XPO Inc (XPO) 2013 Q4 法說會逐字稿

Welcome to the XPO Logistics fourth-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 this call, the Company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the Company's earnings release and the related financial tables. You can find a copy of the Company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the investors section of the Company's website at www.xpologistics.com. I'll now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Thank you Dawn. Good morning everybody, thanks for joining us on our fourth-quarter conference call. With me today in Greenwich are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Director of Investor Relations.

Last night we updated our financial targets, we're projecting an annual revenue run rate by year end 2014 of $2.75 billion, and an EBITDA run rate of $100 million. For 2017, we are updating our targets to $7.5 billion in revenue and $425 million in EBITDA.

At the start of 2013, we were on an annual revenue run rate of just under $500 million and we set a goal for the year of doubling that to $1 billion by the end of December with positive EBITDA for the fourth quarter. And as you saw last night, our team did achieve those targets. We grew our total revenue by 137% and we increased our gross margin dollars by 239% Company-wide.

We also improved our gross margin percentage in every one of our business units for the second quarter in a row. In Freight Brokerage we continue to buck the industry trend and delivered 110 basis points of gross margin improvement from last year, excluding the additional benefit of our higher-margin Last Mile business.

We have now increased our Freight Brokerage gross margin in five of the last six quarters. And in the fourth quarter, we drove double-digit growth and profitability in both our Expedited and Freight Forwarding units.

With Pacer, we have started integration planning with Dan and his team, and we're concentrating on seven areas of potential synergies. We are even more optimistic about the synergies now that we have been working together to examine the possibilities.

In our recent meetings with customers, particularly the larger ones, we are getting very positive reactions to our ability to provide a unique range of multimodal solutions to their transportation needs. These meetings have validated the reasons why we wanted to buy Pacer, 3PD, Optima, and NLM. They all provide services that are rapidly growing in demand in the North American supply chain.

With Pacer coming on board, we can work with our customers to identify intermodal conversion opportunities for long-haul freight. About one-third of our current Freight Brokerage shipments travel over 700 miles, and a significant portion of that business is ripe for conversion. Our sales force is excited to offer an improved intermodal solution to our 9,500 mostly small and midsized customers, and by the way so are the rails.

Pacer has fantastic relationships with several dozen of the largest shippers across North America. In most cases, Pacer is either their number-one intermodal supplier or one of their top three. But the key point is that intermodal is typically less than 10% of a shipper's total transportation spend. So we have an enormous opportunity to sell these customers truckload, Expedite, LTL, Freight Forwarding, managed transportation, and Last Mile.

I'd also like to welcome a very strong addition to our Management team. Chris Healy is now running all of our expedite operations in the US, Canada, and Mexico, and I don't think there is anyone else in the industry with as much experience creating value in expedite as Chris Healy. He goes all the way back to the Roberts Express days before it was bought by Custom Critical. Welcome aboard Chris. With that I'm going to turn it over to John who's going to talk about our results.

Thanks Brad. I will cover the performance of our three business units during the quarter. Freight Brokerage revenue was up 203% from last year and gross margin dollars increased by 381%. Within brokerage, our truckload, LTL, and intermodal revenue increased 71%, and gross margin increased by 110 basis points to 14.5%.

Our brokerage cold starts continue to ramp up nicely. Last year in the first quarter our cold starts run an annual revenue run rate of about $60 million. Today we are at about 2.5 times that amount, roughly $150 million. And we are continuing to grow them fast.

Gross margin is a good story here too. We improved gross margin cold starts in all four quarters of 2013. Organic revenue growth in the fourth quarter in our Freight Brokerage business was 57% over the prior year and for the full Company, it was 24%.

Kelron is now included in our organic revenue, and as you may remember, when we purchased Kelron last year, we outlined our plans to pare back the lower margin business. We achieved this goal and have turned the Kelron business profitable at a lower but healthier revenue level. Excluding Kelron, our Freight Brokerage business had organic revenue growth of 100%.

Within Brokerage, our Last-Mile business had a strong fourth quarter, with gross margins improving 170 basis points sequentially from the third quarter. 3PD continues to expand its business driven by growth in housing activity, e-commerce sales, and outsourcing. We expect all three of these positive trends to continue well past 2014.

In Expedited Transportation we increased our revenue by 19% and improved our gross margins by 100 basis points over last year. Our Expedite business was able to reduce its transportation costs, and this benefit combined with our acquisition of XPO Air Charter, led to 54% increase in operating income.

Our Freight Forwarding business achieved strong profit growth in the quarter. While revenue was flat, gross margin increased 80 basis points and operating income increased 64% from last year. On the corporate side, fourth-quarter SG&A expense increased to $11.6 million from $10.1 million a year ago. Included in corporate expense was $1.2 million of transaction related costs and $1 million of litigation costs.

Net interest expense was $5.6 million for the quarter, which included costs related to the conversion of $10 million of our convertible notes to common shares. We incurred similar costs from additional conversions in the first quarter, and absent any more conversions, our interest expense will decrease sequentially in Q2.

Our accounts receivable facility is currently undrawn and gives us additional liquidity for acquisitions at an interest rate of LIBOR plus 175 to 225 basis points depending on availability. As we previously discussed, we are in advanced discussions with a group of lenders to consider increasing the facility from $200 million to as much as $490 million, including an accordion.

Our effective tax rate for the quarter was 26%. We expect our effective tax rate in 2014 to be in the range of 28% to 32%. At the end of 2013 we had $105 million of federal tax NOLs, and we'll be acquiring over $20 million of tax NOLs with Pacer, which means we won't be a cash taxpayer for several years.

Capital expenditures for the quarter were $5.1 million, consisting mainly of technology related spending. Looking ahead XPO's CapEx for 2014 is expected to be $22 million to $24 million, two-thirds of which is related to IT. This is in addition to our IT operating expense budget for 2014, which is approximately $21 million. These numbers exclude Pacer. Pacer's 2014 IT budget, including both capitalized and operating expense, is close to $35 million, so XPO and Pacer combined will be spending more than $70 million on IT in 2014.

