XPO Inc (XPO) 2012 Q3 法說會逐字稿

Welcome to the XPO Logistics third quarter 2012 conference call and webcast. My name is John and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. 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 the call, the Company will be making certain forward-looking statements within the meaning of applicable securities laws, which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the Company's SEC filings. The forward-looking statements in the Company's earnings release or 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 applicable 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 contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the investor section on the Company's website at www.xpologistics.com. I'll now turn the call over to Mr. Bradley Jacobs, Chairman and CEO. Sir, you may begin.

Think your, operator, and good morning, everybody. Welcome to our third quarter conference call. With me today are John Hardig, our Chief Financial Officer, and Scott Malat, our Chief Strategy Officer. I am pleased to say that in the third quarter we made significant progress on each of the three main components of our plan, on acquisitions, cold-starts and optimizing our operations. We're further developing our information technology, we are expanding our sales force particularly in freight brokerage and we're ramping up better operations center in Charlotte. Two things I am especially excited about in the quarter are the strong advances we made in recruitment and training. Our talent management program is becoming increasingly robust and we are continuing to refine our training programs for new hires. These are two critical components of our long-term plan to create shareholder value.

On our acquisition of Turbo Logistics, we won't recap all the details since we just had a conference call about that 10 days ago. But suffice it to say, bringing Turbo onboard was a major milestone for XPO Logistics. We have been spending a lot of time with the Turbo team in Gainesville. Reno, Chicago, and Dallas. Last week we had about a dozen members of our leadership team on-site at the various locations. Our new Turbo employees have told us that morale is the highest it has been at any time in Turbo's 28 year history. If I had to describe our strategy for turbo in one word it is scale. We are going to scale it up, substantially and quickly.

On the cold-starts, we opened up a truck brokerage branch in Charlotte this quarter. This is an important branch that will grow alongside our operations center. We're planning on hiring hundreds of customer sales reps over the next few years in Charlotte. And we plan to build it into one of the largest branches in the Company. We are in discussions with the state of North Carolina about additional tax incentives to support this large-scale plan. And we have tapped Drew Wilkerson to be the branch President. Drew had been running our Columbia, South Carolina branch and he quickly distinguished himself as an up-and-coming leader at XPO.

We gave our Charlotte cold-start a boost by tucking in acquisition of BirdDog Logistics, that we mentioned in a release last night. The employees of BirdDog have been merged with our team in Charlotte. They have been integrated onto our IT platform and they are benefiting from our carrier procurement capabilities. We also got the benefit of their customer and lane histories. So, we have now opened eight truck brokerage cold-starts and they continue to scale up as projected. We are seeing steady sequential improvement.

In October our cold-starts were on a combined $32 million annual revenue run rate. The vast majority of this came from our initial three cold-starts that we opened in the beginning of the year and the other five are on track to be meaningful contributors in the fourth quarter. Our Charlotte teams for carrier procurement and Shared Services are a big part of the reason why we are able to grow in a rapid disciplined manner. We now have 117 people in Charlotte, including a team of 75 people solely focused on carriers. We plan to have over 100 people developing carrier capacity in Charlotte by year-end. And we could triple that number over the next three years.

Between the carriers we've brought onto the system through the acquisitions and our ongoing carrier recruitment in Charlotte, we now have over 20,000 carriers in our network. That is up from about 8000 carriers last September, when we put our growth strategy in place. We are saying yes to customers more often and it's building our reputation as a go to provider for capacity. Last night, we announced two additional cold-starts, both in freight forwarding, in Houston and in Kansas City. These are important markets that will help us achieve critical mass in this business segment.

So we are continuing to make investments to drive significant growth over the next several years. And we saw results in the third quarter. We increased our revenues by 50% from a year ago and gross margins were up 21%. And in freight brokerage, which is our primary focus for growth over the next several years, our revenues nearly quadrupled compared with Q3 a year ago. So, we're on target with our plan for growth, we are acquiring scalable companies, we are opening cold-starts and we are building a top-notch operation. We are now fast approaching an annual revenue run rate of $500 million and this is the first step we set for ourselves as part of our longer-term plan to build a multi-billion dollar Company over the next several years. With that I will asked John to give you some more color on the quarter.

Thanks, Brad. I will start by giving some color on the performance of our three business units. Starting with freight brokerage. Our revenue was up 290% from last year to $32.2 million and gross margin dollars nearly tripled to $4.1 million. $13.5 million of the revenue increase came from the mid- quarter acquisition of Kelron on August 3. The balance of the increase came from organic growth and our acquisition of Continental.

