virtual way, right through our internal load or IT with Charlotte that's covering them both.

We found so far it's working very, very well. And the key to this is technology and one of the things we're rolling out in the IT later this month is a kind of internal Skype that it's called Link that you go to the company directory, you click on somebody's name to control it and boom, you'd have a video conference with them right away.

So we're fine particularly with the age group, which is generally of your organization with comfort with video technology and technology in general as its second nature. You don't have to necessarily in the same room to have a relationship with them so to speak.

So in terms of the second part of your question, which is compensation and how that fits into this model. We want to compensate these people -- in general our concept for compensation needs higher [than] the organization is. Compensate to motivate their behavior, to maximize their efficiency, what they control. So whatever they're doing to bring profitability to the company, whatever they're doing to serve the customer better, whatever they're doing to improve productivity, let them their incentive compensation based on that.

So in that cold-start, which are primarily selling organizations, we want to compensate them on growth margin, on gross profit because that's what they control and therefore, they have a very aligned interest with the people in Charlotte who are also being compensated in part on growth margin to cover these loads in the most efficient way, to service the customer best and to achieve the best solutions is going to give the best profitability.

Good. That's actually very helpful. And then just the last one I had is thinking about the model and you've got the revenue target and I guess, first I just want to make sure I understand that when you're talking about the revenue run rate by the fourth quarter, so fourth quarter should be somewhere in 00 to get to a $500 million annualized range, $100 million to $120 million or something like that and in the second part of that would be how do you think about you're becoming EBITDA positive? I mean if you get to that run rate, are you generating a significant EBITDA or is there still some time when you actually become EBITDA positive in addition to where your end of the year run rate is?

It's Scott. On the run rate revenues, yes somewhere in that range. We're thinking about the December ending kind of run rate of $500 million -- so fourth quarter comes in a little under that $125 million, that makes some sense in those ranges.

The second part of your question on profitability on EBITDA, you know, it's hard to tell. We're not going to give out EBITDA guidance, the profitability guidance yet because we don't know the companies, which companies we're going to purchase and acquire and that will really depend on that and the makeup of that. I would say that as we look out along the year and along in 2013, we're doing our jobs right and we're investing in the acquisitions and we're adding SG&A and adding headcounts to those acquisitions that we buy to really ramp up growth in the other years and if we're opening up more cold-starts and we're doing a good job on that. And really part of the plan is to be negative on EBITDA for a good amount of quarters.

How we're not managing the company nor is our business plan for the next several quarters of earnings, it's because an ironic business model. We're doing our jobs as Scott was just saying well. The number could --worst-- than otherwise. In other words, if we do more cold-starts, which take money in our EBITDA, a loss when they first start up, then in aggregate it would be a [big] loss, then we want to do that because longer term and multiyear, that's going to take when we begin them.

And with the acquisitions, acquisitions should be accretive in the first year but for the one-time charges that the accounting rules require, we have to write off right after you buy them, the legal and the accounting and the due diligence cost right away. But for those, they should be a accretive.

Sure. No. All of those make sense and it's actually helpful to hear how you're thinking about that. Thanks a lot for the time and good luck.

Thank you, Todd.

(Operator Instructions)

Robert Hoffman, Princeton OP Partners.

Yes, thanks for taking my call. I know it's kind of hard to characterize something with a pipeline of [100] or [400] or however you said it but is there any way of -- what is the driver for people to sell, especially in the Continental type of smaller category? Is there a guy who is 64 and wants to get out of the business so prices everything? Is it a guy, I guess it could be a girl, who realizes that he is technologically behind and so the question is does he invest it himself but he doesn't know anything about that or does it sell out to you guys? Is it somebody who has a paternal instinct about his employees and wants to make sure they have an opportunity to grow? And then finally is it the fact that your cold-starts have been successful, can you use that as a strategic weapon, basically going to Joe in Boise and say, -- well, Joe, we can either buy it from you or we can steal your guys and do a cold-start.-- Any way of characterizing of how people are thinking?

Yes, several good questions in your large question. First of all, the last thing, we don't do that. That's not our game to go to somebody and say sell to us or we'll steal all your employees. That's just not in our DNA.

But in terms of the motivations per sellers, a lot of it depends on age. So in the case of Continental, Weston Davis, a great guy, who's built up the business over several decades, 55 to 57 years' old, and God bless him, time to retire and take some tips off the table and smell the roses. So that's a good and prime motivation for anybody.

There are other companies that we're looking at that the sellers and yes, some of them are willing, and by the way, some of the better ones are women, interestingly in this industry. Some of those are younger, in their 30's and 40's and their goal is to not sell out and cash out and hit the beach but their goal is to team up with us, get access to our capital, get access to our IT.

