XPO Inc (XPO) 2013 Q1 法說會逐字稿

Welcome to the XPO Logistics first quarter 2013 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 this 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 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, including its outlook.

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 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 of the Company's website at www.xpologistics.com. I will now turn the call over to Mr. Brad Jacobs. Mr. Jacobs, you may begin.

Thank you, Operator. Good morning, everybody. Welcome to our call. With me today are John Hardig, our CFO, and Scott Malat, our Chief Strategy Officer. Since our last call, we've made significant progress on our plan. Progress on acquisitions, cold starts, and optimizing our existing operations.

On acquisitions, as you saw last night, we completed the purchase of Interide Logistics. Interide has $28 million of trailing 12-month revenue and the purchase price was $3.1 million in cash plus $600,000 in three-year restricted stock. We expect the acquisition would be immediately accretive to earnings. Sean Snow will continue to lead the operations in Salt Lake City, Minneapolis, and Louisville. Sean is an industry veteran with a successful track record. As president of England Logistics he grew that business to approximately $300 million before taking control of Interide in 2009. He knows the business extremely well and he is excited about growing fast with us.

Between Interide, Covered Logistics, and East Coast Air Charter, we now stand at $98 million of acquired revenue so far in 2013. We are continuing to talk with a number of attractive acquisition prospects, and we're on track to meet our target of at least $300 million of acquired revenue this year. Our eighth freight brokerage cold starts are ramping up nicely. Our total branch network is now up to 62 locations and we have approximately 1,100 employees, that is up from 246 employees in April of last year. We're on track to grow the work force to at least 1,600 employees by the end of the year.

I'm also very excited about our new strategic accounts team which is led by Jeff Battle. Jeff is one of the key executives who led the growth of Turbo Logistics over the last two decades. He is joined by a talented group including Greg Ritter, who many of you know. Greg started and was the president of Knight Brokerage before he joined XPO. The team also includes Dennis McCaffrey who has 20 years in the industry and most recently ran all of outside sales for our Expedited Transportation group, and Pat Gillihan is also on the team. Pat was one of the three former owners of Covered Logistics before we bought them. This team is offering a compelling value proposition to the largest shippers in North America.

We give customers access to a large and constantly growing network of carriers. We're continually developing cutting edge technology and, most importantly, we have a passionate commitment to world-class service. Our customers want to deal with people who are intensely trained and are compensated for flawless execution. So, we're pursuing every avenue for growth and you can see that reflected in our results. In the first quarter, revenue was up 156% year-over-year and growth margin dollars were up 140%, and in freight brokerage, revenue and gross margin were up almost tenfold from a year ago.

So, we're right on target with our growth plan, we're acquiring scalable companies, our cold starts are going strong, we're adding hundreds of sales people, and we're building a top-notch customer centered organization. We remain on track to reach our goal of an annual revenue run rate of $1 billion by the end of the year, and to generate positive EBITDA in the fourth quarter. With that, I'll ask John to review the numbers.

Thanks, Brad. I'll start by giving some details on the performance during the quarter and then provide some color on what we are seeing in the larger transportation market. Starting with freight brokerage, revenue and gross margin were up nearly 900%. Of the $78 million revenue in the quarter, $2.5 million came from the mid quarter acquisition of Covered Logistics. The balance of the increase came from our acquisitions of Turbo, Kelron, Continental, and BirdDog in 2012, and from organic growth. Freight brokerage gross margin percentage of 12.9% was essentially flat with the first quarter last year.

March had the highest gross margin in the quarter. That positive trend continued into April partially driven by margin expansion in our cold starts as we gain scale and benefit from our strong relationships with carriers. Our cold starts are progressing well, as Brad mentioned. In March, they reached a combined revenue run rate of approximately $78 million. That includes about $10 million of contribution from the acquisition of BirdDog and the two Turbo branches that we consolidated into our existing operation in 2012. The other $68 million is organic growth, we see a lot of opportunity to keep building up this business.

In Expedited Transportation our revenue increased 7% to $24 million for the quarter. Roughly $2 million of that came from the mid quarter acquisition of East Coast Air Charter. Gross margin percentage in Expedited decreased to 15.9% down from 18.6% last year. The softness in the expedite market that we saw in the fourth quarter has continued into 2013 and that's putting pressure on margin.

Our freight forwarding segment had a solid quarter despite a weak market. Revenue in forwarding increased 5% and gross margin increased 51% compared with the same quarter last year. We're continuing to gain market share by staying focused on our core competency of serving small and medium-sized freight forwarding customers. The revenue growth in our Company on locations had a positive impact on margin and, as a result, we increased our freight forwarding operating income by 130%. This was despite higher SG&A expense associated with opening Company owned locations in Charlotte, Atlanta, Los Angeles, Houston, Chicago, Minneapolis, and Montreal.

For the Company as a whole, EBITDA for the quarter was a loss of $9.8 million which was consistent with what we had forecast on our last call. Net interest expense was $3.1 million for the quarter which was primarily from the convertible notes. That included $1.4 million of non cash amortization of bond discount. As expected, our effective tax rate was negligible for the quarter and we expect that to be the case for the rest of the year. Earnings per share available to common shareholders was a loss of $0.85 for the quarter. Our liquidity position remains very strong. We had $206 million of cash on our balance sheet at March 31.

Now, turning to market conditions. Overall transportation demand has been weak so far this year. Nevertheless, we can grow the business substantially even in this kind of environment, adding sales people and providing excellent service to our customers. We have strong relationships with carriers who are looking for freight, and these relationship will be increasingly valuable when capacity tightens. Now, I'm going to turn it over to Scott who will give you an update on our strategy, and then we'll go to Q&A. Scott.