Freight brokerage gross margin percentage was down year over year due to lower margins at our cold-starts during their startup phase. However, we improved margins sequentially. Gross margin percentage was up by 160 basis point to 12.6% in Q3 from 11% last year. This improvement was largely due to lower transportation costs, mainly from Charlotte ramping up and doing a better job finding trucks. But also from a loosening of truckload capacity during the third quarter.

In expedited transportation, our revenue was relatively flat, but gross margin percentage was 16.6%, down from 21.4% last year. Expedite business in general started to slow in July and stayed soft through the rest of the quarter. SG&A increased 7%, as we've continued to make investments in our expedite sales force and recruiting efforts to increase the number of independent fleet owners we use. In our freight forwarding segment, we are continuing to make headway despite soft market conditions. Revenue increased slightly and gross margin increased 4% compared with the same quarter last year. We are growing our company-owned locations, which is more than offsetting the decline in revenue in our agent owned offices.

Our newest freight forwarding locations in Houston and Kansas City take us up to six freight forwarding cold-starts this year. The effect of these growth investments is reflected in the decline in operating income for the quarter in freight forwarding. On the corporate side, expenses were $8.2 million, which is an increase of $5.1 million from a year ago. Included in this number is $1.4 million in litigation related legal costs, $1.1 million of M&A transaction cost, and a $1 million increase in non-cash share-based compensation expense. I'm extremely proud of the finance and accounting team we've put together in Charlotte, which is built to support a much larger Company in the years ahead.

In addition, we described in the release that we had a $2.8 million tax benefit in the third quarter from the reversal of a valuation allowance for deferred tax assets recorded in Q2. The reversal was triggered by the accounting treatment for the convertible notes. We expect our tax rate for the fourth quarter to be in a range of 34% to 37%. As we move into next year our effective tax rate could decline, possibly significantly, based on our future operating results and the timing of growth initiatives. Earnings per share available to common shareholders was a loss of $0.22. Our adjusted earnings per share excluding the tax benefit was a loss of $0.38.

Our liquidity position is very strong. We raised $138 million in the convertible debt offering and we now have approximately $265 million of cash on the balance sheet at October 31. Now I m going to hand it over to Scott, who will give you an update on our strategy and then we will turn to Q&A. Scott?

Thanks, John. I'll review our three-part strategy in more detail.

First on acquisitions. The integration of turbo is underway. We are on schedule to move them over to our IT platform within 90 days. And John Tuomala, our VP of Talent Management, is working closely with David Coker and his team to accelerate the recruiting plans. We expect to begin hiring additional salespeople in the fourth quarter. This will increase SG&A in the short term, but should drive longer term growth and profitability. When you walk into the Gainesville office of our turbo division, one of the first things you notice is how big it is. It's a 40,000 square foot building that has 150 people in it now. And there is room to build it up to 400. Across the organization we've made significant progress in recruiting, training, and IT that will help us ramp up growth with both acquisitions and cold-starts.

In recruiting we have innovative programs in place for hiring large number of highly qualified candidates. We've received literally thousands of resumes and we hired 119 salespeople in the third quarter alone, some from the industry and some are from outside. Our training programs are helping our newest salespeople get more productive. We have over 30 new recruits in sales and carrier procurement training this week. Our training team has built out 20 training modules, which are a combination of classroom and structured simulations. There are continuing education and mentoring programs for our recruits and our salespeople get a significant amount of direct coaching from their branch presidents. We are incorporating leading-edge content into our proprietary training programs and we think our approach has the potential to revolutionize the customer experience with XPO.

On IT, we have a new technology in beta test right now. The algorithms that our IT team has created provide actionable pricing information and efficient ways to find the right carrier for each load. It is a fast intuitive user interface. The feedback from our test users has been extremely positive. We plan to roll it out to the rest of the organization before the end of the year.

Lastly, on our other two businesses. For our Express-1 segment, our expanded sales force is working to mine the core expedite market to take share and we continue to focus on our strategic verticals in cross-border Mexico, temperature controlled and defense. Our new regional hub in Birmingham is building our presence with manufacturers and distributors in the Southeast. All this is to get more miles for the Independent fleet owners we work with. That makes driving for Express-1 more appealing. And we're happy to report that we now have a record number of trucks under contract at Express-1.

For freight forwarding, our CGL business continues to ramp up with new offices to gain critical mass across the country. As John mentioned, we've now opened six new freight forwarding offices this year. In addition, we have converted the Chicago and Minneapolis branches from agent owned to company-owned. These are significant markets and we are investing for growth. We are currently at 28 offices in freight forwarding, eight company-owned and 20 agent locations, and our target, as we've mentioned before, is 35 locations. Looking at macro conditions, transportation volumes in general remain sluggish, but we are showing that we can grow in this type of environment. We have a strong talent pool to choose from as we ramp up hiring across the organization.

