XPO Inc (XPO) 2013 Q2 法說會逐字稿

Welcome to the XPO Logistics second-quarter 2013 conference call and webcast. My name is Dawn, and I will be the operator for today's call. (Operator Instructions). 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 security 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 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 except to the extent required by law.

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 information regarding the forward-looking statements and non-GAAP financial measures, in the Investors section of the Company's website at www.xpologistics.com.

I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Thank you, operator, and good morning, everybody. Welcome to our call. With me today are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Karl Meyer, the CEO of 3PD, which, as you probably know, we recently agreed to acquire. Karl will be available during Q&A to answer your questions about Last Mile.

As you saw in the numbers we reported last night, we delivered some exceptional growth. Revenue was up 151% year over year, and gross margin dollars were up 128%. Some of this came from acquisitions, and we're also driving outsized organic growth in our freight brokerage business. Organic growth in brokerage was up 65% year over year.

The investments we are continuing to make in long-term growth, particularly sales headcount, resulted in a loss as expected. Our results were also negatively affected by a soft expedite market, higher-than-expected transaction-related and litigation costs, and most important, the timing of acquisitions. We expect to close 3PD in the third quarter, and we remain on track to be EBITDA positive in the fourth quarter.

Now I'd like to review the quarter in the context of five avenues of growth that are embedded in our existing business. First, we're continuing to scale up our current network of 62 locations. We're doing this by salespeople, giving them world-class training and empowering them with cutting-edge technology to make them as productive as possible.

In freight brokerage alone, we've increased our customer-facing headcount to 788 people, up from just 92 in the second quarter of last year. You can see the benefit of scale and the robust organic growth we reported in our freight brokerage business last night.

In addition, our salespeople now have more services to offer our customers. LTL, less than truckload, is a great example of a huge growth opportunity staring us in the face. Currently we are doing only about $20 million of annual revenue in LTL Company-wide, yet almost all of our 8500 truckload customers have LTL business, and we're taking steps to tap into that.

Our acquisition of Interide in May brought us Sean Snow and a lot of LTL expertise, as well as an LTL technology platform that we've just rolled out in all of our sales offices. Now that we have combined Interide's carriers with our own network, we are already getting better LTL rates from carriers.

The second avenue of growth embedded in our model is our strategic and national accounts program. Our strategic accounts team is one of the most experienced in the industry, and they are getting a great response from large shippers. We recently won business from 26 large accounts, representing the potential for over $75 million in annual revenue. This includes some major wins, not just in truckload, but also in cross-border, less-than-truckload, and expedite. The team is actively bidding on 82 additional accounts right now, and we're just getting started.

The third avenue of growth, we're continuing to ramp up our cold starts. The eight cold starts we've open to date are on a combined annual revenue run rate of over $90 million, and we're in the process of opening our ninth freight brokerage cold start in the Cincinnati metro area. Cincinnati is designed to be our fifth mega-branch, which means it has the potential for exceptional growth because we can recruit from a large pool of sales talent in the area.

Fourth is our acquisition pipeline, which is very active. Most of the targets we're working on are in truckload brokerage, but we're also looking at attractive opportunities in expedite, managed transportation, intermodal, LTL and Last Mile.

And the Fifth Avenue is our acquisition of 3PD, which will immediately accelerate our growth rate. 3PD serves an end market that is growing extremely fast, a combination of the outsourcing trend by retail shippers, and the growth of eCommerce is creating strong demand for logistics providers with 3PD's specific type of expertise.

In addition, 3PD provides a service that is within our core competency of non-asset logistics and is complementary to the services we offer now. We will be able to move freight all the way from the factory to the final destination. Our value to customers will be based on a complete cradle-to-grave supply-chain solution and constant growth in our carrier base. These capabilities make us uniquely attractive to large shippers who want to consolidate their supply chain relationships into fewer providers.

In sum, we are very bullish about the opportunities embedded in each of these five avenues of growth. We are currently on an annual revenue run rate of about $550 million, and we remain on track to achieve our outlook for a $1 billion revenue run rate by year end with an EBITDA positive performance in the fourth quarter.

More importantly, we are right on plan for a long term goal of creating a world-class company with several billion dollars of revenue and several hundred million dollars EBITDA.

With that, I'll ask John to review the numbers.

Thanks, Brad. I'll start by giving you some details on the performance of our three business units during the quarter, starting with freight brokerage.

Freight brokerage revenue was up 587% from last year to $95.4 million, and gross margin dollars increased by 726%. $3.5 million of the revenue increase came from the mid-quarter acquisition of Interide on May 6; the balance of the increase came from three sources; our acquisitions of Turbo, Kelron, Continental and BirdDog last year; the organic growth of our cold starts; and our acquisition of Covered Logistics in the first quarter.

Freight brokerage gross margin percentage increased to 13.2% in the quarter, which was higher both year over year and sequential. The margin improvement was largely due to higher margins from our cold starts. We are seeing a nice pickup in gross margin percentage again in July, and we expect gross margin in our cold starts to continue to improve as we scale up the sales force and build our presence with customers and carriers at each location. The organic growth in freight brokerage continues to be powerful. The second-quarter increase in organic growth year over year was a robust 65%, as Brad said, and the eight cold starts are on a combined revenue run rate of over $90 million. We're encouraged by the trajectory of our cold starts as a whole, both in terms of revenue and margin improvement, and we see a lot of opportunity to keep building them up.