Thanks, John. I'll go over our strategic focus, especially with regard to our sales force and technology. On recruiting, as you saw in the release our headcount in freight brokerage was up 668 from just 40 a year ago. We're accelerating our hiring pace and planning to add at least 400 net new sales in carrier procurement people in our existing freight brokerage operations this year.

To support our expansion, we want to thank the state of North Carolina which agreed to provide us up to $3.6 million in tax incentives over the next several years if we meet certain growth targets. This is in addition to the reward we received in 2012 which allows us to receive up to $3.2 million in incentives. Those of you who have joined us in our investor meetings in Charlotte have gotten a chance to see how well things are going and how quickly we ramped up our operations. This additional round of incentives will help support our next phase of growth there.

We continue to develop cutting edge technology to drive more productivity from our sales people. In April, we launched another major upgrade of our freight optimizer platform. The upgrade added to our capabilities in LTL, and we built new carrier rating engines that help us to better find the right carrier for each load. As we move through 2013 we're working on over 100 IT projects as we build out our proprietary systems. Two of the more notable goals for this year include adding additional carrier analytics as well as upgraded customer and carrier portals.

For our Expedite segment we're increasing our sales and marketing efforts in what is still a soft market. Our sales team is now able to offer more to our customers with the added capability of expedited air charter. And sales is leveraging our relationships with truckload customers to generate more expedite opportunities.

In freight forwarding, we continue to grow by adding new offices. We still have a very small share of the $150 billion global forwarding market and that represents a lot of opportunity. Just this week we opened a new Company-owned office in Orlando. This is in addition to the offices we opened in Montreal and Nashville in the first quarter. We now have 29 locations in our forwarding network, 11 of which are Company-owned.

So, we are delivering on all aspects of our strategy, we're growing the sales force and we're increasing the productivity of our existing sales force. We are investing heavily in our proprietary technology. We have attractive acquisition opportunities and our cold starts are ramping up. We see a lot of runway for growth and we feel confident in our 2013 targets and our long-term goals. With that, we'll open the floor for questions. Operator.

(Operator instructions)

Our first question comes from Justin Yagerman from Deutsche Bank.

Hi. Good morning guys. It's Rob on for Justin. You guys announced the acquisition of Interide last night. Could you give us a little more details in terms of the company. The purchase looks like a very good purchase price relative to revenue. Could you give us a sense of the company's net revenue margins as well as overall EBIT in terms of what you purchased that company for?

It had adjusted EBITDA of about $700,000. So, we paid about 5 times EBITDA which is the market going price for a company that size. Gross margin percentages mid-teens. Super solid company led by a super solid head of it. Sean Snow who is well known in the business, active member of TIA, built England Logistics up to $300 million and is ready to do it again with us. We were speaking yesterday about how big can we get Salt Lake City and he thinks he can do it to $250 million, $300 million over a number of years no sweat, so we're happy to support him doing that.

Yes, sounds like a nice opportunity, particularly in Salt Lake which is a good trucking market. When I think about the freight brokerage segment, your net revenue margins were essentially flat year over year despite headwinds from the growth of the cold starts which typically carry lower net revenue margins as well as a tough brokerage environment that you guys have touched on in the prepared remarks. Could you talk about some of the internal initiatives that are helping improve or at least hold constant XPO's net revenue margins and kind of where you think those can go over time?

Yes. Thanks, Rob. You're right, the cold starts are ramping up in terms of margin and March was the best freight brokerage margin in the quarter and it got better as we went through the quarter. That's being driven by a number of different things. Firstly, we are gaining scale. With each acquisition we get their lien histories, we get the carriers that they've worked with, and long-term and strong relationships with carriers. These are carriers we know well that we've worked with for many years in a lot of cases.

In addition to that, our technology continues to help us price better. We get more lien information, more information right up front to the sales people. On top of that, our training programs continue to develop as we develop our new people. And then in our cold starts some of our newer people are maturing and as they grow into their roles, the margins tend to move up. So, all those things together we're just getting better at pricing the loads and finding the right trucks for the loads.

Great thanks very much for the time.

Scott Schneeberger from Oppenheimer.

Thanks. Good morning, guys. Could you give us a feel for contribution from acquisitions in the quarter and previous quarters, in first quarter and also specifically with regard to East Coast Air Charter and where that heads and that impact? Thanks.

Sure. East Coast Air Charter goes into our expedite division and was $2 million for the quarter. Organic growth in the company was about 46% year over year. That should help you kind of back out in general what we have been doing.

Thanks. And could you speak a little bit to what you're doing on national accounts initiatives there?

National accounts. Okay, so we're calling the -- we have two layers of large accounts, what we call strategic accounts which are the 1200 largest shippers in the United States, and then we have what we call national accounts, which is the next 5000 largest shippers. On the strategic accounts we've got a team that we've put together. So, we've taken people from the organization who are very long in the tooth in this business and very experienced in dealing with tier one accounts and all the idiosyncrasies that go with that and we've made them in a dedicated group. It's a very, very strong experienced group that is solely focused on penetrating those 1200 accounts and doing it in a very intelligent way. And then we have -- they are called strategic account managers.

And then we have a larger group that we're still assembling called national account managers that's going after the next 5000 largest shippers. And then we have all the cold starts who are going after the transactional business and that is hundreds and hundreds of thousands of customers, and going after onesies and twosies there. So, we're attacking the market on every level, all different size customers.

Great. Thanks. If I could sneak one last one in. Could you update us on IT developments in the quarter? Thanks, guys.

IT, there's developments every day. IT is the most exciting part of what's going on in the Company. It's the only division that we never refuse a budget request. We rely on great technology, it's -- all we've got is people in technology. That enables us to have carrier relationships in an effective way and be able to market that to shippers.