Our liquidity position remains strong. We had $358 million of cash at February 21, and our convertible notes that are trading well in the money -- other than those convertible notes we have about $2.5 billion of debt. Now I am going to turn the call over to Scott, and after that we will go to Q&A.

Thanks John. Let me start by talking about our operating environment. Weather is the big topic of conversation in freight right now, a lot of shippers have backlogs of at least one or two weeks or more. Between what continues to be strong demand and the weather disruptions, capacity has been tight since the second week in January and it's gotten even tighter over the last few weeks. If the backlog isn't cleared soon, the start of produce season in mid-March will exacerbate the imbalance between supply and demand.

There are opportunities and challenges for us in this environment, but on balance, we think it will have a positive long-term impact on our business. That's because shippers are looking outside of their traditional vendors for additional trucking capacity, and it is creating opportunities for us to bid on more freight. We can showcase our technologies and our growing network of carriers. The bottom line is we have access to trucks.

Our Expedite unit is also benefiting from the tighter capacity as customers have more urgent freight, and it has been especially good for our Air Charter business. There has been some weather impact with 3PD and our Last Mile business, but 3PD has been growing at a strong clip in areas unaffected by the weather, and their pipeline of new business is robust.

Our strategic accounts team is making significant progress; in the last three months of 2013 we did business with 26 new strategic accounts, and the pace has picked up in the first quarter. We are also improving the productivity of our sales reps, which is a credit to our training and technology, because we added over 300 net new customer and carrier sales reps in 2013. We have increased our gross margin per employee in each of the last three quarters. And in the fourth quarter, Freight Brokerage gross margin per employee increased 11% sequentially from the prior quarter.

With cold starts, we recently added two more offices to our Freight Forwarding network in Salt Lake City and Seattle. We are now growing 23 cold starts Company-wide under experienced leadership, and we are planning to open at least 3 more Freight Brokerage cold starts this year.

Our acquisition pipeline is full. Our outlook to acquire another $400 million in revenue this year, excluding Pacer, is well within our reach. The acquisitions we've made in the past six months have been particularly transformational for our Company. 3PD and Optima have made us a leader in Last Mile Logistics in North America, and Optima is now integrated into our 3PD operations. NLM has catapulted us to a position as the largest manager of Expedited shipment; NLM also gives us a foothold in managed transportation, which is another service that is growing in demand.

So we have many avenues for growth, and we're in a strong position to drive that growth in any operating environment. We've met or exceeded every major financial goal we've set for ourselves over the last 2.5 years. Given our growth trajectory, we're confident in our outlook for this year and our updated long-term targets.

That wraps up our prepared comments and now we will take your questions. Dawn if you'll please start the Q&A.

We will now begin the question and answer session.

(Operator Instructions)

Justin Yagerman from Deutsche Bank.

Good morning guys. It is Rob Salmon on for Justin. I guess touching base with regard to the updated guidance, as you look out to 2017 and the $7.5 billion topline goal, how much revenue do you guys expect coming from acquisitions and organic growth? And as we think about the capital structure, should we still be thinking about a roughly 2 times debt to EBITDA leverage ratio for the Company?

Hi Rob, it's Scott. As you look forward to the next few years with the recent capital raise, we look like we have about $1.5 billion to $2 billion in dry powder to go out and buy acquisitions. That translates to -- when you look at the topline revenue growth, we're looking for low to mid 20%s type of organic growth.

When you look at that $1.5 billion to $2 billion, yes, a large portion of that is going to come from debt. That will come from the accounts receivable facility that we're currently expanding, that could take up to 85% of our accounts receivable. As we grow the Company and as we acquire and grow the Company and become larger, that expands. And then 2 turns of debt on our EBITDA on top of that.

Got you, that is helpful Scott. And then I guess in terms of the near-term guidance, it sounded like from the prepared remarks that was including the Pacer and both the $2.75 billion revenue run rate as well as the $100 million of EBITDA?

That's correct.

And how many companies are you guys expecting to acquire to reach that roughly $400 million of revenue? And can you talk a little bit more about that acquisition pipeline?

Sure Rob, it is Brad. So we sent out yesterday -- we cleared the SEC and we sent out the filing materials and we set the shareholders vote date for March 27. And as soon as we get the vote, which we believe we will, we'll close at the end of the month.

So to get to the $2.75 billion, we have about $1 billion now, we did over $250 million in the fourth quarter and that only included less than a week of NLM. And we'll have some organic growth on that $1 billion. And then we're going to get Pacer's almost $1 billion of [trailing] revenue and some organic growth on that. And then we're going to buy, base case scenario, about $400 million of revenue, and when you add those together, you get up to the $2.75 billion. But I think that is a good solid base case scenario.

In terms of your question about how many different companies, I don't know. It could be one, it could be five, it could be something between one and five. It all depends. We are talking to a bunch of different companies, some of them are small, some of them are big, some of them are medium. And it's very hard to predict that. But in aggregate, the base case scenario is we will pick up about $400 million of revenue.

Thanks a lot Brad, that's really helpful. And what I'm thinking about just in terms of the acquisition closing, I would imagine given that the proxy is out, anything really kind of before April, and even early April would probably be very challenging. Is that a fair interpretation?

Well yes, the first quarter from everybody in the industry, including ourselves, has been impacted by the weather quite a bit. But the $2.75 billion revenue run rate by year end, that's a run rate, so that won't be reported. So we are going to close Pacer for nine months of the year, on a pro forma basis, we're counting the whole year as if we had owned Pacer from January 1 to get to the $2.75 billion revenue run rate.

Absolutely Brad, I was getting into terms of timing of additional acquisitions that just given that Pacer's on the table, it would probably be later in second quarter would be the earliest an incremental acquisition could be coming online. Is that fair?

Probably yes. It's very hard to predict timing of acquisitions; sometimes acquisitions get really close to getting done and then something kills them at the last minute unfortunately, and sometimes deals are going slow and suddenly everyone wants to hurry up and get them all done in two weeks. So hard to predict.

Well good luck I guess closing out the Pacer acquisition and as you guys are in discussions with other interested targets.

Bill Greene from Morgan Stanley.

