XPO Inc (XPO) 2013 Q3 法說會逐字稿

Welcome to the XPO Logistics third-quarter 2013 conference call and webcast. My name is Dawn, and I will be the 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 meanings 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 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 the call, the Company also may refer to certain non-GAAP financial measures as defined under the applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the Company's earnings release and the related financial tables. You can find a copy of the Company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the 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, Dawn, 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 our last-mile business, 3PD. We're also joined by Will O'Shea, the Chief Sales and Marketing Officer of 3PD; and Tavio Headley, our new Director of Investor Relations. Tavio was most recently an analyst at Jefferies, covering transportation, and before that he was an economist for the ATA, the American Trucking Association. We're happy to have Tavio on the team, and I'm sure he's going to be a huge help for all of you.

As you saw in the numbers last night, we delivered exceptionally strong revenue growth in the quarter. Our revenue was up 173% year over year. Some of that came from our acquisition of 3PD, which we completed in August, but our organic revenue growth was also very solid. Companywide, we had 42% organic growth in the quarter, and in brokerage we delivered 146% organic growth.

We also increased our margins. Gross margin dollars were up 251%, and we increased gross margin percentage in each of our business segments. In freight brokerage, we bucked the industry trend and delivered 100 basis points of gross margin improvement year over year. And sequentially, our brokerage margin was up 40 basis points.

As expected, we reported a loss in the third quarter. The largest contributor to the loss came from the strategic investments we've made in long-term growth, including salespeople and technology. These investments are paying off, and I'm happy to say that we are on track to report positive EBITDA in the fourth quarter and expect to exceed our plan for $1 billion of revenue run rate by the end of December.

Our latest acquisition, 3PD, has made a seamless transition to XPO. As you know, we became the largest provider of heavy-goods last-mile logistics when we bought 3PD. Last mile is one of the fastest-growing areas of logistics. Our 3PD team is working on a sales pipeline that's the most robust it's been in years. We are actively bidding on last-mile business in appliances, furniture, electronics, and building materials. The integration of 3PD is off to an excellent start.

There are some strong tailwinds driving growth in last mile. Retailers and manufacturers are making strategic investments in direct sales channels. Right now, for example, we're talking to a large potential customer that's a major electronics manufacturer. They're building out a national fulfillment network, and they need last-mile services.

E-commerce growth is even more of a factor. E-commerce has been growing at 3 to 4 times the rate of traditional retail shopping in brick-and-mortar stores. And heavy goods purchases on the Internet are on the rise, too.

Our acquisition pipeline is full. We currently have several truckload brokers in our sites, and we're also looking at attractive opportunities in last mile, expedite, LTL, and managed transportation.

Our cold-start program is also on track. Our initial eight freight brokerage cold starts are on a combined annual revenue run rate of over $120 million. At the same time, we've been increasing the margins at these locations. Gross margin at our freight brokerage cold starts as a group increased sequentially in each month of the third quarter and increased again in October as well.

We currently have brokerage cold starts underway in Houston and Richmond. This brings us to three freight brokerage cold starts opened in 2013 and 11 opened over the last two years. We also recently opened a freight forwarding cold start in Dallas. So that's 22 cold starts total across freight brokerage, freight forwarding, and expedite.

We're very happy with the progress we've made across a number of fronts. We've become one of the leading freight brokerage companies in North America, and that's up from just one brokerage location two years ago. We are the largest provider of last-mile logistics, we're a top-five player in expedite, and we have growing businesses in LTL, intermodal, and freight forwarding.

Companywide, we are currently handling over 17,000 deliveries a day. We've been executing our strategy very precisely with a lot of discipline, and it's enabling us to grow at a fast clip.

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

Thanks, Brad. I'll cover the performance of our three business units during the quarter.

Freight brokerage revenue was up 374% from last year to $152.6 million, and gross margin dollars increased by 583%. Our midquarter acquisition of 3PD added $46.5 million to the revenue increase in the quarter. The balance of the increase came from our acquisitions of Turbo, Covered, and Interide and from the organic growth of our cold-start locations.

Our freight brokerage cold starts are now on a combined revenue run rate of over $120 million. And our freight brokerage business overall had strong organic growth in the quarter, up 146% year over year.

Freight brokerage gross margin percentage increased 18.1% for the quarter. This increase was driven in large part by the 3PD acquisition. But even excluding 3PD, gross margin was higher both sequentially and year over year. This trend carried over into October, when we saw another nice pickup in gross margin versus September.