So, we are always developing cutting edge technology. It's a very fast-paced agenda. We have over 100 IT projects on the drawing board at various levels of productivity. And we introduced the proprietary freight optimizer software in December, and this year we put out another major release that includes new carrier rating engine and also LTL upgrades. So, lots of stuff going on in technology.

Thanks very much.

Our next question comes from Kevin Sterling from BB&T. Please go ahead.

Brad, it seems like you guys, you're really ramping up your sales force and other operational personnel maybe faster than you may have initially thought. What's driving this ramp of personnel? Is it heavy recruiting by XPO, maybe it's the XPO brand name or financial incentives that Scott mentioned from the state of North Carolina?

All of the above. Here's how we look at it. We have, we're small. We have 1% of a $50 billion addressable market and the $50 billion is the most conservative and smallest way to define the market. You could define it as much larger because we compete with truckload carriers all day long, particularly on the larger customers. So, with only 1% of the market, why shouldn't we expand? We absolutely should. We should hire as many capable people who are able to be -- who have the necessary skill set and the personality and the motivation and put them through our training program which we put a lot of resources in to, and then empower them with our technology and give them a performance-based compensation system and are off to the races. They can make a good living and we can make a good living with them.

So, I think the reason that we're hiring so many people is because we've got a good product to sell, to recruit. Most of these people are young, it's their second or third job out of school usually, and they see the opportunity and they like the atmosphere. They like the energy. They come in. They visit the offices. They see how the excitement is there. They talk to other people and they're doing well and there is a big buzz about it.

I think we'll continue on that pace. And we're hiring about 40 or 50 a month to add, which is a significant number. I think apart from the number one player in the field, I'm not aware of anyone else who is still in 2013 hiring at that kind of level. So, a lot of growth from that hiring aspect.

Great. Now, is that mainly sales folks you're hiring or a combination of sales and operations people?

It's primarily sales people and carrier procurement people, we need both ends of the equation. And some percentage of that, but a minority percentage of that, is also the back office which is more scalable.

Okay. And maybe this is kind of early into kind of the life of XPO, but as you have grown and you have hired these people, can you talk a little about the about the retention rate you're seeing and kind of the stickiness of kind of some of these new employees so far?

Yes, Kevin. We've had a good experience so far. We are dealing with new sales people which is a hard job. So, that's why we focus so intently on recruiting the right people, and all the different things that [John Tamala] and our talent management team has put into place to find the right people in the first place from psychometric testing to multiple rounds of interviewing and interesting techniques that they employ to training very effectively. Marie's team has put together a very impressive and world-class training program that lasts over several months that has many different pieces to it from classroom-based training to structured simulation to mentorship programs, continuing education and, most importantly, direct coaching from our branch presidents which are very experienced resources in each of our branches, and then technology. As we empower our people to produce more with our technology, that should help retention as well. So, so far even with a new sales force it's been relatively low.

All right. Thanks, Scott. And, Brad, kind of shifting gears here. You highlighted in your press release a strong March from a revenue perspective kind of despite general lumpiness in the market. So, guys are taking share, you're growing. Could you common on April trends?

April is more or less flat, was more or less flat with March. We didn't see a big uptick. Excuse me, we didn't see any uptick but we didn't degrade. March was an important month for us because it reached a significant milestone. We did $44 million, which is a record month for us. We multiply that times 12, that gets you to $525 million. And then we bought Interide with another $27 million, $28 million, so we're hovering around the $550 million run rate now which we feel good about and puts us on a good path and gives us confidence that we'll hit our $1 billion revenue run rate by the end of the year.

Okay, great. And as you continue to do more acquisitions, are you seeing multiples rise?

Not really. There is not a lot of acquisition activity going on. There are a number of deals that are in the works and are being discussed, but it's pretty consistent. It correlates with size. The ones that are smaller go for lower multiples and the ones that are bigger go for bigger multiples. So, we look at all those, the small, medium, and big, evaluate the pros and cons, and factor in what the purchase price will be and see if it makes sense. If it makes sense, we go for it.

Okay. And last question here. You guys, you're doing very well in freight forwarding in the market when others appear to be struggling. What's driving your success? Is it your focus on smaller maybe underserved customers?

Partly, but partly it's our dinkiness. We're under $100 million in a $150 billion market, so things can be going on in the larger global $150 billion world that still don't interfere with our ability to grow and take shares focusing on smaller, mid sized customers. And we opened location and freight forwarding in Chicago, Houston, L.A., Minneapolis, Charlotte, Atlanta, and most recently Montreal. So, we've been growing. It doesn't fall on your head, you got to go chase it.

Right. Right. Gentlemen, thanks so much for your time this morning.

Thank you.

Bill Greene from Morgan Stanley. Please go ahead.

Brad, I'm just curious if you can touch a little bit on the fourth quarter EBITDA targets and is it as simple as at this point you've built up a corporate footprint such that you really just need to get the revenue now. And if the revenue is there, you feel very confident in that EBITDA target. I'm trying to think about puts and takes that might put you close to the zero number, maybe it's a little bit negative if the revenue is not there, but maybe there is another aspect of it I'm missing?

No, you're not missing anything. The only iffy part is the acquisitions. As long as we continue at the pace we have been going at and we buy another say $200 million revenue by the end of the year, we should be EBITDA positive. If we fail at buying another $200 million of acquisitions, which I don't think we will, but if we were to fail, then we wouldn't be EBITDA positive.

Okay, great. And when you look at as you've grown the scale, when you look at the buy rates that you're getting, so your ability to source capacity, have you noticed are there any data points you can share with us whereby we can see the price per transaction or the purchase transportation per load or however you want to think of it, that it's actually been dropping?