And our initiatives in training and technology should continue to improve the productivity and efficiency of our organization. On the supply side, truck capacity tightened suddenly in the last week due to the hurricane. The loose capacity that we saw in the third quarter and in early October has largely evaporated. As capacity got tighter truckload rates increased. Shippers have lost access to a fair amount of capacity. Our services are in even more demand now, due to the capacity we have through our Charlotte operations center.

Summing it up. We are executing on our plan, we have got 15 cold-starts, 8 of them in brokerage. The Turbo acquisition is off to a great start. The launch of the Charlotte sales office is a big step forward and it got a boost from a tuck-in acquisition. Our carrier teams in Charlotte have a lot of momentum and are improving our truck finding capabilities everyday. And we are up to 56 locations in total, 33 company-owned and 23 agent owned. So, we've gotten a lot done since we took over a year ago and we have the stage to scale up the Company dramatically over the next several years. With that we will open the floor for questions. Operator, can open now.

(Operator Instructions)

William Green from Morgan Stanley.

Can ask a couple of detailed questions on some of these acquisitions? Just want to make sure I understand the timing on some of this stuff. Kelron came in August 3, contributed $13.5 million or so? But they had a run rate of $100 million. So, does that mean you're culling any business or maybe we're missing some of the seasonality here

From a Kelron standpoint we are still analyzing the lanes and looking over what is the attractive business and what business we won't be working with. It's fair to say that we are on a path towards profitability and we're looking at that as some of the business is unattractive.

One of the things that happened at a competitor over at Echo was that they actually found after they made an acquisition the revenues that the Company said it had weren't quite as robust. How do you think about the risks here as you do a very fast acquisition strategy, some of these companies may not have the accounting systems in place to ensure that they know what they actually earn. How do you guys guard against that or is that just a part of the risk and you bake that into the payouts?

You want to do as much due diligence as you can. And you want to balance your eagerness to do a deal with the need and importance of getting all the I's dotted and the T's crossed. We typically have a fairly large number of people in our organization who get into an acquisition towards the end stage. I'm talking something in the teens number of people from operations to IT to HR, from corporate, from finance. It's quite a -- we start planning the integration before the deal is consummated not afterwards. And we also use inside and outside legal and we often use outside accounting as well for the financial analysis of it. I think we have a lot of bodies and we have other due diligence and background check people involved. I think we do a pretty good job at knowing what we are going to buy before we buy it. That said, any Company, ours or Echo's or anyone, can make a mistake once in a while and buy a Company and did not work out the way you expected it to work out. I think we will get them almost all right if not all of them right.

Last question, Scott, you mentioned the pickup in the last week. I realize it is still early, but can you put any color on that just in terms of the magnitude of the pickup, so, as we think about fourth quarter trends it is not clear to me how to bake that into your numbers.

You can break that up into three parts. We have different businesses and Express-1, they were facing a soft market which continued into October. This is what Express-1 is good at. They can help in these situations when you have anything that disrupts the supply chain, that could help our Express-1 business. We can help in those areas.

In CGL it probably won't affect their business much. If anything, it could be a little bit negative to freight forwarding, some of the ports were closed and there was not much moving. On the freight brokerage division we are growing very fast. So, every week we make a new high over the week before and certainly every month we make a new high over the month before. It's hard to discern exactly what comes from what. We would say the cost of capacity has moved up.

We are -- the vast, vast majority of what we do is on spot. So, we think we can get more business as we go -- a lot of shippers are trying us out. They're looking for capacity, they're asking around and they know that we have capacity and we are getting incoming contacts and outgoing calls to them to get business. It should help us find new business, but it's hard to discern from the trends because they're growing every week.

You probably don't have that much locked up under long-term contract that you get squeezed on this? Is that fair?

That is very fair, yes.

All right, thanks for your time.

Thank you.

Justin Yagerman from Deutsche Bank.

We are at 15 cold-starts and I think when we started on this whole journey, you guys had talked about 20, 21ish. Obviously, that sounds like it's going to be eclipsed within your five year plan pretty soon. Am I right in thinking that the pace is much more rapid? Is it that you are identifying more people than you thought you would and can you put a new number around what you think your five year plan means in terms of number of cold-starts for XPO?