Brad, can I ask you to just expand a little bit if you can, and I know that this has sort of been an evolutionary process, but when we think about the longer-term revenue targets, do you have a sense for how that will break out among the segments? Do you have a wish list even? Like I'd like this much in theory from Brokerage versus intermodal versus other logistics, et cetera?

Yes, it's 2017 so we don't have it down to the T exactly how it's going to break out, but hoping roughly about half in truck brokerage. And then the Last Mile business that we have consider that to grow to get up to call it $75 million, $80 million EBITDA, and assume a 10 times that roughly on the revenue level. Expedite is going to continue to grow, but it's only so big of a market, so that's not going to be the biggest chunk of the revenue mix.

Freight Forwarding, depends quite a bit on what we end up doing with Pacer's international business. The XPO Global Logistics division that we have, which we rebranded the CGL business we bought originally, the Freight Forwarding business, that is growing steadily. But it's a less than $100 million business, and it's doing a few million dollars of EBITDA. Of course intermodal we have a big emphasis on, and that is something that we are going to drill down very hard to grow very, very rapidly. Does that give you the broad parameters?

That is perfect. Obviously you don't know at this point, but just in terms of where the targets are is helpful to have.

Another question I had, and I'm sure you get this at every conference you go to is just about when you about the evolution of the business, you guys have been bucking the trend on the net revenue margins, and that is good to see. How long do you think you can continue to outperform, when we hear about as Scott mentioned in his comments the tightness related to weather and whatnot. I've got to believe that that can create constraints on gross margins, so when you think about this and even looking out to your 2017 targets, how does your gross margin in the Brokerage business evolve do you think?

There is a big debate about what the gross margin is going to be in truck brokerage as an industry in 2017. And it is a question that we ask ourselves internally a lot. And we ask our competitors and our vendors and industry players all the time too. And you get answers back that are really all across the board from 10% to 16%.

I am more in the bullish camp. I'm towards the higher end of that range. I think that truck brokerage is going through a period now where there is a little inflection point, and you had two years of doldrums and balanced equilibrium and now it is pure chaos for the last couple of months, and I think that is a good thing. I think that shakes out some of the weaker players, and the ones who are agile and the ones who have broad access to capacity and have great IT systems, and are just hitting on all eight cylinders are differentiating themselves.

Differentiating themselves in terms of the gross margin performance and differentiating themselves in front of the customer. I was in a customer's office a few weeks ago during the auto show in Detroit and it was during one of those Polar Vortex days, and we got on the phone with our carrier procurement folks and in two hours time, we did up 120 trucks, and that really impressed the customer. And I can give you several success stories like that.

That kind of ability to access capacity during the tough time is what's going to differentiate the ones who are able to generate improving businesses and not, and I'm very confident we will be one of the ones that will be improving.

Okay, that makes sense. Let me ask you one last question because it got mentioned just the first quarter and how difficult it is. Can you give us any help or any thoughts just in terms of what to expect whether it's a gross margin or a revenue trend, is revenue not showing up because of the weather, so the gross revenue or are we getting squeezed on the rate? Any sort of color you can help us on that first quarter would be great. Thanks for the time.

The weather is definitely the topic du jour. And it's what makes the business interesting this quarter. And the weather is affecting us positively in some of our business units, negatively and others, and it doesn't matter in other ones.

So why don't I just take them down one by one. So I'll start with the obvious one. So Expedite, including NLM, is in big demand. And the horrible weather is great news for them, and in January, NLM for example, our XPO NLM division moved 33,000 shipments as opposed to 22,000 shipments in January of 2013. So a very big spike in volume in Expedite, same for our other units in Expedite from around the country that Chris Healy is now going to be leading up. So big disruptions in weather pushes the freight towards the Expedite needs up and this is really good for us.

On the other end of the spectrum, our retail customers in our Last Mile, so our Last Mile businesses mainly with the 30 big-box retailers, those customers have lost business. There were many days when people just could not go into a bricks-and-mortar store and shop for goods and that business -- all that business wasn't lost forever. Some of it was made up, but some of it was lost forever. So the Last Mile business with the weather, the weather is a bad guy for that one.

On truck brokerage it is mixed. We have much more volume than we normally would have because the routing guide compliance has gone to pot. And the spot market has exploded. There is much more volume coming onto the spot market in the last six weeks than there was in similar period last year. And that volume however is coming at a lower gross margin because capacity is extremely tight, the tightest it has been in memorable history. And rates have been going up and going up rapidly. Sometimes in the space of an hour, truck comes back in and says I have got a real problem. People are offering me freight at much, much higher prices and they want to reprice it.

So this is an opportunity again to show to customers what we can deliver when we've got access to 24,000 different carriers and 400 trucks driving for us exclusively at Express-1, but overall I would say the weather is a mixed bag for truck brokerage, maybe slightly negative because the gross margin contraction is there.

On international business on air and ocean, the weather is obviously irrelevant. On the intermodal business, which we are tying in right now, but are going to get huge in after Pacer, there's been disruptions and Chicago is a mess. And volumes are down there.

I would say one positive thing and a hugely positive thing that has come out of all this disruption is the industry as a whole, the truck brokerage industry as a whole competitors are much more focused on pricing right now than on gaining market share. And you saw in 2013 and also 2012 for that matter, competitors and particularly some larger ones really going aggressively after market share regardless of price. That tone has changed.

And the industry as a whole now in truck brokerage seems to be much more focused on -- we've got to get a fair price for what we're doing here, we can't have a high percentage of money-losing loads. Much more than grabbing market share. So in that sense there is a pretty good silver lining.

Thank you for the time.

Thank you.

Allison Landry from Credit Suisse.

Good morning, thanks for taking my question.

Good morning.

I wanted to ask a couple of questions on Pacer. And specifically, if we think about the opportunities to fill some of the backhaul at Pacer and improving their underutilized container fleet. Have you already been engaged with your XPO existing customers in terms of the southbound intermodal lanes to Mexico? And in that vein, what is XPO's exposure to the auto suppliers in the upper midwest?

Okay, several topics there, let's start with Pacer. Pacer we cleared Hart-Scott-Rodino a few weeks ago. We started meeting with Dan and his team to go over the synergies.