In last mile, our 3PD business continued to benefit from strong retail sales of heavy goods, as well as an increase in e-commerce. 3PD's revenue increased 18% year over year. Gross margin in last mile was 28.4%, which is lower than it had been in prior quarters. This was due to higher than seasonally normal delivery volumes for several retail customers in September that resulted in higher carrier costs. So far in October, volume growth in last mile continued to be strong, and our margin has trended back up.

In expedited transportation, our revenue increased 6% to $25.1 million for the third quarter. Revenue increased due to the contribution of air charter, partially offset by a decrease in revenue in our over-the-road expedite business. Gross margin percentage for expedite was 18.1%, which is up 220 basis points sequentially and up 150 basis points from a year ago.

Using lane analysis and selection, we strategically focused our fleet on more profitable lanes. And as a result, we increased operating income to $1.7 million for the quarter from $1.4 million last year. Our freight forwarding business achieved strong growth despite a continued soft freight porting market. We grew revenue by 10.5% and improved gross margin by 270 basis points compared with the third quarter last year. This business is performing well. Excluding the one-time $3.1 million noncash charge to amortize the CGL trade name, we increased operating income 165% from last year.

On the corporate side, SG&A expense increased to $14.2 million from $8.7 million in the third quarter a year ago. The increase was primarily due to an increase in headcount in our corporate shared services and an increase in purchase services. Purchase services included $3.2 million of transaction costs, primarily related to the acquisition of 3PD, and $1.5 million of litigation costs. Corporate SG&A also included $1.2 million in noncash share-based compensation expense.

Net interest expense was $6.4 million, which was primarily from our convertible notes and the $3 million bridge commitment fee related to the acquisition of 3PD.

Our tax benefit for the quarter included a $10.3 million release of the valuation allowance against our deferred tax assets due to the deferred tax liability generated by our acquisition of 3PD. We expect our effective tax rate for the fourth quarter to revert to a range of 32% to 34%.

Our liquidity position remains strong. We had $67 million of cash on our balance sheet at September 30. And last month, we entered into a $125 million ABL facility with the potential to increase the borrowing capacity to $200 million through an accordion.

With the ABL, we can borrow against our receivables at a rate of LIBOR plus 175 to 225 basis points, depending on availability.

Now I'm going to turn it over to Scott, who will give you an update on our growth initiatives, and then we'll go to Q&A. Scott?

Thanks, John. I want to start by adding some color about our operating environment. From a macro perspective, the market continues to be relatively steady and balanced. Truck pricing in the third quarter was up only slightly on a year-over-year basis, which is how it's been going for most of this year.

Business picked up over the last few weeks after a slow beginning of October, possibly due to the government shutdown. In this type of low-growth environment, coupled with balanced capacity, it is no surprise that brokerage margins in industry have been pressured. Despite this, we're improving gross margins consistently as we execute our plan. We're pricing better and we're purchasing transportation better as our sales reps gain experience and the algorithms in our freight optimizer have more data to mine. At the same time, we're growing organically at a rate in excess of 40%. And in a more favorable brokerage environment, when the market is no longer balanced, we should get an additional boost.

Within brokerage, as Brad noted, the last-mile sector has been strong. Home goods retailers and manufacturers have posted solid results. Black Friday is not for several weeks, but the first November promotions hit the stores this week. And with our growing exposure to Internet sales, we expect Cyber Monday to be a big driver for us.

Looking further out, favorable housing trends have given retailers and manufacturers the confidence to invest in going direct to market. And as a result, we're participating in a lot of national bids.

Seasonally, the fourth quarter is typically slower than the third quarter for brokerage. That includes last mile. But given everything we have going on, we still expect to have sequential revenue growth in freight brokerage in the fourth quarter.

Here's some key strategic areas that are driving our growth. One of the most exciting things going on at XPO right now is the traction we are gaining with the 1200 largest shippers in North America. We started our strategic accounts program in April. Our strategic accounts team is highly experienced, and they understand the nuances of working with large shippers.

In the third quarter, we did business with 36 new strategic customers, and we're actively bidding on business with 164 new strategic accounts. We expect to see the significant benefits from our strategic accounts program as we move through 2014.

Another major growth opportunity for us is less-than-truckload. LTL is a $50 billion market, and we do only about $25 million a year in LTL revenue. Virtually all of the more than 9500 truckload customers we do business with now have some LTL needs. So we have thousands of warm leads to grow that business.

In the third quarter, we rolled out a customer Internet portal, and shippers have been quoting and dispatching LTL loads on the site. We've trained each of our offices on LTL, and we've rolled out an LTL certification program for our salespeople.