In expedited transportation, our revenue increased 3% to $26.4 million for the quarter. XPO Air Charter, which we acquired in the first quarter is included in our expedite numbers. The higher revenue contribution from Air Charter was partially offset by a year-over-year decrease in revenues from our over-the-road expedite business in the quarter.

Expedited gross margin percentage was 15.9%, which is unchanged from the first quarter and down from 20% a year ago. The year-over-year decline in margin reflects continued softness in the expedite market during the quarter, as well as the addition of Expedite air charter. Air Charter has much higher revenue per transaction than over-the-road expedite but at a lower margin. Expedite truck capacity tightened somewhat in early July, and we are pleased that margins had expanded in recent weeks.

Our freight forwarding business achieved strong growth, despite what continues to be a flat freight forwarding market. Revenue increased 17%, and gross margin was up 230 basis points compared with the same quarter last year. The revenue increase was driven primarily by growth at our Company-owned locations and an increase in international shipments.

Gross margin percentage in freight forwarding increased to 13.3% in the quarter, up from 11% last year. The increase in gross margin percentage was driven by our investments in Company-owned locations. On a year-over-year basis, operating income in the freight forwarding business increased 119%, and this was despite higher SG&A from the investments we made in opening new locations in Los Angeles, Houston, Chicago, Minneapolis and Montreal.

On the corporate side, SG&A expense increased to $10.7 million from $5.4 million in the second quarter of last year. The increase was primarily due to a larger headcount in corporate shared services and an increase in purchased services. Purchased services included $1.8 million of transaction-related costs, $1.5 million of litigation costs, and corporate SG&A also included $1.1 million in non-cash share-based compensation expense.

For the Company as a whole, EBITDA for the quarter was a loss of $12.4 million, reflecting the investments we've made to build the foundation for a multi-billion dollar company. Net interest expense was $3.1 million for the quarter, which was from the convertible notes that we issued last September. This included $1.4 million of noncash amortization of bond discount.

As expected, our effective tax rate in the second quarter was negligible. In the third quarter, however, as a result of the 3PD acquisition, we expect our effective tax rate to revert to a normal level in the range of 35% to 38%. The acquisition will also cause a one-time tax benefit of approximately $10 million in the third quarter, and this will be on top of the benefit from the quarter's pretax loss. Of course, we won't be a cash taxpayer for some time given our NOLs.

Earnings per share available to common shareholders was a loss of $1.00 for the quarter. We had $178 million of cash on our balance sheet at June 30, and we're in the process of putting in place an accounts receivable facility to supplement our liquidity.

Now I'm going to turn it over to Scott, who will give you an update on the market conditions and 3PD. Then we will go to Q&A. Scott?

All right. Thanks, John. From a macro perspective, we see steady transportation demand. Truckload capacity has been relatively balanced for about two years now. We haven't experienced any material change in that equilibrium, despite the hours of service regulations that went into effect July 1.

At XPO our gross margin dollars improved sequentially in July, which was encouraging in what is typically a slower seasonal month. In August we expect to see demand from back-to-school retail, a pickup in auto business and the produce season in the Northwest.

From a long-term perspective, we are growing the business in tune with secular trends in the markets. Many shippers are choosing to consolidate 3PL services with fewer and larger providers that have deep capacity and a broad range of services. 3PD is a major step forward for us in this regard.

When we completed the 3PD acquisition, we will now be one of the only few 3PLs that can provide an end-to-end solution. We've positioned ourselves to sell freight brokerage, freight forwarding, expedite services, and now, Last Mile Logistics all through XPO's single source. We already have an extensive carrier pool and service range, but more importantly, we shown that we're committed to growing our capacity and scaling up our customer-facing operations. This resonates with shippers who want to consolidate their supply chain partners.

We've spent a lot of time with 3PD management over the last few weeks, and both organizations are excited about the growth potential of the combined company. Karl and his team have started working with our strategic accounts group to meet with some of the largest retailers in North America, and we have 925 customer-facing employees at XPO who are eager to offer Last Mile Logistics as soon as 3PD comes on board.

We also continue to differentiate in technology. 3PD has strong proprietary technology we use throughout XPO, especially for customer experience management. They have four patents pending, all related to their customer-facing IT. One feature that we particularly like is their electronic customer satisfaction scorecard which they use to continuously improve their service levels in Last Mile. We can apply this same technology to other areas of our business. We plan to integrate 3PD's platform with ours over the next 18 months.

Our own IT team at XPO continues to stay at the leading edge of the industry. We recently added sophisticated carrier rating engines that help our branches find the optimal truck for each load, and we will be rolling out new customer and carrier portals and other enhancements in the coming months.

In summary, we have established a differentiated value proposition for XPO with multiple avenues of growth. We are poised to take advantage of both cyclical and secular industry trends. We've built a prominent brand in a short period time, and it's getting us business with customers and carriers. Morale is high at XPO, and we have entered the back half of the year with a lot of momentum.

I am going to open up the call for Q&A. Operator?

(Operator Instructions). Justin Yagerman, Deutsche Bank.

It is Rob Salmon on for Justin. Brad, clearly we saw very favorable responses to the 3PD acquisition and the equity markets. Could you discuss a little bit more about how XPO and 3PD customers, their response to the acquisition, and if your thoughts about the cross-selling opportunity between these two services has changed at all since these meetings?