How we are going to put these companies together in the most intelligent way, and we have been focusing on seven different areas so far. The first category obviously is the revenue synergy, the cross-selling. As I mentioned in the prepared remarks, approaching the several dozen tier one customers that Pacer is very tight with, and marketing to them these other services that we are very strong in.

And then taking the 9,500 small to midsized customers that we have at XPO, one-third of which -- one-third of the truck brokerage volume that we have going more than 700 miles, so a lot of whiteness for conversion to intermodal, and then marketing Pacer's product, which is a superior product than we had in intermodal, to those small customers.

And then on the cost side we have had our IT people meeting with Pacer's IT people having many constructive conversations. They preliminarily identified about $3 million to $5 million of easy synergies over a couple of years. These are obvious things like merging data centers and operating system consolidations and what you do with SAP versus Oracle, and getting all into one CRM, and all the typical things you do in an IT merger.

And then on Brokerage, we are going to be bringing their brokerage group, which is a few dozen people, onto our freight optimizer very quickly after the closing. Give them access to all of our capacity, give them access to our price guidance algorithms, and I can tell you with great confidence I can tell you that they will be ecstatic with access to that technology and to that capacity.

Obviously we are going to tackle the public Company expenses right away. The Board of Directors fees will go away, the auditing fees on a commodity basis will come down. On the real estate we are studying the lease terminations and all the details of the various leases that Pacer has that we have, we're at the very beginning of that process and we're going to look at opportunities to co-locate where that makes some sense.

On the Freight Forwarding and what Pacer calls logistics in their company, we are studying that, we are analyzing that, we're looking at profit improvement opportunities, there's more meetings going on this week. We're trying to understand how can we turn that from the red to the black, and what kind of synergies do they have with our XPO Global Logistics division.

And then the final area of synergies is the sales organization structure. Post-Pacer, we will have a little over 100 outside sales reps, and some of those have been calling on the same customers for their respective companies prior to closing. So we are going to rationalize who makes most sense to be covering -- who has the best relationship with each customer, and how can we reconfigure that? So lots and lots of planning, it's at the early stage but moving at a very fast pace there.

You asked about Mexico. Mexico -- I couldn't quite get what your question is on that. You said something about exposure to -- are you talking about the legislation down there, are you talking about the weather?

Actually, not that at all. Just thinking about the intermodal is generally coming up from Mexico on northbound and the backhaul thinking about southbound intermodal to Mexico, I generally think of that as being auto parts, and I was wondering if XPO has the customers that they could -- you guys would be able to sell that product to Pacer to fill the backhaul southbound into Mexico. Does that make sense?

Absolutely, totally got it. So auto is a big industry segment for us. We started with auto way back into 2011 with Express-1, which serves the auto industry directly to auto companies, and also to some of the 4PLs that manage the auto supply chain.

And then when we bought Turbo, they have a big expedite division there as well in Gainesville that services the auto companies directly, and the tier one suppliers to the auto companies. Of course NLM is a well-recognized, highly-decorated, highly-awarded, has a lot of awards they've gotten for customer service for the auto companies. We have a lot of auto exposure. I would say we are very good at that.

Now on Pacer, that is only going to go deeper because a lot of intermodal business obviously is auto. When you look at the north/south lanes with Mexico, there is a lot of freight coming up from Mexico into the United States, and there's not a lot of freight going down into Mexico. So the whole trick on northbound intermodal is to get -- when you look at that --as the backhaul or the fronthaul, depending on which side of the border you're looking at, to get from going from north to south is the key there.

Of course auto has a bunch of parts that go down there and finished goods come back, so yes, we have a real good synergy with Pacer in terms of taking the freight that we've got from our auto customers, a lot of which is going on truck right now. All the way from the upper midwest down to Laredo and sometimes into Mexico and that can be converted onto intermodal. And putting that together with their capacity.

But it's not just auto. There's other non-auto industries, and there is also consumer packaged goods that we are strong in, and that we can help with the north/south cycle. Does that answer your question?

That answers my question perfectly.

Super.

Just as a follow-up, how would you rank filling this underutilized capacity southbound in terms of all the different revenue synergies that you have? Is it like this is the golden goose here, or how do you think about all the different areas including the seven that you mentioned? Where does this fall in the --?

I would say that is one of the golden geese but there is not one golden goose. I think there is a lot of different avenues to synergize with Pacer and that is one real good one, but I don't minimize the other ones either.

Okay. And I just had one quick follow-up question on free cash flow. When should we expect free cash after CapEx to turn positive?

After CapEx sooner, but when you include the investment in working capital, which is a great investment to make, it's a great return on capital, that will take us to more negative free cash flow this year turning to positive free cash flow in future years.

So free cash flow in this business is pretty simple. We talked about what our EBITDA range is that we're looking at. We talked about what CapEx is. Interest expense, and we are not going to be a cash tax payer for several years. So really it's that investment in working capital. And working capital is let's say roughly 8% of the organic growth, so as we grow organically, we are putting in additional 8%. So the faster we grow it will take us a little longer to turn free cash flow positive.

Okay, great. Thank you so much for your time.

Thank you.

Scott Schneeberger from Oppenheimer.

Thanks good morning. I will pick up on that last question. It is a two-parter. It sounds like a lot of CapEx this year with Pacer. Is that something that over time you can rationalize once you find some synergies?

And the second part of the question is Scott you answered the question on free cash flow 2014 into '15. Any thoughts -- I'm not sure how much you want to quantify, but out into '16 and '17 with regard to free cash flow and what you're thinking there. Thanks.

Good morning Scott by the way it is Brad. I'll take the first part of the question, I'll give it to Scott or John for the second part.

Look on CapEx, compared to where I come from, this is very low CapEx. I'm used to CapEx budgets that are over $1 billion, spend a few tens of millions of dollars on CapEx primarily on IT. I am really good with that.