It is correct to say that we are ahead of plan on the cold-starts. Greg Ritter and his group have put a lot of emphasis on getting out there and meeting lots of candidates for branch Presidents. And as the year has gone on and as XPO has taken shape more, we are attracting more people and more highly qualified people. So, to the extent we find additional cold-start presidents that we love and we want to work with and want to back and support and give the resources of the organization to, we will go ahead and hire them.

But I think where we are now is we are seeing we've got a number of these locations now across the country. And some of those branch presidents have visions for building it up to 50, 75, 100 people over a few years, getting up to $50 million or $100 million in revenue. And a subset of those cold-start presidents have much larger visions and in some cases have very propitious real estate. For example, when I look at our system now, we've got 56 locations in total around Canada and the United States. The ones that I zoom in on and I'm spending most of my time on are Charlotte, where Drew Wilkerson just started our cold-start, and that is a place that we've got the facilities, we have got the infrastructure, and we've got the talent pool in Charlotte to build that up to somewhere between 500 and 750 salespeople. So, that can be a real mega location. And it is right where our training programs are. It's where our HR and our recruiting people are. It is a good place to be. And, plus, we are recruiting about one-third from the industry and two-thirds roughly inexperienced people and there's a fair number of competitors in Charlotte to recruit from.

The other places I look at is the ones most scalable. I love the Gainsville location of Turbo. Gainesville is in a building that's about 40,000 square feet, can hold 400 people and it's presently got 150 people in it. Overtime, it would be great to get that additional 250 heads there and running and going. Chicago's another place that's got good scalability. We have got 40 people there right now. There's no reason that can't be in the many hundreds of people a few years from now. And I could go on a few others and I'm trying to make the point is it's not as -- it is partly the number of cold-starts, and that is important, we will continue doing that, but it is also let's focus on the scalable ones, the ones that we can really hit home runs in.

Brad, as I try to translate headcount into dollars, how should I think about the productivity that you target for each employee as it relates to those? If Charlotte is a 500 to 750 sales people potential, is that $500 million to $750 million in terms of that opportunity or is it more or less than that?

It could be more than that. We tend to target at least $1 million for a salesperson in the first year and it could scale up from there

Piggybacking on one of Bill's questions, was curious, you talked about Kelron, you are still parsing out the quality of the revenue there. At Turbo do you think that there is the same issue where you're going to have to cull before you can grow, or is that going to be a straight growth opportunity?

That would be a very straight high-growth opportunity. Turbo had a completely different MO than Kelron. Kelron had a fair number of lanes and customers that were marginal or losing money. And we knew that going into that, it was part of the plan. We factored that into the price. And we are going back to those customers and saying we will keep this lousy lane, but give us some new business that offsets that or let's talk more about what the right pricing should be. And some of those customers we will get to a good place and some we will just lose.

In Turbo, I'm not aware of any money-losing customers at all. And they have -- are just a really great relationship with a bunch of customers and they are very profitable and it's just a question of growing it, hiring more salespeople and filling up the tables and going out and getting more share of wallet from the existing customer base, now that they've got those marching orders. And also, getting new customers. Both tier one, tier two, as well as tier three customers.

Last question and I'll turn it over to somebody else. You guys have started cold-starts in the Expedite. This quarter you had two cold-starts in freight forwarding. Those other two businesses, besides the freight brokerage, where most of the growth has been concentrated, how do you think about those right now, now that you have been in them for a little while?

Expedite sounds like at least this quarter was maybe a more cyclical business than you would've thought and you're, obviously, growing freight forwarding. Just curious in terms of your growth ambitions there, how you see those evolving, whether or not you are dead set on them being core pieces of the business. Any commentary would be helpful around that.

Truck brokerage is clearly the place we are going to put the most resources and the most growth into. Having said that, we've got nice franchises in both of those other segments. Express-1 is either the third or fifth, depending on which survey you read, largest expediter in the United States and we like that business. It's a business that customers really value the service because they need it. Customers who have a real urgent need to get something picked up right away and delivered in a time definite manner and are willing to pay for that, which is why the margins are typically higher there then in the regular old truck brokerage. So, it's a good business. We have got a good platform to grow. It is more cyclical than truck brokerage and things do change on a dime there much more.

Up until a week ago, Expedite was the stepchild and was having a bad quarter and demand was low and rates were down and it wasn't really a great quarter. And then a week ago, boom. Sandy comes and supply-chain disruptions and suddenly there is a huge demand for Expedite's services, so that's a great business suddenly. It does move around quite a bit. The program to grow our expedite is not via a huge number of acquisitions and a huge number of cold-starts like it is in truck brokerage.