In the last four months, over 800 customers have shipped LTL loads with us. And last month, we onboarded some major LTL customers. We are excited by how much progress we've made in a short time, just scratching the surface of the LTL opportunity.

I also want to mention the rebranding of our freight forwarding division that we announced last night. We used to call this division Concert Group Logistics, or CGL. It's now called XPO Global Logistics, with a new website at xpogloballogistics.com.

This brand is more in line with our positioning as a complete supply chain customer partner. We want our freight forwarding customers to know that XPO stands ready to help them with brokerage, LTL, expedite, and last-mile needs as well. We currently have 28 freight forwarding locations operating under the new brand, including our latest Company-owned cold start in Dallas, where the team is focusing on international exports. We're growing this business under the strong leadership of Dominick Muzi.

So there are a lot of different ways we're executing on our plan. We're driving significant organic growth through our cold starts, our strategic accounts, LTL, last mile, and acquisitions. We're improving gross margin through investments in recruiting, training, and technology. We're rapidly approaching a $1 billion revenue run rate and positive EBITDA. Morale is high, and we have a lot of momentum. We're excited about the growth embedded in our model as we head into 2014.

I'd now like to turn the call over for Q&A. Operator?

(Operator Instructions) Justin Yagerman, Deutsche Bank.

Just a couple of housekeeping items, and then I'll ask a strategic question. John, do you have an estimate for what you think DA is going to be in the fourth quarter?

It should be basically what we did in the third quarter plus another $2.3 million for a full quarter of 3PD.

Okay. All right, I just wanted to get that out of the way. And then the ABL that you put into place, what's your current availability under that facility?

Well, we could borrow up to 85% of our AR on that facility. So our current eligible AR is just about $115 million. So we can borrow up to 85% of that in terms of availability.

Okay. And the litigation that you guys have been reporting, is that still CH Robinson, or is there other litigation that is going on concerning the business?

No, it's primarily CH Robinson.

Okay. All right. And then I guess as we think about acquisitions on a go-forward basis, you listed a bunch of different silos that you're considering. How do you think about those and prioritize them on a go-forward basis? Obviously, 3PD was a big step in what appears to be a good direction. Just curious, Brad, how you're thinking about the opportunities right now.

We are thinking of the opportunities opportunistically. So we are looking at deals in last mile. We are looking at deals in expedite, in LTL. We're dallying in some opportunities in managed transportation, and obviously truckload. So most of our acquisitions over time will be truckload, because that's going to be the biggest part of our business going forward. But we're looking at these other ancillaries as well. And it really depends on when the stars line up for which kind of transactions.

I'm assuming that applies to size as well.

Size? We're looking at big, small, and medium. So it's really all over the board. Our approach to acquisitions is to cast a wide net, look at lots of acquisition opportunities at the same time, and be very disciplined with making sure we dot all the I's and cross all the T's before we get to the finish line.

Yes. Last one. On the margin, I actually had the same phrasing as you used in your prepared remarks, that you bucked the trend of the industry so far. On 100 basis points of improvement in freight brokerage, you did talk about LTL becoming a bigger part of the mix in the quarter. How much of this do you think is technology driven, and how much of it do you think is mix driven in terms of what's going on in your business as it evolves?

Well, it's hard to nail that down, but I can hypothesize with you. But I am very proud that, despite what most of our competitors are showing in terms of margin compression, our freight brokerage had 100 basis points margin improvement year over year and had 40 basis points margin improvement sequentially.

What's causing that, I think, is internal actions. I think we're hiring the right people, to begin with. We are giving them proper training. We're empowering them with technology that's getting increasingly better at pricing and at truck-finding. And I think all those factors together are showing margin improvement, and plus the maturation of the salesforce. We've hired lots of people over the last couple years, and the experience maturation is getting higher and higher as they have more months under their belt.

Okay. Great. Thanks for the time, guys. Appreciate it.

William Greene, Morgan Stanley.

Brad, can you comment at all on some of the dynamics in the quarter, hours of service -- did that affect you? What are you kind of seeing in the markets as we look out in the fourth quarter now relating to changes in the regulatory landscape?

We're not seeing much from hours of service. The main thing we hear about hours of service is our carrier base complaining about it and saying that it wasn't thought through very carefully and wasn't designed by anyone who's ever driven a truck, and it's hurting their productivity.

But you really can't say that it's -- at least we really can't say, in our observations and experience, that it's tightening up capacity in any appreciable, noticeable measure, because if it is, there must be something else that's creating supply, because, apart from some pockets of tightness, our boards are getting cleaned up pretty consistently by midafternoon, which to us is the main measure to know whether there's tight or loose capacity.