I'm going to pass it over to Karl because Karl just flew up from Gainesville yesterday where he is meeting with his team, his sales team and our sales team, and there was a lot of positive energy. Go ahead, Karl.

Yes, I think the customer response has been extremely positive. We were proactive in reaching out as we went to the process to ensure that they understood the broader service level that we were going to be able to bring to the table, and it was very well received.

I think from the synergies standpoint, the two areas that we are going to focus on first are first, implementing our rate tariff for our transactional business into the selling infrastructure that exists at XPO. Within the current 3PD structure, we've only got six salespeople. As we implement and integrate that tariff with XPO, will have over 850 people selling in that service.

The other piece of it is really working with XPO's national accounts team to penetrate the large retailers and the manufacturers where we have very strong relationships. We've already seen some movement there, and we expect by the end of the year that we will have significant opportunities in front of us with the large retailers and manufacturers.

Thanks. That's helpful. You guys had highlighted a real strong pipeline of acquisitions on the call with roughly 100 targets. Could you give us a sense of where XPO's cash and availability under the revolver are on a pro forma basis post the 3PD acquisition, as well as give us a size in terms of the range of targets you guys are currently analyzing?

Sure, Rob. It is John. So, as we mentioned on the call for 3PD a few weeks back, we have a debt commitment from Credit Suisse for a term financing to fund the acquisition of 3PD. We have our current cash balance. Once we do that transaction, once we close 3PD, we will be down to about less -- right around $20 million, a little less, of cash on the balance sheet. And I mentioned on the call that we're doing an asset borrowing facility, an AR facility, that we can use to borrow against our receivables. That basically will certainly fund any organic growth and also can support acquisitions, as well. So that's where we will stand from a capital standpoint.

As far as the pipeline goes, our sweet spot really hasn't changed a lot. We're still looking at deals that are $20 million to $200 million, but we're also looking at some acquisitions that are larger than that. So we are staying opportunistic. There's lots of opportunities out there to do accretive transactions, and we will definitely go after those if we think we can create shareholder value by doing the deals.

And John, in terms of availability under an AR facility once that's finalized, should we be thinking about roughly 85% in terms of receivables that can be borrowed against under a facility like that?

That is right. So we're looking at an 85% advance rate against the AR.

All right. That is helpful. Thanks a lot for the time.

Thank you, Rob.

William Greene, Morgan Stanley.

Maybe we can just do a quick follow-up on that. If you look at the 3PD acquisition, a little bit more expensive than some of the deals you've done. Do you feel like the market is a bit more competitive, or is that just a unique aspect of this transaction?

I don't think it has changed, gotten better, gotten worse. In the last couple of years, multiples have stayed very steady. It depends on size. It's a 5 to 10 times multiple kind of world with the smaller deals toward the lower end and the bigger deals towards this high end.

3PD wasn't that expensive when you look at the growth rate. Here you've got basically about 10 times trailing; about 9 times this year and about 7, 7.5, 7.6 times next year.

That's fair, and a lot of these depend on the specific transaction, anyway. I just didn't know if you felt like you could see more competition out there in terms of auctions or something that would drive prices up.

Not really, no.

Brad, can you talk a little bit about hours of service? There's been obviously a lot of press on this. Do you see any tightening going on when you look at your carrier base in the month of July so far? Is it too soon to tell? How do you think about that?

We have seen some slight tightening, particularly in expedited, which is unusual for July because usually volume is off. But I don't know weather we can trace that to hours of service or not. It's probably a little too early to tell for that, as I'm sure you know. Hours of service, a lot of carriers don't have electronic onboard recorders yet. It is going to time to phase that all in.

Can you tell -- with your comments in expedited, was that a supply comment, or did you mean to say demand got better in July?

Demand got better. Usually in July in expedited is a bad month because you've got the turnarounds and the auto companies slow down. That didn't slow down as much as we expected. It actually picked up a little bit.

And you are suggesting that could be some spillover because folks are having trouble finding capacity, or was that something unique to expedited?

I think it is unique to expedited. Well, truckload also had some slight tightening. I don't know if you can trace that two hours of service. And that is normal ups and downs around the edges.

Okay. And then just last question, John I was hoping to get a point of clarification because I want to make sure I understood you correctly. I think you said in the second half on the freight brokerage side, you expect gross margins to go up -- first, did I understand that right? And if so, is that just scale that's driving that, or what causes the gross margin to go higher?

Well, it's really being driven by our cold starts. So as our cold starts -- they are growing quite rapidly, and the margins are also rising at the same time. So one of the things that we're seeing is that as that business gains scale, we can really start to leverage our relationships with carriers. We have been able to increase margins over time, and as that business becomes a bigger mix of the total freight brokerage, it is having a positive impact on the margins.

Okay. So it is basically the scale argument.

And tenure.

And tenure -- productivity of the sales force. Okay. Great. Thanks for the time.

Thank you, Bill.

Scott Schneeberger, Oppenheimer.

You guys highlighted in the press release that productivity per brokerage employee improved quarter to quarter, and then obviously you added a lot of new hires, net new hires. Could you speak to that dynamic if you expected to persist? Also, what type of productivity measures do you guys track internally to get a look at sales force? Thanks.