The idea on expedite is to go nice and steady. And recruit more owner operators, we're up to 450. We had less than 400 just a few months ago. Get that up to 1000, hire more sales people, take that from a business that is doing a little under $100 million of revenue. Get it to a business that is doing over $200 million of revenue. Just grow it nice and slow and steady.

And on CGL, the freight forwarding, again I don't anticipate doing a lot of acquisitions in freight forwarding, but we will continue to do cold-starts of both agents and company-owned stores. Maybe on the magnitude of 10 or 12 of them over the next year and a half or so. And it will just keep growing from a business that is doing, again, under $100 million of revenue to something approximately double its size in a couple of years. That is the plan.

Last one, I lied. 10, you said, potentially, freight forwarding cold-starts over the next few years and then you didn't give me a new number for what you are thinking on the brokerage side. Over the next year or two, how many cold-starts do think you will be able to open up?

I deliberately didn't give you number because I don't have a number yet. Let's go through the budgeting process that we started last week, let's figure out -- our senior management team is having lots of meetings over the next couple weeks breaking out strategically where we want to spend our time, where do we want to put our resources. To what extent we want to have more smaller cold-starts. When I say small, putting in less than $1 million and they are building up to a business that is going to do several million dollars EBITDA in a few years. They're still great, they are still wonderful, but in terms of management bandwidth what is the right calibration between those types of cold-starts and the more mega cold-starts that we've already got feet on the ground for.

Thanks a lot for the time.

Thank you.

Peter Nesvold from Jefferies & Company.

So, if I could maybe bigger picture look at the year-end target of $500 million run rate. So, if you're roughly $71 million for the quarter, you annualized that you are at $285 million. That leaves about $215 million of annualized revenue to pick up. How would you say that that roughly bridges in terms of just seasonality? How much of an uptick do you think you could see on a seasonal bump? How much do you think is coming from organic growth, now that the cold-starts are ahead of plan. And I guess if we were to plug the balance, how much would probably be acquired?

Peter, you can't take just the $71 million for this quarter and annualize it because it doesn't give you any credit for Turbo that we just closed. So, Turbo is going to do about -- it did trailing about $124 million of revenue. You also don't have a full quarter of Kelron in there as well. So we think we are very much rapidly approaching that $500 million run rate for the year. Our cold-starts are really closing that gap, because they are growing rapidly. And so we feel good about getting that target this year. And that is really what the mix will be. We might do one acquisition yet this year, one or two, but it's hard to predict those and say with certainty that we will.

And then my follow-up question, you're doing a great job of getting to your targets ahead of plan, whether it is cold-starts or this $500 million run rate revenue number. As you look ahead to next year and I know you still go through your year-end budgeting processes, but what should we start to think about big picture in terms of the next stage of targets for this business? Thanks.

Peter, thanks. We have a five-year business plan and year one it made a lot of sense to go after $500 million of revenue run rate to get us some scale, to get us some lean density, to really get the business model moving and start to spread out some of the fixed cost investment over a larger revenue base. As we look toward the next years is very specific plans over our five year plan, we will go through our planning process, which is just starting up, and then we will give an update on the fourth quarter call of what our goals are for next year, but it will be -- the goals will be change over the five year plan.

Okay great, thanks a lot guys.

Thank you.

Scott Schneeberger from Oppenheimer.

BirdDog I recognize it's not the largest acquisition, but could you give some color around the strategy there? The integration with a new development in Charlotte? How is that growing and what end markets does it serve? Will there be any specialties in that area? Just a little more color on that, thanks.

Sure, thanks, Scott. BirdDog is a great tuck-in, so, it's doing $7 million in run rate revenue. It's a profitable business. We paid up to $0.25 million for it and it really is being combined with that Charlotte platform and give a boost to the cold-start. We move them onto our IT platform very quickly. They got access to Charlotte, their business has increased on a revenue and a margin basis, as per plan. And Drew Wilkerson, who has really distinguished himself as a leader in the organization, is taking over the combined platforms there and scaling it up and adding headcount and adding salespeople to Charlotte to match our carrier procurement. BirdDog is in Dryven, almost all of it is in Dryven.

And was it large? Was it just a few people that were involved or -- and how will management work in there?

We are brought over six people, Scott, and if you make it to the analyst day Thursday, you will meet them, their right there on the floor.

And then just a follow-up to the prior question of -- with regard to the goals and objectives you will set. I understanding you have your five year, your long-term goals. Will there be anything unique, and perhaps you are still working on it, with regard to targets you will set for the coming year and not necessarily what they will be, but along with metrics?