And IT, investing in IT is an investment. That is something that goes to the core of how we're differentiating ourselves from smaller brokerage firms, and how we are able to add a whole bunch of value to our customers and to work more efficiently with our carriers. It really is critical that we keep staying on the cutting edge of technology and that we are continually investing and reinventing our algorithms to get pricing just right. And to be efficient at pricing and to make sure that we are also refining our technological ways to find just the right carrier who needs a backhaul where we've got freight. And therefore we will take it at a reasonable rate and be happy about it, because it's a perfect match.

So we have so many different projects going on in technology, and I'm delighted -- I was out in Detroit at XPO NLM about six weeks ago. And I challenged the group to sit together and come up with ways that we can improve our IT system from three perspectives. One, how can we serve the customer better. Number two, how can we interact with carriers better. And number three, how can we be more efficient internally communicating amongst ourselves. And I was just very delighted they came up with 96 different ways to do that, and we've got a time and responsibility chart, and we've gotten the go-ahead, and we prioritized them.

And that is just one example of the kind of creativity and dynamism that we are putting into the IT investment, and we're going to continue doing that. I'm going to pass the mic over to Scott or John for the financial questions.

On the free cash flow, Scott, from a longer-term perspective we have pulled forward some free cash flow, more free cash flow than we had in the prior plan with the acquisitions. The acquisitions come in and drive more free cash flow in the outer years than we had thought before, and that cash flow can then be used for acquisitions and is part of our dry powder of $1.5 billion to $2 billion.

Great, thanks. And then as for a follow-up, it sounds like you are having really nice progress with sales rep productivity. I believe you said 11% sequentially for growth and that sounds great. Could you give us an idea for the plans for the upcoming year of levels of hire, where you are going to hire, and how you're thinking about that? Thanks.

Sure. We added over 300 sales and carrier rep people this year, we're going to keep the pedal to the metal. There's two part to that, it's evenly distributed between sales and carrier people that we have been bringing on. We feel there is a lot of productivity improvements that we can have with our carrier and logistics coordinators where we don't need to add as many on the carrier and logistics coordinators, we have more capacity to grow and to be more profitable with those people.

So when you look at the numbers of people we added this year, the number of carrier and logistics coordinators will be down, and then we will continue to add at a significant pace on the salespeople to continue the growth.

Okay, great. Thanks very much.

Thanks Scott.

Kevin Sterling from BB&T Capital Markets.

Thank you, good morning gentlemen. Brad, I think a little bit you talked about the combined revenue run rate in your brokerage cold starts. I think it's over $150 million, that is up from $60 million a year ago. Is this better than your typical experience with cold starts or is it in line with your expectations?

I would say the cold starts are performing in line. I don't think I could say they are performing twice as much as we expected to, but they're certainly not performing half of what they expected to. It is in line. This is healthy growth. We expected healthy growth.

A year ago we were at $60 million, and now we are 2.5 times that at $150 million. That is spectacular growth but we expected spectacular growth.

What I am equally proud of besides the top line growth is margins are up. So when you are growing revenue and you are growing margins, that is a beautiful thing. And in the fourth quarter, we doubled down even more and opened brokerage offices with two great leaders in Richmond, Virginia, a city you know well. And Houston, Texas.

(inaudible)

There you go.

Great. And maybe looking forward, where do think this revenue run rate can go next year, what are your expectations? Maybe not exactly, but just something to pinpoint.

I'm sorry, what was that?

Just kind of a ballpark what are your expectations for next year from your brokerage cold starts? Revenue run rate.

I think we can continue to grow at a very fast clip on both margin and revenue. With the new ones that we are starting, we opened up three in 2013, we are opening up another at least three in 2014. The cold starts tend to do $5 million to $10 million in revenue in their first year, so we will get the addition of the new cold starts, and then the existing cold starts will continue to ramp up at a fast clip.

Okay, thank you. Brad, I know you touched on Expedited benefiting from the zaniness of the weather. Is Expedited benefiting from the growth we're seeing in e-commerce?

That is more in Last Mile. Expedite there we are getting our freight. Nobody wants to do expedite. Expedite are loads that were non-expedite and they turned into critical, urgent, unplanned shipments because something got messed up in the supply chain. And you are seeing Expedite growing because of the just-in-time inventory. And people figure well I am saving so much money having just-in-time inventory, I can spend more on the expedite. Even though they don't want to. But they kind of have to. That is where that is coming from.

The e-commerce is really from -- is really more directly related to our retail business, which is Last Mile. There was a time just a few years ago where not a whole lot of people bought a refrigerator or furniture or a stove or a television set on the internet, and you went to a store and you bought it and that was it.

Now a lot of people go to stores and they come back and they are sometimes even in the parking lot, they go online and they buy it online. And we're getting a lot of that business. So the e-commerce business is helping us in the Last Mile, and that is going to continue for a long time in my opinion.

I agree, thank you. And you guys I know you briefly touched on your IT spend after the Pacer acquisition. After you close Pacer, will you run two separate IT systems or will Pacer be folded into your existing IT system, and how long will that take?

Pacer, let's divide it up. Pacer's truck brokerage group will go onto our system pretty immediately. Because we have time to go ahead and now that we have cleared Hart-Scott-Rodino, we can go in and we can do some training and we can pull the trigger on that really quickly.

Usually it takes us about 90 days to transfer in a methodical way an acquired truck brokerage operation and put them onto our system. And every single one of our acquired truck brokers and all of our cold starts, they're on the same exact system, they've got to be because they've got to see the same load board, they've got to be able to communicate with each other, they have to have the freight optimizer to guide them on the pricing, you have to all be on salesforce.com so you're not tripping over each other calling the same customers. So the brokerage will come onto our IT system quite immediately.

On the Freight Forwarding side there, interestingly, they were in the middle of migrating to a same system that we were migrating to. So it looks like we will be migrating to the same system. That was purely coincidental.

On the intermodal, a little trickier and that's going to take a long time. And that could take up to two years. Because pacer has developed a good customized intermodal software that has got a lot of good features on it that we do have to get them onto our freight optimizer. We all have to be on the same system, but that's an instance where you want to go a little slower rather than faster, so you don't mess it up at all and don't show any disruption to the customers.

Okay. That's all I had today. Thanks so much for your time this morning.

Appreciate it, thanks Kevin.