So we look at a lot of productivity measures. That's a real key part of the business model. I personally look at three things. I look at gross margin dollars per sales rep per month. I look at gross margin dollars per load. I look at number of customers served. And each one of those metrics is going up and to the right, so it's good.

So if you look at December to July numbers, gross margin dollars per sales rep per month in the cold starts has increased 79%. And also in the cold starts, the gross margin dollars per load from December to July increased 53%. And the number of customers served in the cold starts increased 64%. So that tells you that even though we been hiring more people and we have been hiring lots and lots of people, and the pool has a significant component of people who are new, the productivity is still kicking in. So that means the people who have tenure, the people who are a little longer in the tooth, they are maturing very quickly, which is gratifying.

Thanks. With regard you just addressed gross margins, John, in the back half improving on scale and tenure, I assume that that excludes any 3PD impact if you even put that in the freight brokerage segment. And I assume that does not include acquisitions. If you can just clarify that. And then also with regard to SG&A in the freight brokerage business, what should we think about for trends in the second half? Thanks.

Scott, it is Scott. On gross margin, absolutely. 3PD has doubled the margins that we have in the rest of the business, the pent-up -- they have 30% gross margins and EBITDA margins that are north of 10%.

We haven't made a decision whether or not we will combine that with our freight brokerage business. We will be working with KPMG on it. It certainly falls most within our freight brokerage. They will be working with a lot of the same customers. They're working together on a lot of accounts, but we haven't made the decision yet on how that will be reported on an external basis.

From SG&A, we're going to continue to hire. So from a freight brokerage standpoint, our gross margins will be increasing with tenure, with the technology we put in with our -- as we just mature and our cold starts improve. But SG&A will continue to increase because we expect to continue to add headcount. We added about 97 people on a net basis through hiring just within freight brokerage that are client-facing personnel in the second quarter, and I think that trend will continue.

Thanks, guys. Thanks for taking the questions.

Thank you, Scott.

Kevin Sterling, BB&T Capital Markets.

Brad, can you expand a little bit more on some of your recent business wins? I think you said you guys had participated in 26 national beds, $75 million in brokerage revenue, maybe 80 or so more bids in the pipeline, you're targeting national accounts. It sounds like they tend to be more national in nature, therefore larger.

These bids, are they coming from some of your acquisitions? What's driving your foray with some of these national accounts? Is it your service offering? Your product offering? Is it your recent acquisitions? The Rolodex getting into these accounts? Maybe you could expand a little bit more.

Sure. I think it's a few things. First of all, that is just Jeff Battles's group who is heading up strategic accounts. He's got some fantastic guys on that team. He has got Greg Ritter, who I'm sure you know, and Dennis McCafferty, and some others who are just very, very experienced people in the truckload business. And they have a very compelling value proposition that we are able to put in front of large shippers in that we are young; we are hungry; we are very serious oriented; we are completely committed to world-class service; we are totally committed to on-time pickup, on-time delivery; we don't give back loads, and we have a significant amount of capacity.

XPO Logistics didn't exist two years ago. We were the 17th-largest truck broker last year. We will probably be the sixth or seventh largest this year when the survey comes out. And in a few years, we will be number two, after Robinson.

So we have capacity that is growing, and a few years from now, we're going to have more capacity when capacity may be tight. So it's a long-term relationship that makes a lot of sense.

Now do the acquisitions help? Absolutely they help. Because some of the acquisitions come in with relationships with Tier 1 accounts that now can be grown, and we can get greater share of wallet from those. And we've had several examples of customers that -- companies we've bought, we're doing business with, and the volume has literally doubled or tripled. So it's promising.

That whole strategic accounts Tier 1 effort is doing very well.

Okay. Great, Brad. That was very helpful.

Lastly, on the acquisition front, you talked about the M&A pipeline being full. You are looking at a lot of things. And I think you said earlier, growing your LTL business. But it seems maybe when you look at your product service offerings, maybe if there's one whole, it is intermodal. Could you talk about your thoughts on intermodal and maybe possible opportunities you see there?

The problem with intermodal acquisitions is there is not a lot of them. So of our list of 100 short list of acquisition targets we're looking at, I would say about 80 of them are in truckload brokerage, and the other 20 are spread out between -- well, now it's 5 -- there were 6 that were Last Mile with 3PLs, now it's 5. And there's a handful of others that are in the other categories.

So you can do the math; it is one handful of intermodal ones.

So the way we've got about that is we are talking to some IMCs. Haven't been able to put something together that works for both sides. So in the meantime, we've gone an organic route where we've gotten contracts with two of the large rails, and we're plugged in right on their EDI and it's working. We don't have containers and we don't have boxes, but we've got access to the fleet and it's working.

Okay, great. That's all I had today. Thanks so much for your time.

Thank you.

Tyler Brown, Raymond James.

Now that we are a little further along in the story, you brought on a lot of people, I'm just curious if the productivity curves that you are seeing from the salespeople are maybe above, below, or in line with what you were expecting with whenever you originally put the business plan together?

They are right on line. So if you look at -- what we said about the cold starts, we said we'd be on a $5 million to $10 million annual revenue run rate after year one. Well, right now they are about a year old on average. It's a little tricky because some of the larger headcount increases came in the later years. So on average it is about -- tenure is a little less than a year in terms of how old they are. And they are doing $90 million of our 8 offices, so they are doing a little over the range that we thought they would do at this point.