So right now, we would categorize it as the same old, same old as it's been for about two years now, very balanced equilibrium, not extraordinarily difficult to find a truck. And we don't see that changing, barring some unexpected new circumstance, anytime real soon.

When you look at kind of how you just described the market and you think about the differences in the market, maybe excess supply or even excess demand in that world, is this a good market for you, or do you prefer a market where -- look, more demand is just always good for everybody?

Let's be clear, this is a lousy market for us, and it's a lousy market for truck brokers all across the board. And the last couple of years have been lousy. And we've had a situation where we're growing a business in its early stages in the lousiest part of the cycle, where shippers don't really desperately need you to find capacity. They need you because they don't want to have a room full of 500 people calling trucks all day long. But they're not desperate to find the capacity.

And on the trucking side, they can find freights. It's not impossible to find freight. So you don't have either of your constituents on either side -- the shippers or the truckers -- really urgently needing your services, so you really got to hustle a lot.

Okay. Good. I have a question on some of the longer-term guidance metrics. So near term, we've got the fourth-quarter comment on EBITDA. Do you think that EBITDA comment is dependent on more acquisitions, or you're run-rating at a point where you feel very confident you're going to get there anyway? And then I have one sort of longer-term one after that.

Hey, Bill, it's Scott. We're on track to do the positive EBITDA. We could potentially close acquisitions, or not. Acquisitions are very hard to figure out when they will close, as Brad said.

When you look at the quarter, from the third quarter to fourth, we will improve our productivity. Our people have become more productive over the same number of salespeople. 3PD will be in the results for the full quarter, as you think about it sequentially.

We had almost $5 million in costs from litigation and M&A. Now, we're continuing on M&A activity, but that sounds like a high number. I would expect that to move down. So if you think about the productivity improvements and all the other things we have going on, we're heading in the right direction.

Okay. Very helpful. And then when we look longer term and we're trying to see when we will kind of normalize in terms of getting the steady-state EBITDA targets we've talked about, how soon does this start to translate into a net earnings number? When could we see positive earnings, not just EBITDA?

We haven't given guidance yet for either EBITDA or earnings next year. We've barely started the budgeting process. But we're definitely going to keep the focus on the EBITDA rather than the net income, because we think that's a more meaningful measure, because, like all acquisitive companies, not just companies in transportation making acquisitions, because of the way the accounting rules have evolved over the last few years, you have a just huge amount of depreciation and amortization on the purchase price. So it kind of decreases the net income a lot more than it does the EBITDA.

Okay. All right, thanks for your time.

Scott Schneeberger, Oppenheimer.

Brad, in your quote in the press release, it says momentum is resonating with large shippers. Could you just give us a little bit more commentary on what you're alluding to there, and then just some discussion of your strategic and national accounts? Thanks.

Sure. So I was at CSCMP in Denver -- it's a big tradeshow for shippers -- a couple weeks ago. And we had our strategic accounts team, and we had Will O'Shea out there, too, from 3PD. And we had a booth, and we met with a few dozen shippers over a period of several days. And it was a very, very positive response.

And what resonates with shippers are a few things about XPO -- number one, that we've got a lot of capacity. I mean, we've got a lot of capacity. We're moving 17,000 deliveries a day.

Number two, we've sort of come out of nowhere. Two years ago, XPO Logistics didn't exist. And now we've made a real statement that we're committed to being one of the largest capacity providers and to continue to grow so that we will have more capacity going forward.

And thirdly, I think what resonates with them is the culture of the Company is passionately focused on delivering world-class service. So everybody from top to bottom is very acutely aware of how we're doing with each customer on on-time pickup, on on-time delivery, on rectifying problems when they inevitably come up. And shippers like to hear that, they like to see that, and they like the experiences of a team that is really hungry for their business and really wants it bad.

Thanks. I know you guys mentioned that 3PD would kind of run on its own out of the gate, but could you speak to synergies you're seeing between XPO legacy and 3PD thus far, and maybe some synergistic goals you have over time?

Hey, Scott, this is Karl. You know, our focus right after completing the deal was to go after the low-hanging fruit. And that was really in two areas. One was introducing the XPO national accounts team to some of our large retailers, and we've done that. We've been able to get core carrier status with some of our retailers. And then on the other side, it was using the XPO relationships to bring in last-mile capabilities. And we've been able to do that as well.

I think longer term, we're focused on integrating electronically into the system, so that all of the offices across the XPO brokers network can quote last-mile services in real time and book those orders. And we expect to have that I think mid-first quarter next year.