John Larkin from Stifel Nicolaus.

Good morning and thanks for taking my questions.

Morning John.

Brad, it seems to me as if perhaps you have now moved into the major leagues with the Pacer acquisition and the large-scale equity raise that was completed here recently. Have you found that folks that perhaps were not willing to talk as much to XPO about becoming acquisitions are now a little more open and viewing you a little bit differently here the last month or so?

I wouldn't say that is so much with acquisitions, because acquisitions have always been willing to talk to us. I do see that with customers. There's no question about that. The reception that we're getting with customers, particularly the larger customers is very, very good.

As you know the RILA trade show is going on out in San Diego right now, and obviously we couldn't be at it because we are here. We have a delegation out there and we have been in constant contact with them, and there is a lot of buzz about what we are doing at XPO, and there is a lot of --

From a shippers point of view what are they thinking about? They're thinking about two things. Access to capacity and performance. That's it. Those are the two main big buckets. And because we have grown in size so much, and because we've got a multimodal service offering, we're scoring very big on those two. A lot of customers are interested in us because of our size now and because we can be a meaningful partner of theirs. And because sooner or later people can disagree, but who knows whether it is sooner or later -- but sooner or later the cycle is going to turn to one of a shortage, and having vendors like us who have access to capacity is a big plus. So customers, they like it.

The other thing they like is we started the Company right from the get go with an intense focus on world-class service. So on-time pickup, on-time delivery, problem resolution, and sophisticated EDI technology interface with the customers. All these things that we have set as goals and part of our culture and embedded into our organization, that resonates with customers quite a bit. I would answer your question that it hasn't changed our receptivity with acquisitions much one way or the other, but certainly has with customers.

Thank you. With a fairly big step up in IT investment or at least it appears to be the case for 2014, do you move the Company a little further towards being able to more fully automate, which at many brokerages has been a largely manual process?

In baby steps. The industry will be automated someday in the future. That is not around the corner in my opinion. The reason it is not around the corner is it is not a fungible commodity, it's not like gold or oil or 100 shares of IBM. There's 200,000 OD payers, and there's so many different types of freight with different requirements, and so many different types of trucks, and there's so many service issues, and it's just a complicated thing. Now someday computers will be sophisticated enough to do all that stuff, but there are certainly not going to do it yet.

That said, someday there will be a way to track online where every truck is across North America, and that will be available hopefully in an open-source way and that will disrupt the entire industry. But that is a ways off. That is not just in the next few years.

What we are having success on is something more in the immediate near-term reality is automating little things, lots of little things like click to dial. So instead of having to look up someone's phone number and then dialing it and then 1 out of 10 numbers you dialed it wrong and you have to dial it again, and you killed 20 seconds dialing it; just clicking it on the screen and boom, it starts dialing. And that may sound like a little thing, but that saves 10 seconds here, 20 seconds here, but it saves 10 or 20 seconds thousands of times a day all across the Company, that makes us more productive, that makes us more efficient.

And ways that we can find who is the right truck to call. We have 24,000 carriers. Who's the right truck? Who's got a truck right there where we need it right now for that load? Ways to automate that, which makes us do two things. Number one, it makes us more likely to get the load covered, and number two -- in a timely way. And number two, it helps with the margin. It makes the business more productive and more efficient. We have tons of stuff going on like that. Just tons and tons of stuff to become more effective.

Thank you. Scott talked a little bit about the working capital earlier, and as you are growing quickly obviously you've got to fund that. Is part of that a function of the fact that you have what I will call a quick-pay option where carriers are in some cases attracted to XPO because you are willing to settle with them in a day or two? And often in exchange for that you will get a discount. How much of your business transacts that way if any, and then what kind of return do you think you'd earn on that working capital investment?

Hey John, this is John Hardig. We do offer a quick-pay option for our carriers. And that is certainly something that some carriers will take advantage of. You'd be surprised at how few don't; when you think about the carriers that we deal with primarily, these are small and medium-sized companies that really --the discount is a bigger deal than you think.

So our take-up rate on quick-pay has been relatively low, less than 10%. It has not been a huge driver of our working capital need. Generally working capital is driven by the brokerage business. In that business generally we don't get paid, we pay the carriers about 30 days before we get paid by the customers; in some of our other businesses it's a little bit different.

And so depending on what the mix is over time, that could shift, but if you look at 3PD's business, they bill their customers weekly. And so they get paid very, very quickly, they don't have to wait for paperwork and process paperwork and things like that. And NLM actually has negative working capital because they don't pay the carriers until they get paid by the customers. So it's a little bit different in each business across our different business units.

Thank you. Then there was mention of a $1 million in legal fees I guess in the fourth quarter. Is that related to just the one situation where a competitor is carrying a lawsuit against you all for perhaps recruiting some of its employees or is there something else going on there?

That was primarily our favorite competitor's favorite lawsuit, yes.

Okay, thank you.

Thanks John.

Tyler Brown from Raymond James.

Hey good morning.

Hey Tyler.

Hey John, I was hoping that you could help me conceptualize some of the accounting -- the acquisition accounting. You guys have done I'll call it maybe a dozen acquisitions under your belt or so, but could you conceptualize how much of these purchase prices are generally getting put towards intangibles, and then how you are amortizing those?

Sure, it is different for each acquisition. Because if you look at each business independently and make an evaluation of what the tangible amount is going to be, and it depends on the nature of the business. I think in businesses where we have acquired lines of service that are new to XPO, we tend to have a little bit higher value attributed there because they've got unique relationships with carriers like Pacer for instance, their relationships with the railroads, much different scale than we have today at XPO. That ends up driving a little bit different results in terms of the intangibles.

As we buy more truck brokerage acquisitions, that will tend to have a lower intangible proportion of the total values. Because those are -- we have a lot more overlap with carriers, a lot more overlap with customers on the truck brokerage side. So it depends a little bit on each business.

Even with Pacer, our relationship with the UP is looked at a little bit differently than other relationships. So it really varies. I would say that intangibles as a percentage of total purchase price is going to run anywhere from 20% to 40%. 20% being more oriented towards the truck brokers where there is not as much overlap in the business lines, and higher for businesses that are unique to us. And then there are all kinds of company-specific scenarios that factor in there as well.