Everything has been ramping up as we expected.

Okay, good. So do you believe that the improvements in the productivity, is that more a function of training, or do you guys think you're doing really good job picking the right people?

It's a combination of factors. You've got to hire the right people to begin with because you can have great technology, you can have great training, you can have great leads, and great mentors with great culture, but if you don't have the right people to begin with, they don't have the right personality to sit there and bang out calls all day long to service customers really passionately.

So getting the right people is a big, big, big component of that, and that's helping us manage the turnover, as well.

But you can have the great people, but you have to have the other components as well. So it's several things all together. It is hiring the right people, giving them good training, giving them great technology, giving them good sales and marketing tools.

Okay, perfect. And then just a couple of quick housekeeping items, particularly on 3PD. But I may have missed it on the 3PD call, but how many people do you expect to on board as a result of 3PD?

This is Karl. You mean employees?

Yes.

We have about 650 employees geographically positioned across North America, USA and Canada.

Okay, perfect. And then John, as we've progressed a little further on the purchase accounting, can you give us an update maybe on what the intangible amortization expense might be?

Well, we are still working on that with our auditing firm, and we have some outside advisors doing a lot of heavy lifting on the valuation. So we're not quite there yet in terms of a number, but we will be giving folks an update as soon as we have some sense of what it is going to be.

Okay. Perfect. I appreciate it, guys.

Thank you.

Ryan Bouchard, Avondale Partners.

I wanted to see if you could give us an update on the range for corporate expenses. The last time that you had guided us, you said maybe $33 million to $37 million for the year. And so far year to date, you are tracking just a touch higher than that range. So if you can help us out there, that would be appreciated.

Sure. We definitely had an uptick in the second quarter. And as we said in the release and repeated again on the call this morning, a lot of that had to do with the M&A transaction costs and the litigation costs. And so it's going to be a little bit hard to predict because the M&A costs will be related to our M&A activity for the rest of the year. And the litigation is litigation. It is completely unpredictable. So that's the biggest variable in really giving an estimate for what we're going to do for the rest of the year.

If you look at -- if you take out those items for both the first and second quarter, we're running at a pretty steady level without those costs included. And so we would expect it to stay pretty much level at probably about $30 million without those additional costs and then try to figure out what the M&A litigation costs are going to be on top of that is the hard part.

Okay. So --

It will be at the high end of that range or maybe slightly above just based on, again, based on the M&A activity that we incurred during the rest of the year.

Okay. So on the $1.8 million in transaction-related costs, was that due to 3PD due diligence, or was that something else?

It was partly 3PD, but it was also other transactions that we were involved in that hadn't closed yet. But we put a significant amount of work and effort into it during the second quarter.

I see. So then should we see something related to 3PD also in the third quarter, or was that all booked in the second quarter?

It was just a little bit of it in the second quarter, and you will see the fees related to the capital raising and advisory fees for 3PD in the third quarter when we closed the deal.

So a larger part in the third quarter?

Yes.

And then the $1.5 million in litigation costs, there weren't any litigation costs talked about in the last conference call. Are these -- the $1.5 million this quarter, was that something new, or was that a continuation of a prior event?

We actually did talk about litigation expenses in the first quarter, and we said they were about $1.1 million in the first quarter, and then that was $1.5 million in the second.

But these are primarily related to our friends in Minnesota.

That is what I thought. I just wanted to make sure. I didn't know if that was something new.

No.

Okay. Well, that's all I have. Thanks, guys.

Thank you.

John Mims, FBR Capital Markets.

I got on a little late. I'm sorry if you talked about this. I had to jump off for call. But when you look at the EBITDA-positive guidance for fourth quarter, and Scott, a couple of your comments that I did catch on that you are continuing to ramp up SG&A spend as far as bringing new people on and hiring the right people, how do we get there? What is the risk of not being there? Do you need to scale back the amount of investment you're putting in the new branches? Is it is purely a scale thing now that you've gotten critical mass with some of the existing cold starts plus acquisitions, and then, again, can that carry into first and second quarter of 2014? I'm just trying to get my arms around this EBITDA goal a little bit better.

Sure. On the fourth quarter, it will be a measure of productivity. So we increased sequentially our revenue and our gross margin dollars per rep from 1Q to 2Q. We expect that to continue because we're getting more productivity out of our reps, despite the fact that we're adding more employees.

So we will get some more productivity out of existing base while we're hiring. We're not going to give up on hiring. Hiring is a best use of cash for us. We are going for the big kill over the next several years, and that's a great present-value investment for us.

On 3PD it adds $40 million in EBITDA this year, and it has been growing. And they've done very well in June and July, and everything is looking up and looking good.

The one thing that you can break out is say, well, are there 1 times? Are there integration costs and closing costs that could shift around in 4Q and catch us by surprise? That could always happen. So that is the wildcard a bit on the 1 times in integration in closing good but in general, we feel pretty good about the guidance.

: Now excluding 3PD, which is a little bit of a different animal, but a lot of the earlier acquisitions took a fair bit of I guess you could call it integration costs. But it really it was buying sub-performing, slightly underperforming brokerages and making them better and putting a lot -- investing over the long term. Does that -- I mean are you just at a scale issue where you're still doing that, but it's not as big a deal on the overall piece? Or when you look at other SG&A running at 20% to -- I guess, 17% to 20% of quarterly revenue, does that start to scale back in the next couple of quarters?