Great, thanks. That's helpful, and it segues into my last question. Could you give us an update, just overall XPO, on IT developments and what you're seeing as that's one of your areas of focus, optimizing operations? Thanks.

Thanks, Scott. Yes, we have literally over 100 projects, so I can go on this topic for a long time, which I'm very passionate about and enjoy.

The freight optimizer continues to improve the algorithms on pricing in carrier. We actually just -- we're rolling out new releases on a very fast clip, so every three to four weeks a new release comes out for the freight optimizer. The latest things have improved the algorithms on the pricing and the carrier side, so we will continue to improve those as we get more data.

LTL, which we rolled out across the entire network more recently, we opened up customer portals so that our customers go online, they dispatch loads, and they can do all their business in LTL right on the website. So we've launched carrier and customer portals, we're continuing to, for the rest of the year, work on order input and other parts of the platform, in addition to continuing to improve how we find a truck and how we price. So there's a lot going on at IT.

Great. Thanks for taking all the questions.

John Mims, FBR Capital Markets.

John, you might be on mute. We don't hear you.

I'll go to the next person.

Ryan Cieslak, KeyBanc.

Brad, maybe if you could just talk a little bit about really nice organic growth here in the quarter. And you've been putting up, obviously, some strong organic growth the last couple quarters. Obviously, the comps are going to get more difficult, but what type of organic growth run rate or level do you think is sustainable over the next couple of quarters, or how should we be thinking about organic growth in the current freight environment?

Well, we think we continue to grow organically very fast. And if you think about freight brokerage, which is our fastest-growing part of the business, even if that were to decrease from the 140%s and 150% growth that we've been seeing organically on a quarter basis, that becomes a larger piece of the mix. Our fastest-growing parts of the business are becoming a larger part of the mix, which can continue to sustain the organic growth.

When you think about over the next several years, we're going from a little under $1 billion today to 2017 we're about $5 billion in revenue. About $1.5 billion to $2 billion of that will come from acquisitions. The rest will come organically.

Okay. Thanks. And then, I'm sorry if I missed this, but did you guys give an EBITDA figure for 3PD in the quarter, or did I miss that?

No, we didn't give out EBITDA for 3PD. We did give out revenue and gross margin. And then 3PD is included in our freight brokerage segment. And you can see operating income and EBITDA for our freight brokerage segment.

Okay. Then maybe just directionally, is there expectation that there's -- I mean, what level of EBITDA or profitability do you guys expect in the fourth quarter from 3PD? Just trying to get a sense of what type of accretion, if any, was in this quarter or maybe into next quarter.

3PD contributed low-single-digit millions of EBITDA in the third quarter, because we only closed on it midway through the quarter, on August 15. It will obviously be in quarter for the whole quarter in the fourth quarter. And the EBITDA contribution seasonally is roughly about the same, within $1 million of EBITDA on a quarter-wise basis. So for the whole quarter, it will be high-single-digit millions of contribution to EBITDA.

Okay. And then, you know, Brad, it sounded like, in talking about 3PD, things are running on track -- this may be my words, but maybe a little bit ahead of what you guys were thinking from a topline perspective. But how should we be thinking about the level of revenue into the fourth quarter? I know, Scott you had mentioned typically seasonally it does decline. But it sounds like there's a lot going on. There's new business opportunities.

Should we see sequentially that ramp into the fourth quarter? Obviously, when normalizing for a full quarter, this in a third quarter, I'm just trying to get a sense of what aspect of the sequential trend in 3PD is seasonal and what aspect is actually some potential synergies or new business you guys are gaining.

Well, we will continue to grow, like we said, sequentially third to fourth, like you said. So if we break up the different parts of the business, expedite and freight forwarding typically move down from third quarter to fourth quarter.

Now, in expedite, we'll see if we can buck the trend. We'll see if we can do just as much or hopefully a little more in revenue. But usually third quarter to fourth quarter is down.

Freight forwarding third quarter to fourth quarter is typically down a bit. And then in freight brokerage, we're growing very quickly. So if we talk a few years from now, three, four years from now, third quarter is probably going to be higher than fourth quarter. That, excluding last mile and 3PD, we'd expect to continue to kick up as our cold starts continue to ramp up and we continue to grow.

3PD typically does a little less revenue in the fourth quarter in last mile than they do in other quarters. That has been moving a little bit in the direction where fourth quarter is catching up. Second quarter and third quarter usually are stronger, but we have a stronger Internet presence. Cyber Monday is becoming more important to us, Black Friday productions. So fourth quarter has been increasing, but there's still that time at the end of December when there is not much going on.