We will definitely give very specific targets and we will share those with you on the next quarter conference call. We have got to make them first, we don't want to just give them off the top of our head without having developed them very carefully through the budgeting process, but we will definitely share them with you when we've got them.

And then lastly just a housekeeping, a little bit of the litigation expense again in the quarter. Do you (inaudible) just state that persistent?

You never know, litigations can get resolved if both parties want to resolve them. Litigations can go on for years if neither party or both parties don't want to resolve them. Very hard to predict.

Okay, thanks guys.

Kevin Sterling from BB&T Capital Markets.

Brad, let me just follow-up with Scott's question, a follow-up about the BirdDog acquisition. You folded that into your Charlotte cold-start. Is this a game plan you would like to adopt, maybe, for future cold-starts where you jump start them with a small acquisition like this?

Yes, that something that is appealing to us, because it is very easy to manage and just folds right in. And you get a lot of savings on the SG&A in the back office. It ends up being a higher percentage because their small deals. If you look at those as like lift-outs of employee teams.

And you are paying the owners for doing that. They 're nice, they are nice little things. They are not going to move the needle hugely, but they are going, on the margin, improve it. It was a nice jump start to the cold-start in Charlotte. It was nice to bring a bunch of revenue in from day one.

Let me stick with the cold-start theme. It seems to me your cold-starts from a revenue generation are off to a better start than I initially thought. What is the secret sauce? Is it staffing with seasoned people that can hit the ground running? Is it scale, is it access to capacity? What is your thought there?

Yes to all the above. The cold-starts, it's not a secret sauce, but our sauce is we recruit people to begin with that we think have the right personalities and the right drive and the right life goals and career goals to be likely to succeed in this position. That is step number one. Step number two is learning and development, train them properly. You don't want to overly train them and waste time before you get them on the phones being productive, but you do want to train them properly and adequately so when they are on the phones, they represent the Company in a very professionally way. So, training is a big part of that.

Another part of the sauce is IT. Giving them technology that makes them have a leg up over the competition, both in pricing tools and being connected through the technology to Charlotte for the carrier procurement so they can cover loads and find trucks very effectively. And I would say another part of the sauce is compensation. You want to have a nice incentive compensation there so that when the people start making money for the Company they are making money for themselves as well. At the end of the day, it's about making money and I would say the final but not least important part of the sauce is have a fun place of work. Have a real exciting culture that is teamwork and upbeat and positive and growing and successful and success breeds success.

And that segues into my next question. With truck capacity tightening from hurricane Sandy and shippers looking for capacity and turning to you for capacity because you have capacity, do you see long-term opportunities to pick up new customers and maybe make them repeat customers for XPO? How should we think about this opportunity for you guys?

Being here in the tri-state area, I don't want to crow too much about the benefits of Sandy, because many of us still don't have power and a lot of people don't have houses, but from a business point of view the world changed significantly for logistics a week ago. Up until a week ago, you had capacity, demand was weak, capacity was loosening. Trucks were lowering their rates. Shippers were lowering their rates, because they weren't stupid, they knew that prices that brokers were paying truckers were coming down and it was a more or less balanced market leaning towards loosening capacity, which is one of the worst places in the rubric for a broker to run their business.

And when Sandy came, that took an enormous amount of capacity and still is taking an enormous amount of capacity out of the market and causing lots of supply chain disruptions, the ports are just opening this week, cab drivers still sitting around in New York and New Jersey. You have big asset heavy trucking companies immediately diverted fleet to the Northeast, sometimes adding $500 surcharges to loads. You saw FEMA out there, you still see FEMA out there. Now, FEMA has come down a little bit, right at the emergency they were paying $5 to $7 a mile and now it is still about $4, $5 a mile. You see FEMA out there getting capacity at. You've got -- it's really a different world.

You've got a broad network of small carriers around the country who have avoided the Northeast and don't want to go into the Northeast, and so there is all disruption, here's where a brokerage can really add value, not just XPO but other brokers too, can add a lot of value at matching together shippers with capacity. This works two ways depending on whether your portfolio is more contractual or transactional. On transactional business, which we are predominantly, it is a positive thing. On the contractual you get caught a little bit because you are locked into pricing with your shipper and now you have got raised pricing on the capacity side.

But like you said, I think, it could be a long-term opportunity for you guys as you take good care of maybe new customers, it could be repeat business for you. Is that fair to say?