I will let Scott answer the bulk of that question, but that is one part of that I would take issue with. And that is on the acquisitions, Kelron was a fixer upper, no question about that. And we bought it at a price that reflected that.

The others were fine companies when we bought them. We can't take credit for taking companies that were mediocre or subpar and fixing them up hugely because they were great companies to begin with. And Continental Freight, great company. It has just gotten greater by having access to Charlotte. Turbo, fantastic company, 25-year-old company with amazing relationships with Fortune 500 companies; converted out in Lake Forest, again a fantastic company. Guys really get the business, and Interide is a fantastic company. So you go down the list. If you just take out Kelron, they are all blue-chip companies.

Right. I get that. But there's still -- there's a period time of investment of getting them ramped up on the new system, of training them to use it and what not. So let's see if I mischaracterize that.

Right. When you buy a company and close it, yes, there's a little bit of upheaval for a few months there when you are putting them on to the new IT system and getting them onto the HR platform and so forth. But they are all great companies. I just want to make the record clear about that.

Yes, sure. So I guess the question is --

In the future, we are investing in each of those acquisitions. So we will be adding people to those acquisitions and growing them. So I wouldn't expect -- I think we will get leverage over the SG&A over time, but I think we're going to make those investments in SG&A to grow them.

Okay. That's fine. We will do the rest of it off-line. That's all I have for now. Thank you.

Thanks, John.

Brian Cieslak, KeyBanc Capital Markets.

The first question I had is going back to the recent account wins on the national and strategic initiatives, congratulations with that. But the $75 million that you highlighted, how should we be thinking about that rolling in into the back half of the year? Is that something that you have an opportunity gradually as it is ramped up? Was there any of that here in the second quarter? I am just trying to think of the cadence of that revenue going forward.

That is more ramping up in third quarter and into fourth quarter. The national accounts team we expect to be a significant contributor over the next several years. It's a very experienced team. We been getting great receptivity, obviously, from some of the biggest shippers out there, but it's really a 2014 story to make a significant impact and in 2015 and 2016, but it's just getting going now.

: Okay. And then Brad, you commented a little bit about what the value prop has been to win some of these -- to get some of this new business. Has it been a little bit easier than you would have thought in terms of going into some of these larger accounts and getting some of this business? Just maybe talk a little bit about the experience and how you feel about it going forward.

You know, it has been. I didn't know what to expect, really. Because we started off with the Company going after small- and mid-sized shippers. We wanted to have enough size and be a player in enough lanes and have our chops together enough that we could genuinely make a value proposal to the large shippers saying, we can actually service these accounts.

I am very impressed with the receptivity that we have gotten, and I'm excited about it.

Okay. Great. And then on the cold starts, you guys have shown some nice ramping in there in terms of the overall productivity and the revenue generating from the 8 that you currently have established. What is the expectation of that ramp into the back half? Should it be a similar type ramp that we've seen in the last couple of quarters? Maybe where do you see the annualized revenue from those 8 cold starts by year end, if you would be willing to give some of that color?

We haven't given out that much yet. It will depend on the timing, and we're just getting going Cincinnati. That will also be a contributor toward the end of this year.

We expect the ramp to continue. The tenure of the employees continues to improve, so we expect that to continue along the pace that you have been seeing already.

Okay, great. And the last question I had for you is just if any idea exactly when the 3PD acquisition can close here? I think you had initially said sometime in the third quarter. From a timing perspective, should we be thinking about later in the quarter as this point?

Somewhere between August 15 and September 15.

Okay. Great. That's always had. Thanks, guys.

Thank you, Ryan.

John Larkin, Stifel Nicolaus.

Karl, you mentioned that 3PD has 650 employees. I assume that does not include the owner-operators. Is that a fair assessment?

John, that's true. We have -- our network is with 900 carrier partners, and they represent from a resource standpoint between 1750 and 2000 units running for us on a daily basis.

Because some of those folks have more than one unit, I presume?

Correct. Right.

Now are they viewed as owner-operators or independent contractors? And are you at all concerned about some of the legislation that has been proposed in New Jersey and New York? Do you feel like your relationship pretty much is rock solid in terms of defining these folks as independent contractors?

I do. I think we've worked really hard to ensure that we are operating that fleet best model we can. All of our carrier partners operate under their own motor carrier authority, their own EIN or entity. They bring their own tools to the trade, and they provide their own insurance. So our relationship with our carriers is no different than Express Brokerage is with their truckload carriers.

Thank you. That is very helpful. On the notion of ramping up the cold starts rapidly and hiring folks, could you maybe give us a little more granular detail on the philosophy with respect to the kinds of people you go after? Are you looking at experienced transportation brokers that have a book of business that you can bring in, train briefly, turn them loose on your system and they are off to the races?

Or are there a certain number of people coming in that might have the right psychological profile that require more in-depth training? One of your public competitors recently extended their training program out from something like six weeks to six months in order to ensure that those folks were more productive and that the turnover rate was diminished. Can you talk a little bit about your philosophy in terms of how you ramp up those cold starts so rapidly?