Yes, Bill. This is Scott. The best way to look at that is out of lanes. When we take on new lanes, we don't necessarily have a good network of carriers that we used to do that lane before and what is our ecosystem of people that we turn to, to move that lane? So, we tend to have lower margins on new lanes that we pick up and over a very short period of time, some one to two months, you tend to see margins move up as much as 10% to 12% on that specific lane. So, that gives you an idea as we improve the buying power on those lanes.

With each acquisition we bring on, it does bring lane history and we work to identify specific lanes where XPO is buying at better rates and have good ecosystem of carriers that maybe the acquisition target does not have those relationships and we can help the acquisition target improve their margins. And on the flip side, relationships that the acquisition target that has that XPO does not have and we integrate them, we've been seeing benefits from there as well.

Great. Thank you for the time.

David Tamberrino from Stifel. Please go ahead.

Good morning, gentlemen. Thank you if taking my questions. Wanted to start out with freight brokerage and kind of piggybacking off what Bill was just asking there. Could you give us kind of what your increase in revenue per mile kind of charged to customers was year over year? And then after that the increase in cost per mile that you may have seen?

We don't have that, but we'll get it to you back off line.

Okay. And then circling back to Interide, obviously took a look at the press release and heard the comments earlier. Just wondered if you could give a little bit more quantification around the headcount that they bring to XPO, the amount of customers they currently serve what the mix of business and kind of what those industry verticals are?

Interide has about 35 people in three different offices. They have about 900 customers. The types of customers that they have is very diversified. The biggest chunk is oil and gas. When I looked at Sean's top 20 customers, I only recognized one customer. So, it's not the large ones, it's more small, medium-sized customers.

Okay. And that mix of business, is that more shorter haul LTL, is it TO? What are you --?

Yes, they have a good chunk of LTL, particularly out of the Minneapolis office. And that's something they're very excited about and I want to learn more about. Most LTL customers don't have full truckloads, but a large percentage of truckload customers also do less than truckload. So, there is an opportunity to take their LTL product and cross sell it to our truckload customers at very little extra costs and energy and grow something organically very significantly.

And that's kind of -- is that the plan for the Minneapolis or is that the Salt Lake branch you look to roll that --?

That's Minneapolis.

Okay.

Salt Lake is more truckload, although they do some LTL as well.

Okay. And then as we're kind of thinking about this going forward with your goals through fourth quarter and with the recent acquisitions and kind of the cold start revenue growth that seems to be hitting a nucleus per office kind of faster than we would have expected, as well as the build out in operations in Charlotte, do you kind of believe that first quarter of '13 is probably your EPS loss inflection point?

Yes. Probably. Yes. Probably so.

Okay. Thank you for the time.

Peter Nesvold from Jefferies.

So, a question on brokerage. Clearly very impressive nine-fold increase in gross revenue over the last year. I look at the yields in that business, two things kind of jump out at me and they kind of come at it from two different angles. First, on the year over year basis it looks like the yields kind of flattened out here and I'm curious, on the one hand are we getting to that point where the yield compression in the truck brokerage business is sort of leveling off at least on a year over year basis? And then the other angle I'm kind of thinking through on this is that when I look like 12, 18 months ago versus the CH Robinson, the spread between your yields and their yields was sort of 500 to 600 basis points. And so maybe one could argue easier in market share while the spread is so wide. Now the spread is maybe 300 to 400 basis points and probably getting tighter. At what point does that 800-pound gorilla start to become a hindrance on your ability to grow organically? Thanks.

Okay. So two parts to that. First, on the net revenue margin. There is a couple of aspects for that. Number one is we're getting better which is expected. The maturity of our sales force is growing. The average tenure, people have been around longer so they've gotten more experience in the business and they're just getting better at negotiating and understanding the market and what loads to take and what not to take.

So, that is an internally generated improvement, but there's also an external aspect and you can be great and if the external market is lousy it's tough to be great. And you can be mediocre and if the external market is fantastic you can still do very well. So, externally where we see ourselves right now is it's not the greatest world to be a breaker. That is okay. We designed the business plan fully aware there are cycles and there will be times when it's very conducive and times inconducive and very supportive and not supportive.

Brokerage right now for the time being is for the market that you have pretty good balance and it's been balanced for a while now, a couple of years, which is a long stretch and for people who have been in the business for decades, people say that that's the longest they've seen it stay in this kind of equilibrium. Won't stay that way forever. Sooner or later the see-saw will tip one way or the other. In the meantime, we can still grow and we can still do well. We can still get margins that are decent. With respect to -- I didn't quite understand the second part of your question about the 800-pound gorilla.

Yes, so, my point there is that CH was kind of coming off almost 20% growth yields at 1 point, you were coming at the market with sort of 13% gross yields and CH is down sort of -- it's coming down to like 16%, 17%. And so as I'm thinking about it, arguably -- one could argue you were willing do stuff at lower yields than CH and so, therefore, made it a little easier for you to grab shares. So, as CH 's yields start to get compressed down to levels that are closer to you, at what point does that start to inhibit your ability to grab market share organically?

I don't like at CH as our primary competitor, not like other industries where I've been in where we had, like in last business we had Hertz and RSC and we were competing against them like all the time. Here, we are competing against just hundreds and hundreds of people every day that are all over the place. People have different niches. Very, very fragmented. So, if you look at truckload brokerage, you've got to look at truckload as a whole which is a few hundred billion dollars and about $50 billion of that is being going through brokers at the moment. Our view is that $50 billion is going to increase over time for reasons that we've talked about in various forms at the past.

If you look at CH, not up to date on their latest numbers, but I think they have something like $7 billion, $8 billion of truck brokerage, something in that neighborhood. We have at the moment a run rate of $550 million going to $1 billion, but even those two numbers together don't add up to a significant percentage of the whole market, so what is going on in one particular competitor of ours, even the largest one in the industry, isn't as positive to how our results are going to be. It's much -- the key determining factor for us is not competition from our view. The key determining factor for us is how much freight is there to compete over. There's always going to be competition. There's 10,000 truck brokers out there. Who's got different market shares will keep changing.