Okay. And the last one I have, and I'll get back in line, is, longer term, your goals that you guys have laid out following the 3PD acquisition and maybe the potential impact mix is going to have on your margins maybe versus your original plan, how should we be thinking about what is the right margin type profile longer term when you hit those goals? I think you guys have laid out more of a mid-single-digit EBITDA margin. But does that change now with final mile in there and potentially some other mix impacting going forward? Thanks.

We're still modeling about 6% EBITDA margin long term, if you go out a few years. When you layer in all the different mix of the different business segments that we are in and will be in, that's probably where it will shake out.

Okay. Thanks, guys.

(Operator Instructions) Jack Atkins, Stephens.

Thanks for the time. So I guess a couple of housekeeping items here first. John, what's the correct share count that we should be using for the fourth quarter?

Jack, it was in the back of the press release, if you look at the table that's there. It kind of lays out all the relevant share counts that you need. And if you have any questions about that table, then feel free to reach out to me and I can talk you about it in more detail. But all the --

I guess the question that I had from that, though, is that there was a transaction, I guess, a conversion from the convertible securities into common stock. And I just didn't know how that 600,000 or 700,000 shares should be treated. Is that already in diluted share count or is that additive?

Yes, it will be the same, because those are converted to shares, and we already include them in our fully converted. So it'll just shift from the shares that you see now under the line of convertible securities over to common shares.

Okay. So those were already in diluted share count for the third quarter?

They were. Yes.

Okay. And then what was the total revenue from acquired businesses over the last 12 months in the quarter, not just from 3PD? Do you have that, John?

I don't. Jack, we really haven't been giving out specific Company revenue numbers. So all of that is included in our brokerage segment.

I've got you. You broke out an organic growth number, and I'm just trying to understand what's included in that base. So if you could just kind of give me a total acquired revenue number, not for each specific company, I think that would be helpful.

Yes, okay. That makes sense. From an organic perspective, what is included in there is only our first acquisition that had a full quarter last year, was Continental. All of our other acquisitions are all within a year of buying them or were only part of the quarter of last year. So that's not an organic growth base yet. Next quarter, Kelron will be in our organic growth base, and then it will continue on from there.

Okay. Okay. And then last couple questions -- in your investor presentations in the last couple of months, you've noted I think the revenue and EBITDA targets have been pushed out I think to 2017 from 2016. Could you maybe talk about what drove that extension of the timeframe for those long-term goals?

That really wasn't a as big a change as you may think it was. The original goal was to end 2016 on run rates of [$5.3 billion]. And calendar 2017 would be the reported. So it's really six of one and half a dozen of the other.

Okay. Okay. And then just kind of digging into that a little bit more, on the $1.5 billion to $2 billion of acquired revenue, I guess can you clarify what you mean by that, in that is that a contribution from acquired businesses in total, or is that just the revenue run rate that you acquired at the time of the purchase?

That is the revenue from those acquired businesses as of 2017.

Okay. And that's incremental to what you've already purchased, or that is total acquired from the date that, Brad, you made your initial capital investment?

That's incremental to what we've already purchased.

Okay. That's great. Thanks for the time.

David Campbell, Thompson Davis & Company.

I just -- I'm curious about the 42% -- Jack was trying to get to a 42% organic growth rate. That's the growth rate for the Company, excluding one acquisition, the first acquisition, which has now been in there for 12 months. Is that the way to look at it?

That's right.

Yes. And freight brokerage is largely cold starts when you call it organic; is that correct?

That's right, yes. Cold starts are included in our organic base. It's everything excluding acquisitions.

Right, right. And someone, I think, mentioned interest costs in the fourth quarter versus the $6.4 million. There's something nonrecurring in that $6.4 million.

Yes, there was a $3 million fee that we paid to support the 3PD acquisition. So we had a debt commitment from a group of investment banks to finance the 3PD acquisition. And we ended up not drawing on that facility, but we did pay the commitment fee, and that fell in the interest line.

So going forward, it should be more like $3.4 million on a quarterly basis?

Exactly.

Right. Okay. And the expedited, Scott, you were pretty optimistic about expedited in the fourth quarter. There's usually a seasonal decrease. Is that based upon what's happened in October? Because December, really nothing goes on in that last week of December.

That's right. And expedite in the back half of December is very weak. It's a combination of a factor of -- things have been picking up in expedite. Expedite is a good business. That's a business we like a lot. It's a business we are a top five player in. And shippers need us. As people moved to just-in-time inventory, they need to use expedite services. When you think about their cost to carry inventory, it's so much larger than the cost of expedite.