By the way, sometimes they will contribute to our IT. They will have great things, little customizations, little things they come up that are improvements that we haven't thought of but put best practice together with us and get access to our capacity in Charlotte and grow the business. Because from their perspective, it's a funny thing about the way the truck brokerage business works. As the faster you grow it, the more working capital you need because you have to pay the truckers pretty quickly. You don't get paid by the shippers for months or so after that. So to stay steady state, you'll always have a month or so of working capital tied up in the business but to growing it, that need becomes bigger and bigger.

And that was more easily financeable before, 2008 and 2009, still sort of financeable for many people but it's not as financeable and even when it is, from a free cash flow basis, from a sellers point of view, you know, if you're going to grow a business, he or she are not going to take a lot of cash out of the business while they're growing it.

They're going to be paper rich, growing a company that's got increasing revenue and increasing profits but they're not going to be able to extend their financial statements buying cars and houses and planes or whatever they want to buy. So it makes some sense to offload that negative aspects of the financing future to us who are more than happy to finance something that's going to grow very dramatically over several years. Did that more or less answer all of your questions?

Yes, I mean -- that you would steal their employees as much as you could do a cold-start in this city and that would be competitive for them. So yes, that's it. But it also brings a follow-up question on the working capital. Do you guys have a -- and can you quantify the advantage that you have? I mean, obviously you can borrow at institutional rates and these guys are borrowing at retail, maybe depending on their side. Is there a quantifiable, you know, you guys can bring the cost of that borrower down by a couple of hundred basis points?

Well, yes. First of all, we can get access to capital period. There are some brokers that we run across The money kind of banks (inaudible) in their business plan in order to lend to more companies and when the bank grants are available, they are at significantly higher rates than what we at public company and a larger company can borrow at.

By the way, another thing I want to comment on the comment you just made and very interestingly, sometimes you'll go to a city and you'll meet with your two or three truck brokers in the same day and find out that their customer bases vary out a lot and their carrier bases [vary out a lot] as well and that's because this is a real national business and with the telephones and technology, the customer base isn't restricted to a city that you're in.

So even if we did have a cold-start in the same city, it's conceivable that you'll be stepping on each other's toes. I mean look at the larger established, the companies that are much larger than us (inaudible) they have many, many branches in the major metropolitan area in the same places and they same to be doing very well.

Great. Thank you.

Thank you.

Justin Yagerman, Deutsche Bank.

Hey, guys. Thanks for taking the follow-up question. Sir, going back to the capacity discussion, could you give us a sense of how much incremental capacity has the Continental acquisition added to your network even you're just kind of talking in percentages of terms? And if we think about kind of bringing those additional carriers under your database, how long are you expecting that process generally to take as we look out?

Let's start with the last part, that's the easier part. In any acquisition including Continental, speed is of essence. You want to get the integration done as urgently as possible that's best for everybody involved. So Mario is down there. He had stayed up. It might go (inaudible) and going to start the integration on IT part and the migration onto the same database starts immediately. That's not an after thought. That's how you avoid problems. That's how you can be more effective and more productive and we're on the same page.

In terms of the amount of capacity that we're adding, it's about a $22 million company -- that's about amount of capacity they've got. In Charlotte, our amount of capacity grows literally every day. We at the moment have almost a couple of dozen people that their job is to call carriers all day to talk them out, check them out, and sign them up. Those who are passed the right standards and that's going to continue to happen in larger percentages every month as we hire more people in Charlotte.

Okay. That's fair. If I'm looking at the deferred brokerage, just annualizing out kind of Q1 revenue, it looks like that's about a $32 million top line, I realized because the seasonality that's actually understating the true gross revenue of the business and obviously, you guys are aggressively adding cold-starts and growing same store sales as well. But if I'm kind of looking at the $22 million acquisition relative to that, is it fair to think that your capacity could have expanded by 50% as a result of the acquisition?

A company in that magnitude and although 50% is a small number, I won't jump up and down about it too much but over time in our capacity what we're going to have is going to be vastly large than what we have now.

No absolute. Fair enough. I appreciate your time.

Thank you, Rob.

We have no further questions at this time.

Everyone, thank you very much for participating in the conference call. We look forward to see you at the conferences that we'll be presenting at in May and talking to you on the next quarterly conference call. Have a great day. Thanks.

Thank you very much. So ladies and gentlemen, that does now conclude your conference call for today and you may now disconnect your lines. Have a great day. Thank you very much for joining.