Right now you see the top call it 20, 30 brokers grabbing a huge amount of market share from the smaller tiny brokers. That's the trend that was going on even before we entered the market and has been accelerating in our view in the last couple years. So, that's something that's changing. And how much freight is out there, that's either going to be good or bad. If the market -- if the economy comes back and manufacturers are producing more freight that needs to be transported, retailers are selling more goods that have to be transported, it's level of competition is not going to make it worse. It's going to be better for us.

Great. Thank you.

Ryan Bouchard from Avondale Partners.

I'm just trying to get a sense of how the year-ago comp looked in brokerage gross margins. It was 11% and that was down 430 basis points. Do you recall, did that start soft or did it end soft or was it consistently soft through that quarter?

Ryan, thanks. It was relatively consistent through the quarter, although what was driving that was the cold starts which were just getting going at the time. They really didn't even have the benefit of Charlotte, which was just getting started. It was really just opening that in March of last year. And as that grew, as we started to grow our cold starts those were new lanes that we hadn't done before and we didn't have great relationship with carriers back then, and straight through the quarter the margins were lower on those new lines, but it did grow as a percentage of the overall mix through the quarter as our cold starts grew.

Okay. And so then I imagine we're going to see a year over year improvement on brokerage gross margins, but I was wondering if you could kind of help us ballpark that figure. Can it get to 14%-ish given your existing shift towards more acquisition mix? Excluding any other companies that you buy this quarter, can it get to a 14% level?

It could, but I want to make very, very clear. Our goal in the key performance indicators that we look at measure ourselves and compensate people internally is not the percentage of the gross margin, it's actual gross margin dollars. So, there can be instances where the gross margin percentage business is higher but the total amount of profit isn't great. And there can be other instances where the gross margin percentage is lower, but you've got a lot more business and you made more profit overall. So, we look at gross margin percentage and all things being equal you would rather have a higher one than a lower one, but it's not the be all and end all KPI to look at.

Okay. Makes sense. Then, in the corporate expenses the purchase services number sequentially that was down by $1.8 million. Can you tell us what the biggest delta was there sequentially because it fell from $4.4 million to $2.6 million.

Yes, that was -- this is John. The biggest change there was fees related to M&A transactions. So, we had a big drop in that. We also had a drop in the auditing fees and accounting fees in terms of that, what we pay KPMG for the work that they do for us.

Okay.

The biggest piece was M&A-related transaction fees.

Okay. So, that can tick back up whenever you guys, as you buy more companies throughout the rest of the year?

It could.

All right thanks guys. That's all I have.

Tyler Brown from Raymond James.

Hi. Good morning. Scott, I'm just curious. Can you help us bridge the 594 brokerage folks you guys ended 2012 with to the 668 you ended Q1? I guess my question, how many people came in from covered?

Covered added about 40 people.

40 people. And then did you say about 35 from Interide?

35 from Interide that's included in second quarter, not first.

Interide just closed Monday.

Right. Okay. Brad, just quickly on the employee turnout. I missed it. Did you give kind of an employee turn number and, if not, can you talk about it broadly and is that kind of tracking above or below your expectations?

Turnover is the enemy. If it's high turnover it means that we did not succeed at hiring the right people or we did not train them well enough or we did not give them enough of -- all the tools necessary to make a good living. We don't want high turnover, we want low turnover. Now, you don't want zero percent turnover, that's never going to happen. And the kind of turnovers that we're targeting depend on the level of growth and how we're doing. If we're hiring 40 or 50 a month, we maintain that rate for the rest of the year, you could look at voluntary turnover in the low 20%s.

Low 20%s. Okay. Is that kind of above or below how you are kind of thinking about the model in the beginning?

About the same. About the same, but we'd like to get it lower. We get it lower, that will be a beautiful thing.

And then, Scott, just lastly, I'm just curious about the mechanics of actually bringing a new sales person on. How long is the training period? And when does that person actually begin to generate revenues? And then what kind of productivity do you guys look for say a year out or two years out?

Training is something that is very, very important to be done right and to be done not too quickly. Training is something that is several months in a formal basis and takes several different forms. There's classroom-based training, there's structured simulation and role plays, there's on-the-job training, there's mentorship programs, there's continuing Ed classes, there's webinars, and probably the most important aspect of training after all the formal training is daily direct coaching from the branch president who has been there and done that over and over again for their careers and have been in every situation, just great coaches.

All right thanks.

Our next question comes from Ryan Cieslak from KeyBanc Capital.

Brad, first off I wanted to ask you, I think you had mentioned that overall freight trends were relatively flat into April. I wanted to get maybe your expectation for the coming months as the weather starts to warm up here. Are you hearing the trends are seasonally strengthening? Are you still seeing some relatively flat trends here in the coming months?

We'll get the seasonality. This year's going to be no different than every other year in terms of seasonality, but I don't think the amplitude is going to be so high. We're not banking and counting on buoyancy coming back. It doesn't feel that way anecdotally or intuitively. You don't feel lots of freight coming out of everywhere. And where you see probably the most weakness is on expedite.

On expedite, where our profit was down significantly was a big disappointment for us. There's not too much we could have done about it. As you saw with our competitors had similar poor results because the volatility isn't there. So, an expedite you need the volatility. So, auto production is high but it's not jerking around. So, the just-in-time inventories are working just fine, there's not a lot of disruptions so there is less expedite. And I always watch expedite because expedite sometimes is the leader for the rest of the trucking business, although it's got a little different factor with the volatility being more important.