Sure. So there's two parts to that question, carrier procurement people and customer sales reps.

On the carrier procurement, we have a larger percentage of people who are industry veterans who have been in the business. On the customer sales part, I'd say roughly about 1/3 come from the business. People have been doing it for 5 or 10 years and have relationships and know the business real well. They still go through the training program. It is an abbreviated part to get synced up with the way we do things, but they obviously know the business very well.

The other 2/3 or so are mostly recent college grads, but we tend to hire people who've already had a job or two after college. We tend not to hire people -- although we make some exceptions -- kids right of school, so people have some experience in the job workplace.

And with respect to the training program, yes, training you want to go on for as long as possible. I mean you can train -- there is no harm in overtraining. And the more mentors you have in the Company and the more different facets to the training program, the better.

When someone representing XPO Logistics is talking to a customer, whether they are a shipper with a $1 billion transportation spend or whether it's a small customer, they've got to represent the Company well. They've got to represent the Company professionally; got to know what they are talking about; and they have got to value that customer's freight.

Thanks. That's very helpful. You talked about opening a mega-branch in Cincinnati, which just coincidentally happens to be the headquarters location of probably the current number 2 in the truck brokerage arena. I thought that was an interesting city to focus on as your new super branch. What makes you think that there's a large number of good people to recruit in Cincinnati given that one of the big competitors has already, in theory at least, picked over the folks that are positioned to be the best truck brokerage in that region?

Well, that particular competitor is one that we have extreme respect for and admiration for, and we think they are fantastic. And we think they've grown really well under the radar, kind of stealthily and just done a fantastic job. We don't intend to hire a whole bunch of people from them, partly because we honor competitors' non-competes, and they tend to have strong the noncompetes with their employees.

But also because the types of people that we hire are generally a bit different than their model, although their model is working great for them. They tend to go for the people right out of school. We tend to go for people who've already had a couple of jobs out of school. So we won't exactly be competing head on for the people.

Thanks. That's very helpful.

And then --.

By the way, John, I would add one thing. They did come into Charlotte before we went into Cincinnati.

That's correct. But I think the reason they went to Charlotte was that they felt that they were maybe running out of the recent college grads, to your point, but they historically have not gone after the folks with a little more experience in other industries.

Charlotte is a good place to recruit from. There are several competitors in Charlotte.

Okay. And then the other thing that was a big event during the quarter, there was a large transaction of a transportation management company that does have some transactional brokerage capability, and that company traded from one private equity firm to another private equity firm. I'm sure that you all looked at that in a lot of detail. Do you worry at all that private equity, because of their willingness to kind of lever transactions up quite heavily, is a difficult group to compete against, especially when you're looking at some of the larger strategic acquisitions as you look to grow your business over the next couple of years?

Well, I won't comment on that specific transaction because we like to respect the privacy and confidentiality that we agreed to when we look at companies, but that happened to be a real fine company. We didn't happen to get it. Private equity sometimes will play in this space and be aggressive competitors; and other times they won't. I think it is semi-random.

You won't see private equity in the smaller deals. That's our bread-and-butter. They just don't like to do little deals. They like to do big deals.

On the bigger deals, they often will be in the mix. A lot of times sellers don't want to sell to private equity if they are going to particularly stay on afterwards. It's just a little bit of oil and water. They prefer to sell through a strategic.

Got it. And then maybe just one last question, probably for Karl. The Last Mile world is really a huge land of opportunity, and I guess there are two segments of it. One is the package delivery world and one is the larger items, appliances, televisions, things of that nature, which I guess is more your specialty.

As the model for eCommerce changes and folks like Amazon take on a bigger and bigger role and try to be increasingly more responsive to what their customers need, how do you see that changing your business? For example, do you see same-day delivery being a factor in your sector, and is there a way to adapt your model for delivering more than just the large items that require installation and that are not really suitable for moving through what I would call the conveyorized partial-delivery companies?

Sure. Holistically in this space what we see is brick-and-mortar retailers are trying to pivot static supply chains to move from delivering truckload quantity and pellet quantity to end consumers. And the virtual players are building out their infrastructure to focus on the drivers in that space, which is velocity and free shipping.

Holistically, that this just creates -- that is the opportunity in the Last Mile. Because all of it means more disintermediation of retail stores and more volume going straight to the end consumer, or jobsite, or business.

On the second part of your question there, historically we have focused on larger-than-parcel, the high service market because, one, it's our core competency, and two, it's a great margin business. As we continue to grow out our transactional business, which today is only 10% of our revenue, we see apertures in the future to move into parcel and be differentiated.

I think that's just a massive opportunity for the Company, and to the extent you can utilize some of the great systems and so forth you have in that market, you can really differentiate yourself, I would think.

We definitely see opportunity there.

Sounds great. Thank you very much.

Thank you, John.

Jack Atkins, Stephens.

So just going back to 3PD for a minute, do you expect 3PD to be able to bridge the gap on cash flow to cash flow breakeven, or do you still expect to be in a negative cash flow for the next couple of quarters until you build your scale out?

So our cash flow will turn positive after our EBITDA does. CapEx is relatively minimal, and if you look at the free cash flow conversion, especially 3PD, it is off the charts. They have 80% to 90% free cash flow conversion with low CapEx, $2 million to $3 million in CapEx kind of rate on a run rate basis. And then their working capital is only 4.5% of sales. Versus XPO, we are more 7.5% to 8% of sales. So their working capital investments not as high.