So we've seen a slow environment for expedite in the past. It has been getting incrementally better. We're dealing with it better as well. We've been doing better lean selection. We still had -- we made a decision to improve profitability, and we had lower volumes in the third quarter as result. And that's continued to pick up into the fourth quarter. So maybe something in line with the third quarter, where you typically see it move down, hopefully it can be in line.

You know, David, you might've noticed the gross margin in expedite was up 210 basis points over 2Q.

Well, it used to be 21%.

The good old days.

You've got a ways to go.

That's right.

And, knowing you, you'll get there.

We'll do our best.

What I wanted to do was -- so just about everything -- just one more question. The freight brokerage revenue in the fourth quarter you mentioned would be up because of the 3PL -- 3PD. What about the rest of it? Would that be down from the third quarter?

No, that should be up. But that should be up not due to any specific thing going on in the external market, just because we've hired more people. And a lot of people are coming out of the training programs and they're hitting the phones. And a lot of people have been working for a few months, and now their gross margin production is increasing. So it's because of the internal measures we're taking, that we're doing, that fourth quarter will show more revenue than third quarter, in all likelihood.

Right, right. Okay. Great. Thank you.

David Tamberrino, Stifel.

Maybe just staying with where you just ended in terms of headcount, it looks like you've been growing headcount after adjusting for 3PD for the quarter by about 100, give or take, heads sequentially for the past couple of quarters. What do the hiring plans look like for the fourth quarter of this year? And is that kind of a good number, about 400 people per year that you're going to be bringing in to freight brokerage?

300 to 400, in that band. 300, 350, 400, all depending on the quality of people that we find and how we feel about integrating them and training them and putting them on the phones, but in that range, yes. That's a good number. We're up to 1950 employees now.

That's just under 2000. So in terms of hiring plans for the fourth quarter, you ramping that up, is another 100 probably a good idea for where you're looking to end the year?

We're adding -- we're ramping up a bit from the third quarter. It has been a little bit accelerated, so we should do a bit more than we did in the third quarter.

Okay. And do you have larger training classes now? Do you expect a larger amount of people to be coming out into the sales pool? Or is it kind of a steady run rate now where you have the same 30 or 40 people per week or whatever it may be coming out and it's not necessarily accelerating?

We actually had our largest training class ever starting just recently, 50 people in one shot. So, we're taxing the system, we're pushing the envelope on that.

Okay. Do you think that that's at capacity, or do you think you add five or 10 more, or how does that --?

I'm sorry, I couldn't hear the five to 10 more. What was that about?

Yes, if you had 50 going in now, and that's your largest size class, how many more people do you think you could layer onto that before you kind of don't have enough space or can't fit any more people in the room for the class?

You know, it's hard to say. We've got to go incrementally on that. What's really important is that we keep the quality of the people real high, which we've been able to do, and that we keep the quality of the training really high, which we are also doing as well.

As long as we can maintain the quality control on both those facets, there's no reason other than psychological ones why we can't increase the number of people. There's a big country out there and there's a lot of people to hire. Hiring a few dozen people here, a few dozen people there, it's really a question of just getting organized and approaching it with the right psychology.

Okay. And maybe one last one. How was your turnover rate from 2Q to 3Q? Was it flat? Did it tick up? Did it come down at all?

You know, our turnover rate for the last 12 months has been relatively steady. Our voluntary churn has been in the low 20s.

And I would add to that, David, no matter what it is, even if it were less than that, it's too much. Turnover is the enemy, because you invest in people, you put them through a couple months of training, put them on on-the-job training after that, you chew up resources to mentor them and to teach them and to -- and they really don't contribute to the Company on a profitable basis until month 12, month 13, and when they're contributing $12,000, %13,000 gross margin a month. So anybody who quits or gets fired in the first year, that's not good. Our goal is to reduce that as much as possible.

Okay. Well, thank you very much for your time.

Barry Haimes, Sage Asset Management.

I had a couple questions related to cold starts. I saw in the press release the two you did in the quarter and the one planned for Louisville. How many cold starts in total does that bring you to since inception? Is there any sort of -- I know everyone is different, but is there sort of a mean or median revenue per cold start we should think about?

And then for the fourth quarter and 2014, do you have any plans yet in terms of number of cold starts we should be thinking about?

Okay, Barry. Cold starts, the first question, we've done 22 so far, so 10 in freight forwarding, 11 in freight brokerage, including the three we talked about today, one in expedite, one in Birmingham. So, 11, 10, and one.