On the general freight on dry van, I think that it's modestly improving but it's not improving enough that the routing guides are breaking down and bunches spilling over into the spot market. And I think that is the number one problem right now in the truck brokerage industry by far. That there is just not enough freight coming out of the routing guides, and you have the same number of competitors competing over a measly amount of crumbs that's coming out. That won't last forever. There will be a time where it will be good old days again and there will be either a shortage or a glut, but there will be an imbalance, and those disruptions will be a hay day for brokers again. I don't know when that's going to be. I don't expect it in the next few months barring some geopolitical events.

Brad, with the expedited market, are you seeing any stabilization in the last couple months or does the market feel like it is still relatively mixed and it could weaken maybe potentially going forward?

I don't see expedite getting worse. The sense -- but it's very difficult to predict expedite because, by its nature it's unpredictable freight. It's unplanned freight. I think it really comes -- the biggest contributor to expedite but certainly not the only one is auto. And as long as auto stays stable, slightly growing, they avoid expedite. Why should they pay expedite if everything just goes normally.

Life sciences on the other hand, there is an increase in expedite and a lot of that has to do with Mexico and the way they are designing their supply chains and we are all over that. Another big supplier -- user to expedite services is government related. Overall government related is actually probably down, although it is hard to get good numbers on that, but that's probably what we think but, again, it's something that we are a small market share in because it's something we didn't emphasize as much until last year and now we put a big full court press on it. We're able to grow that, but that's not the overall trend.

Okay. That's helpful. The other question I had is on some of the initiatives you guys have in place for the national accounts, getting some share there. Is that in terms of the sale cycle there, is that something where we start to see benefits in incremental revenue over the next 12 months or is that sort of a shorter sales cycle where maybe you can start to see benefits from, from some of the sales initiatives you have in place there maybe the back half of the year?

It is longer cycle for sure than transactional business. Transactional business on one extreme can be a cold call and they give a couple loads right there on the first call. On the larger strategic account, national account business it's typically done by RFPs which are done often a couple times a year. There's a vetting process to get into -- to qualify for the RFPs. And then you got to bid right. So, we've put together a -- we're doing this very methodically going for the tier one accounts.

The tier one accounts demand very flawless execution. So, if you have more than 2% or 3% service failures, you're out. They don't want to hear about it. There's plenty of other people who will service the account with that kind of service performance and that's who they focus in on. So, we only service the tier ones in about a half a dozen of our locations which are very experienced handling national accounts. And about 20% of our business right now roughly is with tier one accounts and that's mostly business that we inherited through acquisitions with companies that we're doing business with those large accounts already and we're growing. Our plan is to continue to grow and penetrate further. We've gotten some wins of things that were in the hopper already, but the amount growth momentum in that is absolutely going pick up and snowball. There is no question about that.

As we go through this year, introducing ourselves where we're not known yet with those 1200 customers and really getting to understand their needs and their supply chain and exactly what they value over and above the normal on-time pick up, on-time delivery, active billing, et cetera, what kind of technology requirements do they have, what kind of EDI do they work with, how can we mesh our EDI together with theirs. Once we really understand what they want and we position ourselves to fulfill their needs, I see that as being huge. When you look at our largest competitor, according to public filings, they have got and I think it's 40,000, 50,000 different customers but only a few hundred of them account for roughly 50% of it and they have some of those numbers not exactly right. Generally speaking, that's a ballpark.

So, those few hundred largest customers are big customers. So, you can get a tier one account. Maybe the first year they'll start you out with $2 million, $3 million of freight to see if you're for real. You pass the test, you ingratiate yourself, you show them that you're serious, you show them you take your losses when the market moves against it, you show them you perform well in terms of pickup, et cetera. Next year you can get $10 million or $15 million. A few years out those can grow into tens of millions of dollars just on a single account. So, those are big accounts, slower sales cycle, but could represent literally billions of dollars of revenue in the outer years. And, as you know, our business plan is not about this quarter or next quarter, obviously we manage the business as best as we can on a daily and monthly and quarterly basis, but that's not where the big kill is. The big kill is to build up a company that several years from now is $5 billion or so in revenue doing hundreds of millions of dollars in profit that we're doing business with a good percentage of the tier one accounts, a good percentage with the mid size accounts, and a good percentage with a small, medium-sized enterprise as well.

We have built out a branch network now, got 62 locations, 29 of them freight brokerage, 29 in freight forwarding, foreign expedite. We want to expand that branch network. We also want to grow five or six of our locations into mega locations, mega branches, the ones like in Charlotte where we didn't have anything a little over a year ago and now we've got roughly 250 people. Chicago, Lake Forest which we picked up with covered and is excellent with customer service on large accounts. Gainesville, 175 or so people there now, we're targeting 400. Salt Lake City now with Interide absolutely can be a large branch with hundreds of employees and $100s of millions of revenue. We're having a multi-faceted attack on the market and it all comes down to can we serve the customer well and if we can, we'll get the business.

That's great color. I appreciate it. The last one that I have is I wanted to get your opinion, Brad, on the impact on the increase in bond requirements for the industry later this year can have on your acquisition strategy and maybe just the number of potential acquisition candidates that could come to you, to your desk again in the back half of this year?

It doesn't affect us too much on the acquisitions because our view is if you can't afford to put up a $75,000 bond, we probably don't want to buy you in the first place. It is not like a huge amount, but you've got to remember there's 10,000 truck brokers out there and the vast majority of them are small, very, very small. So, for them to put up a bond of that size is sometimes significant, but I see those small brokers downsizing and some going out of business not just because of the bond, it's because the freight world is evolving. Shippers are more demanding in the services that they need, particularly on the technology side, and carriers have pressures to become more and more efficient and, therefore, the brokers which are in the middle of the carriers and the shippers have been to be more sophisticated and need to invest in their infrastructure in order to perform, in order to differentiate themselves from others. And the small ones just don't have the resources for that, but it's not because of the bond.