Yes, yes. Anytime you help solve a customer's problem in a big way, you got a high likelihood that's going to be a repeat long-term customer. That's exactly what we are hustling to do right now is to work with shippers who maybe 1.5 weeks ago were keeping us on the list and giving us a load here and there, but now they need us a lot more and we're helping them and hopefully we have earned that customer's loyalty and make them a long-term customer.

And one last question here. You talked about 35 freight forwarding locations. Of those 35, what is your goal for company-owned locations versus agent locations, if you have a breakdown?

We don't have a breakdown, we do value our agents. Our agents are doing a great job for us in a lot of markets. There is certain strategic markets that we've made investments in that we are growing, but there will be a healthy mix of both.

Okay, that's all I had. Thanks so much for your time this morning.

Thank you.

[David Tembrino] from Stifel Nicolaus.

I think I caught in there that your cold-start locations to date are at a run rate revenue of about $32 million. And that's for the seven operations that are already up and running not the additional eighth

That is right. And the large vast majority are coming from the first three, Phoenix was opened in the January time frame, Ann Arbor and Dallas were in the May time frame.

Right. How many of those seven are currently profitable?

None of them as per plan. They're all scaling up in headcount, which is part of the plan. Usually a cold-start you could put in $1 million, you can get up to $5 million to $10 million on revenue in the first year and you turn profitable after year one. Phoenix is certainly the furthest along. It has been opened up the longest and it is furthest -- closest towards profitability. And just depending on how quickly we scale it up and how well things are going there, how many more people you add in there it will determine exactly what month it turns profitable, but certainly on the way.

And then you are on your way to exiting the year with your $500 million annual run rate. Next year you will set your goals and clue us in on those at the end of 4Q. But just wanted to get your understanding of where you think the Company in terms of a gross revenue level, where the Company turns profitable what the annualized run rate would be.

That all depends. So, that will depend on the acquisitions that we do. If we do -- we're looking at both small and large acquisitions. If we closed a large acquisition in the next few months, we would be profitable in the next few months. If we do smaller acquisitions over time and stretch them out in a measured pace, like we have been doing, it will take a longer time frame. It will depend on the pace and speed that we want to ramp up the cold-starts. The faster we ramp them up, the more investment we make in SG&A, the EBITDA comes down. That's okay, we're going for the big kill. We are going for over five years to what we can maximize the profitability of the cold-starts. But those are the factors that will go into the exact timing of profitability.

And them from a long-term capital structure perspective, obviously, you had somewhat dilutive convertible debt issuance earlier in the year. Have you given any guidance as to where you think your target cap structure is going to be off in 2015, 2016?

I would respectively disagree that it was dilutive. It was not optimal, that offering, because the stock price came down during the offering and we ended up pricing the conversion price at $16.43. But, nevertheless, we are putting those funds to use on accretive basis.

When you calculate our cost of capital, even at $16.43, exchange ratio, as painful as that was, it is still accretive. If we didn't think it would be accretive we would have pulled the offering. It wasn't as accretive as we expected, but we still have accretive uses to apply that cash to.

David, in terms of long-term capital structure, we might put some leverage on the business beyond the convert longer-term. I think we are thinking about a target of 2 times EBITDA leverage when you get out into the latter years of our plan out into '15 and '16. We would not go above that. This is a non-asset based business, it doesn't lend itself to putting a lot of leverage on it and so that is what we're thinking long-term. We might go above that if we had a great acquisition to do that would require us to take on a little more debt short-term in order to do the acquisition, but then we would have a longer-term plan of getting it back down to that two times EBITDA level. But we certainly wouldn't want to be significantly above that on a long-term basis.

Okay, thank you.

Thank you.

Ryan Bouchard from Avondale Partners.

I was wondering if you could tell us when those new cold-start offices were up and running. Was it early in the quarter, mid or late in the quarter?

The timing on the cold-starts, the latest one was started in October. So, we started up Charlotte in October. I think we gave out last quarter the exact months, it was in August, the other three were in August. The other four, actually. You had one in Phoenix in January, you had the May time frame were Dallas and Ann Arbor and then you had four coming on in August.

And then on corporate expenses, in the past, Scott, you have given us some good guidance. Is there any reason to take your assumption of the high $20 millions annual rate, which includes due diligence, any reason to take that any higher or lower in the next quarter or year?

No, I think we are going to come on exactly where we thought we would, in the high $20 millions, corporate expense will be a little bit higher in the fourth quarter than it was in the third. And then we go onto next year. It is lumpy, it just depends on what acquisitions you do, what kind of litigation costs, different things that get included in that, but like we said, the underlying run rate is probably in the low to mid $20 millions and then you get ups and downs along with that.

Okay. That's all I've got guys. Thank you for the time.