Revenue on cold start will depend -- depends what city it's in and what the demographics are and how strong the leader is. But if you look at the ones we've done so far, they got up to about -- rough numbers, about $10 million, $11 million in aggregate per month after a little over a year.

In terms of number of cold starts that we will do over time, you know, we're going to have to improvise on that, and it will depend on the quality of the people and our appetite. But something in the management of three or four cold starts a year feels right.

What we're mainly focusing on is there's about a dozen cities that we did some research on where the demographics look really good, both for hiring people from the industry and hiring people who want this type of a job, and to have the capability in those cities to be megalocations that could be much larger than your typical cold start, ones that could be hundreds of people rather than dozens of people. And that's a larger focus for us.

Having said that, we're happy to work on onesies and twosies as well.

Great. Thank you.

[Jim Mui], JPMorgan.

You guys exchanged some of your converts for stock. Can you talk a little bit about how that process came about? And is there any more appetite for these type of transactions going forward?

That came about in a reverse inquiry way, where we had convert holders who said that converts are trading at [140] or whatever, and do you want to exchange that for common? And at a reasonable premium, it made sense to from a financial engineering point of view. It's not something we're actively going out and tendering for. We're not -- but we looked at it a little bit, once we got a few of these inquiries, in terms of maybe doing it maybe [tenor forum].

But it didn't make any sense to do that with stock, because we'd be putting common stock into hands that weren't natural long-term holders for that common stock. And we wanted to do everything we can to protect the common stockholders. But to the extent that it makes sense from a math point of view to do a common exchange with ones who are already short to common, basically it's not creating any new supply for the common, so it makes some sense to do that.

So that's not a large number of our convert holders. It's a small number. With those small number, the ones who approach us, we listen to them.

Okay. And you mentioned there was a cash premium that was paid. Can you tell us how much that was?

It was small, but it was consistent with what is normally paid in those. But we didn't disclose it publicly.

Okay. Will it be disclosed in the Q?

I don't think so. I don't think we're required to disclose that. And for commercial and competitive reasons, I don't think we'd want to disclose it. It wasn't a lot.

Okay. Great. Thank you so much.

Justin Yagerman, Deutsche Bank.

Hey, two quick ones. The timing on Louisville for the cold start, or Loweville, I guess is the right way to pronounce it?

Yes, Louisville is actually part of our Interide acquisition. They had an office in Louisville, and it's already opened. And we're going to continue to scale that up and grow. And we were fortunate enough to work with the state and getting some tax incentives for that. So that's already opened and will continue to scale up.

So we don't have Louisville, or however you want to pronounce it, Justin, as a cold start, because we acquired it. But we are real happy that the state of Kentucky supported us with the tax incentives to grow it more.

Okay. Are those taxes going to be a help in the fourth quarter?

Not a whole lot. It's a couple million bucks over 10 years.

Over 10 years? Okay, that's --

That's okay. 10 years goes by, and we will take the couple million bucks.

If you want to give me a couple million bucks over 10 years, I'd gladly take it from you.

I'm sure you will. I'm sure.

Last question, how much was the increase in intangibles at 3PD in the quarter, and what's that going to look like in the fourth quarter?

The total intangible book for the transaction was $148 million, and the annual amortization on that is going to be about $22 million a year. There are some big pieces of that that are going to roll off pretty fast. There's a $12 million carrier valuation that has a two-year life. So $6 million of that $22 million will roll off after the first two years. And then there's $18 million of technology that has a four-year life, and so $4.5 million will roll off at year four.

Okay. So the carrier portion was $12 million, and that's two years. The 18 million technology was four years, you said?

Four years. That's right.

Okay. Great. And then the rest is over what period of time?

There's a customer relationship piece. It has a 10-year life. That's $110 million. And, Justin, this will all be in the 10-Q, so you can see it in excruciating detail. And then there's a trade name that is a short one also. It's three-and-a-half years, and that's about $6 million.

Great. That just helps for modeling purposes. Thanks, guys, appreciate it.

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

Okay. Well, thank you, everyone, for participating in the call. The numbers that I would highlight ending the call would be the 42% organic growth in the quarter Companywide, the 146% organic growth in brokerage, and the fact that we increased gross margin percentage in every single one of our business segments.

And most proud of all is that the margin, the gross margin, in freight brokerage increased 100 basis points year over year and sequentially. And the final number I'd highlight is 17,000 -- the number of deliveries we're moving a day. So the Company has really grown substantially over the last two years.

Thank you very much, and we will be seeing you soon.

Thank you, ladies and gentlemen. This concludes the XPO Logistics third-quarter 2013 conference call and webcast. Thank you for participating. You may now disconnect.