Okay. Thanks for the time, guys.

Jack Atkins from Stephens.

Just to kind of go back to something we were talking about earlier on the sales training and ramp cycle, just sort of curious to sort of drill down on that a little bit more. Just to kind of be specific, how long is the typical training cycle and then how long does it take before these new sales reps are profitable?

Sure, Jack. Scott. The training program goes over several months but that is including the on-the-job training. And then when you get the direct coaching from the branch president you're doing shadowing and reverse shadowing. So, there's different phases to it that go over several months and then the continuing education classes that go. So, really it comes out to eight to nine months in total from a total program perspective. Usually our sales reps are turning profitable after the first year. They tend to do $350,000 in revenue in the first year and that's on a fully blended basis with the carrier procurement people and the operations people needed to support them, and then by the end of the first year they're doing about $600,000 to $650,000 in revs by the end of the first year on a run rate basis.

Okay. That's helpful, Scott. Thank you for that. When you guys sort of look at the acquisitions that you've made over the last 12 to 18 months I know you gave up a run rate there on sort acquired revenue over the last -- revenue that you acquired over the last year, but when you look at the businesses that you purchased, can you maybe give us some color on how those businesses are performing relative to expectations because I know sometimes it can be hit or miss in the brokerage world with M&A. Just sort of curious if those are going according to plan, better than plan, or just any commentary there would be helpful?

Sure. M&A in any industry can be hit or miss. Fortunately, the deals that we've down have all been hits so far and no misses and I think that's probably because we have been going at a fairly measured pace. We haven't done dozens of acquisitions. We've done a handful of acquisitions and we are very picky and choosy of which ones we've done. So, let's just kind of walk through each one of them.

So, Continental Freight is beating budget. Kelron is profitable, which is something they couldn't say right before we bought them, and improving, so that's good. BirdDog is fully assimilated into Charlotte, they're a great contributor to Charlotte. It's fully integrated and assimilated right there on the floor. You don't know who used to come from BirdDog and who didn't. They were there in Charlotte and you just merged them together.

Turbo is we're adding people there. We're adding sales people in the Legacy Gainesville business but also we call it [Atlanta] even though it's in Gainesville just to separate it psychologically from the Legacy business which is a cold start that we have Amanda Miller growing and she is hiring people and training people and they're on the phones and they're doing well. They're adding new accounts. When we bought Turbo, it was doing roughly $124 million, $125 million in revenue. I mentioned earlier in the call their specialty is really these large tier one Fortune 500-type of accounts. We added a couple of those. So, what was $125 million-ish business is now $135 million, $140 million business, so that's a good thing.

East Coast Air Charter is good. We -- it hasn't been performing fantastically since we bought it in February through no fault of their own, it's just because of what's going on in expedite. You can even take it one further step along, air expedite is even more extreme than truck expedite because air expedite the customer needs air expedite if they've got a real problem and it's got to be solved so fast that a truck can't get there in a short amount of time it's needed. So, that's avoided unless you really need it. So that prospers and flourishes when a supply chain is all messed up. When it's kind of stable, doesn't do so well.

From an economic point of view in the two months we have had it, it's been a slight disappointment but I'm not worried about that at all because that's a choppy business. It's something that can be doing really great one quarter and it can do real lousy the next quarter and vice-versa. What I am excited about is I spent a couple of days with [Rehan] and John, the two senior sales people last week, and they've got a very careful plan drawn up to cross sell to our other 62 locations and to take advantage of the great relationships that we've got in the rest of our organization to market air expedite to them. So, I'm bullish about that one.

And then what else? Covered. So Covered we bought in February. It's in the final stage of integration which is faster than we have integrated others. Of course, we didn't have currency issues or language issues like we had in some of the other ones, but the integration is in its final stage. Covered I'm excited about. Covered in Lake Forest and in Dallas. These are experienced people who totally get what it takes to give passionate service to tier one customers and we are going to grow it. And we've taken Pat Gillihan who is one of the three former owners there and migrated him to strategic account manager and he is working with the people at Covered to get more business and there is plenty of business to go after. Interide, a little too early to judge. We only bought it two days ago, but all the rest of them that's the state of play.

Okay. That's really helpful color, Brad. Thank you for that. And then last question for me, I guess it's a two-part question. When you think about your long-term goals that you set out at the beginning of this road, $4 billion to $6 billion in annual revenue by 2016 and you think about the breakout between organic growth now and acquired growth or cold start versus acquired growth, has that mix changed any because it seems like you have sort of ramped the organic side of the business faster than originally expected? Would be curious to hear your thoughts on that. And also when you look at the cash on the balance sheet and the capital that you got at your disposal, do you think $206 million is enough cash to hit the long-term bogey that you put out there?

Yes. So, on the organic growth I'm really proud that we had 45% organic growth. That's a heck of a lot of growth organically. I'm real good about that, I'm very proud of the organization that we were able to deliver 45% organic growth. It's a huge amount of organic growth and we're going to keep at it. Organic growth is the least expensive type of growth and it's not buying someone for 6 times EBITDA, it's internally generated and it's very, very sustainable. So, I like it a lot.

Having said that, acquisitions absolutely are going to be a big part of our life going forward. You're not going to be able to grow to $5 billion just organically in the time frame we're talking about without doing acquisitions. So, we will do acquisitions. The other reason we want to do acquisitions is it gives us lane density. It makes us a player in more lanes where we're more in the flow of what's going on. It's easier to find a truck and it's easier to figure out what's the right rate to quote because you're in it. You're in the game all day long. You're in the ebbs and flows of how it's going up and going down by the hour. So, we want to get bigger and bigger so we get better and better in more and more lanes.