But as we grow, we will be investing in the working capital of both XPO and 3PD. So excluding working capital, it would be sooner, and then with working capital and the growth, it will be sometime a little later.

Okay. Thanks to that. Thanks for that detail, Scott.

And then I know we talked about the revolving credit facility, John, but I was just curious if you could maybe walk us through some of the other funding alternatives here.

Brad, when would you consider maybe exercising your warrants? With that be some time over the next 12 months, or is that something later on in the plan?

And if I remember correctly on the Q1 call, you all said that you would not need to access the equity market for additional capital to get to the bottom end of that $4 billion to $6 billion revenue range. Is that still the case here?

So on the warrants, they are 10-year warrants, and they just started less than two years ago. So there's 8 more years on that.

In terms of accessing the equity capital markets, we will be opportunistic on that, and we will keep an open mind, and we are actively looking at the various capital market alternatives. We have a board meeting coming up later this week, and we'll see where we come out on what and when.

There's several different capital markets that are open to a company like us at the moment.

Okay. And Brad, just one last clarification from your prepared comments. You said I think in your opening statement that you expect to be a several billion dollar revenue company. I think the stated goal in the past has been $4 billion to $6 billion. Is that $4 billion to $6 billion range by 2016 still the goal, or has that changed any? Any clarification you can give on that would be helpful, thanks.

Thank you for pointing that out. I didn't mean to signal anything other than the exact same thing I've been signaling all along, $4 billion to $6 billion within a few years -- same exact goal. Nothing has changed whatsoever, and we are right exactly on track where we want to be.

Okay. Great. Thanks again for the time, guys.

Thank you.

David Campbell, Thompson Davis.

The freight forwarding gross margin target, do you have a target that we can use there in freight forwarding for 2014?

In freight forwarding specifically, we do expect the general trend to move up from where we are. There's two dynamics going on there. One, we are growing our Company-owned locations which have higher gross margins. So that will be moving it up. That will be partially offset by the growth we're continuing to have in international. In international, we are doing a lot of import and export ocean. Those come at a much higher ticket on a revenue-per-transaction basis, but the gross margins on that dollar will be a little bit lower. So in general, we will work our way up in the mid-teens range into that 14%- to 15%-type range. Hopefully we can go above that some day, but that is kind of a good range for now.

You know, David, you have been covering the Company longer than literally everybody. You were covering it for years before we took control of it when we were still called Express-1 Expedited Solutions. So you have a good context then. Freight forwarding is actually a bright spot in the Company. There revenue was up 17%; their gross margin was up 230 basis points. EBITDA was up 150-something percent. So I'm sure (multiple speakers) it hasn't always been that case. I'm just sure you must be smiling at the end.

It's a huge market. Express-1 was actually growing very nicely in that business before you bought them. They acquired the company in Tampa, Florida and put them in the sea freight business.

So it's a huge potential. And, of course, it's growing faster right now than the air freight, which isn't growing.

Right.

I think you are in the right place there, and Tampa is still the leading source of a lot of your sea freight business?

We're doing a lot in Tampa. We're doing a lot in Miami that also came with the acquisition. Miami has been growing pretty significantly. And then Houston. So Houston is a cold start that we got going, and their import-export business has been extremely strong, especially in the oil and gas sector.

Yes.

Dominick Muzi has been running that business for us, and I've got to tip my hat to him. He is doing a good job.

Yes. And did I miss it, but you haven't talked about 3PD's revenues; is that correct?

No, 3PD's trailing 12-month revenue is about $325 million, and in 2013 it will be around $350 million.

Correct. In the first half, the business is doing extremely well. Revenue is up 12.5%. EBIT is up 36.3% for the first half.

Right. Well, obviously extremely well-managed because we have another one of your competitors. Forward Air is continually having trouble with the Last Mile business. Is there anything -- is it just management, is that basically it that the difference is?

Yes, I think it is management, our geographic presence, scale, experience, and then a big piece of it is technology. I think we differ in our space in that we measure every single thing we do in real time, and it drives quality processes in real time that hold everyone organizationally accountable, our employees as well as our contract carriers. A huge differentiator for us.

Right. And earnings in the first quarter of 2014, is it too soon to talk about 2014? We know the fourth quarter is going to be cash positive EBITDA -- EBITDA cash positive. Is it too soon to tell about the first quarter next year?

It is.

Okay. And shelf registration, you had one in May. You didn't use it in the second quarter. Was that really to cover the financial sting for 3PD?

Not really. Because we're not paying with a whole lot of shares. The share component of 3PD is less than $10 million, and a big chunk of that is Karl, actually. And another [200 people] that rolled over their shares. The shelf is there for when and if we tap the equity market, it is available to us to use.

Right. But so far in July, there hasn't been any software debt sold, that's correct, except for the Credit Suisse financing?

That's right, David. There's been no stock issuance.

Right. Okay. Right. Well, I think most of my other questions have been asked and answered. Thank you. Thank you very much.

Thank you, David.

Thanks, David.

Thank you. I will now turn the call over to Brad Jacobs for closing remarks.

Well, thank you, everybody. We appreciate your participation in the call, and we will be seeing you soon. Have a great one. Bye.

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