Okay, and then on the life, is it a six to eight year type life generally?

Well the biggest portion of the intangibles typically are the customer relationships, and those are amortized over 10 to 12 years generally.

Okay, perfect, that is good.

Everything else is a lot shorter.

Okay, perfect. And then on the Pacer integration, I appreciate that the intermodal piece won't come on quickly to your system, but is the idea that they are going to simply show up as a preferred supplier in the freight optimizer, which should happen pretty quickly. And then how do you plan to incentivize sales to sell Pacer?

It will be a toggle. So they'll still be access to the screen, but you're going to have to toggle to get from the optimizer to the Pacer software, which is on the surface it goes back to the question we were answering before about the technology investment. So you'll say what is the big deal? Just takes a couple seconds to toggle. What's a couple seconds times many, many times a day across the whole country. We've got to get -- is just going to get fully integrated.

It's easier to scrape the data. One big part of our IT thrust is to get comprehensive, real-time pricing information. So all this information we are getting about rates as they are changing in real-time across the whole country, we have to get that shared throughout the whole country. So that is why it helps to have eventually to have the Pacer technology fully integrated onto our freight optimizer.

Okay, and then is there a different incentive structure for sales to sell Pacer?

We have not fine-tuned the top plans yet. We just haven't drilled down to that yet. It's just too early-stage.

Okay, that's fine. And then Brad, just big picture over the last 12 months you have taken on this more multimodal flavor and some of that maybe by circumstance and some by design, but from a bandwidth perspective can you just give us some color on how you ensure that all of those moving pieces stay put and nothing gets neglected with everything that is going on?

We have fantastic people in charge of those business lines. Give me 10 Karl Meyers and we will end up being a $50 billion Company instead of a $7.5 billion Company in a few years. We just have fantastic people, we have Scott Taylor and Mike O'Donnell running XPO NLM for us, and we've got John Snow, and we've got Josh Allen running Interide. We have just great people.

So if you have the right organizational chart in place, which I believe we do, and if you have the right leaders in those spots in the organizational chart, and you have the right systems and processes and controls, both financial and operational, you can accomplish a lot.

Okay gentlemen, that was perfect. Thanks.

Thank you.

Ryan Cieslak from KeyBanc Capital Markets.

Thanks, good morning everyone.

Hi Ryan.

Brad I wanted to just go back a little bit to Pacer and you gave a lot of really nice color on the areas you're targeting from a synergy standpoint; I just wanted to see if you could maybe, if you have any quantitative idea of where do you think those actually shakeout from a synergy standpoint going forward. Maybe even directionally if you think about the $100 million of EBITDA run rate you are targeting at the end of the year, how much or if any is related to synergies from Pacer?

We do have some general ideas, but I don't want to put them out there because we're such early-stage in the planning, I could be wrong. Let me say it this way. We are encouraged by the amount of synergies that we can have by putting a $1 billion Company with another $1 billion Company. It is more than we originally thought, wasn't what we were planning on. As we now ramp-up the integration planning now, that we have passed Hart-Scott-Rodino, and we are spending more time with each other, I think that is going to become a bigger plus.

But we are not -- implicit in your question is are we counting on some outsized huge synergy that is off the charts in order to get to the $25 million of EBITDA in the fourth quarter, the answer is no. We are counting on a reasonable amount of synergies. We're basically counting on our existing businesses growing organically at a reasonable pace and buying $400 million of acquisitions between now and the end of the year.

Okay, but there is some baked in from a synergy standpoint it sounds like.

Yes, but a reasonable amount.

Got you. Okay, that is helpful.

There are certain synergies that are no-brainers. We're not going to be paying Board fees to their Board members anymore for example. And audit fees will be coming down on an aggregate basis, and there will be some co-los on the real estate, and there are some things that are definite.

Okay. Similar type of question then on just the general freight environment in terms of what you are expecting this year excluding obviously the weather-related challenges or what we're seeing with weather. What are you thinking from a freight environment standpoint within those goals you've laid out for '14? But then also longer-term. I know 2017 is a way out and things could change, but what do you assume in those targets when you think about volume and the overall capacity into the overall freight environment?

I think the economy is coming back, and I think the economy has been coming back across the board with retail, with manufacturing, really all across the board at a slightly faster pace than it was last year. And we base that on -- we just base that on anecdotally on our own experience with what customers are telling us and what customers are showing us in terms of the amount of freight they got.

I don't know whether that's going to continue the whole year. January and February are not the biggest months of the year obviously, let's see what March is. And let's revisit that question at the end of March.

But the tone, in general is, and we have been meeting with lots of customers recently, the general tone is there's going to be more freight. People are optimistic about their own businesses and capacity is certainly tighter. How much of that is from hours of service versus how much of that is from what is going on with some bankruptcies. And how much of that is -- there's a lot of different factors that could be contributing to that.

But in any case, capacity is definitely tighter, much tighter than it was in recent memory. And rates are going up and people are disagreeing about whether they're going to go up 2%, or they're going to go up 6%, or 3%, but everybody agrees they're going up. This is a different tone in the market right now.

Okay, that is helpful. Last couple ones here on Last Mile, I know obviously weather is having an impact. But when you look at that business today versus when you first acquired into it, how does it look relative to your expectation? Maybe a little bit of commentary on what the business pipeline does look like, and what you are expecting out of that business going into this year.

I am very, very pleased with what is going on in Last Mile and that business is just great. It is just great. It is well-positioned with its customers. When we meet with the customers they rave about the 3PD product. They very much value the investment in technology that Karl and his team made prior to us -- and we don't take credit for this, they invested in that before we bought them. And they've got just a cutting-edge customer experience software that measures customer experience right at the point of sale, right at the time of sale, and puts that into metrics and then uses those metrics for compensation, uses those metrics for winnowing the carrier base, and it all translates into very satisfied customers.

And when the customers are really happy and are effusive in their praise for what we are doing, I am very happy about that. Because everything else falls into place.