In terms of the financial capability, with a little over $200 million of cash plus the accounts receivable facility which sooner or later we'll put in and maybe one turn of debt, we're not going to do huge amounts of debt but maybe it's not our plan but maybe another turn of debt, we could get up to the lower end of the $4 billion to $6 billion of revenue, but it wouldn't get us on the higher end. So, somewhere along the line whether that's sooner, medium, or later, we'll revisit what is the right timing to issue equity.

Okay. Thanks so much for the time, guys.

David Campbell from Thompson Davis & Company.

Just wanted to follow up on what you side, Brad, a minute ago about cross selling. That the expedited division, not the expedited division, the East Coast Charter acquisition was beginning to think about marketing their services through your other branches. I haven't heard a lot about cross selling before from your Company and as I've seen, I've heard other brokers and freight [forwarders] talk about cross selling over the years and I've heard about your predecessor, Express One, talk about it and cross selling expedited. It never seems to work. Do you think that's a viable way of getting organic growth? What's your attitude there on cross selling?

I do think cross selling is a viable way to grow and it's a tried and true method of growing in many different industries. I think you need a certain critical mass in order to do that successfully. You need a certain depth of relationships and a number of relationships. I know in the series of sales meetings that we have had over the last few months, it is a big theme where we have -- so we have a sales force that is just an expedite sales force. We have now a sales force of tier one accounts. We have another sales force that does air expedite charter. We have another sales force that does freight forwarding. Those sales forces had been operating more or less in silos independently. That's not the case any more.

There's a lot of cross sharing of information and introductions, so in our expedite group we have long-term relationships with good, important customers that go back long lengths of time and there is no reason why those people can't introduce their counterpart on one of the other, for instance on the tier one account sales force to those customers and get the benefit of the good well as opposed to just coming in cold. So, that's a big plan. It's something we really want to do. It's not a magical formula of cross selling in a vacuum, it's more of a methodical plan to capitalize on relationships, great relationships that we have in parts of the company to introduce the sales forces in other parts of the company to get the business, to get the foot in the door with credibility from day one.

So, you haven't had any success in it so far in the last 12 months, I guess, but that's because you haven't had the density and the teams and so forth?

We haven't really started it in full force until a couple of months ago.

Yes. Okay. Great. And. Scott, you mentioned about the tax incentives in North Carolina. The fact that you started with some and now you have $3.6 million more, could you just explain really what all that does?

Sure. It's tax incentives based on the hiring plants and based on the number of employees and it's our payroll tax will go down over time.

So, it is a payroll tax that goes down?

Yes.

And you've got some of that when you opened the Charlotte office and now you have added -- you've gotten some more and this payroll tax decrease will go on for, what, five years?

Yes. The original $3-point something million that we got from the state of North Carolina envisioned us hiring a couple hundred people over several years and obviously we've blown through that in the first year and went back to the well and said, hey, we're doing what's great for the state. We're hiring people, we're creating jobs, good jobs, good paying jobs. Can you help us support our growth going forward more? And thankfully they gave us another $3-point something million and we have the similar type hiring goals as we had in the past and I'm pretty sure we're going to hit them.

But you don't run the risk of your cost going up $5 million or $4 million?

We don't get the money unless we hire the people but we are going to hire the people.

Yes. Right. Okay.

By the way, David, we really appreciate that money from the state because in the first year when we hire a sales person we don't make money on them. We're training them. We're teaching them the business. We're showing them the ropes. We're showing them parts of the business they're not necessarily going to be involved in but for the sake of having a comprehensive education about the business and be able to sell intelligently to the customer, we want to train them. So, we are really investing in them. It's a real out-of-pocket cost. Until they start making like $11,000, $12,000 a month in gross margin that's when we start breaking even and it usually takes about a year. We hopefully with our training programs maybe we can pull that up a few months, but it's not going to be after three or four months. So, getting help from the state is really something that is highly appreciated and we have other states that we're pursuing similar endeavors.

Yes. And then once the productivity goes up substantially, obviously the loss of the tax incentive is not significant relative to that, although you keep getting more if you keep hiring people, so it sort of never really ends?

It bleeds in over time.

Right. Okay. Well, the rest of my questions -- wait a minute. You mentioned organic growth of 45% in the first quarter, was that the whole company? What part of the company was that?

That was the total company.

That's the total company grew that much? Okay.

Not bad.

So, I mean it's terrific. I mean, there isn't anybody else I know growing at 45%.

We won't be able to do that forever, but as a young company in our early years it's great to do that.

Right. Yes, fantastic. Okay, thanks.

Robert Hoffman from [Princeton Opportunity Partners].

Thanks for extending the call. Just a quick question. On the one hand we have a transportation market that is a little poky and on the other hand you're pursuing an acquisition strategy. It strikes me that the fact that the transportation market is poky is actually good? Are you seeing that acquisition targets are more amenable to the discussion because of the way the market is?

Yes and no. Generally speaking, these are businesses that have little if any debt. The positive cash flow, even if the external market is sluggish, they make a little bit more this year than they were previous year which is more than they made the year before that. So, they don't have a gun to their head usually to sell right away. I can't say that because it is sluggish that people are lowering their prices dramatically. Maybe it's a little bit lower pricing because the profits aren't as high, so even if the multiple stays consistent it's a lower purchase price. I guess in that way I would agree with that.

Yes, I guess calling gang busters and people have the tendency to raise the multiple that they want?

Yes, and it's also a higher amount, too, so it gets a little euphoric.

Right okay. Well, thanks.

Thank you. Okay. Well, I see it's eight minutes past start of the market. Sorry to go past the market open. Thank you very much for your time, everyone. We appreciate the interest and will be talking to you soon. Have a great day.

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