Thank you.

Jack Atkins from Stephens.

First of all just to go back to the accelerated hiring that you are doing on the cold-start front. Could you maybe talk about how salaries and benefits as a percent of that revenue in brokerage should really trend in the fourth quarter? And then are you guys expecting that to be over 100% for the next couple quarters given the level of hiring you are doing there and the crux of my question is when should you guys start to see some leverage on these new hires.

Yes, we will. The salaries and benefits are going to increase faster than net revenue as per plan. That's because -- and that is an investment we are going to make. The typical salespeople will become productive in roughly eight months or so. And as we scale up, that is the investment we make in salespeople.

And then when we think about the Expedite business, you guys are ramping up your owner operator count, you're increasing your rate per mile for those owner operators.

Just curious when you all expect to see the fundamentals of that business, excluding the impact we've seen in the near-term from hurricane Sandy, but the core fundamentals begin to improve there? And also when you expect to see the initiatives that you have been doing in that segment begin to kick in and so you can start to get some return for those investments?

As you said, we have been really focusing on adding owner/operators to our fleet and that has really been a key area to drive growth from our business plan point of view. We did take up the rate per mile in March of this year. That had the intended result, which was we took our owner operator count up significantly. In fact, it's higher than it's ever been right now. The unfortunate thing is we did that right as the Expedite market was slowing in the third quarter. We didn't get as much revenue out of that initiative as we were hoping in terms of having more owner/operators. We really think the number of trucks in our network are really what is going to allow us to go after more business, but it didn't turn out with the third quarter the way it is.

Given Sandy, we have seen an uptick in demand for expedite freight. So, we've got a little bit more opportunity now than we did in the third quarter to take advantage of those owner/operators that we have. But that market generally is driven a large degree by the manufacturing economy in the US. And if you could tell me how that is going to trend over the next four quarters or so I could tell you generally what the underlying momentum will be in that business.

Okay, great. Thank you for the time.

Thank you.

David Campbell from Thompson Davis.

Glad to hear all of your answers to your questions, most of mine have been, but I just wanted to get a general feel for where the gross margins in each of these divisions will be in the next year compared to the third quarter. I realize Sandy, the hurricane, will have some impact, primarily expedited business, I guess. But, we don't know how long that will last or the impact will how long it will last. But it's only in some direction. In terms of gross margins, I guess it will depend a lot on lane density as well. I guess that is particularly the case in the freight brokerage business. But I don't know, maybe you could help me out a little bit.

Yes and we will give some more idea when we go into fourth quarter and talk about direction of the business, but directionally big picture the Express-1 business, the expedite business, is a great business. The very need by the customer, we provide a very important function and we don't think much has changed in that.

We are going after longer lengths of haul to go cross-border Mexico, which will lower margin percentage, but a higher gross margin dollars per transaction. That is one of the factors that will take down gross margin somewhat. That's okay, that's a great business, we can make really good profit in the cross-border Mexico and it's one of our target areas. On the freight brokerage, it is going to depend on a lot of different factors. It will depend on the economy and macro, it will depend on the looseness and tightness of the market, it will depend on how quickly we are ramping up new business and new lanes. When we get a lane on and we're doing that lane for a few weeks our margins go dramatically up as we build out the lane density and we build out the relationships with those truckers. We have seen our margins come up pretty significantly on those lanes as we work on them. The percentage of business that is coming in new lanes will play a key part in any quarter of what the gross margin is.

And David, in all of our business segments, we want to be, to borrow a phrase from another institution, long-term greedy. We are not short-term greedy. We are long-term greedy. When we are doing our 2013 budgeting process right now it's in the context of a longer five-year strategic plan of how do we build up each one of these businesses to something that is very substantial and valuable several years down the line. Now, if that means sacrificing margins in the short-term from, for example, increasing headcount quite a bit and taking a hit to margin profitability short-term in order to have a great payoff long-term, no problem. We will do that all day long.

But in freight forwarding the gross margins would be relatively stable of the three divisions, because not so much lane density there or is it?

I don't know. The last week our margins at Express-1 were a lot better than they were two weeks ago, because the rates we're paying to independent fleet owners stayed the same and the rates we're getting paid when up. It does fluctuate there. On the freight forwarding business, our company-owned margins are higher than agent owned and our company-owned are growing at a faster rate. That could be one of the things that come into play in mix as we look forward.

Okay, thank you very much.

Thank you, David. Operator, are there any other questions?

We have no further questions at this time, sir.

Thank you very much for participating in our call and we will see and talk to you real soon. Have a great day. Bye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.