A lot of cross-selling opportunities that we have already started capitalizing in. That will take time to develop, but I see the momentum there. So the business is growing, it's got a strong pipeline. It's got a phenomenal reputation for customer service, there's cross-selling, just a lot of good stuff that's contributing a lot of money to the Company. I love it, I love everything about the 3PD product.

We are going to be changing the name sometime in the next few months. We're going to be migrating to a name that starts with XPO just like we rebranded NLM to XPO NLM. And we'll migrate the Pacer name to something that's got XPO in it as well, we have not finalized that yet. So we're building up our brands, and the Last Mile group is an important part of that brand.

Okay, that is helpful. And then John on the corporate expense going into this year, just any sort of color on what the expectation is, I think in the fourth quarter there was around $11.5 million or so of corporate expense. Does that go up incrementally into '14, or how should we be thinking about the general corporate expense in '14?

You're right, the vast majority of that expense is fixed, so it doesn't really scale up with the business. There are a couple of small components of corporate that will increase with activity, mainly we are going to be spending just a little bit more in IT in terms of what hits the corporate line. And then we have some accounting resources and credit collections and things like that that hit the corporate P&L that will scale up a little bit with the business. You might see a little bit of expansion, very slight amount in corporate in 2014, but it's going to be nothing like our revenue growth in the year. So it is not going to scale anything close to the revenue growth.

Okay, thanks for your time guys, appreciate it.

Thank you Ryan.

Donald Broughton from Avondale Partners.

Good morning, thank you for taking my question. We talked about the spot rate and wondering whether or not it's capacity, it's demand, it's weather-driven, et cetera, but can you help me think about as we go through this tighter capacity period, can you help me understand how you think about balancing the ability to find a truck, be a solution provider for the customer, and balancing that with the ability to drive the best margin by essentially auctioning off each truck you can get control of?

Donald, good morning by the way, it is Brad. You are hitting it right on the nail, right on the head. That is a balancing act. On the one hand we want to give almost flawless service to the customer. Flawless doesn't happen in the real world, but almost flawless service. Very high 90%s on-time pickup and delivery. That is very important to us that our entire Company is laser-focused on giving over 97% on-time pickup and delivery. And in our Expedite division, over 99% because there it is critical shipments. That is very, very important to us.

At the same time we've got a duty to shareholders to try make a profit here, try and make an honest buck. So there is a balancing act. But in the final analysis if we serve the customer passionately, the margin will follow. And even if the margin on the percentage gets hit a little bit here and there because it will in a tight capacity market, we will make it up in volume, more volume will attract more volume, and we will have more loyalty and stickiness from the customers.

Great, thank you.

Thank you Donald.

David Campbell from Thompson Davis.

Good morning Brad and Scott and John. I appreciate all of your comments, and Brad you have expressed in written reports that you have been interested in Pacer for a long time. I was just curious, what -- I know that intermodal is growing, I know it is an important solution for shippers. But I don't see the growth of Pacer. Pacer has stabilized in the last 12 months. But since 2009 its revenues are flat to down. I am curious as to why -- what are you going to do differently?

A couple things, a very, very good topic. So why is the revenue down? The revenue is down because they had a reclassification of how they handle revenue from an accounting point of view because when the UP contract expired or got renegotiated to the new one, certain gross revenue got booked as net revenue, and I think they lost like $400 million of accounting revenue. And the revenue they did from accounting was booked as net revenue, so that is why the revenue looks like it was going down at least in my understanding and in prying.

In terms of the business there, I'm much more concerned about how people do on the bottom line and topline. On the bottom line there, when Dan came in there, they weren't making a whole lot of money at all. And I think it bottomed out at several million dollars of EBITDA and he built up to close to $30 million of EBITDA. That seems to me to be a pretty darn good trajectory. I think from the profit point of view, he has really changed the course of the ship there and got it pointed in the right direction, the profitability has increased.

You mentioned Pacer's -- I wanted to buy that for a long time. If you read through the proxy, the history of the transaction reads like Brad called Dan, tried to buy them, Dan said no, come back later. Six months later, Brad calls Dan, Dan said go away, this went on for several years.

Intermodal is extremely important to us. When you look at the charts, the slides, David, that we put out when we bought Express-1, you might remember we had four modes, and the fourth one was intermodal. And the reason is that this is the fastest growing part of transportation if you look at the stats back to 1980, and I don't think that is going to change very much going forward. So we've got to be in intermodal and we want to also grow on -- we want to take advantage of this cross-border Mexico growth as well.

Right. And on another subject you haven't said much about less-than-truckload business. I know it is part of your long-term strategy. But it is nothing right now. Is that going to be acquired by buying asset-based companies or do you have a lot of choices on non- asset-based LTL operations?

Our present strategy for LTL is to grow it primarily organically. If some acquisition comes our way, that is great. But our present we're all set up, once we bought Interide, we got their software, which was a leading software for LTL and we over a period of a few months integrated that into our freight optimizer, and we negotiated tariffs with the 100 big -- with most of the 100 biggest LTL providers. And we rolled out the training program to our sales reps to make sure we are all professional in how we are marketing LTL. And that business is growing organically. It's still a rounding error in terms of our entire business, but it's something that could grow real fast.

And final question is Pacer Logistics has been as you know doing nothing for years. They don't break out how much of that is freight forwarding, how much of it is warehousing, and other et cetera. If some of it's freight forwarding and it's not reporting any earnings, what is the problem?

Give me a little time to get into the weeds on that. We have just started getting under the hood. On Pacer our prime focus was on that wonderful intermodal franchise and the cross-border franchises they've got. On the logistics and the freight forwarding and the NVOCC, and all that business they've got, we're just at the beginning process of really deeply understanding it. It's a global business, it's a lot of locations, there's a lot of moving parts.

I want to understand it fully and it's not going to take us a long time to do that, but we don't own the company yet. Once we understand it fully, we will have a plan and that plan will improve its profits one way or the other.

Okay. Thank you very much.

Thank you David. We've gone an hour and 15 minutes, but I apologize we took so long and went into the trading time, but I'm happy that we were able to answer all the questions that people who cover us who had questions. Have a great day, thank you for your support, talk to you in 90 days.

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